# Presentation: 742670

## Financing Techniques Briefing

**Financing Techniques Briefing**
**for Funding Working Group for the Port of the Future**
**Federal Highway Administration Resource Center**

**2007**

## Outline

- Project sponsors for transportation projects
- Public Private Partnerships
- Federal credit programs
- Tax-exempt borrowing techniques
- Other funding techniques
- Multilateral credit programs
- Contacts for more information

## What is a project sponsor?

- Any legal entity proposing a transportation project:
- State or provincial DOTs
- Cities, counties
- Bridge/border authorities or districts
- Economic development commissions
- Private sector firms

**Notes:**
 Project sponsors also may include transit authorities or districts; metropolitan planning authorities; regional mobility authorities (in Texas); joint powers authorities; and legal structures incorporating both public and private components.

(2) In Canada, Crown Corporations may play this role.

## What is a project sponsor?

- For a given project:
- May be combination of legal entities
- May vary depending on relationship between federal, state and provincial governments
- May vary based on project size, complexity, geographic reach and available financing options

**Notes:**
 Examples of combinations would be a partnership of: i) a state department of transportation with an MPO; or ii) several state departments of transportation, several local government units and private sector firms.

 Because characteristics of projects will always differ, there really is no all-inclusive or “finite” list of legal entities that could potentially serve as a project sponsor.

## What is a project sponsor?

- What entity is authorized/obligated to:
- Enter into contracts?
- Enforce contract provisions?
- Borrow funds?
- Repay borrowed funds?

**Notes:**
(1) Answering these questions should pinpoint/define the project sponsor.

## Public Private Partnerships

- Referred to as PPP, P3, or P cubed
- Definition:
- Legally enforceable contractual agreement
- Between public and private sector entity
- Designed to develop and deliver surface transportation project
- Terms, provisions, scope of agreement vary widely

**Notes:**
 PPPs can be used to develop the transportation component of a project alone, but conceptually can also be used to develop other facilities.

 The key in using PPPs is to ensure that public sector control is maintained, and public sector requirements met.

## Public sector partner

- Most commonly, public partner is state or provincial DOT
- However, public partners can also include:
- Local governments
- Highway and toll authorities
- Port or bridge authorities
- Bi-state, multi-state or bi-national districts

**Notes:**
(1) Essentially, any legal public sector entity can serve as the public sector partner.

## Private sector partner

- Most commonly, large engineering or investment companies
- However, private partners can also include:
- Joint ventures
- Associations or alliances comprised of multiple firms
- Quasi-public corporations
- Individuals or companies controlled by them

**Notes:**
(1) Essentially, any legal entity can serve as the private sector partner.

## Partnership arrangement

- Can be structured as letter of intent; memorandum of understanding; simple contract; detailed concession agreement
- Can address one time event, such as donation of land for ROW or guaranty of public debt
- Can address very long-term and complex agreements where private sector designs, builds, operates, maintains and finances transportation facility

**Notes:**
 Complexity of agreement will relate to complexity of transaction.  For a very simple transaction, even a hand-shake agreement can serve.

 And everything in between!  DB, DBO, DBOM, etc.

 Private sector may invest its own (equity) capital and/or borrowed funds.

## Partnership arrangement

- Private sector may invest its own (equity) capital as well as borrowed funds
- Federal-aid grant funds are often used
- Federal credit programs often support PPPs
- Tax-exempt borrowing techniques often support PPPs as well

**Notes:**
(1) Incredible variety of financing plans; creativity is the key!

## Recent PPPs in North America

- $3.85 billion 75 year lease of Indiana Toll Road
- $3.2 billion Texas SH 130, Austin
- $630 million South Bay Expressway, San Diego
- $233 million to improve Dakota, Minnesota & Eastern Railroad line
- Route 407 Electronic Toll Road in Toronto
- Mexico City North Bypass
- BUT not a silver bullet for all projects!

**Notes:**
 Used for purchase of existing assets; new construction; and rehabilitation.

(2) PPPs may possibly be considered for border projects on both borders.

(3) Must balance public and private interests!

## Federal credit programs, TIFIA

_**Summary of Program**_
- TIFIA = Transportation Infrastructure Finance and Innovation Act
- Strategic goal of TIFIA is to:
-  Leverage limited federal resources
-  Stimulate private capital investment

**Notes:**
 Federal budget authority for this program is $122 million/year.  Assuming conservative loan loss rate of 5%, USDOT should be able to support $2.5 billion in annual lending.  

2) Eligible projects include highways and bridges, and international bridges and tunnels.

## Federal credit programs, TIFIA

- Federal credit assistance provided in several forms:
- Direct loans
- Loan guarantees
- Standby lines of credit
- Combinations of above
- For projects costing an estimated $50 million or more; $15 million threshold for ITS projects

**Notes:**
1)  TIFIA contribution is limited to 33% of estimated project costs.

2)  Senior debt must be investment grade.

3)  Dedicated revenues must be available to repay TIFIA credit assistance.

## Federal credit programs, TIFIA

_**Benefits of Program**_
- Interest and principal payments may be deferred for up to five years
- Repayment may extend up to 35 years
- Interest rates equivalent to Treasury rates
- No prepayment penalty
- Eligible projects include international bridges and tunnels and approaches

**Notes:**
  Deferral – up to five years after substantial project completion.

  Interest rates based on federal Treasury rates for comparable-term debt.

  Eligible borrowers are almost always project sponsors, or entities borrowing on behalf of project sponsors.

4)  Generally, any legal entity can be a borrower.  This includes state and local governments, agencies and authorities; bridge, border and transit authorities; multi-state groupings; and private companies.  

## Federal credit programs, TIFIA

_**Contact Information**_
- Mr. Mark Sullivan
-     TIFIA Joint Program Office (HCF-50)
-     U.S. Department of Transportation
-    Room 4310
-     400 Seventh Street, S.W.
-     Washington DC 20590
-     (202) 366-5785
-     _[http://tifia.fhwa.dot.gov](http://tifia.fhwa.dot.gov/)_

## Federal credit programs, PABs

_**Summary of Program**_
- PABs = Private Activity Bonds
- $15 billion available through end of FY 2009
- PABs allow private project sponsors to issue tax-exempt bonds at low, tax-exempt interest rates
- USDOT must approve use of PAB authority

**Notes:**

(1) $15 billion is a nationwide cap; there has been no allocation among the states.

(2) A state or local government unit sells the bond, serving as the “conduit issuer”.  The private project sponsor makes periodic debt service payments and retires the debt.  

(3) Interest cost differential between public and private debt is eliminated.  Private sector is better able to compete.

## Federal credit programs, PABs

_**Eligible Borrowers**_
- Private project sponsors developing highway, bridge, rail or freight transfer facilities
- Must work closely with public sector “conduit issuer” selling bonds
- Must ensure project is included in appropriate STIP and is eligible under Title 23

**Notes:**
(1) STIP = Statewide Transportation Improvement Program

## Federal credit programs, PABs

_**Qualified Projects**_
- Surface transportation projects receiving assistance under Title 23
- Any project for an international bridge or tunnel managed by an international entity
- Any facility for transfer of freight from truck to rail or rail to truck, including temporary storage facilities
- Any TIFIA-assisted public transportation project, such as intercity bus and rail facilities

**Notes:**
Technical quote: “Any project for an international bridge or tunnel for which an international entity authorized under federal or state law is responsible, and which receives federal assistance under Title 23.

 Freight transfer projects, as long as they receive federal assistance under Titles 23 or 49, including cranes; loading docks; and computer-controlled equipment integral to such freight transfers.   

## Federal credit programs, PABs

_**Contact Information**_
- Mr. Jack Bennett
-      U.S. Department of Transportation_ _
-      Office of the Asst. Secy. for Transportation Policy
-      P-20, Room 10305 E
-      400 7th Street S. W.
-      Washington DC 20590
-      (202) 366-6222

## Federal credit programs, RRIF 

_**Summary of Program**_
- RRIF = Railroad Rehabilitation and Improvement Financing program
- The Federal Railroad Administrator is authorized to provide up to $35 billion in loans and loan guarantees
- Up to $7 billion is reserved for projects benefiting railroads other than Class 1 carriers

**Notes:**
1)  RRIF credit is provided for both improved and new rail facilities. 

2)  Class 1 railroads include BNSF, Canadian National, Canadian Pacific, CSX, Norfolk Southern, UP.  Smaller companies are “other than Class 1 carriers”.

## Federal credit programs, RRIF 

_**Eligible Borrowers**_
- Railroads
- State and local governments
- Government-sponsored authorities and corporations
- Joint ventures including at least one railroad
- Freight shippers

**Notes:**
 Railroads may be privately owned and operated, such as the Union Pacific (Class 1) or Texas Mexico (non Class 1), or may be owned and operated by public sector rail districts.

 Freight shippers would be eligible borrowers where they intend to construct a new rail connection.

## Federal credit programs, RRIF

_**Benefits of Program**_
- Loans for up to 100% of eligible project costs
- Repayment periods up to 25 years
- Interest rates equivalent to Treasury rates
- Project acceleration
- Avoidance of future ROW and construction cost increases

**Notes:**
1) Loan guarantees are also available.

2) Interest rates based on federal Treasury rates for comparable-term debt.

## Federal credit programs, RRIF 

_**Contact Information**_
- Mr. Joe Pomponio
-     Federal Railroad Administration
-     Office of Freight Programs
-     400 7th Street SW
-     Washington DC 20590
-     (202) 493-6051
-     _[http://www.fra.dot.gov/us/content/177](http://www.fra.dot.gov/us/content/177)_

## State Infrastructure Bank lending

_**SIB = State Infrastructure Bank**_
- All states and territories can now establish SIBs
- Initial start up capital can be provided by up to 10% of certain FHWA, Federal Transit and Federal Rail funding categories, and matching state funds
- SIB assistance is provided for Title 23 and Title 49 eligible projects
- SIBs operate as revolving funds, with interest income used to make additional loans

**Notes:**
 SAFETEA-LU extended the SIB financing option to all states and territories.  Prior to SAFETEA-LU, SIBs operated as a pilot program under several transportation bills.

(2) Separate accounts for highway, transit and rail.

(3) SIBs are operated by states, not by FHWA. 

## State Infrastructure Bank lending

- SIBs provide direct loans and credit enhancement to public entities or private firms
- Credit enhancement includes credit guarantees, lines of credit, interest rate buy-downs
- Repayment provisions (term and interest rates) are often quite flexible
- Under the similar but separate Section 129 Program, FHWA can also loan funds for an eligible project.  Loan structure is similar to SIB, but loan is made by FHWA rather than SIB.

## BANOBRAS credit programs

_**Summary of Program**_
- BANOBRAS = *Banco Nacional de Obras y* *Servicios Publicos* (Mexico’s National Bank for Public Works and Services)
- Provides financial assistance to state and municipal government administrations in Mexico
- Assistance can be used for transportation border projects

**Notes:**

1) Financial assistance is targeted for projects designed to improve public services and infrastructure, in order to stimulate local economic development and improve society’s well-being. 

## BANOBRAS credit programs

_**Eligible Projects, examples**_
- Construction and improvement of highways, bypasses and bridges
- Construction of passenger and cargo terminals
- Intersection improvements
- Lighting and traffic signals
- Planning and paving of local streets

**Notes:**
1) Allowable projects are designed to promote the planning, modernization and maintenance of roadway infrastructure; quality and efficiency of roadway and transportation systems; and control and reduction of environmental pollution. 

## BANOBRAS credit programs

_**Available Financial Assistance**_
- Direct loans to concessionaires
- Other financial support to concessionaires, such as contingent and revolving credit
- Long-term refinancing
- Partial guarantees for a public sale or offering
- Support for federal New Concession Plan for toll highways and bridges

**Notes:**
 Direct loans are provided to concessionaires based on project finance plans developed for each project.

2)  Long-term refinancing plans allow concessionaires to recover the capital invested in developing new projects and earn a reasonable return on capital. 

 Partial guaranties are designed to improve the credit profile, resulting in a reduced interest rate.

 Supports new Concession Plan by providing funds to Investment Fund for Infrastructure (FINFRA).

## BANOBRAS credit programs

_**Contact Information**_
-    Direccion de Promocion y Proyectos
-    BANOBRAS, S.N.C.
-    Av. Javier Barros Sierra 515
-      Pisos 5, 6 y 8
-    Colonia Lomas de Santa Fe
-    Mexico, D.F., 01219
-    Mexico
-    Tel. 011-52-55-5270-1200 (from US)

## Tax-exempt borrowing techniques 

_**GARVEE bonding**_
- GARVEE = Grant Anticipation Revenue Vehicle
- All states are allowed to issue GARVEEs
- GARVEEs are secured by future federal funds for federal-aid eligible projects
- Expand state’s borrowing capacity
- Accelerate construction of critical projects

**Notes:**
 Tax-exempt debt is lower cost than taxable debt, since purchasers need not pay federal income tax on it.

2) All states and territories can issue Garvees as long as state authorizing legislation has been passed.

3) There are also several negatives attributable to issuance of Garvees.  #1 A portion of future federal funds is absorbed by Garvee debt service.  #2 Future programmatic flexibility is reduced.  

## Tax-exempt borrowing techniques

_**Municipal (Muni) bonding**_
- Under Internal Revenue Code (IRC), states and localities can issue bonds paying tax-exempt interest
- General obligation bonds
- Revenue bonds
- General obligation (GO) bonds can be secured by full faith and credit of issuer or by tax revenues
- Revenue bonds can be secured by any future revenue stream

**Notes:**
 Muni bonds are often used to finance transportation and related improvements. 

(2) Future revenue streams could include future i) user fees such as inspection or security fees; ii) property taxes; iii) sales taxes; iv) tax increment financing revenues; and v) payments by a private sector firm to compensate for a given improvement.

## Tax-exempt borrowing techniques

_**Muni debt service scenarios**_
**$150 million over 15 years = $13.9 million/year**
**$300 million over 15 years = $27.9 million/year**
**$150 million over 20 years = $12.1 million/year**
**$300 million over 20 years = $24.1 million/year**

**Notes:**
 Muni interest rate assumptions are relatively conservative as of 1/18/07: 4.5% over 15 years and 5.0% over 20 years. 

## Tax-exempt borrowing techniques

_**Section 63-20 credit**_
- Section 63-20 refers to IRC section
- Allows corporations to issue tax-exempt debt if they are:
- Organized for a public benefit
- Operated on not-for-profit basis
- Can be used where local community is willing to i) form Section 63-20 corporation and ii) accept user fees to repay borrowing
- Sometimes used to advance transportation projects not considered high priority by state

**Notes:**
(1) IRC = Internal Revenue Code

(2) Section 503 credit operates in a similar way.

## Other funding techniques 

_**Tolling initiatives**_
- Interstate Construction Toll Pilot Program
- Express Lanes Demonstration Program
- HOV to HOT Lane Conversion Program
- Interstate System Reconstruction and Rehabilitation Toll Pilot Program
- One-stop FHWA application procedure

**Notes:**
 Interstate construction program allows a state or compact of states to collect tolls on an Interstate highway, bridge or tunnel in order to finance up to 3 new projects.  Applicant needs to show that tolling is the most efficient and economical way to advance highway project in question.  

 Express lanes program allows 15 demo projects on Interstate system to manage congestion, reduce emissions in non-attainment or maintenance area, and finance additional lanes.

 Lanes can be converted from HOV to HOT, as long as tolls are variable (time of day or level of traffic).

 Interstate reconstruction and rehabilitation program allows up to 3 projects on highway corridors that could not be adequately maintained or improved without collection of tolls.     

## Other funding techniques

_**Trade Development Agency (TDA) funding**_
- TDA provides grant funds for feasibility, traffic and revenue, and finance studies for projects in Mexico
- Project must be high priority in Mexico
- Grant funds will support sales of US goods and services during project implementation
- Targeted “payback” is 100 times TDA funding

**Notes:**
 Contact: Frederick Eberhart, Senior Adviser, International Cooperation and Trade, Office of the Secretary, USDOT.  202-366-7417.

## Multilateral credit programs

_**North American Development Bank (NAD Bank) credit assistance**_
- Provides credit assistance for US/Mexico border zone projects that benefit the environment
- Loans and credit guarantees provided to both US and Mexican jurisdictions
- Environmental benefit is tied to sanitation, air and water quality

**Notes:**
(1) Will project improve air or water quality?  Is metro area an EPA non-attainment area?

## Multilateral credit assistance

_**Export-Import (Ex-Im) Bank programs**_
- Ex-Im credit is available to finance exports of goods and services, such as design-build construction projects
- Ex-Im programs include the following:
- Project finance
- Loans
- Credit guarantees
- Insurance

**Notes:**
(1) Project finance = financing that relies on project cash flows for loan repayment.

## Multilateral credit programs

_**Overseas Private Investment Bank (OPIC) programs**_
- OPIC provides financing, loan guarantees and investments for US investments overseas
- OPIC provides Small Business Direct Loan Program in Mexico:
- Available for US small businesses
- Business must  own at least 25% of investment, or be significantly involved
- Loans range from $100,000 to $200 million

## Additional technical assistance

_**Contact Information**_
- Ms. Thay Bishop, Team Leader
- USDOT FHWA Resource Center Innovative Finance Team
-     61 Forsyth Street SW, Suite 17T26
-     Atlanta GA 30303
-     (404) 562-3695
-     _[thay](mailto:thay.bishop@fhwa.dot.gov)__[.bishop@](mailto:thay.bishop@fhwa.dot.gov)__[fhwa](mailto:thay.bishop@fhwa.dot.gov)__[.dot.](mailto:thay.bishop@fhwa.dot.gov)__[gov](mailto:thay.bishop@fhwa.dot.gov)_

## RC Innovative Finance Team contactsfor followup questions

| Thay Bishop
Atlanta, Georgia | Team Leader
Ph: (404) 562-3695 ;    thay.bishop@dot.gov |
| --- | --- |
| Keith Bishop
Baltimore, Maryland | Innovative Finance Specialist
Ph: (410) 962-0634;    keith.bishop@dot.gov |
| Prabhat Diksit
Lakewood, Colorado | Innovative Finance Specialist
Ph: (720) 963-3202 ;   prabhat.diksit@dot.gov |
| Jim Hatter
Atlanta, Georgia | Innovative Finance Specialist
Ph: (404) 562-3929 ;   jim.hatter@dot.gov |
| Jennifer Mayer
San Francisco, California | Innovative Finance Specialist
Ph: (415) 744-2634;   jennifer.mayer@dot.gov |
| Frederick Werner
Atlanta, Georgia | Innovative Finance Specialist
Ph: (404) 562-3680;   frederick.werner@dot.gov |

**RC Innovative Finance Team contacts****for followup questions**