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Chapter 6 - Opportunities
for Continued Research and Legislative Action
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The majority of strategies tested under TE-045 have now been incorporated into standard practice, either through inclusion in the NHS Designation Act or through adjustments to administrative rules. Even so, lessons learned through the development and implementation of a series of TE-045 projects continue to suggest additional refinements to the financial characteristics of the Federal-aid program. In other cases, the lessons derive from financing concepts that were not successfully implemented or for some reason were not considered feasible during the two-year history of TE-045. Some of the lessons learned indicate a need for further research. Reauthorization of ISTEA offers the next major opportunity for transforming on-going lessons into statute.
Throughout the two-year course of the TE-045 initiative, the financing concepts that have shown the greatest potential to generate substantial leveraging effects are those that foster interactions between Federal assistance and major debt financings. The central irony of the TE-045 initiative is that those tools with the greatest leveraging capacity -- Section 129 loans and bond reimbursement -- are the same ones that have been least frequently used. While no single strategy is apt to respond to all of the barriers that impede States' use of these techniques, continued outreach efforts by FHWA will be an important catalyst to further use of these tools. In addition, continued research and potential legislative consideration of additional proposals promises to broaden the appeal of leveraging strategies.
This chapter introduces these issues by considering, in sequence: the potential to expand use of Section 129 loans and bond reimbursement to support debt financings; strategies for extending the Federal role in project loans and credit enhancement through capitalization of State infrastructure banks, State access to unobligated balances of contract authority and various forms of direct Federal credit enhancement; options for restructuring existing matching requirements; new methods for States to generate non-traditional revenues to augment traditional forms of taxes and fees; and new potential linkages between innovative financing and procurement strategies.
Strategies for Expanding Utilization of Loans and Bond Reimbursement
Continued training and outreach can play an important role in expanding the use of Section 129 loans and bond reimbursement. FHWA's accomplishments to date in publicizing TE-045 are evidenced by the large State response to the program. State DOT officials have indicated that FHWA's training courses have helped them understand the structure of the financing tools tested under TE-045. Equally important, they note that FHWA's efforts to refine the content of courses and publications have been quite responsive to States' changing needs and circumstances. As States gain stronger familiarity with the full range of tools currently available to them, FHWA may wish to hone the content of further training efforts so that these courses place comparatively stronger emphasis on strategies that promote the use of Federal aid to facilitate debt financings. In particular, case studies of projects such as the George Bush Turnpike in Texas can demonstrate how multiple tools, such as loans and partial conversion of advance construction, can be effectively combined.
If training courses are steered in this direction, the audience for these courses should be broadened to include State and local financial managers as well as transportation officials. Development of a larger audience for the innovative financing training courses could enrich the content of roundtable discussions by providing a variety of perspectives on the applicability of various transportation financing tools to State-specific conditions. As access to capital markets and an understanding of project finance become more critical to the structure of State highway (and transit) programs, forging a stronger alliance between transportation officials and financial managers will be essential to States' capacity to capitalize on the leveraging opportunities made available to them.
Another possibility for stimulating the use of Section 129 loans and bond reimbursement is the reconsideration of certain matching requirements. Currently, States must match Federal-aid funds on projects that employ reimbursable loans or bond expenditures, in the same way that they must match Federal funds provided to grant-assisted projects. While existing matching requirements do not appear to be an especially significant barrier to use of loans and debt when compared to all the other impediments to their use, there is little argument for upholding additional barriers to States' capacity to advance these complex transactions. At the margin, waiving, deferring, or otherwise simplifying the matching requirement for projects that use loans or Federal reimbursement of bond financing costs may simplify financing arrangements that already face numerous hurdles.
The appeal of Section 129 loans might also be enhanced by broadening the types of projects States may fund with loan repayments. Under Section 129, as revised by the NHS Designation Act, States may use repayments of loan principal and associated interest payments for three main purposes: (i) grants to new projects; (ii) loans to new projects; and (iii) provision of various forms of credit enhancement, including bond insurance. Regardless of the form of assistance, the recipient projects must be eligible for funding under Title 23 of the U.S. Code. Some States have suggested that greater flexibility in the permissible uses of loan repayments could increase the practical benefits of making Section 129 loans. For example, eligible uses of loan repayments might be extended to include capital expenditures on a wider variety of transportation-related projects, such as port, airport, and railroad improvements.
Greater use of loans and bond reimbursement may also result from continued efforts to identify promising new combinations of Federally-reimbursed loans and bonds with other financing techniques. As previously noted, use of a Section 129 loan in conjunction with partial conversion of advance construction offers a good way to distribute resulting draws on obligational authority over a span of several years. As another example, one State is currently considering the possibility of blending a Section 129 loan with advance construction to create a contingent source of repayment for short-term construction financing. Under this as yet untested approach, the State could initially finance the advance construction project with short-term notes. When the notes mature, a Section 129 loan could be used to repay the notes if other options for converting the short term obligations to permanent financing are unavailable. Continued research through the TE-045 initiative is likely to identify other promising combinations as well; one recent proposal contemplates use of the experimental tapered match strategy in conjunction with bond reimbursement to accelerate the feasibility of a debt financing by several years.
Recent enactment of the State infrastructure bank pilot under the NHS Designation Act represents a major shift in Federal policy toward expanding States' access to a broad array of financial innovations. The pilot, under which Federally-capitalized, State-operated banks will be established in ten States, offers an unusual opportunity to test a range of financing strategies, including conventional loans, subordinated loans, low- or no-interest loans, interest rate subsidies, letters of credit, capital reserves for debt financing, and lease/purchase financings. If State demand is sufficient, authorization of additional slots for pilot banks should be considered -- either as part of ISTEA reauthorization, or sooner. The risks associated with offering additional States the flexibility to establish banks if they so choose are minimal, and the potential gains in terms of additional lessons learned are large. To ensure the widest range of implementation lessons, preference could be given to State proposals that will test strategies not represented in the ten existing pilots. For example, multi-State compacts, wherein two or more states would establish a regional bank, could be given special consideration.(The fiscal year 1997 appropriations act for the U.S. Department of Transportation included language expanding eligibility to establish infrastructure banks to all States, subject to Departmental approval.)
Program-Level Enforcement of Non-Federal Matching Requirements
The use of tapered match under TE-045 has raised fundamental questions about the rationale for existing matching requirements. Most observers agree that matching requirements are probably useful, in that they extend the purchasing power of every Federal dollar by a bare minimum of (usually) 20 percent. In addition, some observers argue that matching requirements help assure States' own commitment to individual projects that they choose to fund with Federal assistance. This latter argument for matching contributions for individual projects implies that States approach Federal funds with less discipline than they do State funds. From a practical perspective, as long as resources are constrained, no State willingly squanders its limited transportation funds, regardless of those funds' initial source.
As long as budgets are constrained and States' commitment to individual projects is assured through a rigorous planning process, the presumed need to enforce matching ratios for individual projects may warrant a closer look. As noted in Chapter 5, program-level match, in which matching ratios are enforced across entire funding categories rather than on a project-by-project basis, offers one mechanism by which matching requirements could still be retained, but in a more streamlined fashion.
Ongoing monitoring of the results of the STP Simplification pilot offers a key opportunity for researching the potential benefits and risks of program-level match. Currently three States -- Minnesota, Tennessee, and Washington -- are planning to experiment with STP Simplification, in which numerous projects being funded through the Surface Transportation Program are bundled together for the sake of streamlining the approval and administration of individual projects. STP Simplification approximates program-level match in that the standard matching ratio applies to the full collection of projects included in the pilot, rather than to each individual project. Some State officials argue that bundling projects together in this fashion has the potential to produce sizable administrative and construction efficiencies by permitting States to concentrate Federal funding on a smaller number of projects. As the participating States develop a track record with STP Simplification, the results of their experiences can indicate whether these advantages in fact materialize. The results of these pilots will also help indicate whether program-level match presents any risks to accountability that could potentially accompany a program structure in which States regularly pay for selected projects with 100 percent Federal funding.
Non-Traditional Income Streams
A number of projects advanced under TE-045 are using tolls or other forms of dedicated revenues (e.g., lift fees at intermodal facilities) to generate a stream of revenue that can repay project debt. The NHS Designation Act of 1995 broadened the terms under which States may levy tolls on Federal-aid highways by raising the Federal matching share for toll roads from 50 percent to 80 percent. While controversial, some transportation experts propose that under reauthorization, continued restrictions on tolls on the Interstate be lifted, such that States have complete discretion as to which highways to toll.
Looking beyond tolls, TE-045 has also prompted State consideration of ways to use existing assets to generate income that could pay for the operation and maintenance of the existing asset, or the capital development of a related facility. Several States proposed TE-045 projects that would have permitted private concessions at rest areas, but FHWA limited its approvals to projects still in the study phase, since rest area commercialization represents so dramatic a departure from existing statute.(The prohibition on concessions at rest areas is codified under Section 111 of Title 23) Principal concerns with the concept center on potential safety impacts and, more notably, perceived conflicts with existing commercial enterprises, such as convenience stores, gas and diesel stations, and truck stops, that currently do business some distance off the Interstate. As a result, the advantages and disadvantages of commercialization of rest areas and other forms of income generation have yet to be tested through TE-045 or any other mechanism.
Within the context of reauthorization, income generation will likely remain an important area for further research, particularly as States seek ways to augment constrained public budgets with new revenues. As part of TE-045, or under a separate initiative, FHWA may wish to take a closer look at income generation, and particularly at those strategies most likely to permit private partners to derive a commercial benefit from rights-of-way without impeding access or jeopardizing safety. While one TE-045 participant, the Missouri Highway and Transportation Department, has entered into a public-private partnership under which fiber optic cable is being installed along Interstate right-of-way, additional opportunities to generate revenue streams through commercial leases or other beneficiary fees merit continued consideration.
Strategic Access to Unobligated Balances and Direct Federal Credit Enhancement
With budgetary constraints likely to persist throughout the coming authorization period, a number of States are seeking ways to leverage their unobligated balances. A number of proposals are currently under consideration, some of which focus on how States' unobligated balances could be transformed into credit enhancements.(All other things equal, using unobligated balances to provide credit enhancement would increase Federal spending, but its impact on spending levels and ultimately the Federal deficit would be fractional compared to the cost of States' accessing unobligated balances as standard obligational authority.) Alternatively, the Federal government could offer direct project loans and direct support to issuers' credit from existing budget accounts. The latter concept has been pioneered by two California Transportation Corridor Agencies, which secured special legislation providing standby Federal lines of credit for three toll projects in Orange County. A third proposed approach would create a new Federally-capitalized financial institution to offer direct loans and credit support to individual projects throughout the nation.
If States are given legal authority to access their unobligated balances for the purposes of credit enhancement, or if the Federal government offers direct loans and credit support either through existing accounts or through a new national financial institution, the effectiveness of the selected strategy will ultimately hinge on its ultimate capacity to make debt financing more attractive and more affordable. An especially critical consideration will be the development of a budgetary approach that can gain investor acceptance while also retaining sufficient discipline within the Federal budget process.
Links Between Innovative Financing and Contracting Strategies
For most highway projects, responsibilities for design, funding and finance, construction, maintenance, and operations are divided among many public and private sector participants. Some States have begun to explore the potential risks and rewards of turnkey contracts, under which a single private entity assumes multiple responsibilities. Some procurement experts believe that powerful efficiencies can be realized when multiple responsibilities are lodged in one firm through, for example, a design/build contract. Other observers fear that consolidation of responsibilities can prove a threat to open competition between firms. To explore the debate, FHWA has been conducting an innovative contracting pilot project known as Special Experimental Project (SEP) 14 for almost three years.
Early, piecemeal evidence offered by the TE-045 and SEP 14 research efforts suggests that innovative contracting strategies can prove especially helpful when teamed with certain innovative financing approaches (and especially those that involve some form of debt issuance). Other experiments with turnkey contracts and developer participation in up-front financing and subsequent facility operations also suggest that for at least certain projects, private participation in selected components of the project development process can improve the feasibility and affordability of debt financings. Managers of the aforementioned Transportation Corridor Agency toll projects in Orange County have indicated that the use of a design/build procurement for those projects helped assure investors that the project would be completed in a timely fashion. They have also noted that in general, limiting the number of parties to a contract reduced the chances for disruptive and time-consuming contract disputes.
At this point, evidence demonstrating the extent to which innovative contracting and innovative financing strategies can mutually reinforce each other remains anecdotal. Closer coordination between FHWA's ongoing SEP 14 and TE-045 research efforts could offer an opportunity to develop a better understanding of the potential synergies between these two forms of innovation and shed light on the circumstances best suited to their linked use.
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The preceding examples offer just a flavor of the types of further innovations that merit continued research and possible consideration during the reauthorization of ISTEA. TE-045 has established a strong, rational, and responsible foundation for the development of innovative financing strategies within the Federal-aid program. Looking ahead, the ongoing challenge is twofold: (i) to move proven financing tools into mainstream practice, and (ii) to continue the search for new strategies that promote better program management and higher levels of investment.
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 an evaluation of the te-045 innovative finnance research initiative prepared for the u.s. federal highway administration |
