TE-045 Evaluation - Effects on Project Acceleration

While TE-045's net effects on investment levels have been spread among just 16 projects, with the vast majority of the extra investment concentrated in just two projects, the financing tools' impact on accelerating projects has been significantly more widespread. Sixty of the 71 active TE-045 projects have been or will be accelerated through use of one or more of the financing tools. In some cases, cash flow tools such as partial conversion of advance construction have offered States the opportunity to pursue multiple projects concurrently; in the absence of these tools, the States would have been required to have sequenced development of these projects over a number of years. In other cases, use of investment tools such as flexible match and Section 129 loans has resulted in additional funding being used to accelerate high priority projects that would otherwise have been deferred in favor of lower priority projects, or used to advance projects that likely would never have been constructed in the absence of TE-045. Expediting project construction generates real economic returns to highway users and other project beneficiaries by bringing direct and social benefits on line sooner. Assuming that a project's benefit-to-cost ratio is positive, the present value of its net benefits is much higher if the project is built now rather than deferred for multiple years.

This chapter details the span of time by which certain of the 88 projects were accelerated through use of the various financing concepts and describes how the strategies expedite projects in differing fashions. The chapter closes with a discussion of the economic returns associated with bringing projects to completion sooner.

States' use of the financing concepts developed under TE-045 has expedited or will expedite construction of 60 of the 71 active projects approved under the initiative. The nature of project acceleration differs across these projects. In 43 cases, State officials were able to estimate the extent to which projects were accelerated or enabled the acceleration of other projects; for these projects, completion occurred an average of 2.2 years earlier than would have otherwise been the case. For five projects, application of a TE-045 financing concept clearly accelerated development of a project, but by an undefined amount. In 10 cases, the projects never would have been pursued in the absence of TE-045. An additional two projects were able to avoid delay by using TE-045 techniques. The following table summarizes the amount of acceleration experienced by the 60 TE-045 projects that have realized or will realize acceleration benefits.(Taking all 71 projects into account, the average number of years of acceleration is 1.7 years.) Table 4.1 summarizes the project acceleration effects realized under TE-045 and Appendix 4 provides a greater level of detail on project-by-project acceleration effects.

	Number of projects accelerated	Average acceleration	Range of acceleration
Projects with specified acceleration	43	2.2 years	6 months to 10 years
Projects with undefined acceleration	5	--	--
Projects that would not have been pursued without TE-045 tool	10	--	--
Projects that avoided delay	2	--	--
Total accelerated projects	60
(Total number of completed or active projects equals 71.)
Source: FHWA quarterly TE-045 project updates and supplementary independent telephone interviews.

Use of cash flow tools typically expedites projects by permitting concurrent, rather than sequential, project development. Before States gained access to these cash flow techniques through TE-045, the slow-spending nature of most Federal-aid highway projects created a situation in which years would pass before obligated Federal funds translated into actual expenditures. This situation occurred because traditional rules governing States' obligation of Federal-aid highway funds demanded that the entire amount of Federal funding needed to complete a given project be set aside in the first year of project development, irrespective of the number of years over which actual expenditures for construction would be incurred, as illustrated in the examples provided later in this section.

In contrast, certain cash flow techniques permit States to obligate only the amount of funding that is expected to be spent in a given year. Some State observers have expressed concern that these techniques can put States in a position of prospectively placing claims on future obligational authority, in that they will be incurring commitments today that will tie up future obligational authority for years to come. However, careful State planning and judicious application of cash flow techniques to suitable project candidates can help forestall situations in which future State flexibility could be inhibited by future demands on Federal obligational authority. State officials emphasize that large projects with well-defined cost schedules are particularly strong candidates for cash flow techniques. Bridge rehabilitations, for example, often provide an especially compelling case for use of techniques such as partial conversion of advance construction, not only because of their generally high cost, but also because the life-cycle cost efficiencies of timely rehabilitation of complex structures are so great.

A few current examples of TE-045 projects serve to illustrate cash flow tools' capacity to expedite projects.

In Florida, use of post-ISTEA advance construction is permitting the State to start construction now on four congestion relief and safety projects with a combined cost of approximately $200 million.(Since enactment of the NHS Designation Act, States may seek FHWA approval to advance construct projects that will be converted to Federal-aid after the end of the ISTEA authorization period. The legislation limits the use of post-ISTEA funds to a State's unobligated balance of apportioned funds plus the amount of Federal funding assumed in the State's three-year State Transportation Improvement Program (STIP). For Florida, this limitation does not prove unduly restrictive, as it represents a level of funding far greater than what the State would envision consuming through advance construction. Current indications are that similar circumstances prevail in most states.) Under the traditional advance construction program, Florida would have had to wait until after reauthorization to assure itself of the opportunity to convert these State-funded projects to Federal-aid at a later date. Under TE-045, Florida DOT can start these projects now and still preserve their eligibility for conversion to Federal-aid after 1997. Each of the projects pursued under Florida's post-ISTEA advance construction program is shown in Table 4.2. The table also displays the respective project acceleration that resulted from use of post-ISTEA advance construction.

Project	Acceleration benefit
Add lanes to Interstate 75	1 to 3 years
Add lanes to Interstate 4	1 year
Add lanes to Interstate 95	Protected existing schedule; without TE-045, project would have been delayed.
Reconstruction of existing and construction of new weigh stations	TE-045 enabled these projects; without TE-045 the State would have been unable to do these projects.

In Connecticut, the State DOT has elected to partially convert the advance construction of a $35.7 million component of a major bridge project with a total construction cost of $55.4 million.(As previously noted, under advance construction States may construct projects with State funds while still preserving the projects' eligibility for future Federal-aid reimbursement. States transfer projects to Federal-aid status through a process known as conversion, which traditionally required States to obligate the entire cost of the project at once, regardless of the expected timeline for actual expenditures. Partial conversion, in contrast, permits obligations to be staged over time such that they reflect the multi-year pattern of actual expenditures.) Through use of partial conversion, the State will accelerate the replacement of a mainline bridge on Interstate 95, as well as the replacement of two ramp structures, and the reconstruction of an adjacent avenue. Without partial conversion, Connecticut would have had to obligate the entire $35.7 million for the I-95 bridge project in fiscal year 1996. Consuming that much obligational authority for the single project would have required the State to defer other important projects. On the other hand, opting to pursue these other needed projects instead would have required the State to defer the I-95 bridge replacement. Under TE-045, however, the State found a third path. Through use of partial conversion, Connecticut will spread its Federal-aid obligations for the I-95 bridge project over two years: $20 million in fiscal year 1996, and $15.7 million in fiscal year 1997. As a result, not only is the State able to proceed with the I-95 bridge project in fiscal year 1996, but it can also redirect the extra $15.7 million in obligational authority, that would otherwise have been set aside for the I-95 bridge project, to other projects. State documents indicate that this $15.7 million can be expected to support simultaneous obligation of funds for about six smaller bridge projects.

As discussed later in Chapter 5, phased funding is a cash flow technique that was tested under TE-045 but not subsequently approved for regular use. The technique has now been largely eclipsed by partial conversion of advance construction, as the two strategies achieve similar ends. Like partial conversion of advance construction, phased funding permits States to tailor their schedule of project obligations to anticipated expenditures. However, phased funding differs from partial conversion in that, subject to congressional authorization, the Federal government makes an up-front commitment to the Federal share of the project costs. Under advance construction, the Federal government makes no such commitment of funds until the time of conversion.

Phased funding of Watkins Drive, an urban freeway in Kansas City, Missouri, provides a good example of how phased funding functions. Construction of the $33.7 million project resulted in Federal outlays of $5.1 million in fiscal year 1995, and will result in Federal outlays of $9.1 million in each of fiscal years 1996 and 1997, for a total of $23.3 million. The remaining project costs will be covered by State and local funds. Under phased funding, Missouri is able to obligate Federal-aid funds in roughly the same pattern that they are expended, meaning that the State avoided the need to tie up the $23.3 million in Federal obligational authority in fiscal year 1995. State officials estimate that using phased funding for this project is accelerating its construction by about two years. In addition, other State projects will be able to advance simultaneously.

While used in only a few instances, tapered match has allowed several States to overcome near-term shortages in State matching funds. In Washington State, limits on State expenditures threatened to delay by a year or more a $35.9 million project to construct high-occupancy vehicle lanes and make related road improvements. By using tapered match, Washington will be able to obtain Federal reimbursement of 100 percent of its expenditures on the project until the maximum Federal contribution has been consumed. By that time, a new State budget cycle will have begun, providing the State DOT with a fresh influx of spending authority that will permit completion of the project with 100 percent State funds. Officials from Washington State DOT indicate that as a result, use of tapered match is accelerating construction and completion of the project by a full year.

Use of cash flow tools typically permits States to pursue multiple projects concurrently rather than having to choose among competing priorities. Cash flow tools thus result in a "net" acceleration of a State's overall annual construction program. In contrast, investment tools tend not to result in net acceleration. This occurs because even when investment tools are used, State DOTs must still commit a share of their annual obligational authority to the selected project, and thus cannot use that same authority to concurrently advance other projects. Nonetheless, financing tools that are principally geared to investment effects can result in programmatic shifts that permit selected Federal-aid projects to move to construction sooner. In addition, flexible match and Section 129 loans have helped to advance projects that may never have been constructed if treated as conventional pay-as-you-go Federal-aid projects.

The following sections present two examples of projects that moved to construction sooner than expected due to use of flexible match and a Section 129 loan. The following examples also explain the process by which each financing tool induced the acceleration.

Flexible match can help accelerate individual projects by offering States increased latitude in choosing which projects to expedite among the array of projects vying for limited Federal-aid funds. In Pennsylvania, for example, the use of flexible match accelerated construction of a $3.2 million TE-045 project that comprises seven individual transportation enhancement projects. The projects include four pedestrian/bicycle paths on abandoned railroad rights-of-way, an overlook, a historic preservation study, and a scenic beautification project. Of the total $3.2 million cost for these seven projects, $1.023 million is being funded from private sources. A series of other projects with a similar construction value were also vying for the same Federal funds, and although these projects were of lower priority, they had readier access to public matching funds. In the absence of flexible match, PennDOT may have had to pursue these lower priority projects at the expense of the privately-assisted projects, since private contributions could not have offset the State match. Under flexible match, however, the opportunity to substitute private funds for public matching funds offered PennDOT a means to expedite construction of the higher-priority projects for which public matching funds were not available.

The capacity of Section 129 loans to attract new capital to a project may result in the financing of projects that otherwise would not have been constructed or would have been substantially delayed. For example, in the case of the Stark County Intermodal Facility, Ohio DOT used a Section 129 loan to contribute to the funding of the facility. The loan will be repaid with trailer lift fees, and the State will use those revenues to capitalize a Congestion Mitigation Revolving Loan Fund. It is true that Ohio DOT had to commit a share of its obligational authority to this project in order to obtain reimbursement for the loan amount, meaning that other projects that could have received that same share of obligational authority had to be deferred to accommodate pursuit of the Stark County Intermodal Facility. However, given the high priority of the Stark County Intermodal Facility, as well as its capacity to help seed a revolving fund, State planners considered acceleration of this project important enough to justify a decision to forego other uses of the State's limited obligational authority. TE-045 was of direct benefit in moving this project to construction, for without the ability to repay the Section 129 loan using lift fees, the project would likely not have been built at all.

Project acceleration often helps State DOTs better manage their annual and multi-year capital programs by bringing individual or multiple projects on line sooner. At the same time, moving projects to construction sooner not only produces scheduling benefits to program managers, but can also generate real economic returns to highway users and other project beneficiaries. Typical highway construction projects provide direct benefits in three dimensions:

In addition, certain projects also offer environmental benefits, economic development opportunities, and other associated advantages that accrue not only to road users, but also to communities more generally.

When projects are accelerated, the stream of net project benefits (i.e., benefits net of costs) are realized by road users and other project beneficiaries that much sooner. In order to compare the costs and benefits that occur over time, those costs and benefits must be placed on a comparable basis by discounting them back to present-day values, taking into consideration the time value of money. The net present value of a project completed today is greater than that of a project completed several years from now, due to the fact that benefits earned later are reduced (i.e., discounted) in proportion to the length of the delay. Consequently, a project that is delayed five years has a lower net present value than one that is delayed by only three years, assuming that its discounted benefits exceed its discounted costs.

To illustrate the value of project acceleration, let us assume that a certain project will generate four times as much benefit as it costs, for a benefit:cost ratio of 4:1. Next, assume that this hypothetical project costs $100 million, and assume a discount rate of 6 percent. Under these conditions, accelerating the project by 2 years can be viewed as yielding a $43 million increase in marginal benefits. The calculation is performed using the following formula:

Quantifying the discounted marginal benefits of constructing a project now versus two years from now yields the following comparison:

Thus, the discounted stream of benefits realized from a project completed in 1996 exceeds that of a project completed in 1998 by $43 million.

To apply this methodology to the entire universe of TE-045 projects would require a separate benefit-cost analysis for every project, as project characteristics, benefits, costs, timelines, and possibly even appropriate discount rates are different for each project. Nonetheless, the basic principle of the net present value of a project being greater when benefits are realized sooner holds true no matter the project, so long as the benefit:cost ratio of the project is positive.

A further financial advantage of completing projects sooner rather than later is the avoidance of inflation costs. Inflation savings can be particularly significant in the case of highway projects, for some types of expenditures can escalate far in excess of the standard rate of inflation. The most dramatic example is in acquisition of right-of-way to support new construction. In areas of rapid commercial and residential growth, the costs of land can double or even triple over as little as a 5-year span of time, such that acquisition of right-of-way to provide new alignments would escalate by similar amounts.

Acceleration of projects can also be of particular benefit in the case of rehabilitation projects. Although preventive and corrective maintenance projects are generally not eligible for Federal assistance, major maintenance, such as pavement rehabilitation, does receive Federal support. Life-cycle cost analyses show that under most circumstances, the present-value benefits of performing early rehabilitation far exceed those of performing a later reconstruction, such that an early investment pays off over time. It thus appears that use of cash flow tools may be especially warranted when used to accelerate rehabilitation projects.