DOT PABs Come up Short

WASHINGTON - More than three years after its creation, the Department of Transportation's $15 billion private-activity bond program designed to help states and localities finance infrastructure through private investment - a program that DOT officials want to expand - has resulted in only one $589 million transaction.

Market participants and analysts say that the program's progress has been slow because public-private partnerships take months and sometimes years to put together, and adverse market conditions in recent weeks have deterred at least one such transaction.

The program is currently authorized by the Safe, Accountable, Flexible, Efficient Transportation Equity Act: a Legacy for Users, or SAFETEA-LU, that was signed into law in 2005 and expires at the end of this fiscal year. It allows state departments of transportation and other government agencies to finance highway and intermodal freight transfer facilities with tax-exempt private-activity debt, subject to approval from the Department of Transportation.

Altogether, the DOT has approved more than $4.08 billion of PABs for allocation under the program. Another $3 billion of PABs are pending approval, said Tyler Duvall, the DOT's acting undersecretary for policy. Duvall said he thinks an additional $8 billion in applications "could be coming" to the department during the next 12 months.

"Clearly, this is going to be a program that will experience a lot more interest in the future," Duvall said.

The $589 million Capital Beltway HOT lanes project in Virginia is the one DOT-approved PAB-funded project that has moved forward under the program. The bonds were issued in June.

"My impression is that deals are coming up slower because of various market problems," said Jack Bennett, manager of the PAB program. "I know, however, that Port of Miami Tunnel is still pursuing a financial plan that includes private-activity bonds, and they're on a very short lead."

Duvall and other proponents of the program argue that the $15 billion volume cap on transportation PABs, which is not subject to state private-activity bond limitations and which is authorized until the full $15 billion is used for projects, should be removed when Congress revisits the federal transportation bill next year.

States will turn increasingly to the private sector for help with transportation financing and the PAB program should be increased so that supply can meet the growing demand, they contend.

Private-activity bonds would allow private entities to take on the financial risk of funding a project such as a tolling facility, "whereas in a traditional municipal bond issuance, if the project under-performs, the taxpayer would be more exposed," Duvall said.

Other participants including the American Association of State Highway and Transportation Officials agree that the $15 billion volume cap should be reviewed.

"I think if we open it up to a broader framework, we will see if there is more interest in it," said Jack Basso, AASHTO's director of management and business development.

Right now, however, market volatility may be hindering the issuance of PABs that have won federal approval so far, analysts and market participants said in interviews.

A recent decision in Missouri may highlight the current market's influence on how willing agencies are to move forward with private-activity bond deals.

The Missouri Highways and Transportation Commission in September withdrew its plan to finance a pilot program using federally approved PABs. The commission had expected to use PABs to finance the replacement or repair of 802 bridges in the state.

The commission had selected the Missouri Bridge Partner as a private-sector partner to help design, build, and maintain projects expected to be financed with $700 million of tax-exempt private-activity debt. But the agreement crumbled under the impact of the credit crunch. The annual cost for the project grew to an estimated $65 million to $74 million in September from $52.7 million in February,.

The Missouri Department of Transportation noted that the spread between MoDOT grant anticipation revenue bonds, or Garvees, and PABs grew to more than 1% in September 2008 from less than 1/2% in September 2007; the difference was about 3.3% for muni bonds versus 4.45% for PABs, according to MoDOT documents. As a result, the commission decided to scrap the PABs and instead use Garvees to pay for the project.

"When all is said and done, our new approach will likely save taxpayers $300 million to $500 million," said MoDOT director Pete Rahn.

Texas' SH-121 was the first project approved under the program in October 2006, for $1.8 billion of PABs. But the PAB financing proposal was withdrawn the following year after the state's Transportation Department rescinded its deal with the Spanish developer, Cintra Concesiones de Infraestructuras de Transporte SA, and entered into a tolling agreement with the North Texas Tollway Authority, a regional public agency.

Scott Trommer, senior managing consultant at Public Financial Management, said a few factors are driving "slower than expected" use of the PABs - the "natural process" of financing projects that often causes a longer-than-planned timeline; the difficulty concessionaires have in raising their own capital to undertake the projects; and the rising cost of projects as credit spreads for PABs have widened.

"A return of more favorable market conditions for these types of bonds will likely drive their use in the future," Trommer said.

If market conditions continue, the expectation is that the use of transportation PABs under the federal cap will slow or remain constrained, he said.

Additionally, since PABs are subject to the alternative minimum tax, the bonds are more expensive than "pure tax-exempt munis," he said. The AMT is designed to prevent the wealthy from taking so many tax breaks that they pay little or no taxes.

"It's really dependent on a number of things - the condition of the market as well as the strategic viewpoint of the [state] DOT and the other entities" such as whether the state DOT needs to take on debt for other purposes in the future, said Chee Mee Hu, senior vice president in the project finance group at Moody's Investors Service.

"The fact that [PABs] haven't been grabbed up isn't because they aren't an attractive alternative. It's just the state of the market" and fluctuating interest rates, she said. Issuers "don't want to get locked into something they may regret in a few months."

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