PROJECT FINANCE

ccording to the Federal Highway Administration, $131.7 billion and $9.4 billion is needed respectively every year over the next 20 years to repair deficient roads and bridges.”

   That passage appeared in the August 1 filing by U.S. Senators Christopher Dodd (D-Conn.)

and Chuck Hagel (R-Neb.) of legislation seeking to establish a National Infrastructure Bank, modeled after the Federal Deposit Insurance Corporation. By tragic coincidence, the act was introduced mere hours before the collapse of the I-35W bridge in Minneapolis, Minn., which suddenly trained an entire nation’s eyes on every bridge, overpass, tunnel and highway.

   The Dodd-Hagel bill seeks to introduce an evaluation, ranking and financing method for “capacity-building infrastructure projects of substantial regional and national significance” with a potential federal investment of $75 million or more, ranging from wastewater systems to mass transit, and including roads. Federal funding would be determined using a sliding scale method that incorporates 11 sets of criteria, including project location and cost, promotion of economic growth and community development, reduction in traffic congestion, environmental benefits and land use policies that promote smart growth.

   Against a bond ceiling of $60 billion, the bank would develop financing using such tools as direct subsidies, direct loan guarantees, long-term tax-credit general purpose bonds and long-term tax-credit infrastructure project specific bonds.

   The measure’s supporters include the managing director of Goldman Sachs, the National Construction Alliance and the American Society of Civil Engineers, whose 2005 Infrastructure Report Card gave the U.S. a “D” and stated that it would take $1.6 trillion a year over five years to bring the nation’s infrastructure into good working order.

   One possible early applicant to that bank could be the Dakota, Minnesota & Eastern railroad, which in February 2007 was denied a $2.3-billion loan from the Federal Railroad Administration to pay for a third mainline into Wyoming’s coal-rich Powder River Basin. The line would compete with existing lines operated by Union Pacific and BNSF.

   While the Infrastructure Bank would target projects that are “not adequately served by current funding mechanisms,” the public-private partnership (PPP) mechanism is popping up around the globe, as billions are invested in public roadways by firms such as Spain’s Cintra, Australia’s Maquarie and others in exchange for long-term leases.

   Depending on your point of view, such inked or proposed deals as those for the Chicago Skyway, Indiana Tollway, Trans-Texas Corridor, Alligator Alley in Florida and the New Jersey and Pennsylvania Turnpikes are a) bringing long overdue private-sector efficiency to a sector known for funding boondoggles, or b) putting public assets wrongfully in the hands of for-profit entities, many based in foreign countries.

   Despite the possible insolvency of the U.S. Highway Trust Fund in 2009 without a rise in the gas tax,

Susan Buse, CFO, North Texas Tollway Authority

U.S. House Transportation and Infrastructure Chairman Jim Oberstar has gone so far as to ask governors to no longer consider new toll roads and PPP arrangements. Such arrangements have been common in Europe since the 1970s.

   Many professionals see a place for all at the table, given the exigencies and scale of the matter at hand. After all, even in Europe, only 16 percent of road projects are coming under the PPP umbrella – in the U.S., it’s only 10 percent, according to forecasts cited by the Urban Land Institute. According to the Federal Highway Administration earlier this year, since 1992, new toll road projects have used PPP 28 times, 22 projects are considering PPP, 91 will not have private involvement and the jury is still out on 28 others.

   It’s all a matter of risk management and affordable borrowing. A new bill just signed into law by Florida Gov. Charlie Crist, for example, raised the bonding cap for new toll roads from $4.5 billion to $10 billion. Those with public-sector agencies understand the lay of the land.

   “There is a transportation funding crisis in this country,” says Susan Buse, CFO for the North Texas Tollway Authority (NTTA), which just beat out an offer from Cintra to develop the State Highway 121 project near Dallas-Ft. Worth. “There are opportunities for public and private entities to come in and use new methods to finance infrastructure. The gas tax has not kept up with need, and we’re losing purchasing power. The NTTA supports the privatization process in general – we’re not against PPPs, and don’t believe public agencies can do everything. It will take a combination of gas tax, public tolling authorities and private entities to meet the need.”

   In NTTA’s case, it was a combination of successful projects already in place for years in the metro area that helped sway the decision by the Texas Transportation Commission in their favor for the SH 121 project in late June. Among the facilities along NTTA roadways are major corporate operations from Texas Instruments, EDS and J.C. Penney.

   In addition to the fact it can sell tax-exempt debt, NTTA leveraged that existing system, affirms Buse, and was able to offer an up-front payment of $3.33 billion in exchange for a 50-year lease term, with the important option of toll-raising flexibility in the future, thanks to a toll rate increase policy adopted by the Regional Transportation Council last year.

   “Being able to look at future rate increases and factor those into the revenue studies that support the bonds we sell is a major change,” says Buse, “and the bond insurance companies are looking at that.”

   Cintra, a unit of Ferrovial, remains very active in Texas, having secured a tollway agreement near Austin earlier this year, as well as a 50-year concession shared with San Antonio-based Zachry Corp. on the $7-billion-plus Trans Texas Corridor project.

   The Center for Economic Development and Research at the University of North Texas said the NTTA proposal would contribute economic activity of more than $6.3 billion to the region. It also argued that the proposal was better than Cintra’s because “as a public sector entity, the NTTA can borrow at a lower cost than a private sector firm,” and “because the NTTA doesn’t have to pay dividends to shareholders, all of the net proceeds after expenses associated with building and operating

121 … can be invested in new tolled and non-tolled highway projects in the four-county north Texas region.”

   Asked about the “other” PPP – positive public perception – Buse says, “One of the reasons the RTC selected our proposal was if there were leftover money, it would remain in the region instead of being profit. In Indiana they worked through that issue and decided they’d rather have the private company take the risk, and the state would have up-front money. There are different decisions in different regions for different reasons.”

   Buse expects the financing to be in place before the middle of October, with bond anticipation notes financing the up-front payment to the Texas DOT. Long-term financing with various structures in it will follow several months later. She points out one detail worth watching as various agencies go forward with projects: higher bond ratings.

   “There’s a little tension, because higher bond ratings mean you are expected to have higher coverage ratios,” she says, meaning taking in more revenue than paying debt. Yet borrowing is limited, in part because of requirements for high reserves and liquidity. “There is a move to leverage more efficiently our existing sysems, which means bringing down our coverage and freeing up debt capacity to build more. That makes ratings agencies want to downgrade a bit. You may see public agencies start to bring their credit ratings down a bit, but freeing up more to build these roadways.”

   Coming into view on the horizon are new investment funds interested in infrastructure investing, with private equity firms and global investment banks looking to place retirement funds and other money. According to ULI, Australia began that trend too, and now is home to some $30 billion in publicly traded infrastructure assets.

   Buse reiterates that there is a place and time for PPP, and that every locality has its own particulars with regard to funding and regional needs.

   “I think one of the benefits of a PPP is what’s called risk transfer,” she says. “The idea is that the public transfers the risk to a private company, and the private company takes that risk. If they bet right, they earn the profit. If they bet wrong, the private company takes the risk and public doesn’t. That’s why there are toll rate limits on the contracts.

   “But there is risk in everything,” she continues, “and for some projects, the risk is lower and it makes sense for the public sector to retain that risk. It’s a matter of evaluating risk factors for projects, and understanding whether it should remain public or not. Obviously the private guys have to have a win every once in a while. By the same token, the public agencies can’t take all the risk either – they have to have some wins too. You have to find that balance.”