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Effects of SIB Financial AssistanceSIBs’ progress toward promoting more efficient use of public resources can be measured in terms of three main performance indicators. These measures center on the extent to which the presence of SIB financial assistance: (i) attracts additional investment by serving as an enabler of projects that otherwise may not have been financeable; (ii) reduces cost to project sponsors and to users of the facilities or equipment that are financed in part from a SIB; and (iii) brings beneficial projects to completion earlier than would have been the case with traditional financing. A definitive assessment of the SIB pilot program’s outcomes would be premature at this point, as this type of evaluation is usually done by looking at past or current projects for which financing plans are complete. However, as will be seen later in this section, the pilot program’s early results are promising.
Although an assessment of the effects of SIB assistance must be limited to a prospective view, some general observations can be drawn by classifying SIB projects in accordance with the role, or function, that SIB assistance is expected to play. These functions are evident in four areas:
By serving these functions, SIB assistance can produce benefits in three ways: by (i) attracting additional investment, (ii) reducing project cost, and (iii) accelerating projects.
Attract Additional Investment
SIBs can attract additional investment to Federal-aid eligible projects by filling a funding gap that derives from temporary cash shortfalls or an inability to access the capital markets. The effect of this role can be measured by comparing the extent to which Federal capital is being matched by other sources of funds, including State, local, and private sector contributions, as well as proceeds from bond issues. An expansion of the level of infrastructure investment that results from a given contribution of public resources can be termed "leverage," under a broad definition of the term. The concept of leverage is more fully explored in Appendix B.
SIBs appear to be attracting a substantial amount of additional investment. Drawing from the anticipated 32-project list appearing in Exhibit 2.8, every dollar of SIB assistance (loan or otherwise) is expected to be reflected in $4.94 of project investment, from private and non-Federal public sources. The resulting multiplier ratio of almost 5:1 clearly exceeds the typical 1.25 ratio associated with 80/20 Federal-aid projects. Two main reasons for this strong multiplier effect are that SIB assistance can: (i) broaden the financing choices available to project sponsors, and (ii) create an incentive for project sponsors to identify new revenue streams that are linked to the benefits that the projects confer.
A second way to look at SIBs’ role in promoting increased transportation investment is to single out the fractional amount of total investment that was directly induced by the provision of SIB assistance. This perspective focuses attention on the amount of new capital, and therefore new investment, that is directly attributable to the pilot program. Until more transactions have taken place, this type of evaluation will be wholly speculative. However, certain individual projects are already indicating how SIBs can induce additional investment.
The interest cost subsidies to be provided by the Florida SIB, which are made available to turnpike improvements that are financed by revenue bonds, provide a particularly compelling example. The SIB interest subsidies will help two Florida turnpike projects to satisfy statutory financial feasibility criteria. For a loan of approximately $30 million, the Florida SIB will enable these two projects, having a value of $278 million, to proceed. Many of the projects anticipated to be funded by SIBs appear to be using the SIB financial assistance to climb beyond a real financial constraint.
Reduce Project CostsSIBs can reduce project costs by reducing the cost of borrowing. In most cases, the savings that can be attributed to a SIB derive from reductions in interest costs. These savings are initially realized by project sponsors (e.g., local governments), and ultimately, by individuals who pay the taxes or fees that support the investment.
SIBs will provide below-market interest loans, and other favorable terms (e.g., minimal fees for loan origination), to the benefit of project sponsors. The project examples detailed in Appendix E illustrate how a SIB can reduce interest cost, either in absolute terms (as in the Oregon and Missouri examples), or on a discounted cash-flow basis (as in the Florida example).
Although the full extent of SIBs’ effectiveness in reducing project cost is yet to be seen, the experience with State environmental revolving funds (SRFs) lends credence to this expectation. In its 1995 survey of SRFs, the Council of Infrastructure Financing Authorities found that interest rates for SRF loans were, on average, 300 basis points below the 20-year General Obligation Bond Index (3.15 percent for SRFs, versus 6.26 percent forgeneral obligation bonds). For a $25 million project, this interest rate differential translates to a savings of $525,000 in annual debt service costs, accruing to a savings of $10.5 million over the term of the loan.
Accelerate Project DeliverySIBs can accelerate the implementation of a project by providing financial assistance that is otherwise unavailable in the short-term. For 10 of the 32 projects displayed in Exhibit 2.8, State officials provided estimates indicating that on average, those 10 projects would move to construction four years sooner than would have been the case without SIB assistance. (Project acceleration could not be estimated for the remaining 22 projects.)
Several particularly good examples of project acceleration appear in the SIB project list. The two toll road projects in Oregon, for example, are relying on the SIB to fund preconstruction costs, which will eventually enable construction to occur earlier than planned. And in Ohio, two loans, totaling $20 million, are enabling early construction activities to occur while permanent financing is still being secured.
Project acceleration provides benefit primarily to the users of a transportation facility, by bringing the facility’s mobility and related benefits to those users sooner. Acceleration may also help reduce a project’s cost. This may be accomplished by the avoidance of escalation in unit costs (e.g., by taking advantage of a short-term surplus in the availability of labor and materials), or by avoiding conditions which tend to complicate right-of-way acquisition or construction staging. In several respects, project acceleration provides one of the most compelling reasons, from a project sponsor’s perspective, to turn to SIB assistance. While grant funding, sometimes augmented through other innovative financing techniques, is expected to remain the cornerstone of the Federal-aid highway and transit programs, SIBs offer States the opportunity to offer a broader menu of financing choices to those project sponsors that wish to construct an improvement now, with a loan or other credit-enhanced external debt financing, rather than wait several years for sufficient grant funding to come available.
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The results to date for the SIB pilots suggest that the program will effectively serve its intended niche: locally and regionally significant projects that have access to dedicated revenue streams, but need flexible financial assistance to clear hurdles that would otherwise obstruct or delay their implementation.
SIBs can attain this effect by providing low-interest loans, providing credit enhancements for third party debt, and by pooling small borrowers together. For now, project sponsors’ demand for SIB assistance is strongest in the first two of these three areas, as evidenced by the fact that most planned assistance consists of: (i) low-interest loans to local agencies seeking to close gaps in financing for local projects; and (ii) loans to larger entities (e.g., turnpike authorities), in which the loan behaves similarly to a credit enhancement by helping the sponsor overcome a specific barrier to its ability to obtain external debt financing.
The growing demand for SIB assistance, combined with SIBs’ ability to stretch the amount of investment supported by Federal capital grants, suggest that the SIB program be included as a standard element of the existing Federal-aid highway and transit programs, with a specific source of funding identified for provision of ongoing capitalization grants.
an evaluation of the u.s. department of transportation state infrastructure bank pilot program
