• Home
• Calendar
• Project Profiles
• Fact Sheets
• MAP-21
• Glossary
• Resources
• Site Directory

Private Activity Bonds (PABs)

Private Activity Bonds (PABs) are debt instruments issued by State or local governments whose proceeds are used to construct projects with significant private involvement.

How Do They Work?

PABs have long provided a low-cost financing option for various types of public-benefit infrastructure projects, such as ports and water and sewer projects. However, transportation infrastructure had not been eligible for PAB financing until the passage of SAFETEA -LU. Section 11143 of Title XI of SAFETEA -LU amended Section 142(a) of the Internal Revenue Code to add highway and freight transfer facilities to the types of privately developed and operated projects for which PABs may be issued. This change allows private activity on these types of projects while maintaining the tax-exempt status of the bonds.

The law limits the total amount of such bonds to $15 billion and directs the Secretary of Transportation to allocate this amount among qualified facilities. The $15 billion in exempt facility bonds is not subject to any individual State's volume cap. State and local projects receiving a PAB allocation must also receive assistance under Title 23 or Title 49, United States Code (U.S.C.).

What Are the Benefits?

Passage of the private activity bond legislation reflects the Federal Government's desire to increase private sector investment in U.S. transportation infrastructure. Providing private developers and operators with access to tax-exempt interest rates lowers the cost of capital significantly, enhancing investment prospects. Increasing the involvement of private investors in highway and freight projects generates new sources of money, ideas, and efficiency.

A technical paper prepared for the National Surface Transportation Policy and Revenue Study Commission estimates, in present value terms, the Federal tax-exemption subsidy for PABs to be approximately 15-20%of the amount borrowed.

How Is It Used?

With approval from the U.S. Department of Transportation (DOT) to issue PABs, the State or local government issues tax-exempt debt on behalf of the private entity undertaking the project. The private entity finances and delivers the project and is responsible for debt service on the PABs. As of May 2011, almost 30% of the authorized $15 billion in PAB allocations had been approved by DOT for seven projects. The first project for which bonds were issued is the Capital Beltway/I-495 high-occupancy toll (HOT) lanes project.

The legislation requires that at least 95% of the net proceeds of bond issues be expended for qualified highways or surface freight transfer facilities within a 5-year period from the date of issue. If this does not occur, the issuer must use all unspent proceeds to redeem bonds of the issue within 90 days after the conclusion of the 5-year period. As an alternative, the issuer may request an extension of the 5-year period if it can establish that the failure to expend the funds was due to circumstances beyond its control.

Project	PAB Allocation
Bonds Issued
Capital Beltway HOT Lanes, VA	$589,000,000
North Tarrant Express, TX	$400,000,000
IH 635 (LBJ Freeway), TX	$615,000,000
Denver RTD Eagle Project (East Corridor & Gold Line), CO	$397,835,000
CenterPoint Intermodal Center, Joliet, IL	$150,000,000
Subtotal	$2,151,835,000
Allocations
Knik Arm Crossing, AK	$600,000,000
CenterPoint Intermodal Center, Joliet, IL	$1,190,000,000
I-80 RailPort, Seneca, IL	$576,000,000
Subtotal	$2,366,000,000
Total PAB Allocations and Issues	$4,517,835,000

Potential Advantages

Potential Limitations

Considerations