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ASSESSMENT OF SHADOW TOLL APPLICABILITY
Functions under a project arrangement utilizing shadow toll concepts will include:
- Collection of funds from one or more non-user sources by a project administrator;
Non-user funding sources can be based on government contributions, including:
- Federal grants;
Funding sources can, and even should, include "value capture" techniques whereby bene ficiaries of the project contribute in rough proportion to the benefits they receive. Value capture funding sources may include:
- Special tax assessments;
The administering entity, generally but not necessarily a governmental unit, could be an office or agency of a state department of transportation, a state infrastructure bank, an economic or industrial development agency, a local government, or a non-profit, private sector organization. It may be possible and advisable for this administering entity to have the power to issue debt; clearly it would be most beneficial if this debt could be tax exempt. Payments to the DBO could be on the basis of shadow tolls to cover life-cycle costs — construction plus operations — or shadow tolls to cover only maintenance and operations ("M&O") costs. Under the latter scenario the bonding capability of the administrator could be utilized to cover construction costs, and annual income from the various funding sources could pay construction debt service and M&O- based shadow tolls. This is illustrated on the accompanying graphic entitled "Alternative Shadow Toll Schemes."
The DBO entity could be a private sector consortium, but not necessarily. An established toll agency (already possessing bonding capabilities) could also fill that role, as could a state DOT operating under contract to or a special arrangement with the project administrator. A parti cularly interesting approach would be to have public and private sector organizations compete to be the DBO.
Assessment Bases
The fundamental questions to be asked in assessing a possible shadow toll structured project are:
- Can the use of shadow tolls permit a project to be undertaken that might otherwise not be possible for political, institutional, financial, or other reasons? and
For most projects considered meritorious but for which normal governmental program financing is not available, the first assessment is whether they can be financed as a pure (real or explicit) toll project on a non-recourse basis. Factors in this phase of the decision-making process typically include:
- Considering "willingness to pay" and fare elasticity as well as overall demand, will the projected traffic produce sufficient revenues to make the project financially feasible?
If "real" tolls are not feasible, the next phase in the decision-making process may be comparing shadow toll concepts to government administration of the project using comparable revenue sources. Considerations in this phase of the process may include:
- Do proposals of competing DBO's for the project actually influence traffic and revenue levels (are alignments, interchange locations and other traffic-related characteristics given to them, or are they developed by the DBO's)?
Project debt may be issued to cover construction costs only, or construction and major maintenance costs. Debt may be issued by the project administrator or by the DBO consortium. As noted above, both the administrator and the DBO could be either public or private sector entities, though it will be more likely that the former is from the public sector and the latter from the private. Depending on this, either entity may be able to issue tax-exempt debt — this should certainly be a factor in the formulation of the overall project structure.
In a typical (real) toll-financed non-recourse project, the variability of traffic and the fact that revenue derived therefrom is subject to elasticity as well as political concerns (will they really be permitted to increase tolls if necessary?) directly influences interest rates and overall project viability. Shadow-toll-based debt issued by the DBO would certainly have its terms influenced by traffic variability, but not elasticity or political reactions to proposed toll increases. Debt issued by the project administrator would be completely independent of all of these concerns, and instead would reflect the creditworthiness of the underlying funding sources.
The potential number and diversity of these funding sources can improve the credit worthiness of an issue dependent on them. Further, the project administrator could be granted the power to increase income from some or all of these sources. Agreements with government funding sources could include provisions for adjustments if construction difficulties or variable traffic made this necessary. Agreements with developers and assessment districts could be similarly structured, though limits would seem to be an appropriate subject of discussion. From the perspective of financial markets, this ability to increase revenues, if required, could take the debt out of the pure "non-recourse" category and improve its marketability and interest rate.
Existing Toll Facility Projects
Many toll authorities today, particularly those in urban areas, are often requested to institute congestion relief measures or modification/improvements to achieve environmental or social objectives. These measures may include: the reduction of tolls during off-peak periods; reductions of tolls to benefit commuters, local resident or other categories of users; the conver sion of an existing traffic lane to high-occupancy vehicle usage; the implementation of intelligent transportation system (ITS) techniques; and the construction of new high-occupancy vehicle or other special use lanes.
Many toll authorities are bound by trust indenture agreements which specifically prohibit any actions on their part which will impair net toll revenue levels. Thus many of the foregoing measures, while socially, environmentally or politically most desirable, cannot be implemented within the present legal arrangements under which the toll authorities must operate.
The calculation of the revenue loss per vehicle were such measures to be implemented can be the basis for shadow toll payments — or more precisely in this case, shadow toll supplements to the real tolls charged by the operating toll agency. The shadow toll payments could be met from recurring annual payments from a federal or state program, or other sources. Alternatively, a federal grant or single state appropriation could be used to establish a fund that could permit necessary construction to be subsidized and on-going operating revenues to be supplemented via shadow tolls.
The toll authority or agency would typically have the resources to carry out all of the necessary project implementation functions ranging from planning and design through construc tion and operation. They would also be the owners of the improvement, and could in many cases finance it themselves via a tax-exempt issue.
Shadow toll concepts can be most applicable to the needs of toll authorities requiring such improvements where net revenue levels may be adversely affected.
Community-Based Non-Toll Projects
In some instances, the need for a new highway project or improvement can be based upon potential community benefits. These can include: access roads to permit economic development; by-passes of a central business district to reduce congestion or truck traffic; other types of congestion relief measures, including ITS procedures; and highway improvements to preserve the character of landmarked, historic or scenic areas.
It is appropriate to identify categories of beneficiaries, and specific benefitting parties within each category. Through such an approach, and normal governmental/political/institutional processes, sources of funding may be identified. As indicated above, these could include grants under various federal programs, state appropriations, county/municipal contributions, special tax assessments, developer fees, and tax increment financing, among others.
To achieve the benefits of tax-exempt financing, and to ensure local/community control of the process, the project sponsor or developer could be a local governmental entity or a non-profit organization established for the specific purpose of advancing the project. This sponsoring entity could then utilize the resources of existing government departments or consultants to carry out necessary planning, design and construction management services. Funds would be accumulated in a special reserve, and construction contractors and, if necessary, facility operators could be paid via the disbursement of shadow tolls. Shadow tolls are not essential to this process; funds could be received and properly disbursed by the sponsoring entity without the employment of shadow toll concepts; nevertheless, if some of the contributions were of a recurring nature, and a private sector operator was to be given the traffic risk, shadow tolling could be appropriate. Alternatively, if a local government were given the facility maintenance responsibility, and the level of required maintenance was roughly proportional to traffic usage, recurring shadow toll payments to the government entity maintaining the facility could be reasonable.
Projects of National Interest
Periodically there are projects proposed of national significance due to location, historic importance, or other factors. In some cases shadow tolling may be an appropriate vehicle to transfer resources from the funding sources to the developer, contractor or operator providing project services.
Depending upon the characteristics of the project, funding sources could include federal grants, state appropriations and local governmental contributions. Having a sponsoring entity possess the ability to issue tax-exempt bonds would clearly be advantageous; a properly constituted commission or authority could be suitable.
Professional services required through construction of the project could be paid for directly by the sponsor; these might include project planning, design, construction and construc tion management. The continuing operation of the project could be reimbursed using shadow tolls — particularly if the attraction or attainment of specific traffic levels were a responsibility of the operator. A significant portion of the operator's maintenance expenses would be proportional to traffic usage, and shadow tolling would be responsive to this.
Project Implementation for Public/Private Partnerships
As noted previously, major advantages of shadow toll concepts include: ready adapt ability to multiple funding sources; the cost to the sponsoring government entity over the concession period can be largely known; the operator is given the traffic risk, or a portion thereof; and competition for a concession or franchise can be based primarily upon a shadow toll schedule and hence can be very "open" and clear cut. Major strengths of public/private partnerships include the use of private sector funds and the extensive support already provided by various legislative actions and mandates. The strengths of both concepts can be most complementary.
Generally accepted considerations with respect to project implementation include:
- Consistency with regional transportation programs and goals;
The foregoing factors guiding project development must be reflected in tasks and pronouncements over the course of the project development process. Each is necessary to obtain and hold support, and create the broad consensus that is essential for a project to advance. The length of the development time frame is a major concern in the implementation guidelines suggested below. It is crucial to minimize uncertainties and durations of involvement on the part of private sector parties if their interest is to be maintained.
Phase One of an implementation process could include the following:
- Identification of a potential project;
While a potential project could be identified by virtually anybody, the other first steps noted above often have a local orientation, though state agencies' support will be necessary in practice. A private sector developer or a local interest could be a catalyst to pull these initial pieces together. The output of Phase One should be a set of documents demonstrating the merits of proceeding further. The identification of a potential sponsor — and the availability of tax- exempt financing — should also be explored.
Phase Two of a possible implementation process could be under the sponsorship of a state agency using legal, financial, and engineering consulting services as required. Major elements of a Phase Two effort could be:
- Preparation of a technical "package";
The development of a financing package should consider "who benefits." The public sector administrator/sponsor/banker could be a state infrastructure bank, or a properly staffed affiliate of a state infrastructure bank or another state agency. The capability to issue tax-exempt debt could be advantageous if the sponsor or developer is not a purely "for-profit" private sector organization.
A third and final implementation phase could include:
- Formal solicitation of private sector interest;
The determining factor among qualified responders is simply a shadow toll schedule. A term of years could be specified, and the developer proposing the lowest toll schedule could be selected. A combination of term and toll at a given interest rate permitting economic comparisons to be made could also be the primary selection criterion.
Public sector advantages associated with the use of shadow toll concepts and public/ private partnerships include:
- Leveraging of limited public sector funds;
Public sector administrator duties include the collection of revenues from diverse sources, remitting the shadow-toll-based payments to the developer/operator, and monitoring perfor mance.
Advantages to the private sector include:
- Project study and support precedes formal private sector commitments;
There are many private sector developers who have been badly hurt by project schedules that go on without end. The procedure outlined above limits that duration and has government- sponsored studies and support precede formal private-sector commitments. The minimizing of front-end funding requirements will encourage more private-sector organizations to consider infrastructure development and stimulate competition.
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