User:Svrmustafa/Sandbox/Funding and Finance

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Introduction

In the early 20th century, the development of highways in the United States was primarily influenced by state governments, which wielded significant power in determining freeway routes within urban areas. This influence stemmed from the states' substantial financial resources, as they collected annual registration fees and motor fuel taxes. With the surge in the number of cars and vehicle miles traveled, state highway department budgets experienced substantial growth during this period.

By 1921, the federal government began playing a more crucial role in highway funding. Despite this increased federal involvement, states continued to take the lead in planning, designing, constructing, and maintaining the nation's primary roadways. These activities were conducted in accordance with federal standards and required federal approval. Consequently, by the 1930s, a rudimentary national highway network had already been established, ensuring that the majority of Americans lived within close proximity to a numbered U.S. highway, exemplified by the iconic U.S. Route 66.

The pivotal moment in the history of highway funding in the U.S. occurred during President Dwight D. Eisenhower's administration. In the 1950s, Congress devised a financial strategy to support the ambitious vision of an interstate highway system that had been contemplated for a decade. The culmination of this effort was the Federal-Aid Highway Act of 1956.

A key aspect highlighted in the historical account is the intricate interrelationship of roadway financing among local, state, and federal governments throughout the 20th century. Successive federal bills incentivized states and cities to increasingly depend on federal transportation funds. This evolving dynamic significantly impacted the road network and urban areas, shaping their development and connectivity.

In more recent decades, as the purchasing power of federal transportation revenues dwindled, states and cities found themselves compelled to rely more heavily on their own funding sources. The historical analysis underscores that this shift has implications for decision-making, suggesting that states and urban areas are becoming more empowered to set their own priorities. However, this newfound autonomy is tempered by a weakened capacity to execute large-scale projects due to reduced reliance on federal support.

Congress has continued its longstanding deliberations on financing investments in highway and public transportation infrastructure. Since 1956, federal surface transportation programs have predominantly relied on taxes on motor fuels, contributing to the Highway Trust Fund (HTF). However, in 2001, trust fund revenues ceased outpacing expenditures, leading Congress to initiate transfers from the Treasury general fund in 2008 to sustain the HTF. Projections indicated a looming annual shortfall of approximately $40 billion in dedicated surface transportation revenues and spending by the end of the current decade.

Over the years, Congress explored various financing avenues, including tax preferences for state and local government borrowing, federal loans like the Transportation Infrastructure Finance and Innovation Act (TIFIA) program, and encouragement of private investment through public-private partnerships (P3s).

The IIJA, enacted as the most recent surface transportation reauthorization act, authorized spending on federal highway and public transportation programs until September 30, 2026. It included a substantial $118 billion in general fund transfers to the HTF, securing its solvency throughout the act's duration. This approach marked a de facto funding policy, sustaining the HTF for 18 years.

However, projections from the Congressional Budget Office (CBO) foresaw a shortfall of $149.7 billion over the five fiscal years following the IIJA's expiration, prompting discussions on how to address this potential deficit. The IIJA introduced changes to the funding structure by providing additional non-trust fund sums through advance multiyear supplemental appropriations. It included advance appropriations totaling $47 billion for highways and $21 billion for public transportation over FY2022-FY2026, ensuring a guaranteed funding source.

The IIJA's reliance on large general fund amounts, in addition to HTF monies, is anticipated to be a focal point during its reauthorization debate in FY2025-FY2026. Potential considerations include exploring options such as raising motor fuel taxes, adopting a vehicle miles traveled (VMT) charge, implementing a carbon tax, or an electric vehicle fee. Alternatives involve continuing the use of Treasury general fund transfers, potentially requiring budget offsets, or evaluating a combination of authorized trust-funded budget authority and multiyear appropriations.

Congress may also need to address the impact of inflation on the purchasing power of IIJA authorizations. Tolling is recognized as a potential financing method for specific heavily used roads, bridges, or tunnels. While it may reduce the need for federal expenditures on such infrastructure, it might not garner broad support for surface transportation.

To further promote financing of surface transportation infrastructure, Congress could consider revising existing tax incentives and programs, potentially increasing public- and private-sector borrowing and private equity investment. This might involve enhancing federal support for the credit risk premium in programs like the Railroad Rehabilitation and Improvement Financing Program. Additionally, Congress may explore other financing mechanisms, including a national infrastructure bank, an asset-recycling program, and the encouragement of value capture tools like tax increment financing and special assessments. These considerations underscore the ongoing evolution of the complex landscape of highway and public transportation funding in the United States.

Capital Funding and Finance (Mustafa)

Federal

TIGER, INFRA & MEGA

• they are actually not that different. Be generic but acknowledge the differences. These acts from the period of appropriation acts not the authorization acts. There are discretionary programs, do not go deep but acknowledge that they are not IIJA they are appropriation rather than authorization. Multi-year approach is critical in infrastructure therefore authorazing committes grant contracting authority rights to give legal contracts with the states. Appropration comittees just have to give the money, they do not have that much choice. CRS, CBO are good sources. Keep it simple.

• Contract authority (goes back to 50s or earlier)
• CRS as a good resource
• Funding Federal Aid Highways  

• https://www.fhwa.dot.gov/policy/olsp/fundingfederalaid/

Build America Bureau

Established in 2016 under the Obama administration, the Build America Bureau (Bureau) emerged as a crucial sub-agency within the United States Department of Transportation. This initiative was conceived as part of a broader government-wide endeavor aimed at bolstering infrastructure investment and fostering economic growth. At its core, bureau was designed to actively engage private sector investors, fostering collaboration, and broadening the landscape for public-private partnerships (P3s) through two initiatives Transportation Infrastructure Finance and Innovation (TIFIA) and The Railroad Rehabilitation and Improvement Financing (RRIF) credit programs.

TIFIA (Reference the Refinancing Project)

TIFIA stands as a dynamic and strategic financial initiative, meticulously crafted to not only amplify the impact of limited Federal resources but also to catalyze substantial capital market investment in the realm of transportation infrastructure. Since its inauguration in 1998, TIFIA has played a pivotal role by extending credit assistance through various mechanisms, including direct loans, loan guarantees, and standby lines of credit. Its unique positioning prioritizes projects of national or regional significance, aligning with the overarching goal of playing a transformative role in advancing and fortifying vital transportation networks across the United States.

At the heart of TIFIA's multifaceted approach lies a set of core objectives, each contributing to the program's strategic vision. TIFIA seeks not only to facilitate projects that bear significant public benefits but also to foster the exploration of innovative revenue streams, encourage active private sector participation, address capital market gaps, and adopt a flexible and "patient" investor approach. This nuanced strategy is carefully designed to navigate and mitigate concerns surrounding investment horizon, liquidity, predictability, and risk. By doing so, TIFIA effectively limits Federal exposure through a judicious reliance on market discipline.

The operational framework of TIFIA includes the enforcement of several critical requirements to ensure the program's efficacy. These encompass the determination of minimum anticipated project costs based on project type, defining credit assistance limits, mandating the attainment of an investment-grade rating from recognized credit agencies, and requiring a dedicated repayment source for both TIFIA and senior debt financing. There is also the requirement of compliance with applicable Federal requirements, spanning Civil Rights, NEPA, Uniform Relocation, Buy America, Titles 23, and 49.

The TIFIA application process unfolds as a dynamic and responsive system, embracing a rolling structure that allows for flexibility in project submissions. Entities eligible to participate range from State Governments to Transportation Improvement Districts, and the process initiates with the submission of detailed letters of interest when a project successfully satisfies statutory eligibility requirements. Upon receiving an invitation from the TIFIA Joint Program Office, eligible entities are required to submit a formal application, marking a critical juncture in the pursuit of TIFIA assistance. TIFIA's expansive scope encompasses a diverse array of projects, spanning highways and bridges, intelligent transportation systems, intermodal connectors, transit facilities, intercity buses and facilities, freight transfer facilities, pedestrian and bicycle infrastructure networks, transit-oriented development, rural infrastructure projects, passenger rail vehicles and facilities, surface transportation elements of port projects, and airports.

To qualify for TIFIA assistance, projects are held to stringent eligibility requirements, ranging from demonstrating creditworthiness and obtaining investment-grade ratings on senior debt to fostering partnerships for public and private investment. A crucial criterion involves showcasing the capability to proceed promptly or at reduced lifecycle costs. Importantly, the reduction of the contribution of Federal grant assistance for the project is deemed essential, and the construction contracting process must commence within 90 days of executing a TIFIA credit instrument. BAB emphasizes that TIFIA's commitment to supporting projects that not only meet high standards but also contribute significantly to the nation's transportation infrastructure is ensured through this comprehensive eligibility framework.

Numerous modifications have been implemented within the program, notably through legislative actions such as the Moving Ahead for Progress in the 21st Century (MAP-21) in 2012, the Fixing America's Surface Transportation (FAST) Act in 2015 and most recently Infrastructure Investment and Jobs Act (IIJA) in 2021.

In 2012, MAP-21 brought about substantial expansions to TIFIA, significantly augmenting the program's credit authority by nearly tenfold for fiscal years (FY) 2013 and 2014. This extension continued into FY 2015. Additionally, MAP-21 introduced the concept of "master credit agreements" and instituted a procedural shift to a "first-come, first-served" application process, departing from the previous annual competition model. Following MAP-21, the 2015 FAST Act marked a notable reduction, slashing the program's credit authority by over 70% for fiscal years 2016 through 2020. This reduction was likely a response to the program's underutilization of the expanded credit authority granted by MAP-21. Accumulated budgetary concerns have persisted since TIFIA's inception, with over $700 million remaining unobligated when MAP-21 was enacted and an unobligated balance of $1 billion following its implementation. Despite the substantial budget cuts under the FAST Act, a considerable portion of the TIFIA program budget remained underutilized. Most notably the FAST Act made a critical clarification regarding the utilization of TIFIA credit assistance for refinancing existing project obligations. According to this clarification, TIFIA credit assistance can only be employed for refinancing if the maturity of the existing obligations does not extend beyond one year after the substantial completion of the project. This adds an additional condition to the existing requirement that any refinancing must occur within one year after substantial completion of the project. The FAST Act also introduced a suite of additional policy adjustments, offering clarity on the authority for "master credit agreements," modifying requirements for the redistribution of unobligated funding, expanding support eligibility to include transit-oriented development (TOD), and prioritizing small and rural projects.

Most notably the FAST Act made a critical clarification regarding the utilization of TIFIA credit assistance for refinancing existing project obligations. According to this clarification, TIFIA credit assistance can only be employed for refinancing if the maturity of the existing obligations does not extend beyond one year after the substantial completion of the project. This adds an additional condition to the existing requirement that any refinancing must occur within one year after substantial completion of the project.

The recently enacted IIJA brought forth significant enhancements to TIFIA loan, ushering in a series of updates to the federal program. Among the key changes introduced by the IIJA, the Act extends the period for contingent commitments under a TIFIA master credit agreement from three years to five, providing a more extended timeframe for project development. Additionally, the threshold requiring more than one credit rating for an eligible project's Federal credit instrument is raised from $75 million to $150 million, streamlining the rating process for projects within the specified range. The potential maturity of a TIFIA loan for a capital asset with an estimated useful life of more than 50 years is extended to the lesser of 75 years after substantial completion or 75% of the asset's estimated usable life. IIJA also further expanded the scope of eligible projects to include Transit-Oriented Transportation Projects, Airport-related projects, and those acquiring plant and wildlife habitats in accordance with an approved environmental mitigation plan. Importantly, the IIJA mandated that projects utilizing the TIFIA program must demonstrate appropriate payment and performance security, irrespective of the obligor's nature. Additionally, a streamlined application process has been introduced for projects with a reasonable expectation that the contracting process can commence within 90 days after a federal credit instrument is obligated.

The Railroad Rehabilitation and Improvement Financing Program (RRIF)

RRIF Program was established under the Transportation Equity Act for the 21st Century (TEA 21). This program provides direct loans and loan guarantees to finance the development of railroad infrastructure. The DOT is authorized to provide direct loans and loan guarantees up to $35.0 billion for this purpose, with a minimum of $7.0 billion reserved for projects benefiting freight railroads other than Class I carriers. RRIF credit assistance is awarded by the DOT to eligible applicants, including state and local governments, interstate compacts, government-sponsored authorities and corporations, railroads, limited option rail freight shippers that own or operate a plant or other facility, and joint ventures including at least one of the entities.

State

State Infrastructure Banks

Planning & Process

Formula versus Discretionary Funding

• Formula-based (land/population) - vast majority of programs are funded ($ amount) through formula-based funding (dominant in federal surface funding paradigm)
• IIJA as discretionary (~150 projects)

• Discretionary projects have always existed, but weren’t as prevalent as they are now

Case Studies (Mustafa)

Express Lanes I-95 and I-66 (I-66 OTB as a project that proposed by a private partner)

• Discussion of the Case Study

• Short, 2-pages.  

Courses and Reading List (Valentina)

Actions

- Annotations

- Re-order in a more user-friendly way

- One citation format

Funding and Financing Highways and Public Transportation Under the Infrastructure Investment and Jobs Act (IIJA) (R47573). Retrieved from https://crsreports.congress.gov/product/pdf/R/R47573

Congressional Research Service. 2017. Public Transportation Infrastructure: Background for the 116th Congress (R45010)*. Retrieved from https://sgp.fas.org/crs/misc/R45010.pdf

Congressional Research Service. 2021. Highway Infrastructure: Issues in the 117th Congress (R45516). Retrieved from https://crsreports.congress.gov/product/pdf/R/R45516

Congressional Research Service. 2022. Public Transportation in the United States: An Overview (R46826) . Retrieved from https://sgp.fas.org/crs/misc/R46826.pdf

Esty, Benjamin. 2003. "Teaching Project Finance: An Overview of the Large-Scale Investment Course at Harvard Business School."

Esty, Benjamin C. 2004. “Why Study Large Projects? An Introduction to Research on Project Finance.” European Financial Management 10(2):213–24. doi: 10.1111/j.1354-7798.2004.00247.x.

Flyvbjerg, Bent, and David Gardner. 2023. How Big Things Get Done. Currency.

Tan, Willie. 2007. *Principles of Project and Infrastructure Finance. Routledge.

Taylor, Brian D., Eran A. Morris, and Jeffrey R. Brown. 2023. The Drive for Dollars. Oxford University Press.

Walter, Ingo. 2016. The Infrastructure Finance Challenge. Open Book Publishers.

Too Big to Fall: American's Failing Infrastructure and the Way Forward

Funding Federal-Aid Highways - FHWA - Office of Policy and Governmental Affairs

Infrastructure and the Economy - Lida R. Weinstock

Public-Private Partnerships (P3s) in Transportation - William J. Mallet

The Transportation Infrastructure Finance and Innovation Act (TIFIA) Program - William J. Mallett

Taylor, Brian D. “The Geography of Urban Transportation Finance” in Hanson, Susan, and Genevieve Giuliano, eds. The Geography of Urban Transportation. Guilford Press, 2004. ISBN: 9781593850555.

Banister, David, and Yossi Berechman. “Transport Investment and the Promotion of Economic Growth.” Journal of Transport Geography 9, no. 3 (2001): 209-218.

Downs, Thomas M. “Is There a Future for the Federal Surface Transportation Program?” Journal of Transportation Engineering 131, no. 6 (2005): 393-396. (Originally presented at the Annual Convention of the American Society of Civil Engineers, October 16, 2004 in Baltimore, Maryland)

Wachs, Martin. “Local Option Transportation Taxes: Devolution As Revolution.” ACCESS Magazine 1, no. 22 (2003).

Chapter 9 (section 9.3) in Meyer, Michael and Eric Miller. Urban Transportation Planning. McGraw-Hill. 2000. ISBN: 9780072423327.

Lukmann, Andrew T. “Unintended Effects of Federal Transportation Policy: A Look at the Lifecycle Costs of the Interstate System.” PhD diss., MIT, 2009. (Abstract and introduction)

Supplementary Reading

Antos, Justin David. “Paying for Public Transportation: the Optimal, the Actual, and the Possible.” PhD diss., MIT, 2007. (Abstract and introduction)

Infrastructure as an Asset Class, by Barbara Weber, Mirjam Staub-Bisang, and Hans Wilhelm Alfen, 2016 

Infrastructure Finance, by Martin Blaiklock  Project Finance in Theory and Practice, by Stefano Gatti 

Public-Private Partnerships for Infrastructure, by E. R. Yescombe and Edward Farquharson

A risk-management approach to a successful infrastructure project （https://www.mckinsey.com/capabilities/operations/our-insights/a-risk-management-approach-to-a-successful-infrastructure-project）

C40 Infrastructure Interdependencies and Cascading Climate Impacts Study (https://unfccc.int/sites/default/files/report_c40_interdependencies_.pdf)

Alova, G., Trotter, P.A. & Money, A. A machine-learning approach to predicting Africa’s electricity mix based on planned power plants and their chances of success. Nat Energy 6, 158–166 (2021). https://doi.org/10.1038/s41560-020-00755-9

Andonov, A., Kraeussl, R. and Rauh, J., The Subsidy to Infrastructure as an Asset Class, Stanford University Graduate School of Business Research Paper, 2019, 18-42. (Available at SSRN).

Bitsch F., Buchner A., and C. Kaserer (2010), Risk, return and cash flow characteristics of infrastructure fund investment, EIB papers, Volume 15, No.1

Blanc-Brude F. (2013A), Towards efficient benchmarks for infrastructure equity investments, EDHEC Risk Institute

Blanc-Brude F. and O.R.H. Ismail (2013B), Who is afraid of construction risk? Infrastructure debt portfolio construction, EDHEC Risk Institute

Blanc-Brude F. and O.R.H. Ismail (2013C), Measuring infrastructure debt credit risk, EDHEC Business School

Blanc-Brude, F. and Hasan, M., A Structural Credit Risk Model for Illiquid Debt, Journal of Fixed Income, 2016, 26:1, 6-19.

Blanc-Brude, F. Whittaker, T. and Wilde, S., Searching for a Listed Infrastructure Asset Class Using Mean-variance Spanning, Financial Markets and Portfolio Managements, 2017, 31, 137-179.

Blanc-Brude, F., Hasan, M. and Whittaker, T., Calibrating Credit Risk Dynamics in Private Infrastructure Debt, Journal of Fixed Income, 2018, 27:4, 54-71.

Blanc-Brude, F., Long-Term Investment in Infrastructure and the Demand for Benchmarks ASSA The Finsia Journal of Applied Finance, 2014, 3, 57-64.

OECD (2016), Green investment banks: scaling up private investment in low-carbon, climate-resilient infrastructure, Green Finance and Investment, OECD publishing, Paris

Peng H.W. and G. Newell (2007), The significance of infrastructure in investment portfolios, Pacific Rim Real Estate Society Conference, Freemantle, January

Sawant R.J. (2010), Infrastructure investing: Managing risks and rewards for pensions, insurance companies and endowments, Wiley: chapters 1, 2, 3, 4, 7, 8

UBS (annual) Q-series: Global Infrastructure and Utilities (Index)

Weber B. and H. Alfen (2010), Infrastructure as an asset class, Wiley: chapter 2

Begg, Vernasca, Fischer and Dornbusch, Economics (Twelfth Edition, 2020). McGraw-Hill. (Available online through UCL Library.)

Krugman, Paul and Robin Wells, Economics (2015). Worth Publishers. (Available in hard copy in UCL library.)

Välilä, T., 2005. How expensive are cost savings? EIB Papers, Volume 10, No 1, pp. 94-119. - https://www.eib.org/en/publications/eibpapers-2005-v10-n01

Välilä, T., 2020. An overview of economic theory and evidence of public-private partnerships in the procurement of (transport) infrastructure. Utilities Policy, 62 (February 2020).

Välilä, T., 2020. Infrastructure and growth: A survey of macro-econometric research. Structural Change and Economic Dynamics 53: 39-49.

BIS (Bank for International Settlements) (2014), Understanding the challenges for infrastructure finance, BIS Working Papers No 454, www.bis.org

Brealey R., Cooper I. and Habib M. (1996), Using Project Finance to Fund Infrastructure Investments, Journal of Applied Corporate Finance, Volume 9, No.3, 25-38

Brealey R., Cooper I., and Habib M. (2000), The Financing of Large Engineering Projects, in Miller R. Lessar D. (eds), The Strategic Management of Large Engineering Projects: Shaping Institutions, Risk and Governance, MIT Press

Brealey R., Myers S. and Allen F. (2020), Principles of corporate finance (13th eds), McGraw Hill Collier P.M. (2015), Accounting for Managers (5th edition), Wiley

Damodaran A. (2011), Applied Corporate Finance (3rd edition), Wiley

Estache A. (2010), Infrastructure finance in developing countries: An overview, EIB papers, Volume 15,No2, 60-88

Esty B.C., Chavich C. and Sesia A. (2014), An Overview of Project Finance and Infrastructure Finance—2014 Update, Harvard Business School Background Note 214-083

Finnerty J.D. (2013), Project financing: asset-based financial engineering, New York, John Wiley: chapters: 1-5, 9-11, 13

Gatti S. (2013), Project finance in theory and practice: designing, structuring and financing private and public projects, Academic Press: chapters 1, 2, 5, 6, 8

Merna T. and Al-Thani F.F. (2018), Financing infrastructure projects, 2nd edition, ICE Publishing, chapters 1, 2, 4, 6, 7

Weber B., Straub-Bisang M. and Alfen H.W. (2016), Infrastructure as an asset class, 2nd Edition,Wiley: chapters: 6, 7

Yescombe, E.R., 2013. Principles of project finance. Academic Press.

For those who lack a finance background:

Benninga, S. (2010) Principles of Finance with Excel, 2nd Edition U.S.: MIT Press. Take advantage of F1F9’s free financial modeling course for the project finance industry (excel tips, best practices) http://info.f1f9.com/31-day-better-financial-modelling-course

Goldman, Todd, Sam Corrett, and Martin Wachs. “Local Option Transportation Taxes: Part Two.” Berkeley, CA: University of California, Berkeley, Institute of Transportation Studies, 2001.