Moving forward with an effective federal credit assistance program that is growing ten-fold
A major expansion of the Transportation Infrastructure Finance and Innovation Act program under MAP-21 means a $10 billion logjam of projects will be freed, creating opportunities for investments and jobs. But as preparations get underway, some key operational questions remain.
Expanding popular program enhances effectiveness of available funding
After a difficult period of halting uncertainty within the transportation industry, there is a new optimistic momentum, powered primarily by the passage of a new surface transportation bill and its ten-fold expansion of the Transportation Infrastructure Finance and Innovation Act program.Thanks to the recent federal authorization, known as Moving Ahead for Progress in the 21st Century, infrastructure investments will grow and construction jobs will be generated. In fact, the U.S. Department of Transportation already is aggressively promoting the expanded TIFIA program.
This unique wellspring of credit assistance has been enlarged to the point where many, if not most, of the eligible projects across the country will be helped. In addition, USDOT will save money by efficiently funding projects with potential revenue streams, thus being able to use its limited – and shrinking – grant resources where they are needed most.
An effective use of limited resources
In late July 2012 – just three weeks after MAP-21 was signed into law – Secretary of Transportation Ray LaHood announced the availability of $1.7 billion in TIFIA capital during the next two fiscal years, providing a sense of relief to many in the industry who had been operating under a great deal of uncertainty through 90- to 180-day extensions since the last authorization bill expired in 2009.
An official release was accomplished through a Notice of Funding Availability regarding initial details of the expanded program and to allow a period of comment while USDOT staff to hit the ground running to finalize the remaining details.
According to USDOT, that $1.7 billion translates to $17 billion in loans, which in turn can leverage $20-$30 billion in transportation infrastructure investment. (Each dollar of federal funds can provide approximately $10 in TIFIA credit assistance.) Altogether, the expanded federal loan program could result in up to $50 billion in federal, state, local and private sector investment for critical transportation projects across the country.
What is TIFIA?
First enacted in 1998, TIFIA most often provides loans to help states pay for large, partially funded projects of regional and national significance. The assistance also can be in the form of a loan guarantee or a standby line of credit.
TIFIA most definitely is not a grant program. Rather, it is a loan program that must be paid back with a distinct revenue source.
At the same time, credit assistance provided by TIFIA is superior to capital market bonding solutions or bank loans due to its flexibility and attractive low interest rates.
TIFIA was designed to leverage federal funds with local or private investment by offering attractive terms and the flexibility to more efficiently finance projects with unpredictable revenue streams. The federal government acts as a “patient lender” with regard to repayment terms and also allows for a deferral of interest for five years while a project matures and advances beyond the ramp-up period.
Since its inception, the TIFIA program has used $9.2 billion in funding to leverage more than $36.4 billion in private and other capital to help build 27 major transportation projects across the country. TIFIA is a proven winner.
MAP-21 program enhancements
Significant changes include:
- Funding: increased from $122 million per year to $750 million in 2013 and $1 billion in 2014
- Maximum potential TIFIA share: increased from 33 to 49 percent of total development costs
- New program opportunities: Establishes new programs for rural infrastructure projects, multi-project programs and early commitments for master credit agreements
- Qualification: Establishes creditworthiness as the defining selection criteria, rather than previously included factors, such as sustainability and livability
- Submission process: Static notices and submission deadlines are replaced by a rolling application process and defined required turnaround times for application acceptance and ruling.
- Eligibility and selection: Projects eligible for TIFIA assistance shall receive it as long as funds are available. Once funds for a fiscal year have been exhausted, eligible projects may choose to “get in line” for the next year’s funding once it becomes available. MAP-21 removes much of USDOT’s discretion to select winners and losers from eligible projects by making the above criteria mandatory and eliminating considerations of national and regional significance, environmental benefits and innovation.
- The use of tolls and user fees are specifically referenced as approved revenue streams to repay any federal credit assistance provided.
In the past, USDOT would review 30-40 applications in a given assistance period, following an open, “first come, first serve” process. It would then formally talk to about 10 of those applicants.
Actual credit assistance will not be available until October 2012, when MAP-21’s new rules go into effect, but the department already is getting the ball rolling with its recent announcement. Not all of the program’s criteria have been finalized, but several things are clear:
- There are no given assistance periods, simply a rolling “first come, first serve” application process throughout the fiscal year.
- Projects that previously submitted Letters of Interest under TIFIA but were not asked to submit additional information must reapply and complete a new initial review.
- Revenue sources can vary widely but include tolls, user fees, availability payments under public-private partnerships, real estate tax increments, interjurisdictional funding agreements and room and sales taxes.
- There will be an uptick in the number of applications in what was already a highly competitive process, particularly given the introduction of master credit agreements for related projects, including Los Angeles Mayor Antonio Villaraigosa’s vision for completing 30 years’ worth of LA Metro transit projects in the next 10 years.
- TIFIA has been – and will remain – an excellent venue for encouraging the growth of public-private partnerships in the U.S. In fact, MAP-21 strengthened and reaffirmed P3s’ potential role and ease of use for projects through the procurement process.
It will be up to the USDOT to define new regulations and finalize program implementation. It most likely will be late 2012 – at the earliest – before most issues are clarified. However, we can draw some conclusions and recommendations based on the authorization’s language and past TIFIA implementation by USDOT.
Is the program now too big?
Some experts have expressed concern that the TIFIA program is now so large that there aren’t enough creditworthy projects in the project pool – that essentially the bar will be lowered too far and expose taxpayers to unnecessary risk.
Prior to the passage of MAP-21, there were more than $13 billion worth of projects that had already submitted Letters of Interest in the most recent assistance period. While these projects would still need to demonstrate their creditworthiness, clearly the pipeline is large enough to safely absorb the funding increase.
What actually makes a project creditworthy?
For purposes of the approval process, creditworthiness refers to an investment grade rating from two of the three primary bond rating firms: Fitch, Moody’s, and Standard & Poor’s. The bottom line will be whether or not the project has a revenue stream – sales taxes, tolls, fees – that will safely secure repayment.
Ultimately this does favor large, complex mega projects. Departments of transportation typically cannot “pay as you go” for such significant work. TIFIA will help plug gaps left by more traditional public subsidies.
Will taxpayers be exposed to more risk?
The significant increase in funding will allow more projects to attain TIFIA support without a long and subjective process. Since creditworthiness was reinforced as a requirement, assessed externally by rating agencies and internally at USDOT, taxpayers in general should not be put at any additional risk of default. Additionally, the credit subsidy required of each TIFIA loan acts as a large reserve fund covering the whole program against any under-performing loans.
MAP-21 does allow USDOT to waive the “springing lien” provision and subordinate TIFIA loans to pre-existing debt if certain criteria are met. Unlike the previous TIFIA program, that means the senior creditors would get paid back first in the case of bankruptcy.
For projects to be eligible for this subordination process. They would be required to pass a more rigorous test for eligibility, submitting to more strict review criteria and a higher bond rating. In reality, these non-springing lien loans would have more strength than typical TIFIA loans. Riskier single asset projects with uncertain traffic estimates simply will not pass muster.
How quickly can USDOT ramp up?
With more money, additional competitiveness within the application process and a program designed to be faster and more streamlined; USDOT will be under pressure to quickly hire additional analysts to support the underwriting process. Current staff members have done a great job, but they will need help to remain successful.
In fact, in his recent announcement Secretary LaHood admitted there would be a need for additional staff support and the department has indicated $60 million in 2013 and $80 million in 2014 will be used for administration and overhead. It isn’t clear how quickly that process will be completed, however.
What about measuring project performance?
While the department will no longer be able to use considerations of national and regional significance, environmental benefits and innovation to select projects, MAP-21 requires TIFIA recipients to track project performance. What those performance measures will be must be determined by USDOT, so it’s unclear how much that will ultimately impact the project selection process.
How subjective will TIFIA be?
For applicants just beginning the process, several rather opaque factors may come into play:
- Overall subjectivity: The applicant’s Letter of Interest must outline several qualitative criteria that USDOT staff will need to evaluate, including overall project benefits, the project’s likelihood of success without TIFIA, as well as how much TIFIA will foster partnerships and reduce the need for federal funds. How these criteria are weighted against the legislation’s focus on creditworthiness isn’t clear.
- Reserving capacity: USDOT may grant early contingent credit capacity ahead of the stated 90-day procurement process through a master credit agreement. That money could support large-scale project development for initiatives are not ready to let. That could essentially reserve critical funding outside of the two fiscal years covered in MAP-21.
- Level of assistance: It’s good to have some flexibility, and there’s nothing in MAP-21 that says all projects must receive the maximum potential TIFIA share of total project costs. Perhaps some projects will be given assistance at the previous 33 percent level to spread the dollars across a wider field of worthy projects and provide additional assistance to those initiatives that are truly struggling to get the right amount of money to move forward.
USDOT can unlock a $10 billion logjam of projects that are very close financially to moving forward. That means jobs and infrastructure improvements in the very near future. The industry has dealt with a lot of uncertainty in the last few years; TIFIA will be a terrific tool that helps turn the page.
Additional Resources
For more information about TIFIA, consult the following:
Brad Guilmino, HNTB Corporation
Chief Financial Consultant
(212) 915-9517; bguilmino@hntb.com
TIFIA
http://www.fhwa.dot.gov/ipd/tifia/
Federal Register Notice
http://www.dot.gov/cfo/doc/tifia-nofa.PDF
Letter of Interest Template
http://www.dot.gov/cfo/doc/app-c-1%20-loi-template.pdf
AASHTO Center for Excellence in Project Finance
http://www.transportation-finance.org/
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