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

2. 2 Outline Introduction Section Why Innovative Finance? Debt Financing Private Financing Credit Assistance Project Finance Case Study OIPD Resources

3. Introduction Section

4. 4 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 www.fhwa.dot.gov/ipd

5. 5 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

6. Why Innovative Finance?

7. 7 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

8. 8 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

9. 9 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!

10. 10 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

11. Debt Financing

12. 12 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

13. 13 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

14. 14 GARVEEs by State (as of 2012) CT MA GARVEE Enabling Legislation Issued GARVEE Bonds Considering GARVEE Enabling 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

15. Private Financing

16. 16 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

17. 17 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

18. Credit Assistance

19. 19 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

20. 20 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

21. 21 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

22. 22 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

23. 23 Capital Beltway Project Financing Source Amount ($000s) PABs589,000 TIFIA588,922 VDOT Contribution408,895 Equity348,695 Interest Income During Construction 70,793 Total Sources2,006,305 Uses Amount ($000s) Construction, Oversight & Other Administrative Costs 1,508,477 Development Costs65,936 Net Financing Costs152,798 Ramp up Reserve30,000 Revenue Stabilization Reserve50,000 Capex Reserve19,000 Debt Service Reserve58,900 Project Enhancement Fund15,000 Contingency106,193 Total Uses2,006,304

24. FHWA OIPD Resources

25. 25 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

26. 26 OIPD Resources  OIPD Website: www.fhwa.dot.gov/ipdwww.fhwa.dot.gov/ipd  OIPD Project Finance Website: http://www.fhwa.dot.gov/ipd/finance/index.htm http://www.fhwa.dot.gov/ipd/finance/index.htm  OIPD Project Finance Fact Sheet: http://www.fhwa.dot.gov/ipd/fact_sheets/finance_introducti on.htm http://www.fhwa.dot.gov/ipd/fact_sheets/finance_introducti on.htm  OIPD Academy StaffNet Website (internal to U.S. DOT): http://staffnet.fhwa.dot.gov/ipd/academy.htm http://staffnet.fhwa.dot.gov/ipd/academy.htm  OIPD P3 Website: www.fhwa.dot.gov/ipd/p3/www.fhwa.dot.gov/ipd/p3/  AASHTO Center for Excellence in Project Finance: www.transportation-finance.org