LAW: The Contractor's Side

Innovative financing in TEA-21

Article December 28, 2000
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Shortly after I wrote my June column on innovative contracting, the president signed the six-year Transportation Equity Act for the 21st Century (TEA-21), which included several innovative contracting provisions. In this column, I will address innovative finance provisions in TEA-21. Next month, I will address design-build provisions that are likely to be of great interest to state DOTs.

Interstate reconstruction and rehabilitation

Section 1216(b) is titled: Interstate System Reconstruction and Rehabilitation Pilot Program. It authorizes the secretary to permit the states to collect tolls on any three sections of the interstate system, of which must be in a different state. The purpose of the program is to provide funding for the reconstruction and rehabilitation of the interstate highway corridors that cannot otherwise be adequately maintained or functionally improved. States must apply to be eligible and the secretary will select three facilities for the program. The state application must include a description of whether consideration will be given to privatizing the maintenance and operational aspects of the facility. It is this aspect of the program, which could affect the segment of the industry accustomed to submitting bids for maintenance work. I anticipate potential legal battles if maintenance is privatized on a state-wide basis.

TEA-21 includes a substantial subchapter titled: The Transportation Infrastructure Finance and Innovation Act of 1998 (TIFIA). This subchapter establishes a program of financial assistance for transportation infrastructure projects, intended to support projects that can attract private investment and facilitate better leveraging of that private investment. Under this act, authorization is provided for secured loans, loan guarantees and lines of credit. In order for a project to be eligible under this program, it must meet or exceed either $100 million or 50% of the amount of federal highway assistance funds for the prior fiscal year, whichever is less. In the case of an intelligent transportation system project, the reasonable estimate must meet or exceed $30 million. Project selection criteria includes factors such as the extent to which the assistance would foster innovative public-private partnerships and attract private debt or equity investment. Another factor listed is the extent to which the project uses innovative technology such as intelligent systems to enhance efficiency.

Once a project is selected, the Secretary of Transportation may enter into agreements with one or more obligors to make secured loans or may make loan guarantees of up to 33% of the eligible project costs. The secretary also may enter into agreements to make lines of credit to one or more obligors in the form of direct loans. Once again the total amount of the line of credit may not exceed 33% of the project costs. A project that receives a line of credit cannot receive a secured loan or loan guarantee of an amount that, combined with the line of credit, exceeds 33% of eligible project costs. Payment of the loans shall be paid in whole, or in part, from tolls, user fees, or other dedicated revenue sources.

Obviously, TIFIA presents a great opportunity to finance additional transportation infrastructure projects that possibly would not be constructed without the innovative financing. Contractors must be aware that this legislation may invite state DOTs to combine projects to reach the size requirements for eligibility and thus make it more difficult for family owned firms to bid.

State infrastructure bank pilot program

Section 1511 allows the secretary to enter new cooperative agreements with the states of California, Florida, Missouri and Rhode Island to establish state infrastructure banks (SIBs) and multi state infrastructure banks. The purpose of the SIBs is to provide loans and other financial assistance to public and private entities who are carrying out projects that are eligible for aid under this section. The state may elect to contribute any federal funds that are made available to a state by any particular code section as the federal capitalization grant. These funds, generally must then be used by that SIB only for projects that would qualify under the particular statute that authorized the funds. In other words, rail program funds that are made available to a state under subtitle V of title 49 USC, must be used for rail programs. To establish a SIB, the state must contribute matching funds from non-federal sources that amounts to at least 25% of the federal capitalization grant or its apportioned share under 23 USC 120(b) if less.

The amount of the loan can equal the full cost of the project. Borrowers from a SIB must begin repayment within five years of project completion or, in the case of a highway project, within five years of opening to traffic, whichever is later. The term of the loan cannot exceed 35 years after repayment begins or the useful life of the project, whichever is less.

Conclusion

TEA-21 contains sections that emphasize the use of private funding and endorses the use of innovative funding methods that will attract private investment. Congress stated that one reason behind this approach is the recognition that the federal transportation systems cannot be maintained and enhanced with the funding currently available. It also appears the legislation will lead to toll collection projects, greater privatization and larger construction projects. That trend could adversely affect the smaller family owned construction companies. State DOTs should consider ³innovative ways² to ensure those firms have opportunities to compete for projects funded in part by TEA-21.

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