Major transportation infrastructure facilities that address critical national needs typically face enormous financing challenges. In many cases, the scale and complexity of these projects exceed the financial resources of existing government programs. Because these facilities generate substantial economic benefits in terms of accessibility and mobility of goods and people, they often are capable of generating user charges and other project-related revenue streams. If project sponsors can draw upon these new revenue streams to back a substantial portion of capital costs with private capital, they can free-up traditional public resources for smaller, non-revenue-generating projects. To gain market access, however, these major projects frequently require supplemental or secondary sources of capital.
A surface transportation credit program could facilitate the borrower's access to the private capital markets by overcoming market imperfections. Large, complex start-up projects may encounter market resistance due to investor concerns about investment horizon, liquidity, predictability, and risk. This is particularly true for subordinate and secondary sources of capital. The federal government is uniquely qualified to fill the role of a patient investor, willing to accept a long-term return in order to help advance projects providing substantial benefits to the nation's economy. There may be an appropriate federal role for a carefully defined credit program to fill these gaps until the capital markets develop greater capacity to absorb these risks. Addressing these gaps would reduce the transactional friction associated with large and complex project financing, which is reflected in unnecessarily large reserve requirements, coverage margins, capital costs, and transaction fees.
Traditional federal-aid grant programs, which are commonly based on federal contributions of up to 80 percent of total project costs, have an implicit leveraging ratio of 1.25 to 1. A surface transportation credit program could provide meaningful assistance to certain large infrastructure projects with federal participation of no more than 33 percent of project costs. And the budgetary cost of the credit assistance, based on rating agency risk assessment models and prevailing averages for existing credit programs in other sectors, might be less than ten percent of an equivalent amount of grant assistance.
Under the federal credit structure outlined in this study, annual capital investment of more than $3.5 billion could be generated by $1.2 billion of federal credit assistance at a budgetary cost of only $100 million. Those amounts represent a leveraging ratio of 35 to 1 in terms of total capital investment to budgetary resources consumed.
To date, federal credit activities in the surface transport sector have been characterized by ad hoc efforts. For example, Congress in recent years has passed several pieces of special legislation assisting three major projects in California. The success of these transactions has stimulated considerable interest and created demand for a programmatic structure to a broader range of projects. An important objective of federal assistance, therefore, could be to establish uniform, objective, and transparent criteria for states, local governments, and other sponsors to obtain federal credit, and to set forth an orderly process for evaluating, selecting, and funding projects.
A surface transportation credit program should be designed to overcome current market gaps by familiarizing investors with the risks and financial profiles associated with subordinate and supplemental capital for transportation projects. Federal direct and guaranteed loans would be offered at or near Treasury rates, which generally will be higher than the rates available for investment-grade tax-exempt obligations. Over time, as the financial performance of these projects allows them to obtain improved ratings, borrowers should be in a position to graduate to 100 percent private debt, by refinancing their federal loans in the capital markets. As private investors become more familiar with the repayment characteristics of junior-lien and standby debt, it may be possible for them to ultimately take on the role of providing such credit for surface transportation projects without a federal back-up. By demonstrating the financial feasibility of this class of transportation investment, a federal credit program could help develop a market which would no longer require federal participation. This outcome would be the ultimate test of the credit program's effectiveness.
