Infrastructure 2022: Afternoon keynote

Morteza Farajian, Executive Director, Build America Bureau

Transcription:

Alma Subasic (00:07):

Good afternoon everybody.

(00:12)

I realize it is right before lunch, but we are gonna have to get started. My name is Alma Subasic. I am with the Bond Buyer and I am here to introduce our next keynote, Dr. Morteza Farajian. Forgive me, doctor. He is the Executive Director with the Build America Bureau. Dr. Morteza has served as a senior executive leading the Build America Bureau at US Department of Transportation since April, 2019. He is responsible for credit programs and loan guarantees, approximately a hundred billion in lending capacity and 25 billion in existing portfolio that support development of large scale and multi-modal transportation infrastructure. J Burro also promotes innovative project project financing solutions and helps state and local government develop and finance public private partnerships transactions for transportation facilities. Prior to this position, Dr. Farajian was serving as acting Deputy Secretary of Transportation and director of Public Private Partnerships office in Virginia. Over a period of seven years, he led procurement financing and contract negotiation of multiple multimodal transportation projects, totaling of 10 billion in value. Under his leadership, the P three program in Virginia was reformed to promote competition engaged stakeholders and increase accountability. He established the first strategic program to manage a portfolio of P three contracts post procurement totalling 14 billion in project value as I promised him. I will gonna stop here. The bio can go on for days. Thank you, doctor, please join us. It is a pleasure.

Morteza Farajian (02:07):

Well, good afternoon. They told me I have all afternoon to talk to you, but I know that you need to eat lunch. At some points I will try to make it as quick as possible. Many of you have worked with me in the past especially when I was in Virginia. Some of you have worked with me since almost four years ago when I joined Build America Bureau at US Department of Transportation, so I am actually very happy to be in this room today, see so many familiar faces and

(02:43)

Thanks. Talk about some of the exciting things that is happening. Every time that I go to a conference I try to sit down somewhere in the back and listen because every time I learn a lot of new things about what is going on in the market and this is actually a very good opportunity. Bond buyer provides very unique perspective about what is going on, especially in the bond industry and some of the deals that you all are working on them much closer than we are working on them. Some of them come to us to get private activity bonds like the one that we just heard from folks who were working on it, the street light in dc. Some of them come to us to get a loan, but typically when we get involved is not early in the process. Sometime it is a little bit later down the road so it is always good to hear about what is going on in the market.

(03:42)

I am assuming that everyone is familiar with Build America Bureau. I will talk a little bit about the bureau, but before talking about Bureau, you heard multiple times today that the infrastructure legislation that was passed exactly a year ago in November of last year one year into this five year legislation, a lot has happened since then. You have heard multiple times that this is once in a generation probably opportunity to invest in our infrastructure. A lot of new areas that this new infrastructure legislation is supporting. You have probably seen a lot of new grant programs that have gone out, some of them through Office of Secretaries, some of them through different modes that US Department of Transportation has and some are not. Even within the Department of Transportation, department of Energy a lot of water projects, a lot of broadband projects have all benefited from this legislation.

(04:42)

So one year into this legislation with all those good opportunities that we have seen, all the good stuff that has happened, I guess some of us have also noticed the challenges that comes with those opportunities. One of the major challenges that I hear a lot because I travel a lot by the way these days I love to just go to where these projects are, try to sit down and talk to project sponsors and try to learn from them about the challenges that they are dealing with and try to help them as much as we can. So I would like to share a couple of those points that they have learned cause of those conversations. And then because of what I have seen in the market, one of the major ones is capacity and at various levels that capacity has become a challenge for project sponsors, for contractors, for even consultants.

(05:36)

It is interesting to see that even consultants who are always looking for new contracts now some of them are under a lot of workload that they can take new clients especially the project sponsor level. I think that is where we see that because we need to work on a lot of these projects and try to get them ready even to go to procurement, all of that early stage work, environmental work, all the studies that need to happen, procurement, a lot of project sponsors are dealing with those challenges and now they are feeling that at it is heart to go after every single new grant program that is out there, for example, because some of them are new you need to apply for them, you need to submit applications, a lot of good projects out there, but how are you going to do that? You need to build significant even grand writing capacity or higher consultants, and that is the area that we see that a lot of folks are dealing with those challenges.

(06:37)

When it comes to construction, that is another area. I just saw some statistics that 93% of construction companies have job openings because they are all trying to grow. they are all trying to hire new of say new capacity because many of them are getting contracts that before they did not have. And that is a major bottleneck for a lot of construction companies right now to make sure that they have the necessary resources. We are all familiar with supply chain issues and some of the other issues that construction companies are dealing with and because of all of these issues that we see in market construction costs is going up. Inflation in general is a challenge, but when it comes to construction we have seen steeper rises due to the fact that there is also more demand for construction, especially in infrastructure projects. So I I am saying all of that because over the last year or so I believe many of you have faced those challenges, but with challenges also, I keep talking about challenges and opportunities at the same time because I was just talking to someone earlier about workforce challenge and we were talking about the fact that many industries are playing off their employees.

(08:14)

For example, tech industry is seeing some layoff. We have probably seen the news about some of the major companies out there. That is also an opportunity for us in infrastructure, especially if these folks have special skill sets, let us say tech companies software engineers who can come and help us when it comes to its projects, maybe they can just switch a little bit. I mean the same skill sets can work in infrastructure projects maybe in a different way. I have started doing that in my own office because we have been growing anyone else in this industry and sometimes it is hard for me to find underwriters who have special experience in transportation projects, but they can go and maybe pick underwriters from other federal agencies that are not getting as much budget that Department of Transportation is getting or portfolio managers or risk managers. And I believe that is maybe a common path that a lot of us in this industry are going to go and try to not only focus on workforce development and special programs that we can put in place to make sure that we are training people for the type of a skill sets we need, but also try to get innovative and figure out how we can take advantage of some of these folks who may be losing their jobs somewhere else and try to bring them to our industry and try to take advantage of the capacity that they can bring to our industry.

(09:50)

One of the major issues that folks when I go and talk to them, they are dealing with right now, as I mentioned earlier is that inflation and construction cost escalation. A lot of projects that we were working with them before they had a cost estimate and now because of construction cost escalation, all of a sudden they have a funding gap. We have had multiple projects that when they got their bids, all of a sudden they got surprised because their estimates were conducted back in 2019, 2020 pre pandemic. And now some of them they see even up to 50% in some cases that I have recently talked to compared to their estimates to 2019, 2020. that is a sharp increase just in two years. And they are trying to figure out how they can close that funding gap and move their projects forward. And that is where I think we in this financing world, can step in and try to help them to move their projects forward, leverage their resources.

(10:58)

So not to just hit that break too quickly and put the project on pause, but try to figure out what other innovative approaches are out there that would allow them to move the project forward. And I will talk a little bit about that, what we are providing at Build America Bureau. Quite honestly, I think our products and what we provide that Build America Bureau can be easily mixed with the type of products that bond market or I would even say loans from other financial institutions can provide to help some of these projects move forward. Financing is one challenge though because when it comes to infrastructure projects, those of you who have worked on larger projects probably know that it takes years sometimes to move projects through different stages, through different steps and get them ready. You heard about my background. I come from Virginia and I used to work in Virginia D OT , running their P three office.

(12:05)

One project that I can think about right now because they have their grand opening later this month is I 66 express name project in Northern Virginia that they started working on that project back in 2013. We signed the contract in 2017. Here we are in 2022, end of 2022 and the road is opening. And that is a really fast timeline for those of our who are familiar with the timelines. that is a really fast timeline. So how can we help project sponsors to actually expedite this process and be able to move more projects to market so they can actually take advantage of the opportunities? A couple of things again, you heard about the importance of some of the best practices that through Build America Bureau and other offices at ut we are trying to promote, one of them is working with the communities early in the process.

(13:00)

US DOT just published some guidelines. It is not guidelines, but it is best practices that has been shared about how to get communities engaged not just them inform because it is different. Community engagement is when we truly allow the community to step in early in the process and try to take their input, try to work through different solutions and try to, I implement as many of the requests that they have of course within certain boundaries because we all know that there are always trade offs but that process can reduce the friction and help a lot of these projects move forward a little bit faster, maybe down the road, reduce the risk quite a bit too. So those are the type of things that within Build America Bureau we are trying to promote. And my conversations with folks that I go and talk to them I try to make sure that they understand that these are important, the fact that they can look at different options.

(14:02)

Innovative solutions is another area that we are trying to emphasize. Some of you may have heard about the new programs that we are trying to promote. One of them is called Regional Infrastructure accelerated Program and many technical assistance programs like Thriving Communities like Innovative Finance Technical Assistance program that are new because of the new legislation, we are able to implement them that are all geared toward the same goal, which is creating capacity. The capacity that I mentioned a little bit earlier we talked about construction side, we talked about procurement side, but one of the areas that capacity I can see is lacking for a lot of project sponsors on the public side is the fact that they can think a little bit outside the box and finance their projects. Many of the CFOs are not truly financial people. They are accountants. We still tend to in public sector, we still tend to go back to the accounting principles that this is the budget they have.

(15:10)

These are the projects I have got. How can I make the left side and the right side of the equation match and move forward? Not many of them think about financing. And when I say financing, there are various ways to finance these projects. And again, the previous panel you heard from the panelists that even though they had a lot of experience with certain types of bonds, for example, they did not know about other options, other opportunities that they had. And that is the area that I truly believe that we together as industry can invest our time and resources and try to educate some of public sponsors to think outside the box to get innovative. And my team, particularly within Build America Bureau has been focused on that since I joined Bureau over the last four years. It has been my top priority for some of you who know me that I travel. I try to meet with people, meet with mayors, meet with governors, meet with secretaries of transportation, face to face meet with their staff, roll up my sleeve in front of a whiteboard and try to look at different options, educate them, tell them how they can mix and match different programs and products that we have and move their projects forward. So instead of basing their projects, if they do not have budget, they can actually go quite the opposite of that. Finance, the projects finance Phase two in current environment, I mentioned high inflation.

(16:43)

It makes a lot of sense to finance it because if you can finance it at a rate that is lower than inflation every year that you are financing it and expediting delivery of project, you're saving money. And that is where I think when we put the numbers in front of them, when we put the scenarios in front of them and we explain to them that, look, by financing, not only you're not paying more, but you are actually saving money. And by the way, if you do a couple of these projects now instead of waiting 5, 6, 7, 10 years, this is how much you can save and this is how much more you can deliver with the exact same budget that you have. Those are the type of things that our technical assistance programs are trying to promote. When I talked about regional infrastructure accelerator program, which by the way, we have created 10 of them already.

(17:32)

Can you believe that we just started last year and we have already 10 and we are probably gonna have more because no, around three of that grant program the nofo, we are working on it internally and it is probably gonna go out most likely before end of the year, but hopefully sooner than that sometime, sometime in November is going to create maybe another seven or eight of them is specifically designed to help project sponsors to understand financing principles, to understand how they can bundle different phases and not only bundling different phases, bundle different types of projects. If you have different bridges that they all need to be replaced, think about a program in which you can finance all of them go through procurement once. And by the way, you are dealing with capacity issues. It is hard for you to submit multiple grants. It is hard for you to do multiple environmental studies, multiple procurements, oversee multiple contracts.

(18:34)

How about bundling them? How about just going through each one of those steps? One but 4, 5, 6, 10, 20, 50 bridges. That is the only way that we can still move as many projects forward that they need is with still limited capacity that we have, especially in the public side. The same thing for the contractors. Instead of going after multiple contracts and chasing multiple contracts, most likely they will be more interested in going through one procurement. Either they get it or they do not get it. Either way, they probably prefer it compared to going after 20 or 30 different procurements and wasting the resources on it and this whole bundle can be financed. So that is the area that we have been pretty busy trying to build capacity and we are seeing a lot of good progress. By the way let me give you a couple of numbers that we are seeing firsthand.

(19:32)

Before I joined Bureau, let us say around 2016, 2017, 2018, 2019. In that timeframe those four years Build America Bureau financed about, I do not have the exact number, but anywhere from eight to 9 billion worth of loans that we close in four years. So on average it is about two, maybe 2.2 billion a year. Last year a loan we closed 11.3 billion. Well, some of it was refinancing because the rates dropped and we actually provided a new flexibility that project sponsors could refinance some of their projects. But a lot of it was new projects. And let us look forward right now we have over 5 billion currently in our underwriting process. These are active projects that we are trying to underwrite them and most likely we will close them, hopefully all of them, but you never know that exceptions always happens. But they hope that we can close all of them within the next 12 months.

(20:41)

Our pipeline, that is a good indication of what we are going to close. I would say that the timeline timeline is 12 to eight to maybe 24 months from now, the pipeline is 30 billion dollars. So that tells you that how big this pipeline is growing and it is not just one type of projects. You heard again that some folks think that when we talk about Build America Bureau, our TFIA loans, Riff loans or private activity bonds, it's highway projects as toll roads. Well maybe at some point in the past that was the case. And by the way, I was the number one borrower back then when I was in Virginia. But it has changed again the last four years. We have tried to diversify not only our products, but our pipeline has diversified in terms of assets that we are trying to finance from majority being highway projects in the past.

(21:36)

Highways not the majority of our pipeline in the future. These are the loans that I mentioned earlier. We are expecting to close. The majority of what we have in our pipeline now is transit or transit-oriented development. Some of you may not even know that we can finance transit-oriented development. It is a new program that we have set up at the bureau. Any type of public infrastructure such as civic centers, schools, libraries government administration, buildings to even mixed use development. It could be residential office commercial as long as it is, IT meets certain criteria, the most important one is to be half a mile within a transit station. We can finance those projects and that is the area that we see a massive growth in our pipeline. The other areas which are interesting is, for example, we have had its projects as part of a larger project in the past, but now we are in discussion with multiple project sponsors who want to actually have a standalone, it is project building, future roads, building autonomous building roads that can actually provide the necessary hardware and software for autonomous vehicles.

(22:56)

That is one area that we see a lot of growth in our pipeline. I mentioned qd, that is another area we see growth. And then an area that is new airports. We could not finance airports in the past, but the new legislation has added them as a new eligibility. So now we can finance airports as well. We see diversity in terms of who is borrowing from us. Before it was mainly state dots, but most of my time these days is being spent on meeting with mayors, meeting with county officials, meeting with MPOs. And that tells you that the dynamic has shifted a little bit. And that is because especially in the legislation now, there are a lot of new grant programs that these localities do not need to go through their states to apply for them. They can apply directly. So now they know that they are in driver's seat, they can have their projects, they can actually have their destiny in their own hands and work on these projects, submit grant applications and then come to us and borrow directly.

(24:02)

And one of the other changes in the legislation that we are educating folks on it and they love it, is that the loans let us say TFIA or rif, in the past, they were not counted toward local share, but they are now. So for a lot of those grand applications, locals in the past had to find a match, a local match. And that is why they also had to go to states and try to find some money that is not federal. it is either state money or local money for the match. But now they know that they can borrow from us and that money is going to be counted toward the match. And then the geography is also very interesting because the diversity is not just between locals and the state folks. It actually goes to urban and rural. We have a lot of rural loans that we are closing now.

(24:53)

Three rural loans, for example, we have closed in California and they are all for electric bus maintenance facilities. We just closed one in Oklahoma and I believe another one in Louisiana, which is interesting. You see that how a lot of rural projects are coming to us and trying to get financed. But also a lot of new states, the states that had never borrowed from us in the past, Minnesota for example, is one of them, Oklahoma that I mentioned. They closed their first loan in 2020. And since then we have had multiple loans that we have close for them and many more in our pipeline that we are working. So it shows that when they understand how it works, once they keep coming back because they see the benefits. And then finally, I want to also make the point that these loan programs that we have as some of, they provide a lot of favorable terms.

(25:51)

One of the new changes is the term of the loan that previously was capped at 35 years post completion. For a lot of our projects, it would take about five years to design and construct. We could go 35 years after that. So the longest loans that we had was about 40 years. Well, the legislation has changed that now we can go up to 75 years posten completion, meaning that we can have loans that would have a fixed interest rate for 80 years. Well that is a big challenge we have right now to figure out how to underwrite those loans. Sure, a lot of you understand it is really challenging, it is really difficult. We are going through that process right now to come up with a strategy methodology to do that. But also setting the rate is interesting, right? Because we use treasury rates and treasury rates do not go 75 or 80 years.

(26:44)

But those are all good challenges that we are dealing with them right now. Not everyone can borrow up to that length. It all depends on the life of the asset too. So these loans are for assets that have a long life. For example, for someone to qualify for a 75 year loan, their assets should be, their asset life should be at least a hundred years. So certain tunnels, certain bridges may qualify for that or it could be anywhere in between. Does not have to be necessarily 75. It could be a 50 year loan or 60 year loan. So with all of that I just try to give you a flavor of what is happening and maybe share some news with you about different programs that we are working on them. One more program that I want to mention. You heard about private activity bonds, so I am not going to repeat that.

(27:39)

We did get 15 billion additional capacity that probably about 3 billion of it is already allocated to different projects. A lot of interest, especially from P three projects on that. But one particular program that I want to share with you is what we call innovative finance technical assistance program. The legislation has given us 20 million per year over the next five years. So we get a hundred million. And the idea there is to provide technical assistance to project sponsors who have assets that are underutilized and they want to develop those assets and put them in a better use. Always use the example of a surface parking lot right next to a transit station or a bus maintenance facility right next to a transit station. What we can do is we can provide a grant, the first million dollar, there is no match for it, the second million dollar, we ask them to also put a million dollar in and hire consultants who would help them to scan their assets.

(28:48)

Of course they need to have some criteria. And then if the assets score highly and the assets rise to the point that we think private companies would be interested in stepping in and developing those assets we can create a list of those assets, have some basic information, compile this list from different project sponsors that we are helping create a national database that we can put out there. So private companies who are interested in looking at those assets, they do not need to go and chase them one by one on their own dime or try to go and find them with limited resources, limited capacity they have, because a lot of these assets, to be honest, even project sponsors do not know that they have got them or they do not know what is the true value of this assets, you are sitting on them. So we are hoping that through this process, through creation of this list, we can actually connect the two sides and we can see many more projects like the one that you just heard about.

(29:53)

And that is something that you will hear a little bit more about it. We are working on it and we will probably roll it out sometime early next year. It takes a lot of time to set it up because something like that does not exist and I am very practical. So I want to make sure that as we set it up, is something that can actually generate good outcomes. And the outcome, as I mentioned earlier, is truly bringing private and public side together so they can form that partnership and redevelop this assets that are underutilized today. So with that, let me just stop. I know I tried to cover a lot of different programs, a lot of information that maybe takes a lot longer than the time that I had today to talk about the details, but I will be happy to take any questions if you may have not how to contact us. You can always send us a message or an email give us a shout, and someone from my office would definitely follow up with you.

Speaker 3 (30:56):

Hold on.

Audience Member (30:59):

With regard to the county projects that you discuss what coordination is done with the state? I mean I think you said they come to you, the counties come to you directly. And so generally the state has, if these are transportation projects or even other infrastructure projects, a statewide initiatives. So how do you coordinate that? How does that work?

Morteza Farajian (31:23):

Very good question. So depends on the type of project that is coming to us. FHWA has their division offices in every single state. We encourage folks to talk to. For example, if it is a highway project, we encourage them to talk to FHWA division. And through that channel we want to make sure that the state is aware of what is happening. They are always a stakeholder. One of the goals we have is to actually bring stakeholders together. We want to make sure that, as I mentioned earlier, everyone is engaged early in the process. Nobody is surprised. We want to make sure that everyone is feeling that this is their project and they are on board. And sometimes you also have requirements. For example, if someone wants to borrow under a TFIA program the project should be in the tip and a tip. And that is a whole process that they need to go through it to not only make sure that the state is on board, but for example the MPO is on board.

(32:22)

So that is one of the best practices that we try to encourage people to focus on it and make sure that they are not working in the vacuum and they are actually inclusive of taking an inclusive approach rather than just pushing things forward alone. The same thing at DOT. We want to make sure that when they come to us, they are talking to us, they bring the right mode to the conversation as early as possible. If it is a transit project, want to make sure that our transit folks are part of the conversation or the division office, A transit division office is a regional office in case of FTA is part of the conversation. I do not see any other hands, so I guess everyone is ready for lunch. Thank you very much. Appreciate it.