Innovative

Finance

Franchising is becoming an increasingly

important technique in the United States

for financing transportation improvements, such as toll roads and the deployment of Intelligent Transportation 

Systems (ITS).

Broadly defined, a franchise refers to the

exchange of access to public rights-of-way

or other public facilities in return for the

satisfaction of public interest obligations,

which often include providing services to

the public. Franchising can attract private

investment by firms that then have the

opportunity to generate a profit through

their access to the public rights-of-way or

facilities. Even in situations where revenues may not provide private firms with

sufficient return on investment, as long as

the public sector is willing to make up the

difference between revenues and adequate

profit, private financing of at least part of

the transportation improvement project

can be achieved.

Franchising historically has applied to natural monopolies where it is uneconomical

or disruptive to permit more than one

type of private service to install transportation or telecommunications infrastructure

within public rights-of-way. Franchising

was common during the early years of the

mass transit industry, and was the principal means of deploying electric distribution systems as well as cable television.

Today, franchising is taking new forms,

some that involve formal franchise agreements and some that do not. Franchising

examples include the following:

1. The California Department of

Transportation awarded a contract to a

private consortium to finance, design,

construct, operate, and eventually turn

back to the state a toll road on State

Route 91. The contract, in the form of

a franchise agreement, grants access to

public rights-of-way and stipulates the

return on investment. The agreement

also requires that the tolls charged vary

with congestion levels.

2. HELP Inc., a non-profit corporation

comprised of states and motor carriers,

awarded a franchise to Lockheed 

Information Services (now Lockheed 

Martin). The franchise grants access to

public rights-of-way in participating

states in exchange for installation 

of electronic equipment. The equipment will be used to monitor motor 

carriers at weigh stations and to provide 

related services to states and motor 

carriers on a fee-for-service basis.

3. The National Capital Region Traveler

Information Showcase involves an offer

by the States of Virginia and Maryland,

the District of Columbia, and other

localities to grant access to public

rights-of-way and provide some portion of total funding for an Advanced

Traveler Information System (ATIS) in

the Washington, D.C. metropolitan

area. In return, a private consortium

will provide the remaining funds for

the project and deploy the ATIS.

Recently, the FHWA sponsored a major

study entitled Overcoming Barriers to ITS

– Lessons From Other Technologies, which

included the development of model franchise agreements (i.e., legal documents)

for deploying Advanced Traffic

Management Systems (ATMS) and ATIS.

The model franchise agreements provide

guidance to public agencies in drafting

their own franchise agreements and tailoring them to reflect assumptions such as:

• Degree of cost recovery (e.g., capital

costs, operating costs, or total costs 

plus profit);

• Mix of public (i.e., “free”) goods versus private (i.e., priced) goods being 

provided;

• Nature of services being offered (e.g.,

basic vs. value-added); and

• Degree of market exclusivity (e.g.,

monopoly, multiple providers).

Other types of franchise agreements may

involve shared resource projects, which

refer to the bartering of access to public

rights-of-way in exchange for the provision

of wireline or wireless communication

infrastructure. Franchise agreements can

also incorporate ancillary services, such as

towing services or food concessions, to

enhance revenues and profitability.

Finally, franchising can be combined with

specific features of the Federal program of

innovative finance. For example, private

funding contributions can be used as a

credit toward a state’s matching share for

related Federal-aid projects.

WILLIAM A. HYMAN, EDITOR VOL. 2, NO. 1

ESTHER STRAWDER, FHWA MANAGING EDITOR FEBRUARY 1997

Franchising Attracts Private Investment

Also in this Issue . . .

Innovative Finance and

Finance Managers

Conferences Planned

State Infrastructure Banks

Update

SIB Questions Answered on

FHWA’s Innovative Finance

Home Page

Some Definitions. . .

Innovative Finance Course

Dates

Contacts:

James Saklas, FHWA, 202/366-9254 or 

William A. Hyman, 

Cambridge Systematics, Inc., 202/466-5542.
2

A conference on innovative finance for transportation will 

be held in Dallas, Texas, from April 23 to 25, 1997 at the 

Hyatt Regency Hotel at Reunion. The Transportation

Finance for the 21st Century conference is jointly sponsored

by the Transportation Research Board, Federal Highway

Administration, Federal Rail Administration, and Federal 

Transit Administration. 

The conference will provide a national forum to present and

discuss techniques and case studies of innovative finance being

used for highway, transit, and intermodal projects. The conference will include information on bond financing, advance

construction, public/private partnerships, State Infrastructure

Banks (SIBs), and future directions for innovative finance.

Case studies of successful innovative finance projects will illustrate toll financing, credit reform, turnkey and design-build

project delivery, and private financing.

State, metropolitan, and local government officials with

finance, budgeting, planning, and programming responsibilities should consider attending this conference. Others who

will benefit include transit properties and toll authorities, and

private sector financial institutions with an interest in

public/private partnerships. Opportunities will be provided

for peer-to-peer contact with colleagues from around the

country.

The 1997 National State/Federal Financial Managers

Conference will be held from March 4 to 6, 1997 at the

Radisson Hotel in Kingston Plantation in Myrtle Beach,

South Carolina. The conference, which is jointly sponsored

by the FHWA and South Carolina Department of Transportation, will be preceded by a meeting on March 3 of the

American Association of State Highway and Transportation Officials (AASHTO) Subcommittee on Financial

Management. 

The conference will address topics ranging from public/private

partnerships to performance measures. Several breakout sessions will include presentations on SIBs, partnering, unobligated balances, Surface Transportation Program (STP) pilots,

cash forecasting, and much more. There will be opportunities

to exchange information and to attend several trade shows

over the course of the three days.

Transportation officials from Federal, state, and local governments with financial management responsibilities are encouraged to attend this conference. 

Innovative Finance and Financial Managers

Conferences Planned

Contact:

Mary DeMinter, TRB, 202/334-3205. For hotel

reservations, contact the Hyatt at 800/233-1234.

Nine cooperative agreements have been signed with states to

establish SIBs. The nine states that have signed agreements are

Arizona, Florida, Missouri, Ohio, Oklahoma, Oregon, South

Carolina, Texas, and Virginia. California is in the final stage

of completing its cooperative agreement. 

Seven states have transferred Federal funds to their SIB

accounts. Ohio’s SIB has made the first loan of the pilot program in the amount of $10 million to Butler County to support a likely $100 million bond issuance. The other states are

currently working with project sponsors to determine which

projects will be assisted most effectively by the SIBs.

The fiscal year 1997 U.S. Department of Transportation (U.S.

DOT) Appropriations Act enabled the Department to increase

the number of states participating in the SIB pilot program

and included an additional $150 million to capitalize pilot

SIBs. The U.S. DOT is in the process of selecting additional

states ready to implement a SIB from among the 26 applications it has received. 

The additional $150 million will be disbursed to the initial ten

SIBs and any additional states selected for pilot SIBs. Due to

Congressional outlay constraints, the actual amount distributed to states participating in the pilot program is limited to

$22.5 million in fiscal year 1997. According to the

Appropriations Act, these funds cannot be distributed until

April 1997 and will be available to capitalize both highway

and transit SIB accounts.

State Infrastructure Banks Update

Innovative

Finance

Contact:

Debra R. White, South Carolina Department of

Transportation, 803/737-1243. For hotel 

reservations, contact the Radisson at 800/333-3333.

Contact:

Lucinda Eagle, FHWA, 202/366-5057.

States Sign SIB Agreements; Ohio Makes First Loan Under SIB Pilot Program
3

Innovative

Finance

Contact: 

Lucinda Eagle, FHWA, 202/366-5057. 

Many more answers to questions about the SIB program are provided on the FHWA Innovative Finance home page. To access the home

page, enter the URL “http://cti1.volpe.dot.gov/fhwa” and choose Program Areas and Innovative Finance from the menu of options. 

In the August, October, and December 1996 issues of IF, updates were provided on the State Infrastructure Bank (SIB) pilot program established under the National Highway System (NHS) Designation Act of 1995. Another forum for SIB information has

been created on the FHWA’s Innovative Finance home page. This page contains answers to commonly asked questions about

SIBs. Some of these questions and answers are as follows: 

Q Will a state be bound to any future guidance that may be developed after signing a SIB cooperative agreement?

A Yes. While the U.S. DOT has endeavored throughout the SIB pilot program to implement Section 350 of theNHS Designation Act in a way that places the fewest burdens on the states, Section 350 requires the Secretary

to issue future guidance. This guidance will be based in large part on the questions and answers provided to

states in the SIB program. All comments received from the states will be considered before future guidance is

issued by the Department.

Q What financing instruments in addition to United States Treasury securities may the Department approve toearn interest on the investment income generated by funds contributed to an account of the SIB?

A Any investment instrument in which the state invests its own money will be considered acceptable to theDepartment. If the state cannot demonstrate that it invests its own funds in a particular investment instrument, the state should apply to the Department in writing. All interest earned on capitalizing funds (including

Federal-aid funds and state matching funds) must be credited to the initial capitalizing account.

Q Does the use of Surface Transportation Program funds to capitalize a SIB require approval of a MetropolitanPlanning Organization?

A Surface Transportation Program (STP) funds, Interstate Reimbursement Segments funds, or other IntermodalSurface Transportation Efficiency Act (ISTEA) equity funds that are attributable to an urbanized area may be

used to capitalize a SIB only upon concurrence in writing by the Metropolitan Planning Organization (MPO)

for the area. Other STP (statewide) funds that are not attributable to an urbanized area do not require MPO

approval. It is stressed, however, that while up to 10 percent of the eligible categories of funds (including STP

funds) can be deposited into the SIB, this does not relieve a state from the minimum funding requirements

within a particular apportionment category, as defined in Title 23.

Q Does Section 350 prohibit financial assistance from the SIB to take the form of a grant?

A Section 350 states that “initial assistance” from a SIB cannot be in the form of a grant, and the CongressionalConference Report on Section 350 states that “Federal funds contributed to a SIB may not be used as a grant.”

Therefore, the first use of the funds cannot be a grant, although the law does not explicitly prohibit grants as a

second use of the funds. However, Congress envisioned the SIB program as providing a self-renewing source

of transportation funding through the repayment proceeds derived from SIB loans. The granting of these

repayment proceeds will diminish the capacity and effectiveness of the SIBs over time, and states are discouraged from making grants from the SIB.

SIB Questions Answered on FHWA’s Innovative

Finance Home Page
A REMINDER TO READERS

FHWA DOES NOT MAINTAIN A MAILING

LIST AND DOES NOT DISTRIBUTE IF

DIRECTLY. IF IS AVAILABLE AS AN INSERT

TO THE ITE JOURNAL AND AASHTO

JOURNAL, AND IS AVAILABLE ELECTRONICALLY THROUGH:

• ITE’s WWW Home Page:

“http://www.ite.org” 

(select “Reference Library”)

• FHWA Federal-Aid Financial

Management Division’s WWW

Home Page:

“http://cti1.volpe.dot.gov/fhwa” 

(select “Program Areas” and

“Innovative Finance”)

IF IS ALSO PROVIDED TO THE FOLLOWING ORGANIZATIONS FOR REDISTRIBUTION AND/OR AS INFORMATION FOR

THEIR MEMBERSHIP:

• National Association of Regional 

Council’s (NARC’s) Association of 

MPOs (AMPO)

• ITS America

• American Public Transit 

Association (APTA)

• Surface Transportation Policy 

Project (STPP)

• State & Territorial Air Pollution 

Program Administrators/Association of Local Air Pollution 

Control Officials 

(STAPPA/ALAPCO)

• Association for Commuter 

Transportation (ACT)

WILLIAM A. HYMAN, EDITOR

LAURIE L. HUSSEY, CS MANAGING EDITOR

CAMBRIDGE SYSTEMATICS, INC.

617/234-0531

FAX: 617/354-1542

WAH@CAMSYS.COM

LLH@CAMSYS.COM

ESTHER STRAWDER, FHWA MANAGING EDITOR

202/366-6949

FAX: 202/366-7493

ESTHER.STRAWDER@FHWA.DOT.GOV

Reproduction (in whole or in part) and

broad distribution of IF is strongly encouraged. Permission from FHWA, the editor,

or any other party is not necessary.

Innovative

Finance Innovative

Finance

Upcoming sessions of the FHWA’s Innovative Finance and Statewide Financial

Planning Course offered to states and Metropolitan Planning Organizations

include the following:

• February 4-5, Nashville, Tennessee

• February 25-26, February 27-28, Atlanta, Georgia

• February 6-7, Carson City, Nevada

• March 10-11, Philadelphia, Pennsylvania

• February 13-14, Honolulu, Hawaii

• March 20-21, Ames, Iowa

• February 19-20, Lansing, Michigan

Innovative Finance Course Dates

Contact:

Esther Strawder, FHWA, 202/366-6949.

Here is some help to understand the meaning of. . .

Advance Construction is a technique that allows a state to initiate a project using

non-Federal funds while reserving eligibility for future Federal-aid funds. After an

advance construction project is authorized, the state may convert the project to

regular Federal-aid funding provided that Federal funds are available for the project. The use of advance construction allows a state to deliver transportation benefits to the public earlier, to better coordinate transportation development with a

state’s economic initiatives, and to preserve a project’s eligibility for Federal aid.

Partial Conversion of Advance Construction is a form of advance construction in

which the state converts, obligates, and receives reimbursement for only part of its

funding for an advance construction project in a given year. This removes any

requirement to wait until the full amount of obligational authority is available.

Obligational authority is the ceiling or limit on the total obligations that can be

incurred for Federal-aid highway programs during a year.

A Rating Agency is an organization that provides ratings of securities issues.

Agencies performing the evaluation of an issue’s credit worthiness include

Standard & Poor’s Corporation, Moody’s Investors Service, Inc., and Fitch

Investors Service.

Bond Ratings are designations of the quality of bonds or notes. Ratings are provided by agencies or corporations (rating agencies) that seek to render a professional judgment considering the quality of the security being rated. 

Subsidy Cost, as defined in the Federal Credit Reform Act of 1990 (FCRA), is the

“estimated long-term cost to the government of a direct loan or loan guarantee

calculated on a net present value basis, excluding administrative costs.” Under the

FCRA, the budget reflects the authority and outlays needed to cover the subsidy

costs of loans or loan guarantees at the time they are extended to borrowers.

Some Definitions. . .

Contact:

Esther Strawder, FHWA, 202/366-6949.

4