DALLAS -- The five-year, $305 billion federal transportation funding measure signed into law by President Obama in early December provides opportunities as well as some limitations for states looking to public-private partnerships for increased infrastructure investments in 2016.
The Fixing America's Surface Transportation Act (P.L. 114-94) extends federal transportation funding from the Highway Trust Fund through fiscal 2020, increases infrastructure investments by 11% over five years from current levels, and establishes new freight-specific programs aimed at uncorking road and rail bottlenecks that impede the flow of goods and limit economic activity.
The measure also cuts funding by 70% for the Transportation Infrastructure Finance and Innovation Act credit-enhancement program, which has been instrumental in the financial plans of most large P3 projects.
TIFIA funding, which that had been $1 billion per year in fiscal 2014 and 2015, totals $1.43 billion in the FAST Act -- an average of $287 million per year. The annual funding includes $275 million per year in the first two years, rising to $285 million in fiscal 2018 and then to $300 million per year in 2019 and 2020.
"There is a significant reduction in TIFIA funding in FAST to the point where it is now borderline adequate," said Ananth Prasad, transportation practice leader at infrastructure solutions firm HNTB and former Florida transportation secretary. "Loans and lines of credit provided by TIFIA have been instrumental in financing many of the large and complex P3 projects over the past 10 years, and the supply is going to be tighter."
P3 projects probably won't feel the pinch from the reduction in TIFIA funding during the first two years or so of FAST, said Doug Koelemay, director of Virginia's Office of Public-Private Partnerships, but it could slow down the sector in the later years.
"It looks like it doesn't hamstring us for the first few years, but that's because there are some projects already in the pipeline for 2016 and 2017," he said. "We might even see some projects being accelerated in the next two to three years as they compete for the limited TIFIA assistance that is available."
The funding crunch will come in 2019 and 2020, and that could hamper development of new P3s and a slowdown in some that are now in the planning stages, Koelemay said.
Several large P3 projects are set to move ahead in 2016 but small, innovative projects may be the best bet for long-term growth in the U.S. P3 industry, Koelemay said.
"States will move forward with discrete steps, like Michigan's new highway lighting P3, that lets them gain experience in P3 procurement," he said. "These can be on-going efforts rather than the one-off, big projects."
Michigan
Michigan Department of Transportation signed a P3 agreement in August that calls for private partners BlackRock Infrastructure and Freeway Lighting Partners LLC to replace 15,000 obsolete freeway lights in three Detroit-area counties with energy-efficient LED lights and to keep them operational for 15 years.
The state said the arrangement will save it $13 million over 15 years. About 30% of the lights are not functional at this time, but the private partners agreed to make sure at least 98% are operational when the two-year construction period is completed.
"Conversion to LED lights, economies of scale that lower equipment costs, and transferring risk while creating incentives to a private partner ensure effective operation and maintenance," said Michigan DOT spokesman Jeff Cranston.
Arizona is contemplating a similar project. The program in the FAST Act that makes transit-oriented development projects eligible for TIFIA funding is a plus for P3s, Koelemay said, as is the creation of the National Surface Transportation and Innovative Finance Bureau that will administer TIFIA as well as a new discretionary freight funding program.
The new finance bureau within the Transportation Department will develop and promote best practices for P3s, and provide advice for local and state governments with limited experience in procuring P3s.
The bureau will make allocations of federal private-activity bonds dedicated to transportation projects. President Obama had asked lawmakers to raise the cap on the bonds to $30 billion but the FAST Act keeps the limit at $15 billion.
The two new freight-dedicated programs may help finance P3 projects that cannot obtain a TIFIA loan, Koelemay said.
"P3s should be able to take advantage of those," he said. "There is interest from the private investment sector in freight projects, because shippers and manufacturers realize how much money they are losing when their trucks are sitting idle in traffic or can't get in or out of a because the roads and rails are clogged."
The National Highway Freight Program, with funding allocated by a formula to every state, will provide $6.2 billion through 2020 for road and bridge projects.
The competitive Nationally Significant Freight and Highway program will distribute a total of $4.5 billion for road projects, especially those that include port access or rail aspects. Funding begins at $800 million in 2016 and goes up $50 million per year to $1 billion in 2020, the last year of the funding plan.
"We're probably going to be OK, but it seems like Congress is at cross-purposes and sending a negative signal to the P3 industry with the TIFIA cuts," Koelemay said. "If P3 project delivery expands rapidly in three to four years – and that's what many states, including Virginia, are looking at -- we could outgrow the FAST Act.
"It's really up to the states to make this work," Koelemay said. "The real progress will come from states, such as Virginia, taking the lead themselves and sharing best practices with other states."
Virginia
P3 activity in 2016 will include Virginia's selection of the private partner for a $2.1 billion project to add express toll lanes to Interstate 66 outside the Capital Beltway, and Maryland's determination in March of a preferred private partner on its $2.16 billion Purple Line light-rail project.
Two New Jersey state senators said in November they may introduce legislation in 2016 to expand the use of P3s in the state. New Jersey has used P3s mostly for building projects at state universities.
"We really need to be moving toward P3s for everything in the state: infrastructure, roads, highways, bridges, utilities," said Sen. Steve Sweeney, who is president of the state senate. "This is the way to get things moving."
The concerns that the cuts in TIFIA funding will affect P3 developments are not shared by former Transportation Secretary James Burnley, who served as transportation secretary from 1987 to 1989 and now co-chairs the transportation law practice at Venable LLP in Washington. Burnley said the lower TIFIA allocations should be more than adequate to meet the anticipated demand from P3 projects.
"The Transportation Department has struggled to use the TIFIA capacity that has been available," said Burnley. "The whole approach of the program is a good one but it has not delivered what supporters had hoped would be delivered."
TIFIA had been funded at an average of $122 million per year for 10 years before the program was increased to $1 billion for the first time in fiscal 2014, said Jeff Davis, a senior fellow at the Eno Center for Transportation.
"It appears that the $1 billion per year TIFIA program provided money far in excess of DOT's ability to process TIFIA applications, and quite possibly was more subsidy cash than needed to fund the entirety of all ready-to-go, credit-worthy projects that met the statutory criteria," Davis said.
In April, the Transportation Department had to transfer $638.7 million of unobligated and uncommitted TIFIA funds from fiscal 2013 through 2015 to the states through the formula-based funding programs, he said.
The FAST Act removed the requirement that unused TIFIA funds be redistributed.
"The unobligated and uncommitted balance at the end of fiscal 2015 was probably close to $800 million, or at least four years' worth of new spending at the 2015 rates," Davis said.
"If DOT can process and commit anywhere close to their $2.2 billion-plus in TIFIA subsidy contract authority over the life of the FAST Act, between now and September 2020, then a return to annual spending levels closer to the peak might be justified," he said.
