The U.S. Department of Transportation (U.S. DOT) will have

$2.4 billion available for credit assistance during 12 months

beginning October 1, 2001. These funds, authorized by the

Transportation Infrastructure Finance and Innovation Act of

1998 (TIFIA), can be used as secured loans, standby lines of

credit, or loan guarantees to finance up to 33 percent of a

surface transportation project generally costing more than

$100 million. As shown in the figure, the TIFIA program has

current credit assistance commitments of more than $3.1

billion for 10 projects that total nearly $12 billion in costs.

This translates into a leveraging ratio of 62:1.

The TIFIA program will accept letters of interest from potential

applicants at any time. A project that the U.S. DOT concludes

has met all threshold criteria can then apply for credit assistance

based on its scheduling needs. This “rolling” process and Notice

of Funding Availability, announced in the Federal Register on

May 18, 2001, replaces the annual fixed-period solicitation used

during the first two years of the TIFIA program.

The first applicant to take advantage of the rolling process is the

California Department of Transportation, seeking $600 million

in credit assistance to help finance the $2.9 billion seismic

retrofit of the San Francisco-Oakland Bay Bridge (SFOBB).

The U.S. DOT is currently reviewing the SFOBB application.

South Carolina Loan Agreement Executed

On July 11, 2001, the U.S. DOT and the South Carolina

Transportation Infrastructure Bank (SCTIB) closed a $215 million TIFIA loan to help replace the existing Cooper River

Bridges in Charleston, South Carolina. This $667 million project will construct the longest cable-stayed span in North America, replacing aging twin bridges that cannot support current

levels of traffic and impose navigational restrictions on commercial ships using the Port of Charleston. The project includes a

$531 million design-build contract, the largest in the history of

the South Carolina DOT. The SCTIB pledged hospitality fees

collected by Horry County, South Carolina and annual payments from the South Carolina DOT to repay the loan.

Contact:

Mark Sullivan, TIFIA JPO,

202/366-5785.

TIFIA Leveraging To Date – 62:1

Quarterly

FHWA's

VOLUME 7, NUMBER 2 SUMMER 2001

New TIFIA Funds Available Through “Rolling” Application Process

FEDERAL CREDIT PROGRAM

Also in this issue ...

TIFIA Non-Subordination: 

Where Are We Now? . . . . . . .2

Florida’s SIB Program . . . . . . .4

Minnesota’s TRLF . . . . . . . . . .5

GARVEEs In Action . . . . . . . . 6

Website Unveiled . . . . . . . . . .6

FHWA Workshop 

Announcements . . . . . . . . . . .7

Concessions: An Option

to Reduce Project Costs and

Accelerate Major Projects . . . .8

The volume of State Infrastructure Bank (SIB) activity across the country continues

to grow. As of September 2001, 32 states have entered into 250 loan agreements

with a dollar value of over $2.8 billion (see table on page 4). This represents 46

additional loan agreements valued at $391 million since March 2001. Nearly twothirds of the value of new loans was provided to projects from Florida’s SIB.

A newly-created state-funded SIB is supporting Florida’s increased loan activity, as

highlighted in this issue of IFQ. Also highlighted is the Minnesota SIB, which is

jointly managed by the Minnesota Department of Transportation and the Minnesota

Public Facilities Authority. The Authority has significant experience in the administration of another state revolving loan fund. This partnership allows the two

agencies to meld their expertise and evaluate projects for SIB funding both on

technical and financial merit.

Contact:

Phyllis Jones, FHWA,

202/366-2854.

SIB UPDATE

SIB Activity Approaches $3 Billion

continued on page 4
Quarterly

FHWA's

2

TIFIA permits the U.S. DOT to finance

on a non-recourse basis up to 33 percent

of the cost of qualifying projects. Under

the statute, the lien securing a TIFIA

credit facility “may [be] subject to any

lien securing project obligations”

[§183(b)(3)(B)]. The TIFIA loan,

however, must “not be subordinated to

the claims of any holder of project

obligations in the event of bankruptcy,

insolvency, or liquidation of the obligor”

[§183(b)(6)]. U.S. DOT’s TIFIA

Program Guide (May 2001) elaborates

on this provision stating that “the lien

securing the [TIFIA] loan shall be on

parity with the lien securing the project’s

senior debt” in the event of bankruptcy,

insolvency, or liquidation (Program

Guide, page 2-3). This non-subordination requirement, often termed the

“springing lien” by some, has been the

subject of extensive discussion within

the financial community.

Three years after TIFIA’s enactment, and

two years into program implementation,

what really is the effect of the statutory

non-subordination provision that must

be part of every TIFIA credit facility?

To date, no senior project financing

subject to the TIFIA statutory nonsubordination requirement has come to

market. Thus, there is not yet any market

experience with the provision.

But how have market participants

analyzed the provision? Some have

questioned whether under this statutory

structure a TIFIA loan is ever truly

subordinated, irrespective of the

transaction documentation, to other

project debt. Others have urged U.S.

DOT, through covenants in the loan

agreement, to minimize or eliminate the

provision’s effect. Still others have concluded that the provision is not a significant impairment to senior financing.

Default and Non-Subordination

There is a widespread perception that “if

there’s a default, the TIFIA lien springs

to parity.” That is simply incorrect.

The TIFIA statute has no effect on 

the negotiated contractual relationship

between the senior debt and the TIFIA

loan in a mere default situation. Financial

deterioration must move beyond – in

most cases, well beyond – a default into

“bankruptcy, insolvency, or liquidation.”

A default alone, including a payment

default, never of itself creates the

conditions for the TIFIA non-subordination provision to come into play.

TIFIA’s Credit Risk Window

Perhaps it is most useful to look at the

statutory non-subordination provision

in the context of the TIFIA program

structure. In the interest of building and

advancing more transportation infrastructure, the TIFIA program permits

the Federal government to take noninvestment grade credit risk. But the

statute sets bounds on how much risk

the government can take in two key

ways. First, by capping at 33 percent of

total project cost the amount of TIFIA

credit support, the statute limits the

amount of the government’s exposure

related to any single project. Second,

the statute establishes, in effect, a

minimum standard for the credit quality

that U.S. DOT may accept in each

project. This minimum standard is

established through the interplay of two

statutory provisions: 1) the investment

grade rating requirement for the senior

project obligations (if there are no

project obligations senior to the TIFIA

facility, then the TIFIA facility itself

must be rated investment grade); and 2)

the non-subordination provision.

The mechanism of the first credit

standard, the investment grade rating, is

straightforward: if the project is so

speculative that even senior project debt is

non-investment grade, the highly speculative credit quality of the project’s

subordinate debt creates more credit risk

than TIFIA permits. The mechanism of

the second credit standard, the nonsubordination provision, is best understood by examining the rating agencies’

approach to project finance credit analysis.

The Rating Agencies’ Credit

Analysis Approach

The rating agencies have commented on

the potential effect of the TIFIA nonsubordination provision. Although

expressed in different ways, their comments generally support U.S. DOT’s view

that in project financings appropriate for

TIFIA credit assistance, the non-subordination provision does not materially

impair the credit of the senior project

debt; in fact, its addition to the project’s

capital structure enhances both the senior

debt and overall project credit strength.

All three rating agencies begin their

credit analysis of any project financing

with the proposition that the project

assets (as might be valued in a

liquidation scenario) have a relatively

low value relative to the project’s goingconcern value. Thus, they evaluate a

project finance credit based on the

project’s expected cash flow. The effect

of this approach is that stronger credits,

those with less speculative cash flows, are

not significantly adversely affected by the

TIFIA non-subordination provision.

TIFIA Non-Subordination: Where Are We Now?

continued on page 3

Bryan Grote Departs TIFIA JPO

The TIFIA program, at least for the near term, must contemplate a future without Bryan Grote who left his position as chief of

the TIFIA Joint Program Office (JPO) on August 24, 2001. Bryan was instrumental in helping conceive, develop, and grow the

TIFIA program, which although still in its infancy, is providing significant leverage to major surface transportation projects. His

impact on TIFIA and the U.S. DOT’s innovative finance program has been profound, and he leaves a legacy of commitment to

the Department’s role in helping finance the nation’s transportation system. His leadership, keen intelligence, and insight will be

missed. Max Inman, Chief of the Financial Management Division, will head the TIFIA JPO on an interim basis.
Quarterly

FHWA's

3

Projects with weaker credits, on the other hand, bear a greater

risk that their speculative cash flows will not materialize – and

consequently a greater risk that the TIFIA non-subordination

provision will come into play.

It is only the projects with the weakest credits that may be

affected by TIFIA’s non-subordination provision. In some cases,

that provision may impair the credit rating and the marketability

of the senior project debt. But those projects likely are outside

U.S. DOT’s range for acceptable credit risk. The senior debt for

stronger projects – those less likely to experience cash flow

problems – should not be materially impaired by the nonsubordination provision in the TIFIA credit facility.

U.S. DOT’s Programmatic Approach

When the Federal government acts as a lender in a transaction, it

is not a conventional creditor. Its motivations are not purely

financial, but leavened by policy considerations. Consequently,

the Federal government can be expected to behave differently

when financial problems occur. In general, it is likely to be a more

forbearing lender than would a commercial creditor. That does

not mean, however, that U.S. DOT considers TIFIA facilities to

be “soft” loans. To the contrary, U.S. DOT attempts in every

TIFIA negotiation to produce a credit agreement that maximizes,

consistent with the Department’s transportation policy objectives,

the prospect for ultimate repayment to the Federal government.

In practice, the effect of the statutory non-subordination

provision is to ensure that U.S. DOT’s borrowers take seriously

their Federal indebtedness and, in the event of financial

difficulty, engage U.S. DOT in serious workout negotiations.

Since the U.S. DOT’s interest is in building transportation

projects, it is difficult to envision a circumstance where the

Department would want to use its position as a creditor to

cripple a project’s viability as an operating transportation

facility. The TIFIA statute empowers the Secretary to engage in

workout negotiations, and it specifically authorizes him to offer

debt service deferral for up to 10 years after the project’s

substantial completion in the context of a workout plan that

offers the government “reasonable assurance of repayment”

[§183(c)(4)(A), (C)]. U.S. DOT has a clear policy interest in

engaging its borrowers in workout negotiations before availing

itself of its non-subordination rights, and it has the statutory

authorization to make those workout negotiations meaningful

from the borrower’s standpoint.

In short, in U.S. DOT’s view, the purpose of the nonsubordination provision is not to elevate the Department’s

credit position in times of financial disaster, but to ensure that

borrowers will – long before financial disaster is imminent –

engage in meaningful restructuring negotiations.

Actual incorporation of the TIFIA non-subordination provision

into transaction documentation has varied, depending on the

unique aspects of the specific deal. What U.S. DOT has not

done, and cannot do, however, is contractually agree never to

avail itself of the additional security the statutory nonsubordination provision provides.

Contact:

Robert C. Brown,

TIFIA JPO,

202/366-6813. 

TIFIA TRIVIA

The “TIFIA Trivia” box provides responses to questions posed by our readers and other observers. We hope you find this

“TIFIA Trivia” section useful and that you will submit questions to either of the IFQ co-managing editors (Max Inman or

Suzanne Sale, FHWA, at 202/366-0673).

Question

What are some important features of a TIFIA credit structure?

Answer

❖ Through TIFIA, U.S. DOT is a minority investor – by statute, credit assistance is limited to 33 percent of project costs.

❖ Payment terms are flexible: debt service payments (but not necessarily principal amortization) must begin within five years of

project completion, may be structured according to project cash flows, and may extend until 35 years following completion. If

the project fails to generate sufficient revenue during “ramp-up” to make scheduled loan payments, the Secretary may allow such

payments to be deferred (with interest accruing) during the 10-year period following substantial completion.

❖ Although significant flexibility exists (e.g., five-year grace period for beginning of debt service, back loaded payments, extended

maturity), the amortization schedule will be structured according to the project’s needs. For projects with tax-based revenues,

the sponsor should not expect U.S. DOT to automatically agree to the most lenient terms permitted by the statute.

❖ U.S. DOT will closely examine the disposition of residual revenues (remaining after satisfaction of operating and maintenance

and debt service expenses). Unless U.S. DOT is receiving at least current interest on the TIFIA loan, residual revenues generally

may not be “freed up” for returns on equity contributions or other purposes desired by the project sponsor.

❖ It is important to note Congressional intent relative to the repayment structure for TIFIA credit assistance as reflected in

the TIFIA Conference Report – “The Conference would like the Secretary to encourage Federal borrowers to prepay their

direct loans or guaranteed loans as soon as practicable from excess revenues or the proceeds of municipal or other capital

market debt obligations.”

TIFIA Non-Subordination: Where Are We Now?, continued from page 2
Quarterly

FHWA's

4

Florida’s SIB Program Enhances Its Flexibility

Through the creation of a state-funded SIB, Florida has added

to the flexibility of its already active SIB program. Florida’s

SIB is a revolving loan and credit enhancement program

consisting of a Federal-funded SIB account and a state-funded

SIB account. The Federal-funded SIB is capitalized with

Federal money matched with state money as authorized under

Section 1511 of TEA-21, while the state-funded SIB is

capitalized with state money only. In June of 2000, Governor

Jeb Bush signed a bill into law to create Section 339.55,

Florida Statutes, which authorized and funded a state-funded

SIB. This SIB will be capitalized with $50 million per year

from state funds for state fiscal years 2001 through 2003.

The Florida SIB can leverage funds through loans and credit

enhancement assistance to improve project feasibility. The

amount of any loan or other assistance may be subordinated to

other debt financing for a project with an investment grade 

rating of “BBB” or higher. Loans from the SIB may bear interest

at or below market interest rates, as determined by the Florida

Department of Transportation (FDOT). In order to receive

financial assistance from the SIB, a public or private entity must

submit an application to FDOT. Awards are made based on

project priority, project feasibility, ability to repay the loan, and

the amount of funds remaining in the balanced SIB finance

plans. Applications for SIB loans may be accepted at any time

during a fiscal year and evaluation and awards for SIB loans will

be processed up to twice each year.

Since inception of the state-funded SIB in June 2000, Florida

has completed two application cycles with set timeframes for

applications and awards. During the first award cycle ending

October 2000, FDOT received 15 applications and awarded

eight projects. During the second award cycle ending April

2001, FDOT received 16 applications and awarded five projects.

Since FDOT provides transportation services to the

public and does not serve as a private bank, below

market rate loans are a subsidy FDOT has been

willing to provide to further develop transportation

projects that can be delivered earlier, or that may not

otherwise be built to better serve the traveling public.

FDOT requires that the project sponsor propose an

interest rate pertaining to the loan and repayment

stream. The net present value of the repayment

stream is a key component of the evaluation of the

loan when awards are made.

Florida is currently developing a web-based SIB

application process and project sponsor progress

reporting features to better serve loan applicants and

recipients. These program enhancements will be

operational later in 2001.

Two examples of successful projects awarded loans

through the Florida SIB are:

❖ Regional Intermodal Center in Downtown

Orlando. The Regional Intermodal Center will

function as the focal point for the Central Florida

Regional Transportation Authority’s LYNX threecounty service area. The new center will replace the

existing regional bus terminal and facilitate

connectivity between existing and proposed

transportation modes such as rail. Project costs total

$29.2 million with state-funded SIB loan assistance

of $7.96 million at an interest rate of five percent.

LYNX currently does not have senior debt, but may

issue debt senior to the SIB loan with the

concurrence of FDOT. LYNX representatives affirm

that “the State Loan program ... provides transit

agencies the opportunity to leverage funding and

generate additional funding sources for buses and

other capital improvements. The ability to secure a

loan at below market rates, to match a grant and to

advance a major intermodal facility project several

years ahead of schedule is significant for the region.”

State Infrastructure Bank Loan Agreements by State

As of September 2001

Loan 

Number of Agreement Disbursements

State Agreements Amount to Date

($000) ($000)

Alaska 1 $2,737 $2,737

Arizona 28 303,375 164,154

Arkansas 1 31 31

Colorado 2 400 400

Delaware 1 6,000 6,000

Florida 32 465,000 94,000

Indiana 1 3,000 0

Iowa 1 739 739

Maine 23 1,780 759

Michigan 23 17,034 13,033

Minnesota 7 66,124 29,581

Missouri 10 69,251 66,754

Nebraska 1 1,500 0

New Mexico 1 541 541

New York 2 12,000 12,000

North Carolina 1 1,575 1,575

North Dakota 2 3,565 1,565

Ohio 35 146,624 102,550

Oregon 9 11,483 11,181

Pennsylvania 15 14,600 14,600

Puerto Rico 1 15,000 15,000

Rhode Island 1 1,311 1,311

South Carolina 5 1,502,289 510,428

South Dakota 1 11,740 11,740

Tennessee 1 1,875 1,875

Texas 32 80,001 69,617

Utah 1 2,888 2,888

Vermont 3 1,030 0

Virginia 1 18,000 18,000

Washington 1 700 0

Wisconsin 2 1,188 1,188

Wyoming 5 49,090 32,614

250 $2,812,471 $1,186,861

Note: Includes both Federal and State SIB programs.

continued on page 5

SIB HIGHLIGHTS
Quarterly

FHWA's

5

❖ Lee Roy Selmon Reversible Express Lanes. This project for

the Tampa Hillsborough County Expressway Authority

(THCEA) will increase urban traffic mobility in a highly

congested area of Tampa to the Port of Tampa by improving

access and adding needed capacity to the expressway during

peak travel periods. The project will utilize reversible autoonly lanes and electronic tolling and lane management

without the need for any additional right-of-way. The total

project cost is $290.8 million with state-funded SIB loan

assistance of $35 million at an interest rate of 3.5 percent

subordinated to senior debt rated “A” by the international

bond rating agencies. THCEA may issue additional debt

senior to the SIB loan with the concurrence of FDOT.

THCEA officials state that “the subordinate loan program ...

permits ‘gap’ funding until project revenues ramp-up and

reliable (bondable) toll revenue streams are established. Also,

projects are completed many years earlier, thus generating

new transportation funding (toll revenues) and most

importantly delivering needed facilities to the customer.”

In total, the Florida SIB has awarded loans to 32 projects. As

shown in the table below, Florida has leveraged $3,034 million

in transportation projects with $465 million in SIB funding.

This is a significant return on investment (6.5 times) that is

providing valuable transportation assets and options to the

traveling public in Florida.

More information about the Florida SIB is available at

www.dot.state.fl.us/financialplanning/sib.asp.

Contact: 

Lowell Clary, 

Florida Department of Transportation,

850/414-4455.

Minnesota’s Transportation Revolving Loan Fund

Minnesota’s SIB, referred to as the Transportation Revolving

Loan Fund (TRLF), was established in 1997 to provide loans

and other financial assistance to cities, counties, the state, and

other governmental entities for all phases of Federal-aid eligible

transportation projects. Borrowers can pledge any type of

repayment source. However, the TRLF is restricted from

providing financing for toll or congestion pricing projects.

The Minnesota Department of Transportation (Mn/DOT) and

the Minnesota Public Facilities Authority (MPFA, the agency

that administers Minnesota’s Waste Water and Clean Water

revolving loan funds) jointly administer the TRLF. Mn/DOT

evaluates the technical merit of project applications, while the

MPFA evaluates the financial merit. This interagency

partnership enabled Mn/DOT to develop and operate the

TRLF without the addition of any staff.

To date, the TRLF has been capitalized with approximately

$58.5 million (a $3.5 million Federal grant, $31.5 million in

Federal ISTEA advance capitalization funds, $16.5 million in

state general funds, and $7 million in state trunk highway

funds). These funds have been leveraged through the sale of

revenue bonds to enable the approval of over $110 million in

loans to 21 projects.

Seven of these 21 projects are currently under agreement,

with an additional 10 expected to close by the end of the

calendar year. These projects range from a $535,000 loan to

a city with a population under 5,000 for approach work on a

Federal-aid bridge project to a $15 million loan to Mn/DOT

for advance acquisition of right-of-way to preserve a new

principal arterial corridor.

Also of note is a $21 million leveraged loan from the TRLF’s

Transit Account to the Metropolitan Council (the Twin Cities’

metropolitan planning organization) for the completion of 53

transit capital projects ranging from vehicle rehabilitation to

bus lane and shelter construction. The interest rate for the loan

is 2.71 percent. The repayment source is regional property

taxes, and the repayment term is variable depending on the

useful life of the projects. It is estimated that the Metropolitan

Council will save approximately $4 million over other

financing options.

Overall, the TRLF has been a very successful tool for enabling

the timely completion of transportation projects that lack

current funding.

Contact:

Brad Larsen, 

Minnesota Department of Transportation,

651/282-2170.

Federal 22 $2,246 million $304 million $48 million $12 million

State 10 $794 million $161 million $46 million $0 million

Total 32 $3,040 million $465 million $94 million $12 million

Florida Department of Transportation – State Infrastructure Bank

As of June 30, 2001

Type Number Total Project Total SIB Amount Repayments

of SIB of Projects Costs Assistance Disbursed Received

Awarded

SIB Activity Approaches $3 Billion, continued from page 4
Innovative Finance 

Website Unveiled

The National Cooperative Highway Research Program (NCHRP)

Innovative Finance Clearinghouse –

Innovative Finance.org

– was officially launched on June

15, 2001. The web site is

available at http://www. innovative

finance.org/ and provides comprehensive information on all

aspects of innovative surface

transportation finance. 

FHWA, Federal Transit Administration, and Federal Railroad

Administration have all supported the creation of the 

site by making materials and links

available for posting, as have

several state DOTs.

The site is updated on a month-ly

basis. All IFQ readers are encouraged to use the site as a regular

reference and to enrich it by

sharing their own innovations

with InnovativeFinance.org.

States are continuing to advance highway projects using the

Grant Anticipation Revenue Vehicle (GARVEE) tool. The

Arkansas State Highway Commission issued $185 million in

direct GARVEE bonds on July 10, 2001 to finance a new round

of Interstate rehabilitation projects. This is in addition to the

$175 million in GARVEE bonds issued last year. The last piece

of Arkansas’ currently authorized $575 million GARVEE

program will be sold in 2002. Through June 2001, 32 projects

have been contracted to improve 224 miles of Arkansas’

Interstate System. The three-year program will improve a total

of 380 miles of Interstate highways in the state.

The Governor of Georgia announced plans in late June for an $8.3

billion statewide transportation program that will be funded in

part through GARVEE bonds. The program includes adding

more miles of high-occupancy vehicle, or HOV, lanes in the

metropolitan Atlanta region and transit improvements. While

Georgia officials are still working out the details of the financing

plans, the use of GARVEEs is expected to shorten project

completion times from 17 to 22 years to as few as seven years.

The Montana Transportation Department is considering using

GARVEEs to fast-track a $125 million reconstruction project

on U.S. 93. The GARVEEs are expected to be issued in late

2003 or early 2004. The issuance will not require new

legislation since Montana has had statutory authority to issue

highway construction bonds since the early 1980s. While the

existing legislation grants the authority to issue debt, it does not

specify which funds must be pledged for repayment of that debt

(state or Federal).

The Ohio Department of Transportation, the first state to

leverage Federal funds through GARVEEs, is planning to sell a

third GARVEE issue of $100 million in mid-September.

Looking ahead, three additional bond issues are planned for the

2002-2004 period.

Contact:

Jennifer Mayer, 

FHWA Western Resource Center,

415/744-2634.

Quarterly

FHWA's

6

New Mexico Sep–98 $100.2 million A3/A–/na

Feb–01 $18.5 million A2/A/na

Ohio May–98 $70 million Aa3/AA–/AA–

Aug–99 $20 million

Arkansas Mar–00 $175 million Aa2/AA/na

Jul–01 $185 million Aa2/AA/na

Colorado May–00 $537 million Aa3/AA/AA

Apr–01 $506.4 million

Arizona Jun–00 $39.4 million Aa3/AA–/AA–

May–01 $142.9 million Aa3/AA–/AA–

Total $1,794.4 million

GARVEE Transactions to Date (July 2001)

GARVEEs In Action

GARVEE ROUNDUP

State Date Face Rating Projects Backstop

of Amount Moody’s/ Financed

Issue of Issue S&P/Fitch

New

MexicoState

Route 44

SpringSandusky

Project

Interstate

Highways

Any project

financed wholly

or in part by

Federal funds

Maricopa

freeway

projects

No backstop;

Bond insurance

obtained

Moral

Obligation

pledge to use

state gas tax

funds and seek

general fund

appropriations

in the event of

Federal shortfall

Full faith and

credit of state,

plus state motor

fuel taxes

Federal highway

funds as

allocated

annually by

CDOT; Other

state funds

Certain subaccount transfers
Quarterly

FHWA's

7

Where can GARVEEs be found in legislation or regulations?

The term “GARVEE” was invented by FHWA, so it does not appear in any legislation. The legal authority to reimburse debt

and interest is found in Section 122 of Title 23 of the United States Code.

Are GARVEEs backed by a Federal guarantee?

No, there is no Federal guarantee for GARVEEs. GARVEEs can only be backed by a pledge of the state or local government,

or other issuing entity.

Does FHWA set limits on GARVEE amounts?

No, neither legislation nor administrative policy sets limits on GARVEE amounts.

What is a recommended/suggested guideline on the proportion of future Federal-aid apportionments to be dedicated to

repayment of GARVEE debt?

There is no official guidance or recommendation on this. Many states have tended to limit the percentage in some fashion,

ranging from 10 percent to 50 percent.

Does FHWA set limits on GARVEE terms?

No, neither legislation, regulations, nor administrative policy limits GARVEE terms. The market determines what term is an

acceptable risk, and over how many anticipated highway funding reauthorizations a debt instrument should span.

What is a recommended/suggested term limit for GARVEE debt?

There is no recommended or suggested term. Most states have issued debt between 10 and 15 years. Since highway reauthorization bills typically have covered four to six years’ worth of funding, most GARVEEs to date will probably span two to three

highway authorization periods.

Does FHWA set limits on GARVEE interest rates and issuance costs?

No, all interest and issuance costs are eligible. State and local governments will use their own procedures to ensure that interest

rates and issuance costs are reasonable, based on current market conditions.

Each issue of IFQ features questions and answers on the GARVEE program. This issue focuses on limits set on GARVEEs. Note that

answers to these questions are not regulatory or legislative, but represent FHWA’s current administrative interpretations. If you have

questions or want to confirm any of this information, please contact your local FHWA Division office, or the GARVEE contacts listed

in the Fall 2000 issue of IFQ. GARVEE guidance is also available at www.fhwa.dot.gov/innovativefinance/garguid1.htm.

GARVEE “Questions of the Quarter”

FHWA Workshop Announcements

EVENTS AND RESOURCES

The Transportation Research Board’s (TRB) Committee on Taxation and Finance and FHWA will be co-sponsoring a Transportation

Project Finance Workshop in Washington, D.C. on Sunday, January 13, 2002 from 1:30 to 5:00 p.m. at the Washington Hilton in

the International East Room. This workshop is being held as part of TRB’s 81st Annual Meeting from January 13-17, 2002.

The workshop will address the latest developments in innovative financing techniques, covering a range of approaches from

GARVEEs to TIFIA. The emphasis will be on applying the tools and best practices.

More information is available on TRB’s web page: http://www4.trb.org/trb/annual.nsf

Contacts: 

Jon Williams or Mary Kissi, TRB, 202/334-3205.

The American Road & Transportation Builders Association’s (ARTBA) 13th Annual Conference on Public-Private Ventures will

be the venue for a FHWA workshop focusing on the building blocks of innovative finance. The 2001 Public-Private Ventures

Conference is being held at the Hyatt Regency on Capitol Hill, October 10-11, 2001. The half-day workshop is scheduled from

8:00 to 11:45 a.m. on October 10, at the beginning of the Conference’s two-day program.

The workshop will provide a comprehensive overview of innovative finance, featuring the “tools in the toolbox” and how they can

be applied to meet transportation funding needs. The workshop will feature a roundtable discussion with transportation experts,

providing an opportunity for interactive dialogue on a wide spectrum of innovative finance issues.

More information is available on the conference web page: http://www.artba.org/meetings_events/2001/ppv/ppv_2001.htm

Contact:

Michael F. Martin, ARTBA, 202/289-4434.
Given the significant unfunded transportation infrastructure needs in this

country, governments at all levels are

exploring more innovative financing and

contracting approaches to stretch

limited resources. In the 1990s, new

partnerships between the private and

public sectors emerged, facilitated by a

more favorable legislative and regulatory

framework at both the Federal and state

levels. While there has been progress in

advancing transportation infrastructure

investment through new financing tools

and partnership models, there are a

number of public-private approaches

that offer untapped “potential” for

accelerating transportation projects and

reducing costs. One such approach,

used in Europe for several decades, is the

concession concept.

Concessions are a contracting arrangement

where a government executes a long-term

contract for the construction and operation

of highways and bridges. In Europe, the

concession concept has been an effective

alternative to conventional contracting

techniques. For example, concessions were

used in France between 1960 and 1997 to

build a 6,500 kilometer expressway

network. In addition, Portugal is currently

using 16 concessions to complete its

primary national network. Concessions

also have been used extensively in Mexico

and South America, to construct and

operate major transportation facilities such

as toll roads, bridges, and airports.

Concessions are typically awarded to a

private or quasi-private company for a

long-term period, generally ranging

from 10 to 35 years. Companies

receiving these contracts – referred to as

“concessionaires” – agree to perform one

or more of the design, build, operate,

finance, and maintainance activities for

a given project over the contractual

term. At the conclusion of the

contractual term, the concession is

either extended or the underlying

transportation facility is turned over to

the state. Concessionaires bear project

risks, including the risks inherent in

construction and traffic projection, and

are paid by the state in several ways.

Payments to concessionaires are based on

either facility usage/availability or a

negotiated payments schedule, as defined

in the contract documents.

Benefits of Concessions

In general, concessions can provide

several key advantages over traditional

contracting for the construction and

operation of transportation facilities: 1)

project costs are reduced; 2) project

completion dates are accelerated; 3)

project risks are assumed by concessionaires; 4) private sector efficiencies,

innovation, and expertise flow/accrue to

the state; and 5) private sector financing

augments the capital otherwise available

to the state.

The decades-long European experience

with concessions bears out these

advantages. For example, in the United

Kingdom, significant project cost savings

were shown to be afforded through

concessions. Specifically, one report on

the U.K. experience concluded that

projects completed by concessionaires

cost up to 30 percent less than projects

directly managed by the government. In

Portugal, the national concession

program has allowed the government to

complete its primary national system up

to eight years faster than had the

conventional budget allocation and

project construction processes been used.

One reason for the success of

concessions in Europe is that private

sector firms can borrow at interest rates

very similar to those paid by

governments. In the United Kingdom,

for example, the difference is under one

percent. Because European governments, unlike their counterparts in the

U.S., are not authorized to issue taxexempt bonds they do not benefit from

the lower interest rates of such

borrowings. Accordingly, the interest

rate gap between public and private

borrowings in Europe is small, and

private companies can “recoup” their

Quarterly

FHWA's

8

Concessions: An Option to Reduce Project Costs and Accelerate Major Projects

TECHNICAL CORNER

continued on page 9

Project Name Project Location Year Opened Concession 

Period

The Prado-Conrdage Tunnel Marseille, France 1993 32 Years

The Confederation Bridge Prince Edward Island, 1997 35 Years

Canada

The Vasco da Gamma Bridge Lisbon, Portugal 1998 33 Years

A50 Shadow Toll Road Stoke to Derby Link, UK 1998 30 Years

The Highway 91 Express Lanes California, United States 1999 35 Years

The Johannesburg Maputs Southeast Africa 1998-2000 30 Years

(N4) Highway

N.V. Westerscheldo Tunnel Westerschelde River, 2003 To be sold by LLC 

The Netherlands after construction

Prominent Concession Developed Road-Related Infrastructure Projects
Quarterly

FHWA's

9

Concessions: An Option to Reduce Project Costs, continued from page 8

continued on page 10

slightly higher interest costs through the many efficiencies and

innovation inherent in private sector operations.

Concessions in the United States: What Are the Issues?

An apparent challenge to implementing a concession program in

the U.S. is the gap between the cost of public and private

financing. In other words, while states can issue tax-exempt

municipal bonds at very low-interest rates, private firms must pay

the higher rates prevailing in the corporate market. For example,

in mid-2001, states could issue bonds with a 10 to 12-year

maturity at rates of four percent or less, depending on their overall

credit rating and the underlying collateral. Private sector

borrowings, however, carried substantially higher rates; in mid2001, private sector borrowers often paid seven percent or more

for the same 10 to 12-year instrument.

In order to successfully launch a U.S. concession program, a

strategy needs to be developed to bridge this interest rate gap and

“marry” the efficiencies of the concession program to the benefits

of tax-exempt, low-interest rate borrowing. For example, the

financing phase of the project could be undertaken by an entity

legally authorized to issue tax-exempt debt. However, all other

portions of the project – design, construction, operation, and

maintenance – could be the responsibility of the concessionaire.

This differs from the European model, where concessionaires

typically agree to finance all or part of the project.

Entities authorized to issue tax exempt debt in the U.S. typically

fall into two main groups: 1) states and local governments and

2) so-called 63-20 corporations. States and local governments

have a long history of issuing tax-exempt debt, and often use

this authority to issue bonds to finance needed transportation

projects. Similarly, 63-20 corporations, which refer to singlepurpose, not-for-profit corporations established under Ruling

63-20 of the Internal Revenue Code, are legally entitled to issue

tax-exempt debt on behalf of the public entity and thereby

benefit from the same low interest rates paid by states and

municipalities. Such 63-20 corporations have recently been

used in South Carolina and Virginia to finance major

transportation projects (see IFQ, Volume 6, No. 2, Summer

2000 for a description of Virginia’s Pocahontas Parkway project,

financed by a 63-20 corporation).

Where a state chooses to raise the needed project capital through

a 63-20 approach, care should be taken to structure the

transaction in a way that does not jeopardize the borrowing’s taxexempt status. Under current law, the Internal Revenue Code

limits the extent to which a private concessionaire may be

employed on a project seeking to access the tax-exempt bond

market. Where a 63-20 corporation is used to raise the necessary

capital, the concession arrangement may need to be defined as a

fee-based management contract, so that the corporation retains

operational responsibility and its ability to issue tax-exempt debt.

Where Do We Go From Here?

Over the last decade, transportation legislation and policies at

both the national and state levels provided opportunities for

encouraging greater private sector involvement in transportation development and operation. Emphasis should continue

on removing the barriers to private investment and developing

implementation strategies for building highway facilities through

new contracting approaches, such as the concession model.

A more responsive legislative environment could facilitate new

public-private partnerships. In some states, enabling legislation

is needed in order to implement concessions. Implementing

legislation typically determines the kinds of partnership

arrangements into which the government can enter and

prescribes the procurement process. Also it should be recognized that strong public sector support among key stakeholders

(the state DOT, the legislature, and the Governor’s office) and

extensive outreach are important to the success of any publicprivate partnership.

Changes in the tax code could help make the concession

approach more financially feasible. In this regard, draft

legislation, entitled the Multimodal Transportation Financing

Act (Multitrans), was introduced in the U.S. Senate in May

2001. The Act provides tax incentives for public-private

partnerships in financing highway, mass transit, high-speed

rail, and intermodal transfer facilities projects. This bill would

lift the current restrictions on tax-exempt bond financing for

public agencies seeking greater private participation in these

types of projects.

Basic Implementation Steps for a

Concession Procurement Approach

❖ State enacts enabling legislation, if required.

❖ State issues a request for letters of interest from the

engineering, construction, and finance community to

assess the level of industry interest and allow time for

teams to form.

❖ State issues requests for qualifications/requests for

proposals (RFQ/RFP) to potential concessionaires for

one or more of the following activities: design,

construction, operation and/or maintenance; the

RFQ/RFP could solicit private involvement in a range

of projects or could target participation in a specific

project.

❖ Potential concessionaires submit bids/proposals to the

state, which then follows its regular evaluation and

selection process.

❖ State provides capital or a 63-20 corporation issues taxexempt debt to reduce project financing costs.

❖ State takes appropriate steps to ensure that the legal

structure of the concession does not impair the taxexempt status of any state borrowing.

❖ If financing is through a 63-20 structure, the state

takes appropriate steps to ensure that the concession’s

scope is defined as project/program management to

ensure a 63-20 corporation’s operational responsibility

and related tax-exempt status.
10

A REMINDER TO READERS

FHWA DOES NOT MAINTAIN A MAILING

LIST AND DOES NOT DISTRIBUTE IFQ

DIRECTLY. IFQ IS AVAILABLE AS AN

INSERT TO THE AASHTO JOURNAL,

AND IS AVAILABLE ELECTRONICALLY

THROUGH FHWA’s WWW HOME

PAGE:

http://www.fhwa.dot.gov/

innovative finance/

IFQ IS ALSO PROVIDED TO THE FOLLOWING ORGANIZATIONS FOR REDISTRIBUTION

AND/OR AS INFORMATION FOR THEIR

MEMBERSHIP:

• American Public Works 

Association (APWA)

• Surface Transportation Policy 

Project (STPP)

• National Governor’s Association 

(NGA)

• National Association of State 

Treasurers (NAST)

• National Association of State 

Auditors, Controllers, and 

Treasurers (NASACT)

• National Association of Regional 

Council’s (NARC’s) Association 

of MPOs (AMPO)

SUZANNE H. SALE, FHWA

CO-MANAGING EDITOR

602/379-4014

FAX: 602/379-3608

SUZANNE.SALE@FHWA.DOT.GOV

MAX INMAN, FHWA

CO-MANAGING EDITOR

202/366-0673

FAX: 202/366-7493

LAURIE L. HUSSEY, CS MANAGING EDITOR

CAMBRIDGE SYSTEMATICS, INC.

617/354-0167

FAX: 617/354-1542

LLH@CAMSYS.COM

Reproduction (in whole or in part) and

broad distribution of IFQ is strongly

encouraged. Permission from FHWA, 

the editor, or any other party 

is not necessary.

Quarterly

FHWA's

Contributors to Vol. 7, No. 2 

of IFQ include:

Roger Berg, Cambridge Systematics, Inc.

Robert C. Brown, FHWA, TIFIA JPO

Lowell Clary, Florida Department of Transportation

Phyllis Jones, FHWA

Brad Larsen, Minnesota Department of Transportation

Jennifer Mayer, FHWA, Western Resource Center

Benjamin G. Perez, PB Consult

Suzanne H. Sale, FHWA, TIFIA JPO

Mark Sullivan, FHWA, TIFIA JPO

Frederick Werner, FHWA, Southern Resource Center

Finally, FHWA as part of its Special Experimental Project No. 14 (SEP-14) continues to

encourage the use and evaluation of promising innovative contracting practices proposed

by state transportation and highway agencies and others. FHWA as a joint industry effort

recently conducted a European study tour to gather “best practices” information on

innovative contracting and financing. The report, which will provide more

comprehensive information on the European experience with concessions, will be issued

in Spring 2002. These Federal initiatives to promote innovative contracting practices can

foster positive changes to our traditional ways of doing business and result in worthwhile

improvements that will benefit the Nation’s highway users.

Contact:

Frederick Werner, FHWA Southern Resource Center,

404/562-3680.

Concessions: An Option to Reduce Project Costs, continued from page 9

TIFIA JPO Adds a Veteran Banker

On May 7, 2001, Ms. Cheryl E. Jones joined the TIFIA Joint Program Office (JPO)

as a Project Finance Advisor. Ms. Jones, who has more than 25 years experience in

public finance investment banking and advisory work, has managed varied financings

during several tax law eras, priced securities under a broad variety of changing market

conditions, and implemented a wide range of innovations. She has served as senior

manager or financial advisor for more than $40 billion of tax-exempt and taxable

securities for transportation, real estate, economic development, education, water and

sewer, public power, airport and seaport, and general government issuers. Ms. Jones

graduated from Boston University and holds an Ed.M. from Harvard University and

an MBA from Columbia University. With the addition of Ms. Jones to the TIFIA

JPO, which already includes Suzanne H. Sale and Robert C. Brown, the U.S. DOT

now has three capital market finance experts on its staff.