Executive Summary of Innovative Project Finance: Exploring the Options Frederick Werner Project Finance Manager FHWA Office of Innovative Program Delivery.

Executive Summary of Innovative Project Finance:

Exploring the Options

Frederick Werner Project Finance Manager

FHWA Office of Innovative Program Delivery

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Outline

• Introduction Section• Why Innovative Finance?• Debt Financing• Private Financing• Credit Assistance• Project Finance Case Study• OIPD Resources

Introduction Section

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Welcome

Thank you for the opportunity to speak to you today!

Today’s presentation provides a general introduction to innovative project finance alternatives

Some of these alternatives are widely used; others are relatively new

The Federal Highway Administration (FHWA) is available to assist you, both at the Division Office and Office of Innovative Program Delivery (OIPD)

OIPD conducts webinars, provides direct technical assistance, and hosts guidance materials on its website, www.fhwa.dot.gov/ipd

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Objectives

Define key finance terms Identify benefits associated with innovative project

finance Introduce specific innovative finance techniques

and programs to supplement traditional methods Identify resources for future technical assistance Provide Case Study to illustrate use of multiple

innovative project finance techniques

Why Innovative Finance?

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Why is it necessary?

Limited Federal funds to support capital investment

Little likelihood of change in foreseeable future Under traditional (pay-as-you-go) delivery

methods, large and/or critical projects can languish for years, if not decades

Adverse safety, mobility, and trade outcomes

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What IS Innovative Finance?

• A supplement to traditional financing methods• Targeted use of credit at favorable terms• Identification and implementation of new

revenue streams to repay debt service• Partnership with private sector, leveraging its

financial and technical resources• One or more of the above

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What Innovative Finance Is NOT!

• A replacement for traditional financing methods• Silver bullet: the answer to all project financing

challenges• Easy solution• No cost solution• And remember… credit must be repaid!

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Benefits of Innovative Finance

• Accelerates project delivery• Provides states and localities with additional

options• Leverages Federal grant funds and credit• Leverages private sector equity and expertise

Debt Financing

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Traditional Municipal (Munis) Bonds

Definition: Government bonds issued by State and local entities to finance the capital cost of public facilities

Benefits: • Interest paid on Munis in U.S. is currently exempt from Federal

taxes, and in some cases exempt from State taxes in State issued

• Therefore, interest rates are typically lower than the rates on taxable bonds, resulting in relatively low financing costs

Munis vs. Commercial Paper:• The private sector can also access the capital markets by issuing

commercial debt, which is generally taxable for Federal income tax purposes

• Since privately issued commercial paper is often considered riskier than govt. debt, it carries higher interest rates than Munis

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Grant Anticipation Revenue Vehicles

Definition: Bonds, generally tax-exempt, sold by States and backed by and repaid with specific Federal-aid funds

Purpose: Issued to provide new funding to an eligible project or to refinance existing bonds

Key Provisions:• No Federal guarantee of repayment; any pledges or obligations

must come from State legislation and/or executive authority

• Local match is required with every debt service repayment

Advantages: Acceleration of construction; low interest rates for new money bonds and re-financings; leveraging of Federal funds

Challenges: Cost of interest; loss of future flexibility Administration: FHWA establishes rules on GARVEEs; States

issue the debt and establish the terms of the bonds

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GARVEEs by State (as of 2012)

CT

MA

GARVEE EnablingLegislation

Issued GARVEEBonds

Considering GARVEEEnabling Legislation

VI

Northern Mariana Islands

Guam

American Samoa

AK

RI

ND VT

HI

DE

NH

SD WY

ID

ME

UT

NE NV

MT

IA

NM

NJ

KS

OR

WV

MD

MN

AR

IN CO

WI

OK

LA

VA

AZ

KY

MI

MS AL

IL

MO

NY

TN

OH

SC GA

NC

PA

FL

TX

CA

WA

DC

PR

GARVEE Enabling Legislation for sub-State level entities

Private Financing

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Public-Private Partnerships (P3s)

Definition: Contractual agreements between a public agency and private entity

Purpose: To allow for greater private participation in project finance and delivery

Advantages: Accelerates Projects• Provide opportunities for risk sharing; optimal allocation to

entity best able to manage and mitigate a particular risk

• Value can occur from lower costs, time savings, innovation

• Opens opportunity for private equity investment

Challenges: Public acceptance, enabling legislation, organizational capacity, and high cost of capital

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Private Activity Bonds (PABs)

Definition: Allows private sector to issue tax-exempt bonds for certain categories of projects advanced with private investment

Key Provisions: Does not provide revenue or borrowing authority, only grants tax-exempt status

Legislation and Current Status:

• In 2005, Congress created a special class of PABs to be allocated by U.S. DOT (some modes had prior experience with State-directed PABs)

• $15 billion made available under SAFETEA-LU

• Unallocated funds still available under MAP-21

Credit Assistance

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TIFIA Federal Credit

Definition: Provides $17 billion in secured (direct) loans, loan guarantees, and lines of credit to projects of national or regional significance in FYs 13/14

Purpose: Encourages new revenue streams and private investment

Eligibility: Sponsors include private firms, special authorities, and State and local governments; specific provision for int’l bridges and tunnels

Benefits: Low interest rates and flexible terms Applications accepted on a rolling basis

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State Infrastructure Banks (SIBs)

Definition: Revolving funds using Federal transportation dollars to provide credit assistance for local transportation projects

Eligibility: Only Title 23 and Title 49 projects; MAP-21 does not provide for new capitalization of Federal-aid funds to SIBs, however existing SIBs may continue to operate

Key Provisions: State takes Federal-aid funds and provides the local match, thus “capitalizing” the SIB

Administration: State administers and operates the SIB; Federal government provides oversight

Portfolio:

• At least 32 States have created SIBs since 1995, about 10 of which are currently active; over $7 billion to 600+ projects

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Section 129 Loans

Definition: Loan program to use Federal-aid funds for tolling projects and projects generating other types of revenue

Key Provisions:• Loans are issued by a State DOT to a project owner using FHWA formula

grants

• Eligible projects are those covered under Section 129 of Title 23 (i.e. roads, bridges, tunnels, and ferries)

• Loan may be up to the amount of the 80% Federal share

• Loans can be subordinate to other debt

• Projects require a dedicated revenue source for repayment

• Repaid loans are to be used for grants or loans or other forms of credit assistance to Title 23 projects

• Administration: State administers and operates the loan program; Federal government provides oversight

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Capital Beltway Project

New 14-mile segment constructed in median of existing roadway 80-year Design, Build, Finance, Operate, Maintain contract Two new HOT lanes in each direction with variable tolls; HOV3 free Replacement of over $260 million of aging infrastructure Financial close in December 2007 for $1.9 billion VDOT will retain ownership of facility

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Capital Beltway Project Financing

SourceAmount ($000s)

PABs 589,000

TIFIA 588,922

VDOT Contribution 408,895

Equity 348,695

Interest Income During Construction

70,793

Total Sources 2,006,305

Uses Amount ($000s)

Construction, Oversight & Other Administrative Costs

1,508,477

Development Costs 65,936

Net Financing Costs 152,798

Ramp up Reserve 30,000

Revenue Stabilization Reserve 50,000

Capex Reserve 19,000

Debt Service Reserve 58,900

Project Enhancement Fund 15,000

Contingency 106,193

Total Uses 2,006,304

FHWA OIPD Resources

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OIPD Role

Professional Capacity Building Research Awareness Direct Federal Credit Support (TIFIA) Stewardship Technical Assistance to help evaluate the appropriateness

of innovative finance tools for a given project Capture and disseminate lessons learned and best

practices Research and Policy/Legislative Development

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OIPD Resources

OIPD Website: www.fhwa.dot.gov/ipd OIPD Project Finance Website: http://

www.fhwa.dot.gov/ipd/finance/index.htm OIPD Project Finance Fact Sheet: http://

www.fhwa.dot.gov/ipd/fact_sheets/finance_introduction.htm OIPD Academy StaffNet Website (internal to U.S. DOT):

http://staffnet.fhwa.dot.gov/ipd/academy.htm OIPD P3 Website: www.fhwa.dot.gov/ipd/p3/ AASHTO Center for Excellence in Project Finance:

www.transportation-finance.org