There are a number of innovative financing tools available to private-sector entities that are willing to provide debt or equity financing for highway projects. In addition to standard financing mechanisms available in the general capital markets, including lines of credit, loan guarantees, and other debt instruments, private-sector entities have the ability to use TIFIA financing, private activity bonds, or funding from state infrastructure banks on highway projects. These tools are briefly summarized below.18 These tools often must be used in conjunction with tolling and pricing strategies that generate sufficient revenues to reduce debt or finance operations.
a) TIFIA Financing.-TIFIA19 allows USDOT to provide direct credit assistance to the sponsors of major transportation projects. The TIFIA program tools are designed to occupy the area between 1) traditional grant projects that do not generate revenue from tolls or other revenue sources and 2) projects that generate sufficient revenue to support marketable securities without governmental credit assistance. The TIFIA program offers three distinct types of financial assistance-direct loans, loan guarantees, and standby letters of credit. The project sponsors eligible for TIFIA assistance may be public or private entities. There are various criteria that must met to qualify for TIFIA assistance, and only 33 percent of eligible project costs can be supported.
b) Private Activity Bonds.20-A private activity bond is a form of tax-exempt bond financing that can be issued by or on behalf of state or local governments to provide special financing benefits for qualified projects. Under current law, highway and other transportation facilities are eligible for up to $15 billion in tax-exempt private activity bonds that are not subject to the general annual volume cap on private activity bonds for state agencies and other issuers. The primary advantage of a private activity bond is that it attracts private investment for projects having some public benefit and reduces financing costs to levels that are close to tax-exempt municipal financing rates.
c) State Infrastructure Bank Credit Assistance.21- State infrastructure banks (SIBs) are revolving funds administered by states that support surface transportation projects. SIBs offer low-interest loans, loan guarantees, and other credit enhancements to public and private sponsors of federal-aid highway projects. The Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU) established a new SIB program that allows all states to enter into cooperative agreements with the Federal Highway Administration (FHWA) to establish infrastructure revolving funds eligible to be capitalized with federal transportation funds authorized for fiscal years 2005-2009.22 This program gives the states the capacity to increase the efficiency of their transportation investments and significantly leverage federal resources by attracting nonfederal public and private investment.
d) 63-20 Public Benefit Corporations.-A 63-20 corporation is a nonprofit corporation that, pursuant to Internal Revenue Service Rule 63-20 and Revenue Proclamation 82-26, is authorized to issue tax-exempt debt on behalf of private project developers. In order to qualify for this status, the nonprofit corporation must engage in activities that are "public in nature," the state (or a political subdivision thereof) must have a "beneficial interest" in the corporation while indebtedness remains outstanding, and unencumbered legal title in the financed facilities must vest in the government until after the bonds are paid.
State and local governments can issue tax-exempt toll revenue bonds through established conduit issuers or by creating 63-20 nonprofit corporations. Although the conduit method is preferred, the 63-20 method provides a viable alternative that can be used to finance revenue-generating highway projects in two different ways. First, a 63-20 corporation can issue debt by leveraging future expected toll revenues and can enter into a DBOM agreement with a private contractor to design, build, operate, and maintain the facility for a specified period. Alternatively, the public sponsor of the project could agree to lease the toll highway to be developed by the 63-20 corporation to a private entity, and the 63-20 corporation would leverage the future lease payments to issue its debt. Under both of these arrangements, the private partner may assume responsibility for arranging the financing, but the debt would be issued on behalf of the 63-20 corporation.23
e) Tolling and Variable Pricing Initiatives.-There are a variety of strategies available to impose direct fees on the users of highway facilities. The most common is a toll that can be imposed on a flat-fee basis. An alternative approach is some form of variable or congestion pricing, which charges higher user fees based on the level of traffic volume or time of day (e.g., peak-hour premium). There are a number of different technologies that can be used to collect such tolls, including electronic toll collection systems, automatic vehicle identification systems, and video-based toll collection enforcement.
As noted above, there is a common perception that federal and state gas taxes and other traditional methods of infrastructure finance alone cannot provide adequate funds for the enormous capital and maintenance requirements of the highway network. Tolling is an alternative strategy that can provide positive cash flow to invest in new capacity or reinvest in existing systems. Variable or congestion pricing is a mechanism that can increase the capacity of new or existing high-way assets by spreading out demand and reducing congestion at peak hours. It has been supported by a wide spectrum of stakeholders, including economists (who view congestion pricing as the most efficient method of allocating constrained resources) and certain segments of the environmental community.24
The use of tolling or pricing techniques does not have to be implemented as part of a PPP. There are many toll roads operated by state and regional turnpike authorities. In addition, not all PPPs in the highway sector (as defined in this report) involve tolling or pricing techniques. The use of innovative contracting methods such as D/B does not require any implementation of user fees. Nonetheless, the use of tolling and pricing expands the type and potential benefits of PPPs that can be implemented in the highway sector, particularly as a means of encouraging private-sector investment in highway facilities. PPP project delivery structures involving tolling and pricing include both long-term con-cessions for the design, build, finance, and operation phases of new facilities (where toll revenue can flow to the private sector in exchange for its initial up-front payment or investment in the facility) and short-term operation and maintenance contracts for existing facilities (where toll revenues can be used to fund ongoing operation and maintenance activities).
f) Shadow Tolling and Availability Payments.-A variation on the use of tolling to support private financing of a highway project is the payment of a "shadow toll" to a private contractor that agrees to design, build, operate, or maintain the facility. A shadow toll is a payment to the contractor (or its debtors) equal to the amount of the toll that would have been imposed on users of the facility if a direct user fee had been implemented.25 In other words, a shadow toll is not an actual user fee but a payment that incentivizes the private contractor to maximize actual traffic volume on the facility.
Another variation on this technique is the use of "availability payments" to compensate a private contractor that agrees to front the costs of designing and building a highway facility. An availability payment is a regular (e.g., monthly) payment that is made to the concessionaire during the operating and maintenance phase in exchange for providing a facility available for public use at a predetermined level of capacity and quality. This financing technique has been used frequently in the United Kingdom (U.K.). The Port of Miami Tunnel project (discussed below) is the first major U.S. transportation project to be funded with availability payments.
Unlike shadow tolls, availability payments do not depend on the volume of traffic using the facility. In-stead, the concessionaire typically receives an agreed-upon regular payment during the operating and maintenance phase of the contract less any deductions it is assessed as a result of failure to meet performance standards relating to availability of lanes, service quality, and safety. Availability payments can be used to supplement or even replace user fees in situations where user fees are insufficient, difficult to predict, or unacceptable from a policy perspective. The public sponsor of the project typically provides financing for the availability payment through public sources, although it can also be the recipient of the user fees if a facility is tolled. Since availability payments typically do not start until a facility opens for business, they create a strong incentive for timely completion of the project. In addition, availability payments provide an incentive for continued high operating and maintenance standards and lower the concessionaire's cost of capital by eliminating traffic risk.26
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18 The various tools available to finance highway projects are not the central focus of this report. For more detailed in formation on this subject, see Congressional Budget Office, Innovative Financing of Highways: An Analysis of Proposals (1998); Fed. Highway Admin., Manual for Using Public-Private Partnerships on Highway Projects (2005); Transp. Research Bd., Special Report 285, The Fuel Tax and Alternatives for Transportation Funding (2006); Nat'lCoop. Highway Research Program, Project 20-24(49), Future Financing Options to Meet Highway and Transit
Needs (2006).
19 23 U.S.C. § 601-609.
20 See U.S. Dep't of Transp., Innovation Wave: An Update on the Burgeoning Private Sector Role in U.S. Highway and Transit Infrastructure (2008), available at http://www.fhwa.dot.gov/reports/pppwave/ppp_innovation_wave.pdf.
21 See 23 U.S.C. 610, SAFETEA-LU, § 1602, program discussion available at http://www.fhwa.dot.gov/safetealu/factsheets/sibs.htm.
22 23 U.S.C. 610, § 1602 (2008).
23 See FHWA Overview of Non-Profit Public Benefit Corporation Models, available at http://www.fhwa.dot.gov/PPP/dbfo_6320.htm.
24 For more background on the potential benefits of variable tolling and congestion pricing, see Environmental Defense, No More Just Throwing Money Out the Window: Using Road Tolls to Cut Congestion, Protect the Environment, and Boost Access for All (2006), available at http://www.edf.org/documents/5257_TollingReport0506.pdf.