SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 1785 words

COMMITTEE: SENATE ENVIRONMENT AND PUBLIC WORKS

HEADLINE: SURFACE TRANSPORTATION FINANCING ALTERNATIVES

TESTIMONY-BY: PHYLLIS F. SCHEINBERG, DEPUTY ASSISTANT SECRETARY FOR BUDGET AND PROGRAMS

AFFILIATION: UNITED STATES DEPARTMENT OF TRANSPORTATION

BODY:
Statement of Phyllis F. Scheinberg Deputy Assistant Secretary for Budget and Programs United States Department of Transportation

Before a Joint Hearing of the Committee on Senate Environment and Public Works

and the Committee on Finance

September 25, 2002

Chairman Jeffords, Chairman Baucus, Ranking Members Smith and Grassley, and Members of the Committees:

Thank you for holding this hearing today and inviting me to testify on Federal innovative finance initiatives for surface transportation projects. These financing techniques, in combination with our traditional grant programs, have become important resources for meeting the transportation challenges facing our Nation. Secretary Mineta, in his testimony last January before the Environment and Public Works Committee, indicated his desire to increase their application.

The Secretary stated that "Expanding and improving innovative financing programs in order to encourage greater private sector investment in the transportation system.." will be one of the Department of Transportation's core principles in working with Congress, State and local officials, tribal governments and stakeholders to shape the surface transportation reauthorization legislation. He remains steadfast in his support for these programs. Defining "Innovative Finance"

Perhaps the first issue to address today is "What is innovative finance?" We increasingly hear the term used in the context of transportation projects, but what does it really mean? We at the Department apply the term to a collection of management techniques and debt finance tools available to supplement and expand the flexibility of the Federal government's transportation grant programs. We see the primary objectives of innovative finance as leveraging Federal resources, improving utilization of existing funds, accelerating construction timetables, and attracting non-Federal investment in major projects. The quantifiable successes of such innovative finance are beginning to mount.

The July 2002 report entitled "Performance Review of U.S. DOT Innovative Finance Initiatives"states that Federal investments of $8.6 billion have helped to finance projects worth a total of $29 billion, a ratio of $3.40 invested for each Federal dollar. Of this $29 billion, more than 27 percent, or $8 billion, consists of debt that will be repaid from new revenue sources. Sponsors report that more than 50 projects were accelerated from six months to 24 years as a result of innovative financing compared to transportation grants. The total economic impacts of $91 billion nationwide represent benefits that have accrued more rapidly than ever possible using a pay-as-you-go method.

While these achievements demonstrate the value of innovative finance techniques and tools, they also deserve a realistic assessment in the context of the grant system, financed by the Highway Trust Fund, that provides the foundation of Federal financial assistance for surface transportation projects.

The first assessment in realism is to examine the "innovative"nature of the financial tools. Improving the flexibility of fund administration and creating opportunities to borrow and lend Federal money have been vitally important initiatives, and we can thank numerous role models outside the transportation sector for developing these tools long ago. The "new"or "innovative"feature of these tools, then, derives from their application to the Federal transportation program. Further, these financing techniques have now become better known and accepted by many State and local transportation partners. Because the demand for transportation investment throughout the country consistently exceeds the supply of resources, those regions facing the greatest challenges to mobility have readily embraced -- and in many cases paved the way for -- the opportunities provided by innovative finance.

The second assessment concerns the potential for innovative finance to ease demands on the current grant funding distributed each year to States and local agencies. That doesn't seem likely. The focus of innovative finance (and perhaps a more appropriate term to designate these tools) is project finance. The techniques supplement existing programs on an as-needed, project-by-project basis. Transportation officials must evaluate each project individually to determine the best financing approach. The grant programs remain the bulk of Federal transportation assistance, supplemented by the extra muscle and flexibility of innovative finance.

The diagram below depicts a pyramid that illustrates the range of surface transportation projects and the innovative tools available for financing them. The base represents the majority of projects: those that rely on grant-based funding, but may benefit from measures that enhance flexibility and resources. Various Federal funds management techniques, such as advance construction, tapered match, and grant-supported debt through Grant Anticipation Revenue Vehicles, or GARVEEs, can help move these projects to construction more quickly. The mid-section represents those projects that can be partially financed with project-related revenues, but may also require some form of public credit assistance. State Infrastructure Banks (SIBs) can assist state, regional, and local projects through low-interest loans, loan guarantees, and other credit enhancements. State loans of Federal grant funds known as Section 129 loans represent another credit assistance technique. The Transportation Infrastructure Finance and Innovation Act (TIFIA) program provides credit assistance to a small number of large-scale projects of regional or national significance that might otherwise be delayed or not constructed at all because of risk, complexity, or cost. The peak of the pyramid reflects the very small number of projects able to secure private capital financing without any governmental assistance.

Federal Project Finance Tools for Surface Transportation

The TIFIA Credit Program

Let me begin with the program that, through the leadership of the Senate during enactment of the Transportation Equity Act for the 21st Century (TEA-21), provides a direct role for the Federal government to assist large transportation projects. In June 2002, the Department delivered its Report to Congress on the Transportation Infrastructure Finance and Innovation Act of 1998 (TIFIA), which authorizes the Department of Transportation (DOT) to provide three forms of credit assistance -- secured (direct) loans, loan guarantees and standby lines of credit -- to surface transportation projects of national or regional significance.

The public policy underlying the TIFIA credit program asserts that the Federal Government can perform a constructive role in supplementing, but not supplanting, existing capital finance markets for large transportation infrastructure projects. As identified by Congress in TEA-21, "..a Federal credit program for projects of national significance can complement existing funding resources by filling market gaps, thereby leveraging substantial private co-investment." Because the TIFIA program offers credit assistance, rather than grant funding, its potential users are infrastructure projects capable of generating their own revenue streams through user charges or other dedicated funding sources.

Identifying a constructive role for Federal credit assistance begins with the acknowledgement that, compared to private investors, the Federal Government's naturally long-term investment horizon means that it can more readily absorb the relatively short-term risks of project financings. Absent typical capital market investor concerns regarding timing of payments and financial liquidity, the Federal Government can become the "patient investor"whose long-term view of asset returns enables the project's non-Federal financial partners to meet their investment goals, allowing the project's sponsors to complete a favorable financing package.

The TIFIA program's pragmatic challenge is to balance the objective of advancing transportation projects with the equally important need to lend prudently and protect the Federal interest. The DOT must apply rigorous credit standards as it fashions assistance to improve the financial prospects of participating projects. The Federal objective is not to minimize its exposure but to optimize its exposure--that is, to take prudent risks in order to leverage Federal resources through attracting private and other non-Federal capital to projects.

The TIFIA program assistance is meant to support expensive, complex and significant transportation investments. In general, a project's eligible costs must be reasonably anticipated to total at least $100 million. Credit assistance is available to highway, transit, passenger rail and multi-modal projects. Other types of eligible projects include intercity passenger rail or bus projects, publicly owned intermodal facilities on or adjacent to the National Highway System, projects that provide ground access to airports or seaports, and surface transportation projects principally involving the installation of Intelligent Transportation Systems (ITS), for which the cost threshold is $30 million. The TIFIA credit assistance is limited to 33 percent of eligible project costs.

Congress has authorized the DOT to provide up to $10.6 billion of TIFIA credit assistance through the TEA-21 authorization period of 1998-2003. From the Highway Trust Fund, Congress authorized $530 million, subject to the annual obligation limitation on Federal-aid appropriations, to pay the subsidy cost of TIFIA credit assistance and related administrative costs. The subsidy cost calculations establish the capital reserves which the DOT must set aside in advance to cover the expected long-term cost to the Government of providing credit assistance, pursuant to the Federal Credit Reform Act of 1990 (FCRA).

To date, the DOT has selected 11 projects, representing $15.7 billion in transportation investment, to receive TIFIA credit assistance. The TIFIA commitments total $3.7 billion in credit assistance at a subsidy cost of about $202 million. The DOT has received 38 letters of interest and 15 applications from project sponsors. All major categories of eligible projects -- highway, transit, passenger rail and multi-modal -- have sought and received credit assistance. The TIFIA credit assistance ranges in size for each project, from $73.5 million to $800 million, mostly in the form of direct Federal loans from the DOT to the project sponsors.

LOAD-DATE: September 26, 2002