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Recent Buy America Developments

Posted in Legislation, News

At the end of 2015, two modal administrations of the United States Department of Transportation (US DOT) have encountered changes to their Buy America programs.  Both the Federal Transit Administration (FTA) and the Federal Highway Administration (FHWA) have had changes imposed upon their Buy America procedures – the FTA by Congress through provisions in the Fixing America’s Surface Transportation Act (or, FAST Act) and the FHWA through a recent opinion in the United States District Court for the District of Columbia (United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Works International Union, et al. v. Federal Highway Administration, case number 13-cv-01301).

Federal Transit Administration

The most recent long-term surface transportation reauthorization bill, the FAST Act, was signed into law on December 4, 2015.  The FAST Act is a five-year bill that reauthorizes programs to improve surface transportation infrastructure and enhance surface transportation safety programs.  The FAST Act generally covers roads and bridges, transit, and passenger rail.

The FAST Act includes changes to the FTA’s Buy America program at Section 3011.  The changes include:

  • Increasing the domestic content requirement for rolling stock from 60%, the current requirement through Fiscal Year (FY) 2017, to 70% in FY 2020 and thereafter. It should be noted that the term “rolling stock” applies not only to rail vehicles, buses, and ferries, but also to train control, communication, and traction power equipment, including prototypes.
  • If rolling stock vehicle frames or car shells are components that are not produced in the United States, and if the average cost of the rolling stock vehicle is more than $300,000, the FAST Act permits the inclusion of the cost of steel or iron that is produced in the US and included in the frames or car shells in the calculation of domestic content in the rolling stock vehicle. The inclusion is permitted regardless of where the frame or car shell is produced, including in a foreign country. This provision changes the current calculation of component domestic content used to determine whether a rolling stock vehicle is a domestic product.
  • If a request for Buy America waiver is denied, the FAST Act requires the Secretary of the US DOT (through the FTA) to certify in writing that the steel, iron, or manufactured good is produced in the US in a sufficient and reasonably available amount and that the item produced in the US is of satisfactory quality. The Secretary must also identify a list of known manufacturers in the US from which the item can be obtained. This certification must be made public on a US DOT Web site. Currently, there is no such requirement placed on the US DOT or the FTA.
  • Clarifying that the small purchase threshold that applies to the general public interest waiver set forth at 49 C.F.R. § 661.7, Appendix A, paragraph (c), is $150,000. This matches the small purchase threshold identified in the Common Grant Rule.

Federal Highway Administration

Also at the end of 2015, the United States District Court for the District of Columbia issued an opinion in United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Works International Union, et al. v. Federal Highway Administration (hereinafter “United Steel”) regarding an FHWA Buy America policy. The opinion invalidates the FHWA’s 2012 memorandum that clarified the following two broad Buy America public interest waivers regarding:

  • Steel or iron manufactured products; and
  • Miscellaneous steel or iron products.

In December 1997, the FHWA issued its first memorandum regarding a public interest waiver for manufactured products. The FHWA determined that it was in the public interest to waive Buy America requirements for manufactured products other than steel and iron manufactured products. The 2012 memorandum subsequently clarified that in order for a manufactured product to be subject to Buy America, it must be manufactured predominantly of steel or iron. The FHWA then assigned a 90% steel or iron content to determine whether a manufactured product is “predominantly” steel or iron.

In addition, the 2012 memorandum extended the original public interest waiver to miscellaneous steel or iron components and subcomponents that are commonly available as of-the-shelf products. The 2012 memorandum identified examples of these “miscellaneous products,” including cabinets, covers, shelves, clamps, fittings, sleeves, washers, bolts, nuts, screws, tie wire, spacers, chairs, lifting hooks, faucets, light bulbs, and door hinges.

The court in United Steel determined that the 90% content threshold articulated in the 2012 memorandum was a substantive rule implemented without appropriate notice and comment, in violation of Section 553 of the Administrative Procedure Act (APA), and was an arbitrary and capricious action in violation of Section 706 of the APA. Further, the court in United Steel determined that the miscellaneous products exemption violated Sections 553 and 706 of the APA because it was a substantive rule implemented without appropriate notice and comment as required by law.

Subsequent to the issuance of the opinion in United Steel, the FHWA has rescinded its 2012 memorandum.

Buy America continues to evolve, and it is in the interest of public agencies and contractors and manufacturers to be versed in the changes made to the program.

Design Liability and Right of Way Risk Allocation for Design-Build Projects

Posted in Design-Build

Design liability and right-of-way risk allocation are topics addressed in a legal research digest recently published by the Transportation Research Board’s National Cooperative Highway Research Program (NCHRP).  The report, which can be downloaded here, discusses statutes, case law and contract language relevant to design liability, addresses how the right of way acquisition process interrelates with design-build projects, and analyzes how design-build contracts allocate the related risks.  The report was authored by Michael Loulakis (Capital Project Strategies, LLC); Nancy C. Smith, Donna L. Brady, and Rick E. Rayl (Nossaman LLP); and Douglas D. Gransberg (Gransberg and Associates).  Additional Nossaman attorneys also assisted in research and drafting, including Steve Roberts, Casey Johnson, Steven Hardt and Frank Liu.

This report provides information regarding a wide range of legal issues relevant both to transportation agencies interested in using design-build and the consultants and contractors who work on design-build projects.  Topics addressed in the report include:

  • Principles of Construction and Design Liability, including standards of care, the Spearin doctrine, and rights of third parties to sue designers
  • Design-Build Contract Clauses Affecting Liability, including disclaimers of liability, provisions regarding design development, standard of care/warranty, indemnity and limitations of liability
  • Procurement and Contract Administration Issues Affecting Design and Design Liability, including owner-provided design requirements, design review process, issues relating to differing site conditions, and alternative technical concepts
  • Right-of-Way and Design-Build Processes, including a discussion of federal requirements affecting property acquisitions and different approaches to allocation of responsibility and risk for right-of-way acquisition
  • Case Law Addressing Design and Construction Liability

The report includes appendices providing summary-level information regarding:

  • Right-of-Way Requirements and Contract Terms for a number of projects
  • Anti-Indemnity Statutes Applicable to Public Agency Contracts
  • Statutes of Repose
  • Certificate of Merit Statutes
  • Sovereign Immunity Statutes in Various States

The report also notes and discusses key proposed changes to the federal regulations that govern design-build procurements.  Those changes were proposed in November 2014 and remain pending.  It is not yet clear when – or even whether – those changes will take effect.  The proposed regulations can be tracked at http://www.regulations.gov/#!docketDetail;D=FHWA-2014-0026.

Top Public Finance Attorneys Urge Regulatory Changes to Foster More P3’s

Posted in Financing, PPPs

We all know how hard it is to change federal statutes these days—you need an Act of Congress and the President to sign the bill.  Last week, a group of the top public finance lawyers in the US offered an approach relating to the use of tax exempt bonds that wouldn’t require a change in tax statutes but instead could be accomplished through a change in the regulations relating to the so-called “private use” test.  As the group pointed out in its letter to high ranking US Treasury officials, Congress itself has made it clear that Treasury had the authority to adopt other, more flexible rules.

The US is unique in the world in its use of tax exempt financing to finance a variety of infrastructure. To benefit from this source of debt capital, a project must not have private use nor can debt service be repaid from private business revenues.  The issue for P3’s arises because of the long-term operation and maintenance responsibilities that are a feature of many P3 contracts.  Current IRS rules limit the length and method of compensation payable to a private party in a way that makes it almost impossible to effectively transfer long-term life cycle risk to the private sector.  There are notable exceptions to these rules for specific types of infrastructure, such as qualified transportation facilities, airports and ports and water/wastewater facilities but in many cases there are so many requirements applicable to issuing these “private activity bonds” tax exempt financing is not available.

The question for P3’s is when do long-term operation and management services and payment for these services create “private use” for purposes of the tax exempt bond rules?  In the past the IRS has published somewhat prescriptive revenue procedures that describe “safe harbor” provisions for management contracts relating to the term of the contract and the manner of compensation.  The problem is these “safe harbor” provisions predate the development and growth of the P3 delivery model.  Over the last several years, through published notices and private letter rulings, the IRS has indicated that strict adherence to the “safe harbor” provisions may not preclude the use of tax exempt financing.  Furthermore, the IRS recently published regulations relating to the allocation and accounting of revenues from a bond financed facility that recognize merely sharing these revenues with a private entity will not adversely impact the tax exempt financing for the project.  And recent private letter rulings for water/wastewater facilities, solid waste disposal facilities and electrical transmission and distribution systems recognize the need for flexibility in this area.  The Treasury Department released a 2014 white paper on “Expanding our Nation’s Infrastructure through Innovating Financing” describing in detail the use of an availability payment contract where the public owner makes service fee payments to a private manager subject to compliance with specific performance standards and provided the facility is available for general public use.

In addition to several specific “fixes” to the “safe harbor” provisions on the term of the contract and how compensation is paid, the attorney group is proposing a general framework that focuses on the primary purpose of the project—is the arrangement designed to transfer the benefit of the lower cost of tax exempt financing to a private party or are there sufficient controls on the activities of the private party exercised by the public owner to achieve the primarily public purpose of the project.

This simple fix to the current “safe harbor” rules relating to private management contracts could go a long way to increasing the use of the P3 delivery approach for much needed public infrastructure.

House and Senate Conference Committee Reports Out Five-Year Surface Transportation Reauthorization Bill

Posted in Legislation, News

Posted by guest blogger Billy Moore.

Billy Moore of Vianovo works with the Transportation Transformation Group, a consortia of public and private entities that looks at ways of improving the funding and financing of the nation’s transportation infrastructure, which is co-chaired by Nossaman Partner Geoffrey Yarema.

The House and Senate conferees have agreed on a compromise $305 billion five-year surface transportation authorization: the Fixing America’s Surface Transportation (FAST) Act. The bill should be headed to the White House in the next few days. It would provide $281 billion from the Highway Trust Fund and up to $24.5 billion from the general fund, subject to annual appropriations.

It is funded in part by a one-time use of Federal Reserve surplus funds and by a reduction in the dividend national banks receive from the Fed. Lawmakers expect to pass the conference report this week and deliver it to the White House in time to avoid a shutdown of transportation programs at midnight Friday night.

The FAST Act

The bill increases contract authority for highway programs from their current total of $40.2 billion to $42.3 billion for fiscal year 2016; $43.3 billion for fiscal year 2017; $44.2 billion for fiscal year 2018; $45.3 billion for fiscal year 2019; and $46.4 billion for fiscal year 2020.

The transit contract authority totals would increase from $8.6 billion to $9.3 billion for fiscal year 2016; $9.7 billion for fiscal year 2017; $9.7 billion for fiscal year 2018; $9.9 billion for fiscal year 2019; and $10.2 billion for fiscal year 2020.

TIFIA is funded at $275 million for fiscal year 2016; $275 million for fiscal year 2017; $285 million for fiscal year 2018; $300 million for fiscal year 2019; and $300 million for fiscal year 2020. The redistribution provisions are repealed.

The bill adopts the three-year use-it-or-lose-it tolling provision, dropping the Senate’s burdensome administrative process as well as the House requirement for legislative approval of tolling before submission.

The agreement relies on a combination of offsets to pay for the measure, including a cut in the dividend the Federal Reserve pays to certain member banks, tapping the Federal Reserve surplus account, transferring customs fees and selling a portion of the Strategic Petroleum Reserve.

Senate and House negotiators agreed to cap the Fed’s surplus account at $10 billion and sweep any excess to the Treasury. The bill would also reduce the interest rate paid on capital that banks with more than $10 billion hold in the Federal Reserve System. The rate would be reduced to the high yield on a 10-year Treasury note in the last auction before a dividend is to be paid to the bank, as long as it is lower than the 6 percent that is currently paid. Lawmakers had been considering lowering the 6 percent dividend to 1.5 percent for member banks with more than $1 billion in assets, but met stiff pushback from the industry.

The bank dividend reduction is less than originally proposed. Banks with $10 billion or less in assets would be exempt from the reduction. The current dividend rate is 6 percent by statute. The bill would create a dividend tied to 10-year U.S. Treasuries, which currently yield about 2.2 percent. If Treasury yields rose higher than 6 percent, the Fed wouldn’t have to pay the banks more than that amount.

There are no provisions that address the issue of tax-exempt bonds.

The bill creates a Council on Credit and Finance responsible for reviewing applications for credit assistance programs, including TIFIA, PABs, the Nationally Significant Freight and Highway Projects (NSFHP) program and the Railroad Rehabilitation Improvement and Financing (RRIF) program. It also creates the National Surface Transportation and Innovative Finance Bureau to administer the application process for these programs to reduce project delays.

The NSFHP program is a new grant program under the bill, funded at $800 million for fiscal year 2016; $850 million for fiscal year 2017; $900 million for fiscal year 2018; $950 million for fiscal year 2019; and $1 billion for fiscal year 2020. The program would provide grants of up 60 percent federal money for highway, bridge, rail-grade crossing, intermodal and freight rail projects costing more than $100 million that improve movement of both freight and people, increase competitiveness, reduce bottlenecks, and improve intermodal connectivity.

The bill also includes a national freight formula program that would direct from between $1.15 billion (in FY 2016) to $1.50 billion (in FY 2020) per year of total highway formula apportionments to a new formula freight program authorized. Larger states would be required to spend their annual freight apportionment on projects on the primary highway freight system, on critical rural freight corridors, or critical urban freight corridors. Smaller states would be able to spend their money on projects on any part of the National Highway Freight Network within that state. States can obligate up to 10 percent of their total freight apportionment for intermodal or freight rail projects.

The legislation converts the Surface Transportation Program (STP) to a block grant program and increases the amount of STP funding that is distributed to local governments from 50 percent to 55 percent over the life of the bill. The bill rolls the Transportation Alternatives Program into STP and allows 50 percent of certain transportation alternatives funding to be sub-allocated to local areas for use on any STP-eligible project.

The proposal streamlines the environmental review and permitting process to accelerate project approvals and establishes a pilot program to allow up to five states to substitute their own environmental laws and regulations for the National Environmental Policy Act (NEPA) if the state’s laws and regulations are at least as stringent as NEPA. It provides for an assessment of previous efforts to accelerate the environmental review process, as well as recommendations on additional means of accelerating the project delivery process.

The bill includes a number of extraneous provisions, including the re-chartering of the Ex-Im Bank, regulatory relief for rural banks, credit unions and requiring that a consumer privacy notice need be sent only when disclosure policies change. Among the initiative left out is a proposal to cut the crop insurance program by $3 billion.

Appropriations

The budget and debt ceiling deal raised the sequester caps over two fiscal years by $80 billion. Appropriators have until December 11 to negotiate spending and policy provisions for the 12 annual appropriations bills.

Transportation-HUD

Before departing for the Thanksgiving Recess, Senators began floor debate of their Transportation-HUD appropriations bill. The Senate shut down debate when Senator Rand Paul demanded to amend the bill to bar assistance for refugees.

Last year’s bill funded programs totaling $53.8 billion. The House bill outlines $55.3 billion in spending while the Senate’s revised bill sets funding at $57.3 billion The House bill passed in June. An additional $100 million was added to the Senate bill for the TIGER program and an additional $311M for Federal Transit Administration Capital Improvement Grants. Other funding improvements were provided for Federal Aviation Administration facilities and equipment ($255 million); Home Investments Partnership Program affordable housing grants, or HOME; and community development block grants. The bill also includes an additional $50 million aimed at improving rail safety through infrastructure upgrades and Positive Train Control technology.

Both bills would offer approximately $40.25 billion from the Highway Trust Fund to be spent on the federal-aid highways program, unchanged from the FY2015 level.

Omnibus

Spending negotiators say they are confident about winning a final appropriations agreement, with the back-and-forth over policy riders unrelated to transportation the main obstacle to producing a final bill. They do not expect to produce a conference agreement until early next week.

Regents’ Approval Authorizes UC Merced 2020 Project to Move Forward

Posted in PPPs

UC Merced campus

The Regents of the University of California (the “Regents”) approved the commercial terms of the P3 agreement for the UC Merced 2020 Project (the “Project”) on Thursday, November 19, 2015 at the Regents meeting held in San Francisco, contingent on a not to exceed limit on financial proposals.

The Regents’ approval authorizes the university to move forward with the Request for Proposals (RFP) phase of the Project with the three proposing teams that were shortlisted in January.  The equity members for these teams are:

  • E3 2020:  Balfour Beatty Investments, Inc., Star America E3 2020, LLC.
  • EP2 Developers:  Plenary Group (Canada) Ltd.
  • Merced Campus Collaborative: Lend Lease (US) Investments, Inc., Macquarie Capital Group Ltd., and ACC OP Development LLC.

According to Daniel Feitelberg, Vice Chancellor for Planning and Budget at UC Merced, the final RFP will likely be released “at the turn of the new year.”

The Project consists of the comprehensive development, design, construction, financing, operations, and maintenance of a broad mix of academic, residential, student life, and recreational facilities at the University of California, Merced campus.  The planned campus expansion, which will add approximately 919,000 assignable square feet to campus facilities, is intended to support projected enrollment growth from nearly 6,700 current students to 10,000 students within five to seven years.

The Project is expected to have a significant economic impact on both the San Joaquin Valley and the state of California.  It is anticipated that the Project will create 10,800 new construction jobs regionally (12,600 statewide) and inject $1.9 billion into the regional economy ($2.4 billion statewide).

The current schedule calls for proposals to be submitted in the spring of 2016, followed by the selection of the winning proposal and Regents’ approval of the external financing for the Project.  Execution of the Project agreement would take place soon after, allowing for construction to begin in late 2016.

Delivery of the first set of facilities is scheduled for 2018, and the Project is expected to be substantially complete in 2020.

Los Angeles World Airports Announces DBFOM Procurements for $5 Billion Landside Access Modernization Program

Posted in News

Los Angeles World Airports (LAWA) staff today briefed its Board of Airport Commissioners on its plans to deliver and finance the estimated $5 billion Landside Access Modernization Program (LAMP) at Los Angeles International Airport (LAX).  LAMP includes several elements, including an elevated 2.25-mile automated people mover (APM), a consolidated rent-a-car facility (ConRAC), parking garages, pedestrian bridges to airport terminals and roadway improvements.  The APM will have several stops between LAX’s Central Terminal Area and the new ConRAC, including a stop at a station connecting to LA Metro’s regional transit system.

As part of the briefing, LAWA announced its decision to deliver the APM and ConRAC through Design-Build-Finance-Operate-Maintain (DBFOM) contracts.  Sean Burton, President of the Board of Airport Commissioners, stated that “This approach, unique to U.S. airports, will create an exceptional guest experience, and cement LAX’s competitiveness in the global aviation marketplace.”  The Board will determine the delivery methods for other elements of LAMP at a later date.

LAWA will hold an Industry Forum and related outreach activities on February 4, 2016.  Los Angeles Mayor Eric Garcetti is scheduled to host the forum.  LAWA expects to release the Request for Qualifications (RFQ) for the APM DBFOM contract by the second quarter of 2016, followed by the RFQ for the ConRAC DBFOM contract.

LAWA’s press release regarding LAMP can be found here.  A copy of LAWA staff’s presentation to the Board regarding LAMP can be found here.

For further information regarding LAMP, see www.connectinglax.com.

Three Signs that the U.S. is Growing More Comfortable with Innovative Project Finance and Public-Private Partnerships

Posted in PPPs

Some recent events, taken together, provide evidence that policy-makers in the United States are growing more comfortable with public-private partnerships as a vehicle for project delivery, in particular with respect to the nation’s decaying infrastructure and bridging the resultant financing challenges.

Following President Obama’s “Build America Investment Initiative” early this summer, the U.S. Department of Transportation established the Build America Transportation Investment Center (or “BATIC”) that would, among other things, enable non-federal but still public project sponsors the opportunity to “utilize federal transportation expertise, apply for federal transportation credit programs and explore ways to access private capital in public private partnerships.”  If it survives the conference committee, the recently-passed House transportation bill, the “Surface Transportation Reauthorization and Reform Act of 2015,” would create another new entity, the National Surface Transportation and Innovative Finance Bureau.  The Bureau would focus on establishing and employing public-private partnerships (or other “innovative financing”) to deliver the projects themselves.  That there are two new entities focused on project delivery with express mention of private participation in the project is news.

Second, the conference process of the House transportation bill with the DRIVE Act, the Senate’s transportation bill, is being led by U.S. Senator Deb Fischer (R-Neb.).  Senator Fischer is chair of the Commerce Subcommittee on Surface Transportation and participated in passing the DRIVE Act within the Senate this past July and, following her appointment as chair, highlighted the value of the long-term scope of the bill, as well as its effort to “enhance project flexibility for states,” including her home state of Nebraska.  This comes as Nebraska has recently started to examine alternative project financing.  Of note in this process is that both bills fund only three of the authorized six years.  The existing BATIC and the planned “Bureau” likely are envisioned, as a policy matter, to tap private capital for the public infrastructure contemplated for at least part of the unfunded final three years.

Third, the U.S. Internal Revenue Service recently promulgated regulations, which, among other things, gives new rules regarding use of tax-exempt financing.  Under the new regulations, clarification on the limitations of “private use” in the context of mixed-use developments affords the public issuer the ability to finance its contribution to a public-private partnership with tax-exempt bonds.  See 80 FR 65637, preamble, Section IV (The “Final Regulations” are in response to “recognition of the development of various financing and management structures for government … facilities that involve the participation of private businesses, to provide flexibility to accommodate public-private partnerships, and to remove barriers to tax-exempt financing of the government’s … portion of the benefit of property used in joint ventures….”).

What we have is the President and both houses of Congress actively promoting transportation financing innovation and education.  At the same time the IRS is issuing tax-exempt finance-favoring regulations.  While much will be clearer when the conference committee’s work is over, the signals coming out of Washington seem to favor innovative financing and broader use of public-private partnerships.

Arizona Department of Transportation Receives Three Proposals for South Mountain Freeway P3 Project

Posted in PPPs

A crucial highway improvement for the growing Phoenix region reached an important milestone November 2 when the Arizona Department of Transportation received proposals from all three short-listed teams vying to develop the Loop 202 South Mountain Freeway Project.  The three multidiscipline teams are identified in our March 2015 blog.

This $1.9 billion megaproject includes the design, construction and 30-year maintenance of the last section of the Loop 202 Freeway – a route which will stretch 22 miles from the Maricopa Freeway segment of I-10 to the Papago Freeway segment of I-10 in the southwestern quadrant of the Phoenix Metropolitan Area.  It is the single largest highway project ever undertaken by ADOT.  To view a 3D fly-through video animation of the project, click here.

The project has been a critical part of the Maricopa Association of Governments Regional Freeway Program since 1985, when Maricopa County voters approved Proposition 300 – a measure which included its funding.  The freeway is also part of the Regional Transportation Plan funding passed by the county’s voters in 2004 through Proposition 400.

The South Mountain freeway will break new ground as the first highway project procured under Arizona’s P3 statute, and ADOT’s first design-build-maintain project.  ADOT will fund the project capital costs with a combination of available federal funds, regional sales tax revenues and tax-exempt bonds.

ADOT and the proposers adhered closely to the schedule the transportation agency issued at the beginning of the RFP stage of the procurement.  The schedule included several rounds of one-on-one meetings, including meetings to consider alternative technical concepts and plans to avoid right-of-way takes.

Right-of-way acquisition cost and delay risks present the most significant potential pitfalls for the project.  ADOT crafted innovative procedures to offer price evaluation credits for avoiding planned parcel acquisitions and relocations.  The procedures will likely serve as a national template to help project owners with similar needs manage and reduce right-of-way acquisitions.

In a further innovation, ADOT harnessed competition to obtain advance pricing of potential price changes if notice to proceed with construction of the center portion of the project is advanced or delayed outside a benchmark issuance date.  If the agency issues the center portion notice to proceed sooner than expected, it will receive price reductions for the time savings based on the daily price reduction offered by the winning proposer.  If the notice to proceed is issued later than expected, ADOT will raise the price by the daily price increase offered.

This approach will help both parties avoid potential disputes over price adjustments for early or late notice to proceed for the center portion.  The daily amounts proposed will be factored into the construction bid price to determine price scores, motivating proposers to carefully calculate their proposed adjustments.

Proposal evaluations, involving scores of technical experts, are underway.  A best value determination and proposer rankings are expected by mid-January 2016.

For inquiries about the project and the procurement process, contact projects@azdot.gov.

S&P Says Infrastructure Costs Go Well Beyond the Initial Investment

Posted in PPPs

In a number of recent conversations regarding using Public-Private Partnerships (P3s) to deliver large infrastructure projects under an availability payment structure, I’ve heard a lot of angst by public owners over the cost of private finance and that AP’s may be viewed as “debt” by the rating agencies.  It’s true the rating agencies have indicated that AP’s can be considered debt for purposes of assessing an agency’s debt capacity but that’s only one aspect of the delivery method to consider.

S&P has issued several reports/FAQs regarding P3’s in the last couple of months, including the conditions under which the rating agency would factor in the annual AP when looking at a public agency’s debt profile.  But what caught my eye is their most recent report “U.S. State Debt Levels may be More Sustainable Than the Condition of the Nation’s Infrastructure”.   States have typically used tax exempt debt when there’s the need to advance construction of a major infrastructure project.  After noting the modest and sustainable pace at which U.S. states have issued debt since the financial crisis in 2008, S&P looks at the bigger picture—the infrastructure costs relating to long-term O&M that go well beyond the initial capital investment—these costs CANNOT be funded with tax exempt debt and except for major maintenance are not eligible for federal grant funding.  To highlight the issue S&P cites an analysis by the Congressional Budget Office (CBO) suggesting that more than half (50% to 55% from 2000 through 2007) of total public spending on transportation and water infrastructure has been for O&M. These estimates may even be understated because they exclude spending on public power, equipment, or buildings. According to S&P, “relying solely on traditional forms of tax-secured debt to finance the nation’s infrastructure needs, therefore, would likely result in negative credit pressure for numerous states. Furthermore, by overlooking the O&M costs, the estimate presented above almost certainly understates the fiscal pressures that would arise from an exclusively debt-financed approach.”

In conclusion S&P opines that the states can’t solve their infrastructure gap with debt financing alone.  “We anticipate that both because of what it would do to their direct debt levels and because of the O&M implications of funding the nation’s infrastructure needs with tax-supported debt alone, states will increasingly consider alternative financing strategies. P3s are one such avenue.”

AASHTO Launches BATIC Institute to Support Innovative Financing Solutions

Posted in News

BATIC InstituteLast month, the United States Department of Transportation (USDOT) formally unveiled its Build America Transportation Investment Center (BATIC).  BATIC’s mission is to:

  • Expand the use of federal transportation credit programs;
  • Innovate new approaches to project development processes and funding challenges and institutionalize technology and best practice across credit programs and modal teams; and
  • Deliver streamlined technical and financial assistance to accelerate project delivery

BATIC is intended to serve as a “single point of contact” for project sponsors to obtain federal expertise and to address procedural, permitting and financial barriers to increase infrastructure investment and development.

Following on the heels of BATIC’s unveiling, the American Association of State Highway and Transportation Officials (AASHTO) recently announced the launching of its BATIC Institute.  The BATIC Institute is an education and training component of BATIC, aimed at assisting state departments of transportation and other agencies on how to better utilize innovate solutions to finance transportation projects, including bonding, federal credit assistance, and public-private partnerships.  The BATIC Institute will offer a specialized website and a program of in-person and online training.  The first webinar offered by the BATIC Institute will be on November 4, featuring the Pennsylvania Department of Transportation’s Rapid Bridge Replacement Project.  Click here to register for the webinar.