Topic:
This article will discuss innovative financing for highway projects, such as cash flow options, financing of debt, tolling options and public/private partnerships.
Discussion:
Traditionally, most State highway agencies utilized a pay-as-you-go approach to financing their highway improvement programs. This means that they would analyze their expected total combination of both State and Federal funds in future years and determine how they would allocate the monies to future projects. If there was a particularly large and expensive project, the costs associated with that project could be spread out over several years. In projecting out a State’s highway program, the responsible officials had to take into account the costs of those projects that would be 100% State funded and those that would be Federal projects, typically requiring a State match of 20% to 80% of Federal funds.
In recent years the FHWA has provided the States with various funding opportunities that could help manage the use of both State and Federal funds in order to make the most efficient use of available funds. Most of these financing options afford earlier construction with potential attendant cost savings from inflation of construction costs and the earlier realization of road user benefits. Listed below are the more significant funding options that fall under the heading of "innovative financing". Each of these funding options has a wide variety of rules, guidelines, and nuances that are often quite complicated. Each option listed below, is described at its most basic level.
CASH FLOW OPTIONS
The FHWA makes certain procedures available, which could assist States in managing the 20% match requirement to their greatest advantage.
1. Advance Construction
In those situations where a State has used (or plans to use) all of it’s available existing Federal funds, and still wishes to move additional projects to construction, future Federal funds can be committed to the project. In this situation, State funds would be utilized from an existing pot of money, and then there would be the ability to replace those State funds with Federal funds when a new pool of Federal funding was made available. Prior approval from the FHWA is required, and the subject project must be set out in the State Transportation Improvement Plan (STIP).
Advantage - This procedure allows States to advance their programs with the assurance that future Federal funding will be available to provide compensation for previously authorized projects.
Disadvantage - If future Federal funding is reduced below what had been anticipated, it could result in a State having to reevaluate and adjust its Federal-aid program.
2. Tapered Match
In certain situations where a State does not have the required 20% matching funds for a project available, they may request a payment schedule whereby a reduced match is contributed early in the project, with a proportionally larger match at the end of the project. Ultimately, the normal 20% match is achieved by project end.
Advantage - This allows a State to advance a project to construction when there is a near-term lack of available State funds.
Disadvantage – This procedure requires a more sophisticated level of bookkeeping and fiscal management than normal. If projected State funds do not materialize, the State would have to adjust its program schedule.
3. Toll Credits as Match
Where a State has an independent toll authority, the amount of funds that the toll authority spends to build or improve public highway facilities that serve interstate travel, may be used as State match to federal-aid projects.
Advantage - This allows States to maximize their 20% match requirement.
Disadvantage - Complicated record keeping required.
FINANCING OF DEBT
In those situations where a State borrows money in the municipal bond market to finance its transportation program, the interest rate that the State is required to pay will have a significant financial impact. Where hundreds of millions of dollars are being borrowed, even the slightest lowering of interest rate will result in significant savings to the taxpayer. The FHWA has developed several options that States may consider utilizing that could have the ultimate effect of reducing interest rate charges on borrowed money.
1. Grant Anticipation Revenue Vehicles (GARVEE)
In order to reduce the risk factor associated with borrowing funds, and accordingly reduce the interest rate charged, a guaranteed source of repayment money is useful. A GARVEE financing vehicle allows the State to pledge future Federal funds as collateral for the bond-financing instrument. The future Federal funding can be pledged to help pay both principal and interest debt. The FHWA must give prior approval for any project (or group of projects), which applies for GARVEE status.
Advantage – Lower debt financing for projects
Disadvantage – Additional record keeping, and specific dedication of future Federal funds.
2. State Infrastructure Banks (SIB)
In order to allow surface transportation projects to be funded with money borrowed at a relatively low interest rate, States may establish an internal bank of funds that is made available for loan on qualified projects. Federal-aid funding is available to help establish and maintain the bank. As borrowed money is returned, the bank is replenished.
Advantage – Loans are made available for qualifying projects at a lower interest rate than is available in the public market.
Disadvantage – Complicated to establish, and requires significant management oversight.
3. Transportation Finance and Innovation Act (TIFIA)
The U.S. Department of Transportation has created its own banking organization, which has a separate pool of public funds available to assist eligible surface transportation projects. This could include highway and transit projects. The TIFIA banking organization has the ability to offer direct loans, loan guarantees, and lines of credit, which are available to both public and private entities. The basic concept of the TIFIA program is to provide reasonable funding options for large projects (typically costing in excess of 100 million dollars) utilizing guidelines as established by the U.S. DOT. The use of TIFIA funding does not have any impact on a State’s normal federal-aid apportionment.
Advantage – Loans and loan guarantees are made available for qualifying projects at a lower rate than is available in the public market. The TIFIA bank is established and in operation.
Disadvantage – Must apply (with application fee) and compete for funding categories. TIFIA will also assess a substantial processing fee to defray the costs of negotiating the loan agreement.
TOLLING OPTIONS
As the costs of managing the highway program continue to rise faster than revenues are increasing, the option of placing tolls on roadways becomes more prevalent. This option allows the State to collect toll revenues from those who are using the roadway.
1. Tolling Federal-aid Highways
The FHWA now allows tolling of most roadways other than the Interstate Highway System. If a State wishes to place tolls on either a new or a reconstructed roadway, it is allowable as long as the State executes a "toll agreement" with the FHWA setting out the manner in which the tolls will be used. Normal Federal-aid financing of construction is available.
Advantage – A source of road user funding for project purposes.
Disadvantage – Additional motorist costs, along with toll collection expense.
2. Interstate Tolling Pilot Project
The FHWA has a pilot project to allow new tolling of a portion of the Interstate System in order to finance the improvement or expansion of the Interstate facility. The various States interested in this option must compete for eligibility. Normal Federal-aid funding of construction is available.
Advantage – A source of road user funding for project purposes.
Disadvantage – This option is currently very limited. Tolling would place additional costs on the motorist, along with toll collection expense.
(Note: The Pennsylvania DOT is currently (2/1/08) requesting FHWA approval to place new tolls on I-80, as a means of providing a source of Statewide highway revenue. This proposal does not contain a major element of I-80 improvement or expansion. How the FHWA responds to this request may have major consequences).
PUBLIC/PRIVATE PARTNERSHIPS
Public/Private Partnerships represent a vast array of projects where a private concern invests in the public roadway construction or upgrading, with a promise of receiving a future revenue stream. Essentially, the private concern enters into a business arrangement and hopes to recoup the investment in the future, along with a profit on the investment. These partnerships can be configured in many ways, depending on the needs of both the public entity and the private investor. This situation almost always involves some method of toll collection.
Advantage – Instead of borrowing money with associated interest charges, a public entity can enter into a financial arrangement with a private concern that treats the situation as a financial investment.
Disadvantage – The public entity loses a degree of control over the project, as the private concern treats their return on investment as a major component of the venture.
Source:
 |
Robert Kleinburd |
| © O.R. Colan Associates |
|
