Since the creation of the Federal Aid Highway Program (FAHP) with its predictable flow of funding, state departments of transportation (DOTs) have relied on a combination of state and Federal revenue sources to fund highway construction. During the period which ultimately led to significant increases in funding to support the Interstate and a growing set of companion programs, revenue mechanisms such as tolling and bonding were debated intensely. The "pay as you go" model was considered the "gold standard," intended to promote accountability and fiscal integrity among grantees. This meant that public investments decisions essentially did not take into account the time value of money and the cost of deferred investment to communities and the Nation until complete funding for a project was effectively in hand. Using Federal aid grants on a "pay as you go" basis requires grantees to accumulate sufficient federal and state sources to fund project construction and development. While that is taking place, however, project costs can increase due to inflation thereby eroding the buying power of funds already accumulated.
As states and agencies grew more sophisticated and aware of the cost of such delays, they began to consider diverting from strict "pay as you go." Along with using new mechanisms to borrow from future revenue sources, including a greater use of toll revenue, they began to partner with the private sector in the delivery of projects via various P3 models to optimize their portfolios. Traditional Federal funding continues to play a role and continues to evolve with respect to the blend of traditional formula programs, features that address tolling, and programs that provide technical and loan guarantee support. Various Federal policy initiatives have been advanced to facilitate and encourage private sector participation in infrastructure delivery. Starting with the Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA), and with each major transportation program authorization since, USDOT and FHWA have introduced financial and programmatic innovations that have been incorporated as part of the financial and project development and delivery approaches for the 28 projects reviewed in this report. The following sections provide an overview of some of Federal tools and programs contributing to the successful financing and delivery of many of today's groundbreaking P3 projects.
Longstanding federal Financial support has been provided as a collection of categorical grants, mostly to state DOTs, known as the Federal Aid Highway Program (FAHP). Administered by FHWA, typically FAHP grant funds are distributed through apportionment formulas to the states from receipts in the Highway Trust Fund. Distributions are made on a reimbursement basis as states incur qualifying expenditures to develop and construct highway projects and then request reimbursements from the FHWA. (For more detail, see Publication No. FHWA-PL-07-017, Financing Federal-aid Highways).
The funding details of the individual programs have changed over time but generally FAHP grants reimburse a Federal share of qualifying expenditures and thus result in a non-Federal expenditure or match. Within the FAHP there are numerous rules and regulatory requirements associated with using federal funding for any given project expenditure, governing for example, funding percentages, eligible purposes, contracting procedures, and planning. For state DOT fund managers, compliance with federal funding rules as well as managing state fund sources carrying their own set of rules, at times created significant cash management challenges and inefficiencies. As an example, at the end of a state fiscal year, state DOTs commonly managed their Federal Fiscal Year closure by assuring that their state funds were used as match to avoid the loss of soon to expire potential Federal program balances. One might argue that this could distort state priorities and optimal financial management.
In order to provide the state DOTs greater flexibility in addressing these and other types of funding challenges, FHWA and USDOT coordinated with Congressional leadership to focus on creating options to remove unintended barriers and transform the Federal role with respect to transportation finance. Though the standard federal grant plus non-federal match still remains as part of the funding plan even for complex projects delivered under the P3 model, there have been a host of initiatives and tools developed that serve to augment, leverage, optimize and accelerate the use of available federal aid funds.
A series of administrative initiatives and legislative acts beginning in the early nineties laid the foundation for Federal tools and processes that provided increased flexibility to state agencies and encouraged private sector participation in the funding and delivery of highway projects. As noted earlier, ISTEA initially authorized new concepts designed to increase transportation investment. Outlined below are some of the key initiatives that have contributed directly or indirectly to the funding packages for the P3 projects covered in this report.
In 1994, FHWA launched a major initiative to solicit ideas from the states on a range of new financial strategies designed to stretch limited transportation dollars and enhance the flexibility of Federal-aid highway funds. This experimental "Test and Evaluation" initiative known as TE-045 has generated substantial benefits in terms of building more projects with fewer federal dollars and accelerating project construction. Many of the innovations tested were subsequently approved for general use through administration action or legislative changes made under the National Highway System Designation Act (NHS) of 1995 and the Transportation Equity Act for the 21st Century (TEA-21). Along with cash management tools such as tapered match, toll credits, and advance construction, resulting innovations include leveraging of FAHP grants in the capital markets (GARVEEs) discussed below.
The NHS Act of 1995 amended Section 122 of Title 23 to authorize the use of FAHP grant funds for the reimbursement of debt service and related financing costs of qualifying state debt issuances. The capital markets vehicle that is secured by future FAHP grant funds is commonly referred to as a Grant Anticipation Revenue Vehicle or GARVEE bond. In order for a state to ensure repayment of GARVEE debt utilizing FAHP grant funding, states must obtain authorization through the state FHWA Division Office for payment of the debt service using federal aid. This authorization is also documented in the form of a Memorandum of Agreement between the state DOT and FHWA outlining oversight and administrative responsibilities throughout the term of the GARVEE bond debt.
In general, projects funded with the proceeds of a GARVEE bond are subject to the same requirements as other Federal-aid projects with the exception of the timing of the reimbursement process. Instead of reimbursing eligible construction costs as they are incurred, the reimbursement of a GARVEE project cost occurs at the time of the semiannual debt service payment.
GARVEE bonds have been widely used by state DOTs as a means of accelerating eligible grant funding to complete the plan of finance for highway projects. Like many other funding and financing sources, GARVEEs can be part of an overall financial plan to complete the funding for projects delivered under a P3 model. In 2012, the Virginia DOT issued their first GARVEE bonds, utilizing the proceeds to fund a portion of the state contribution to the Elizabeth River Tunnels DBFOM project.
Among the factors often cited for the relatively slow acceptance of the P3 delivery model in the U.S. has been the lower cost capital available to state DOTs via the tax-exempt bond market. In comparison and as evidenced by the high cost of borrowing for one of the early privately developed toll road projects, the Dulles Greenway, private borrowing was nearly cost prohibitive. As such, efforts to attract an increased level of private participation and investment in transportation infrastructure in the U.S were unlikely to succeed without private sector access to lower cost financing.
In 1998 Congress passed the TEA-21 authorization bill creating the Transportation Infrastructure Finance and Innovation Act of 1998 (TIFIA). Through the TIFIA Federal credit program, public and private sponsors could obtain direct loans, loan guarantees, and standby lines of credit for surface transportation projects in amounts up to one-third of the eligible costs. The TIFIA credit program was created to provide access to much needed capital for critical transportation projects facing challenges accessing debt through the regular capital markets. TIFIA credit assistance also provides loans at attractively low interest rates tied to U.S. Treasury bonds. TIFIA loan rates are typically lower than those available in the open market.
Credit assistance through the TIFIA program has provided a major boost to the development of the transportation P3 market in the U.S. The program is widely supported by members of the P3 industry who actively lobby Congress for the continuation of and increased financial support for the program. Approximately two-thirds of the P3 projects included in this report received credit support from TIFIA. In fact, during the height of the financial markets crisis, the only P3 projects to achieve financial close, did so with TIFIA credit assistance as a component of the plan of finance.
Beyond creation of the TIFIA credit program, the Federal government has advanced legislation to provide private developers additional access to lower cost capital through the tax-exempt bond market. As noted earlier, state DOTs and other government entities have benefitted from provisions in the Internal Revenue Code (the Code) permitting municipalities to borrow funds in the capital bond market on a tax-exempt basis to finance public works projects.
Generally, the private sector is precluded from borrowing funds in the tax-exempt market. However, there are certain qualified exceptions listed in the Code for which private entities may borrow funds in the tax-exempt capital market to finance projects that serve a public purpose such as hospitals and housing through the sale of Private Activity Bonds (PABs). It was not until 2005 however, with the passage of the Safe Accountable, Flexible, Efficient, Transportation Equity Act: A Legacy for Users (SAFETEA-LU) that the Code was amended to add highways and freight transfer facilities to the list of privately developed and operated projects for which PABs may be issued.
SAFETEA-LU limited the total amount of PABs for highway purposes to $15 billion. Typically issuance of non-highway, qualifying facility PABs is managed according to individual state volume caps. For highway projects, the $15 billion authorization is not subject to any state's PAB volume cap, but instead is allocated to qualifying projects by the Secretary of Transportation. About half of the P3 projects reviewed in this Report on P3s (and nearly all since its introduction) have included PABs as part of the financial package, often in combination with TIFIA assistance. The first such project was the I-495 Capital Beltway HOT Lanes project in 2007.
New Federal programs and tools designed to encourage private sector involvement in delivery of highway projects have been largely successful. However, P3 projects benefitting from these measures must be developed in compliance with the same Federal regulatory requirements and processes as any other project. In some cases, states and private developers have found that federal processes may present challenges that do not support some of the approaches or efficiencies contemplated in a P3 delivery. Special Experimental Project 15 (SEP-15) offers states an opportunity to work with FHWA to explore whether exceptions from or changes to existing policies or procedures within FHWA's purview may be warranted.
SEP-15 applications may include suggested changes to FHWA's traditional project approval procedures and may require some modifications in the implementation of FHWA policy. Experiments generally fall into four major categories: contracting; environmental compliance; right-of-way acquisition; and project finance. One such experiment was conducted shortly after Congress amended the TIFIA statute to make refinancing of existing debt eligible for TIFIA credit assistance. That was at about the same time the Virginia DOT (VDOT) was negotiating the refinancing of the Pocahontas Parkway project and the transferring of the facility operation under a toll concession agreement. Although refinancing had been authorized in statute, the policy that would govern this activity had not been written. As such, VDOT applied through the Virginia FHWA Division Office to conduct an experiment to evaluate a refinancing of existing project debt through TIFIA. Following financial close of the transaction, VDOT submitted a report to FHWA on the findings and benefits of the experiment as required by the SEP-15 process.
Oversight and administration of the programs, tools, and initiatives highlighted above have been carried out by the FHWA and the Build America Bureau. FHWA provides research, training and technical assistance for states interested in exploring and implementing innovative finance and alternative P3 delivery options for highway projects. FHWA currently provides support to the USDOT's Build America Bureau.
The Build America Bureau and FHWA have been instrumental in streamlining the process for states and private developers seeking to navigate the available finance tools and initiatives and varied application and approval processes. Collaboration with the Build America Bureau and FHWA has been vital to sorting through a host of complex issues in developing P3 projects - particularly from a funding and financing perspective. When Caltrans was formulating the financial plan for the Presidio Parkway, it wanted to pursue use of FAHP grant funds as a revenue source for availability payments. However, the finance plan for the project also included TIFIA, which must be repaid from non-federal sources. Further complicating matters was the difficulty in determining the portion of the long-term availability payment that could qualify for FAHP funds. FHWA coordinated efforts to evaluate federal regulatory and policy issues and worked with Caltrans to sort through the funding issues to develop a solution that became the first FAHP-funded availability payment transaction.
Further, FHWA has developed tools and primers designed to increase public-sector understanding of the complexities of the P3 delivery approach and support better informed decision-making when contemplating whether a P3 option may be appropriate for a particular project. A suite of educational materials, referred to as the P3 Toolkit is available on the FHWA website.
