Since 1916, the Federal government has supported surface transportation investment through a grant-based funding strategy known as the Federal-aid highway program (FAHP). Since 1957, revenues derived from the Federal gas tax and other excise taxes have been credited to the Federal Highway Trust Fund (HTF) and allocated among the States pursuant to various formulas for reimbursement of eligible capital costs. Under this approach, the United States Department of Transportation (DOT) reimburses expenditures on transportation infrastructure at prescribed Federal matching rates, while the remainder of project costs is covered by the States.
The FAHP has enabled the construction of an extensive national transportation system, including the Nations 46,000-mile Interstate highway system. In recent years, however, the programs financial limitations have become evident as the growing demand for transportation investment has outpaced the available public funding to meet that demand.
The Federal government over the last decade has responded to the shortfall in conventional funding sources by providing new funding techniques that complement and enhance the existing grant-reimbursement program by leveraging additional capital investment in transportation infrastructure. The Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA) and Executive Order 12893 (issued in 1994) established Federal policies designed to encourage innovative project management and financing strategies. In 1994, the Federal Highway Administration (FHWA) launched its Test and Evaluation Finance Research Project (TE-045) which spawned a variety of grant management improvement techniques. The National Highway System (NHS) Designation Act of 1995 authorized the State Infrastructure Bank (SIB) pilot program, in which participating States may use some of their Federal highway and transit grants to help capitalize revolving funds. That act also led to the creation of Grant Anticipation Revenue Vehicle (GARVEE) bonds, by permitting States to use their Federal-aid funds to pay for principal, interest and other costs related to the issuance of debt financing instruments.
The Transportation Equity Act for the 21st Century (TEA-21) continues the Federal governments incremental approach to streamlining administrative procedures and providing new financing tools. It gives States and local governments even more flexibility in managing their Federal transportation grants, extends the capacity of SIBs in certain States, and establishes a new financial assistance program, under the Transportation Infrastructure Finance and Innovation Act (TIFIA), through which DOT can provide direct Federal credit to public and private sponsors of eligible surface transportation projects.
Role of Innovative Project Finance
The purpose of DOTs innovative project finance initiative is to respond to the shortfall in conventional public funding by supplementing traditional financing techniques and directing resources to transportation investments of critical importance. Specifically, this is accomplished by fostering public-private partnerships; drawing on the publics willingness to pay direct user charges for transportation benefits and services; leveraging new sources of capital; andenabling additional transportation facilities to be developed more quickly and at less cost than would be possible under conventional public procurement, funding and ownership.
Figure N-1 summarizes the various Federal financing mechanisms available to assist surface transportation projects. The pyramids shape reflects the relative number of projects in each funding category.
Figure N-1.Federal Assistance for Transportation Infrastructure.
The base of the pyramid represents the vast majority of projects that cannot generate revenues and therefore will continue to be dependent upon funding primarily through grants. The Federal government has adopted enhanced grant management techniques such as advance construction and grant-supported debt service to help move these projects to construction more quickly.
The middle layer of the pyramidperhaps 5 to 10 percent of total capital investmentrepresents those projects that can be at least partially financed with debt payable from project-related revenues, but may also require some form of public credit assistance to gain market access. The SIBs can offer many types of assistance (e.g., low interest loans, loan guarantees and other credit enhancements) to local or regional projects with revenue streams, while the Federal credit program established under TIFIA is designed to assist large-scale projects generating major economic benefits that might otherwise be delayed or not constructed at all because of their risk, complexity or cost.
The peak of the pyramid represents the very small number of projects that can arrange private capital financing without any governmental assistance. These relatively few projects may be developed on high-volume corridors where the revenues from user charges are sufficient to cover capital and operating costs.
Grant Management Techniques
In 1994, President Clinton issued Executive Order 12893, which established more cost-effective investment as a priority for the Administration and directed Federal agencies to seek greater private sector participation in infrastructure investment and management. In response to Executive Order 12893, the FHWA launched the TE-045 research program which invited States to come forward with new financing techniques not generally permissible under traditional Federal-aid procedures.
The successful experience under the TE-045 research program formed the foundation for subsequent legislative and regulatory actions. As a result, new financing techniques are now available to State and local governments and, in some cases, private project sponsors. These techniques offer more flexibility in meeting the non-Federal matching requirement, provide more credit options, and allow more effective use of obligation authority.
Grant Anticipation Revenue Vehicle (GARVEE) Bonds
Prior to November 1995, States could use their Federal-aid highway grants to repay only the project-related principal component of debt service on bonds issued for Title 23-eligible projects. Section 311 of the NHS Designation Act altered the rules by significantly expanding the eligibility of debt financing costs for Federal-aid reimbursement. This significant change to the Federal-aid program was codified into permanent highway law as an amendment to Section 122 of Title 23, U.S.C. Bond-related costs now eligible for Federal-aid reimbursement include:
The capitalization from bond proceeds of a reserve account or contingency fund required by or incidental to the debt issuance is considered an eligible Federal-aid expense. The funds deposited in such an account, along with any interest earnings, must be used for project costseither on a current basis or as a final payment to the bondholders.
Once a State selects a project for GARVEE financing and its costs are estimated, the project is designated as an advance construction (AC) project under Section 115 of Title 23, U.S.C., by the responsible FHWA Division Office. The AC designation preserves the projects eligibility for future Federal assistance, over the life of the bonds. The amount of the AC designation should equal the Federal share (typically, 80 percent) of the debt-related costs anticipated to be reimbursed during the life of the bonds. All projects approved for GARVEE financing must be eligible for Federal-aid funds under Title 23, U.S.C.
State Infrastructure Banks
The NHS Designation Act (P.L. 104-59, Section 350) authorized the DOT to establish the SIB pilot program. A SIB is a State (or multistate) revolving fund that can offer loans and non-grant forms of credit assistance to public and private sponsors of Title 23 highway construction projects or Title 49 transit capital projects. SIBs are intended to complement the traditional Federal-aid highway and transit programs by supporting certain projects with revenue streams which can be financed in whole or in part with loans, or that can benefit from the provision of credit enhancement. As loans are repaid, or the financial exposure implied by a credit enhancement expires, a SIB's initial capital is replenished and can be used to support a new cycle of projects.
Under the original NHS Designation Act provision, Congress established a pilot program for up to ten States to enter into cooperative agreements with the FHWA and/or the Federal Transit Administration (FTA) for the capitalization of SIBs with up to 10 percent of certain categories of their Federal-aid funds provided in fiscal years 1996-1997. The ten States initially selected by the DOT for the SIB pilot program were: Arizona, California, Florida, Missouri, Ohio, Oklahoma, Oregon, South Carolina, Texas, and Virginia. The DOT Appropriations Act of 1997 amended the NHS Designation Act to allow DOT to expand the SIB pilot program to include additional States, and appropriated $150 million in Federal General Fund revenues for SIB capitalization. The TEA-21 extended the pilot program for four StatesCalifornia, Florida, Missouri and Rhode Islandby allowing them to enter into cooperative agreements with DOT to capitalize their banks with Federal-aid funds provided in fiscal years 1998-2003. The SIB authorization in the TEA-21 modified some of the key provisions of the NHS Designation Act by: removing the 10 percent limit on the amount of Federal-aid that could be used for capitalization; eliminating the requirement for separate highway and transit accounts; applying Federal requirements to all SIB assistance, including second round assistance from non-Federal sources; and establishing a 5-year disbursement schedule for capitalization grants.
Figure N-2.SIB Pilot States.
Figure N-3.Basic SIB Structure.
SIBs provide financial support to public and private sponsors of eligible surface transportation projects during all project stages. The types of assistance which may be provided by SIBs include loans (which may be at below-market rates), guarantees, interest rate subsidies on other project debt, letters of credit, purchase and lease agreements and other forms of non-grant assistance.
Federal Credit Assistance: TIFIA
The Transportation Infrastructure Finance and Innovation Act (TIFIA), which was authorized in Sections 1501-1504 of TEA-21 and codified in Sections 181-189 of Title 23, U.S.C., authorizes DOT to provide secured (direct) loans, loan guarantees and standby lines of credit to private and public sponsors of eligible surface transportation projects. The objective of TIFIA is to use credit rather than grants to leverage limited Federal funding in a prudent, budget-effective manner, in order to help advance major projects of national or regional significance.
The TEA-21 provides $530 million to cover the subsidy costs (expected losses) associated with the provision of Federal credit assistance under TIFIA. The total nominal amount of Federal credit assistance authorized under TIFIA for fiscal years 1999-2003 is limited to $10.6 billion.
To be eligible for assistance, a project must be classified within one of the following categories:
Eligible projects meeting the initial threshold criteria will then be evaluated by the Secretary of Transportation based upon:
In addition, each project applicant must provide a preliminary rating opinion letter from at least one rating agency indicating that the projects senior obligations have the potential to achieve an investment-grade rating.
Direct (Secured) Loans. Direct loans from the Federal government to project sponsors provide long-term, fixed-rate permanent financing in a manner that enables loan repayments to coincide with the receipt of project revenues rather than adhering to inflexible repayment schedules.
As authorized under TIFIA, direct Federal loans may fund up to 33 percent of project costs. The interest rate on such loans will be set at the Treasury rate for comparable-term securities. The maximum term is 35 years after project completion, and repayments may be deferred up to 10 years. Any deferred payments would be added to the outstanding loan balance and continue to accrue interest. The loans will be secured by a pledge of project revenues or other security features. DOT may charge application initiation and credit processing fees to offset a portion of the budgetary costs of providing loans.
More specific terms and conditions of each loan will be negotiated between DOT and the borrower, but will enable DOT to accept a claim on revenues junior to that of the projects senior indebtedness. In the event of default that leads to bankruptcy, insolvency or liquidation, DOT must have a parity or co-equal claim on project assets with other investors.
Loan Guarantees. Loan guarantees offered under TIFIA are intended to facilitate senior project borrowing by guaranteeing junior loans made by institutional investors. The terms of the loan guarantees are very similar to those established for the direct loan program. Loan guarantees are capped at 33 percent of project costs. The interest rate on guaranteed loans will be negotiated between the borrower and the lender and approved by the Secretary of Transportation. Interest payments on guaranteed loans will be subject to Federal income taxation. The maximum term of guaranteed loans is 35 years after project completion, and repayments may be deferred up to 10 years. The guaranteed loans will be secured with defined claims on project revenues.
Standby Lines of Credit. Under TIFIA, standby lines of credit represent contingent loans to help pay debt service, operations and maintenance, extraordinary repairs and other costs if needed to respond to revenue shortfalls in the first 10 years of project operations. In contrast to direct loans and loan guarantees, standby lines of credit would not be used to directly fund construction costs as part of the projects initial capitalization. The line is rather a supplemental source of reserves that canbe drawn upon if needed during the projects ramp-up phase. The line is designed to provide a source of secondary capital if needed, thereby assisting the borrower in obtaining an investment-grade rating on its senior bonds.
These contingent loans may be in an amount up to 33 percent of projects costs, and may be drawn down over a ten year period following substantial project completion. The borrower may draw down up to 20 percent of the line in a given year. The interest rate on any draw will be set equal to the then-prevailing yield on 30-year Treasury bonds. The draws must be repaid, with interest, within 25 years following the period of availability. The contingent loans will be secured with defined claims on project revenues.
Table N-1.Leverage Comparison: Grants vs. TIFIA Credit (Hypothetical Project Cost: $100).
|Form of Assistance||Federal Share||Budgetary Cost per Dollar of Federal Assistance||Effective Budgetary Cost||Leverage Ratio|
*Estimated; subsidy amounts will vary from project to project.
Electronic version of Publication No. FHWA-PL-99-015