Mobile Edition
Print
Get the Mag
Weekly UpdatesThe $1.4 billion Capital Beltway project involved the VDOT granting its private-sector partner the right to design, construct, finance, and operate high occupancy toll (HOT) lanes on the Capital Beltway on 1-495 in Virginia. (8) The Capital Beltway HOT lanes project aims to bring congestion relief to Northern Virginia through the construction of 14 miles of electronically tolled Hot Lanes, adding two new lanes in each direction. This will increase the total number of lanes from eight to 12. HOT lanes are toiled lanes that operate alongside existing highway lanes (see Exhibit 2). Buses, carpools, and emergency vehicles can access the HOT lanes for free, and drivers with fewer than three occupants can choose to pay to use the HOT lanes. Simple supply and demand principles combine with advanced traffic management technology to ensure both the HOT lanes and the adjacent regular lanes operate at maximum efficiency. When traffic is light, toll prices are low. When congestion increases, toll prices go up to regulate the number of drivers wanting to enter lanes.
In financing the Capital Beltway project, VDOT's private partner relied on two innovative, federally sponsored finance options, PABs and TIFIA funds. (9) The PAB issuance was authorized under the recent federal transportation-funding bill, SAFETEA-LU, which permitted the U.S. Department of Transportation to allocate up to $15 billion in PABs between qualified highway and surface freight transfer facilities. PABs retain their tax-exempt status despite a greater level of private involvement than is ordinarily allowed for these types of bonds. This allows public-private partnerships to obtain lower financing rates, eliminating one barrier to private sector participation in transportation finance.
[ILLUSTRATION OMITTED]
The TIFIA program, as reauthorized under the Safe, Accountable, Flexible, Efficient Transportation Equity Act, provides federal credit assistance to nationally or regionally significant surface transportation projects, including highway, transit, and rail. The program is designed to fill market gaps and leverage substantial private co-investment by providing projects with supplemental or subordinate debt at low-interest rates. The U.S. Department of Transportation expected that applicants for PAB authority would, like in the Capital Beltway project, also apply for TIFIA credit assistance. Thus, TIFIA applicants that might previously have needed to consider senior-lien taxable financing could now combine the benefits of senior-lien tax-exempt financing with subordinate TIFIA debt.
In financing the $1.4 billion project in June 2008, VDOT'S private partner relied on $589 million of PABs and approximately $525 million in TIFIA funds, with the rest of the project funded by private equity The 40-year tax-exempt PABs are costing the private entity 4.97 percent, while the TIFIA funds were borrowed at an interest rate of 4.45 percent. As such, the weighted average cost of capital of both PABs and TIFIA loans for the project is 4.71 percent. (10) This debt cost of capital is likely much lower than what this private-sector entity could have procured in the corporate bond market at the same time. In June 2008, 20-year BAA-rated corporate debt was being sold in the low-to-mid-7 percent range.
CONCLUSIONS
The significance of the private entity's reduced borrowing cost directly relates to the current debate between private financing and conventional municipal bond financing in funding large-scale surface transportation projects. That is, critics of public-private partnerships often cite the public sector's historical ability to raise funds through the tax-exempt municipal bond market much more cheaply than the private sector can through the taxable debt and equity markets. This cost of capital advantage (as well as the public sector's long history of designing, managing, and building the nation's infrastructure in the United States) is cited as one of the primary reasons why the public sector can design, construct, finance, and operate U.S. infrastructure more efficaciously than the private sector. However, as demonstrated in the financing of the Capital Beltway project, this cost of capital difference between the public and private sectors may not be as pronounced as it once was due to the use of innovative finance tools like PABs and TIFIA loans. Thus, the narrowing cost of capital spread in concert with two other factors favoring the use of public-private partnerships--namely, the operational and capital cost efficiencies offered by the private sector and the ability to allocate risk properly between the public and private sectors in a P3--provides ample evidence that state and local governments should continue to seriously consider P3 arrangements in their attempts to provide sufficient and timely funding for maintaining and developing surface transportation infrastructure.
Notes
(1.) Dennis Enright, The Chicago Skyway Sale: An Analytical Review, Northwest Financial Group LLC, May 2006.
(2.) Dennis Enright, Then There Were Two: Indiana Toll Road vs. Chicago Skyway, Northwest Financial Group LLC, November 2006.
(3.) Gary Gray, Patrick Cusatis, and John Foote, An Analysis of Financial and Strategic Alternatives for the Pennsylvania Turnpike, study commissioned by Democratic Caucus of the Pennsylvania House of Representatives, February 2008.
(4.) Peter Samuel, Should States Sell Their Toll Roads?, Reason Foundation, May 2005.
(5.) Robert Poole, Tolling and Public-Private Partnerships in Texas: Separating Myth from Fact, Reason Foundation, May 2007.
(6.) Ibid.
(7.) Capital Beltway Hot Lanes, Transurban Group, December 2007.
(8.) Ibid.
(9.) Toll Roads News, "Transurban closes on senior debt at 4.97% for DC Capital Beltway HOT Lanes," June 18, 2008.
(10.) Ibid.
MARTIN J. LUBY is a senior vice president in the Chicago orifice of Scott Balice Strategies, an independent financial advisory firm serving state and local governments. He is also a doctoral student in public affairs at Indiana University's School of Public and Environmental Affairs, concentrating his studies on public finance and public management. His current research includes municipal finance and state and local tax policy Luby's primary focus at Scott Balice has been financial strategy assignments, including modeling and structuring capital finance programs, pricing bond and derivative transactions, and authoring debt and swap policies. His clients have included the Illinois Tollway, Illinois Sports Facilities Authority, State of Illinois, Chicago Transit Authority and the City of Chicago. Prior to joining Scott Ballice Strategies, Luby was a public finance analyst at Bear Stearns and Chapman and Cutler.
FEED