1. UCI Center for Urban Infrastructure The New Generation of Transportation Financing in California Karen J. Hedlund, Esq. Nossaman Guthner Knox & Elliott LLP March 7, 2003 Tax-Exempt Financing for Public-Private Transportation Projects

2. Few Equity Projects in the U.S. Have Gone Forward   Virginia Greenway   SR 91 Express Lanes Acquired by OCTA   SR 57 Franchise terminated   SR 125 AB Macquarie investment

3. Few Asset Sales in U.S.   Privatizations mostly in water/wastewater sector   Airport demonstration program – a dud   Chicago Skyway auction expected in April 2003

4. Equity Investments in Tollroad Projects Source: Macquarie Infrastructure Group US v. World (Macquarie Infrastructure)

5. Cause: Federal tax code discourages private investment in highway and transit projects!

6. Tax-Exempt Bonds Preclude Private Investment—With Exceptions   Since 1969 interest on “private activity bonds” subject to federal income tax   Except: “exempt facilities”   Most “exempt facilities” bonds subject to statewide volume caps not airports, ports

7. Long-term Management Contracts Constitute “Private Use”   Safe harbor for “fixed fee” contracts   15-year max term   No compensation based on net revenues “One-time” incentive compensation payment allowed

8. No “Private Activity Bond” Exception for Highway/Transit Airport Terminals – No volume cap Port Facilities – No volume cap Water/Wastewater – Subject to cap Solid Waste – Leases exempt High Speed Rail – Special provision   Rationale: no private involvement in highways in 1970s when PAB exceptions legislated

9. Result: “Private” Deals Convert to “63-20” Non-profit Structures Non-profit   Pocahontas Parkway   S.C. Southern Connector   Las Vegas Monorail Private to non-profit converted to fully public financing:  Tacoma Narrows

10. Do We Need Private Equity? “Equity Is More Expensive!”   Equity supports higher risk   Equity cushions debt – makes debt cheaper or more saleable   Projects selected on feasibility/need v. politics   Attracts world-wide experienced owner/operators

11. Advantages of Tax-Exempt Debt   20% lower interest cost – millions over the life of the project   More favorable market   Longer maturities   Less stringent covenants   General comfort level with governmental issuers

12. Solution: Congress must create a level playing field for private investment

13. 1997/99 – “HICSA”   “Highway Innovation and Cost Savings Act” first introduced by Sen. Chafee in 1997   Reintroduced in 1999   $15 b in bonds for up to 15 highway demonstration projects   Budget “scoring” only $102m – 2000-2009   Included in Tax Bill that passed House and Senate –vetoed by Pres Clinton

14. 2001/2002 – S. 870 “Multitrans”   Multimodal Transportation Financing Act – introduced by Chrm. Bob Smith (NH) May 2001   Highways and transit   Multimodal facilities Air/rail Truck/rail   Volume cap exemption   Permits second advance refunding to reduce financing costs upon completion of construction and end of ramp up   Attempts to attach Davis-Bacon requirements could cost Republican support – would be only tax-exempt bond category subject to federal prevailing wage requirement

15. Multitrans – Future Prospects?

16. Contact Karen J. Hedlund Partner Nossaman Guthner Knox & Elliott LLP Phone: (213) 612-7854 Fax: (213) 612-7801 Email: khedlund@nossaman.com www.nossaman.com