Lesson

Consider public/private partnerships and unique financing methods as ways to cover costs for managed lanes projects.

Guidance provided by the Texas Transportation Institute on funding and financing managed lanes projects.


2005
Texas,United States


Background (Show)

Lesson Learned

A critical issue facing transportation officials today is the manner in which they fund and finance managed lane facilities. Increasingly, governments are looking to the private sector for participation in these large complex projects. Several federal programs strive for inclusion of the private sector not only as investors but also as active participants in project development, construction, and operation. Additionally, the unique operating strategies on managed lanes facilities gives way to innovative financing techniques that are new and untried in the transportation arena. Based on Texas Transportation Institute's (TTI) research, lessons learned have been developed for ways to finance managed lane projects.
  • Develop regional public partnerships to facilitate quicker financing of managed lanes projects. The state of Texas passed legislation that allows for more flexibility and control by local entities in developing projects that meet the needs of the region. As a result regional mobility authorities (RMA) may now be created, consisting of one or more counties that have agreed to their formation. A RMA then develops, finances, operates, and maintains each managed lane facility. Additional proposed legislation, giving RMA's bonding authority and powers of eminent domain, would give RMA's the power to issue bonds and finance projects. Financing projects through an RMA frees resources for the Texas Department of Transportation to devote funds to other needed projects that may not be as financially feasible as a toll project, or the available resources may be leveraged to enable a project to move forward by enhancing its' financial viability.
  • Fund managed lane projects using the design/build concept. The design/build concept works by combining federal, state, and local investments to encourage developers to fill the funding gap. Usually a consortium is formed that may include design engineers, right-of-way agents, environmental specialists, financial advisors and even legal counsel. The consortium negotiates a deal with the other parties, such as the state department of transportation or the local transportation authority that will allow it to build, operate and lease a facility. The negotiations usually work in one of two ways: a consortium builds and operates a facility for a specified period of time and when the debt is retired ownership reverts back to the public entity, or a developer builds a facility, transfers the ownership to the governmental entity and then leases the facility from the entity.
  • Be cognizant of the various financial issues that may arise for all involved parties. Typically, private investment backed by public debt assurance makes large ITS managed lane projects more financially feasible. However both public and private parties involved need to be aware of the potential risks and plan accordingly. From the public sector the risks to consider include:
    • Private sector expected rate of return – Private investors must understand that the success of the project relies on whether it meets the goals of the community, which may conflict with their expected profits. It is thus essential to clearly define expectations from the onset of the project.
    • Price gouging – In areas where drivers have limited options and overwhelming need to travel a particular route, incentive may exist for private parties to raise prices to unrealistic levels. Public entities must take steps to prevent even the perception that private companies are conducting price gouging. During the implementation phase, managed lanes on State Route 91 in California the California Department of Transportation (CALTRANS) restricted the California Private Transportation Company's (CPTC) return on investment to a base cap of 17%; however if person throughput increased the cap would raise to 23%.
    • Higher borrowing costs – When assessing project costs it is often necessary to account for the higher cost of borrowing due to the fact that private entities are generally not tax-exempt. As a result, the amount of capital costs that can be financed will be reduced because a higher taxable rate will be paid on bonded debt.
    • Project ownership – A project runs the risk of having conflicting goals and objectives if public and private parties involved do not delineate a chain of command in the earliest stages of the project development.
    The private sector investor risks must also be considered, including:
    • Public Policy – In case leadership changes on the public sector side, private investors need assurance that agreements will be honored throughout the term of the project.
    • Project Development – Before private partners are likely to commit and risk a substantial amount of money a project must receive assurance that it will likely move forward.
    • Competition – Private investors will view nearby transportation enhancements as competition to the project and possibly diminishing the return on their investment. In developing and operating the express lanes on SR 91 an agreement between CPTC and CALTRANS prohibited CALTRANS from making improvements to any facilities within the corridor that might have negatively impacted the revenue stream. This led to considerable animosity between the traveling public and all parties associated with the project. The public saw CPTC as profiteers with no regard for the greater public good and viewed CALTRANS as a public agency failing to protect the safety of the public. Obviously, equitable terms must be negotiated by each party for a partnership to be successful.
  • Relieve the tax burden of private sector investment by utilizing the Internal Revenue Service 63-20 Rule. The IRS 63-20 rule declares that state and local governments have the right to finance public projects through non-profit corporations that issue debt on the behalf of the government sponsor. Financing large ITS projects through a 63-20 corporation allows government sponsors to contract with private companies using many of the cost saving measures employed by the private sector. However, in order to maintain tax-exempt status, private companies are prohibited from making a true equity investment in the project. The non-profit corporation may also enter into management contracts with the private sector for maintenance and operation of a facility but the IRS limits the terms.
  • Create unique financing opportunities by delineating special districts. The creation of a special district provides state and local governments three methods for financing managed lanes projects, using special assessment districts, tax increment financing (TIF), and development impact fees. With special assessment districts the recipient of the project benefits pays for a proportional cost of the project. A real world example might be creating a special assessment district and levying a tax on the property owners in the district if a project was of substantial and primary benefit to that particular district. This method is especially useful in projects that include a transit component. For instance a bus rapid transit line and station could be part of a transportation network that influences land use resulting in a high density development. This development would receive a substantial benefit from being part of the network, therefore businesses or residents in the district could be charged a special assessment. Similar to special assessment districts is Tax Increment Financing (TIF). In this approach, a special district is created and improvements are made within the district, which stimulate private sector development. Before development begins or improvements are made though, the tax rate is frozen. The taxes continue to be paid but the difference between the original assessed tax and the tax on assessed value after the improvements is deposited into a special account that is used to pay off the bonds that were sold to finance the improvements. This money can also be leveraged for more improvements in the district. Development Impact Fees function in much the same way as special assessment districts. In this case, new infrastructure is built or improved upon with money from developers. The term developer, in this instance, refers to business developers or land developers rather than a project developer. Developers may pay the required fees in cash or by donating rights-of-way or anything else that the developer and the project sponsor may have negotiated. This infusion of cash and/or equity can greatly increase the financial viability of a project. The amount of development impact fees that will be collected over a period of time can be projected and the proceeds can be pledged to pay off bonds that may be issued to finance the project. Both the San Joaquin Hill and Foothill/Eastern Toll roads were implemented with development impact fees.
Funding and financing mechanisms available today reflect a shift from the traditional means of grant-based funding and address the realities of certain funding shortfalls. Federal and state governments, as well as state departments of transportation, are working collaboratively with other local entities and the private sector to maximize the effectiveness of every transportation improvement. Project stakeholders must work together to assemble a funding package that will result in a financially feasible project. The mechanisms described above can be combined and structured to achieve this in the most cost effective manner. The U.S. Department of Transportation has achieved tremendous advances in making large, complex projects, such as managed lanes, more feasible. They have developed numerous programs to capitalize on all available resources. More effective financing of managed lane projects will ultimately help to improve the mobility of the transportation system.


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Source

Managed Lanes: The Funding and Financing of Managed Lanes

Author: Tina Collier & Ginger Daniels Goodin

Published By: Texas Transportation Institute

Source Date: 2005

URL: http://managed-lanes.tamu.edu/products/guidance/Funding_and_Financing.pdf

Lesson Contacts

Lesson Contact(s):

Tina Collier
Texas Transportation Institute
(512) 467-0946
t-collier@tamu.edu


Agency Contact(s):


Carlos Lopez
Texas DOT
(512) 416-2400
clopez@dot.state.tx.us

Lesson Analyst:

Jane Lappin
Volpe National Transportation Systems Center
617-494-3692
jane.lappin@volpe.dot.gov


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Lesson ID: 2007-00382