The Federal Perspective: Project Finance, TIFIA and Public Private Partnerships

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1 The Federal Perspective: Project Finance, TIFIA and Public Private Partnerships Mark Sullivan, Federal Highway Administration Innovative Transportation Finance Workshop Shoreview, Minnesota October 20, 2009

2 Topics to Cover GARVEE Bonds Build America Bonds Private Activity Bonds TIFIA Federal Credit Assistance Public Private Partnerships Case Studies

3 Grant Anticipation Revenue VEhiclE (GARVEE) Bondholders Debt Service Bond Proceeds Project Costs State DOT or Issuing Authority Federal Share State Share FHWA State Fed. aid Eligible Project

4 Regular Federal-Aid Project vs. GARVEE Debt-Financed Project Total Project Cost Eligible for Federal Reimbursement Basis for Reimbursement Timing of Reimbursement Federal Requirements What Shows on STIP? Standard Federal Aid Project Total eligible construction costs Construction expenditures Period of construction (3-5 years, typically) All applicable Total funds needed to reimburse construction expenditures during fiscally-constrained years of STIP Debt-Financed Project under Section 122 (GARVEE) Total debt service (including principal, interest, and issuance) for bond issue to finance eligible Federal-aid project Debt service payments Term of debt (5, 10, 15 or even 20 years) All applicable Total funds needed for debt service during fiscallyconstrained years of STIP

5 Build America Bonds (BABs) Authorized in American Recovery and Reinvestment Act of 2009 (ARRA) for two years: 2009 and 2010 A response to credit market difficulties that hindered state and local government issuance of tax-exempt debt Allows state and local governments to issue taxable bonds, with the Federal Government contributing 35% of the interest payment to investors Expands investor pool dramatically, increasing demand and further lowering interest rate cost Many traditional tax-exempt bond issuers have used BABs in the ensuing months

6 Private Activity Bonds (PABs) PABs are government-sponsored bonds, the proceeds of which go to a private entity for a public purpose Private transactions handled through a public entity, such as an industrial development authority, to gain tax-exempt status and lower the cost of capital Long available for uses such as housing, airports, water and sewer. National issuance is limited by a volume cap calculated annually by the Dept of Treasury and distributed on a state-by-state basis.

7 PABs for Surface Transportation SAFTEA-LU in 2005 authorized $15 billion in PABs for facilities that previously did not qualify for this special treatment: Any Title 23 surface transportation facility International bridges and tunnels Rail/truck transfer facilities Secretary of Transportation, not Treasury, responsible for allocation DOT has an application process Projects must receive Federal assistance under Title 23 or Title 49

8 Transportation Infrastructure Finance and Innovation Act (TIFIA) Federal credit assistance to surface transportation projects of national or regional significance, in the form of: Direct loans (up to 35-year term, fixed rate) Loan guarantees (same terms as direct loans) Lines of credit (available for 10 years after completion) Specific objectives: Facilitate projects with significant public benefits Encourage new revenue streams and private participation Fill capital market gaps for secondary/subordinate capital Be a patient investor regarding time horizon, liquidity, predictability and risk Limit Federal exposure by relying on market discipline(35 years), line of credit (10 years) or loan guarantee

9 TIFIA Requirements Highway, transit, rail and port projects are eligible Public or private borrowers are eligible to apply Total project costs must be at least $50 million (intelligent transportation systems ITS $15 million) TIFIA contribution up to 33 percent or amount of senior debt, whichever is less Senior debt must be rated investment grade Standard Federal requirements (Civil Rights, NEPA, Uniform Relocation, Titles 23/49) apply

10 Public-Private Partnerships (PPPs) PPPs are contractual agreements between a public agency and a private entity that allow for greater private participation in the delivery and financing of projects. Typical examples include: Design-build (DB) Design-build-operate-maintain (DBOM) Design-build-finance-operate-maintain (DBFOM) Use of private finance (in DBFOM) occurs when a public agency offers a project under a long-term concession

11 PPPs and Risk Allocation Oft-cited advantage of PPPs is the ability to structure a contract that optimizes the risk allocation. Each party can assume the risk to which it is most suited, e.g., Public Sector environmental approval, existing conditions Private Sector construction and revenue risk Such terms can differ extensively among contracts. The value of any concession is defined by its terms!

12 Case Studies Missouri Safe & Sound Bridges PPP, GARVEEs, BABs Capital Beltway HOT Lanes (Virginia) PPP, TIFIA, PABs I-595 Corridor Improvements (Florida) PPP, TIFIA

13 Missouri Safe and Sound Bridges Missouri identified its 802 worst bridges Proposed in 2006 to hire a single contractor to work on and pay for the project through private financing, i.e., DBFOM In turn, the state would reimburse the contractor for repairs, improvements and 25 years of maintenance Negotiations with the selected concessionaire were terminated in Fall Missouri chose to utilized its existing funding options.

14 Missouri Safe and Sound Bridges GARVEEs $600 million in GARVEE bonds issued September 2009: Series A -- $195.6 million tax-exempt Series B -- $404.4 million taxable Build America Bonds Final maturity in May 2033 Secured by a first lien on future receipts of federal highway funds under Title 23 of the U.S. Code Additionally secured by a fourth lien on state gas tax and motor vehicle fee revenues Highly rated: Aa2/AA+/AA- How was this possible?

15 Rating Agency Comments on Missouri GARVEEs The rating reflects the strength of the secondary pledge of state gas tax and motor vehicle fee revenues. The rating incorporates the pledge of federal highway grants and the long history of federal transportation funding. With the primary payment source of debt intended to be federal highway funds, the 24-year maturities planned for bonds issued under this program are a meaningful weakness at this rating level, but are offset by the pledge of state-controlled gas tax funds. Federal revenues remain vulnerable to significant changes in federal policy at the end of each surface transportation funding authorization period. interruption in the flow of federal transportation funding is highly unlikely given the broad-based political support for the program [although] the most recent multi-year reauthorization was significantly delayed.

16 Capital Beltway HOT Lanes Four high-occupancy-toll (HOT) lanes added to 13 miles of Interstate 495 in northern Virginia (Washington DC) HOT lanes will use dynamic pricing to manage traffic flow Advanced under 80-year concession agreement with Virginia DOT Private concessionaire owned by Transurban (90%) and Fluor (10%) Terms of concession: DBFOM + collect tolls Traffic revenue risk is assumed by the concessionaire and its investors

17 Capital Beltway HOT Lanes Finance Plan Private Activity Bonds $585.6 TIFIA Loan VDOT Funds Interest Income 69.3 Private Equity Total $1,998.0

18 Capital Beltway HOT Lanes TIFIA Loan Executed December 20, 2007 (PABs issued June 2008) Holds a subordinate lien on a pledge of the project s toll revenues and interest income, after operations and maintenance expenses certain capital expenditures senior debt service reserve debt service payments to senior lenders 5 years of capitalized interest during construction, followed by 5 years of partial interest payments, followed by 15 years of current interest payments, followed by 15 years of interest plus principal, concluding in 2047

19 I-595 Corridor Improvements Three reversible express lanes added to 10.5 miles of Interstate 595 in central Broward County, Florida Express lanes will use dynamic pricing to manage traffic flow Advanced under 35-year concession agreement with Florida DOT Private concessionaire owned by ACS Infra Development Terms of concession: DBFOM Florida will collect tolls Traffic revenue risk is assumed by the State Concessionaire will receive availability payments

20 I-595 Corridor Improvements Finance Plan Senior Bank Debt $781.1 TIFIA Loan FDOT Funds Revenues 10.0 Private Equity Total $1,833.8

21 I-595 Corridor Improvements TIFIA Loan Executed March 2, 2009 (simultaneously with bank debt) Holds a subordinate lien on availability payments made by Florida DOT to the concessionaire 5 years of capitalized interest during construction, followed by 17 years of current interest payments, followed by 11 years of interest plus principal, concluding in 2042

22 FHWA s Office of Innovative Program Delivery Established October 15, 2008, combining: FHWA Innovative Finance Technical Services Team TIFIA Credit Program Major Projects Team Experts in Pricing and Policy Current focus on big, complex projects: Revenue generation (e.g., tolling and pricing) Project and program financing (e.g., TIFIA, GARVEEs, SIBs) Procurement (e.g. PPPs) Objectives: Build awareness Increase professional capacity Develop decision support tools Capture and disseminate lessons learned Technical assistance Influence policy through research and legislative development Website: