As noted earlier, PABs are an existing financing tool-albeit a newly available one for highway investment. A number of factors have been cited as potentially limiting the value or impact of this financing tool for surface transportation. The Commission believes that policy makers may wish to examine these issues in assessing the future role of PABs in the context of an expanded program.
• Issuance Volume-The $15 billion national limit on the highway/intermodal PABs authorized by SAFETEA-LU is likely to be consumed by major user-backed projects currently in the pipeline or being planned. Increasing the amount authorized would expand the reach of this financing tool.
• Applicability of the Alternative Minimum Tax-Like virtually all other private activity bonds, the interest on highway/intermodal PABs is subject to the Alternative Minimum Tax (AMT).6 This narrows the market of potential investors and increases borrowing costs, thus reducing the financial attractiveness of these instruments. Particularly with the current credit market disruption, the AMT "yield penalty" on PABs significantly restricts project sponsors' ability to obtain cost-effective financing. Removing the AMT is under consideration by policy makers and would encourage greater investment in user- Packed infrastructure projects that benefit the public.
• Restrictions on Land Acquisition-The U.S. Tax Code requires that not more than 25 percent of Pond proceeds be used to acquire land. Qualified highway or surface transportation facilities (e.g., new capacity toll roads) may require significant right-of-way (ROW) acquisition for project construction. Typically ROW acquisition costs amount to about 10-25 percent of total project costs and can occur months, if not years, in advance of final design and construction. As a result, more than 25 percent of the proceeds of any single Pond issue sold early in the project life may be needed to help finance the acquisition of real property. Increasing the allowable percentage or eliminating the restriction could increase the number of projects eligible for PABs.
• Limited Structuring Flexibility-Many start-up toll roads do not generate sufficient revenue during the ramp-up period to fully cover the interest expense on borrowed funds. Tax regulation prohibits the accretion of interest on PABs, which is deemed to be working capital and a prohibited use of proceeds. This restriction limits the usefulness of PABs in project financings that require back-loaded repayments, where interest is deferred to accommodate the revenue profile and increase the amount of proceeds available to build the project. Eliminating the prohibition could increase PABs' attractiveness for start-up toll roads.