uci center for urban infrastructure the new generation of transportation financing in california...
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UCI Center for Urban InfrastructureThe New Generation of
Transportation Financing in California
Karen J. Hedlund, Esq.Nossaman Guthner Knox & Elliott LLP
March 7, 2003
Tax-Exempt Financingfor
Public-Private Transportation Projects
Few Equity Projects in the U.S. Have Gone Forward
Virginia Greenway
SR 91 Express Lanes Acquired by OCTA
SR 57 Franchise terminated
SR 125 AB Macquarie investment
Few Asset Sales in U.S.
Privatizations mostly in water/wastewater sector
Airport demonstration program – a dud
Chicago Skyway auction expected in April 2003
Equity Investments in Tollroad Projects
0
200
400
600
800
1000
1200
US Canada Australia Europe
Source: Macquarie Infrastructure Group
US v. World(Macquarie Infrastructure)
Cause: Federal tax code discourages private investment in highway and
transit projects!
Tax-Exempt Bonds Preclude Private Investment—With Exceptions
Since 1969 interest on “private activity bonds” subject to federal income tax
Except: “exempt facilities”
Most “exempt facilities” bonds subject to statewide volume caps not airports, ports
Long-term Management Contracts Constitute “Private Use”
Safe harbor for “fixed fee” contracts
15-year max term
No compensation based on net revenues “One-time” incentive compensation payment
allowed
No “Private Activity Bond” Exception for Highway/Transit
Airport Terminals – No volume cap Port Facilities – No volume cap Water/Wastewater – Subject to cap Solid Waste – Leases exempt High Speed Rail – Special provision
Rationale: no private involvement in highways in 1970s when PAB exceptions legislated
Result: “Private” Deals Convert to “63-20” Non-profit Structures
Non-profit Pocahontas Parkway S.C. Southern Connector Las Vegas Monorail
Private to non-profit converted to fully public financing:
Tacoma Narrows
Do We Need Private Equity? “Equity Is More Expensive!”
Equity supports higher risk
Equity cushions debt – makes debt cheaper or more saleable
Projects selected on feasibility/need v. politics
Attracts world-wide experienced owner/operators
Advantages of Tax-Exempt Debt
20% lower interest cost – millions over the life of the project
More favorable market
Longer maturities
Less stringent covenants
General comfort level with governmental issuers
Solution:
Congress must create a level playing field for private investment
1997/99 – “HICSA”
“Highway Innovation and Cost Savings Act” first introduced by Sen. Chafee in 1997
Reintroduced in 1999
$15 b in bonds for up to 15 highway demonstration projects
Budget “scoring” only $102m – 2000-2009
Included in Tax Bill that passed House and Senate –vetoed by Pres Clinton
2001/2002 – S. 870 “Multitrans”
Multimodal Transportation Financing Act – introduced by Chrm. Bob Smith (NH) May 2001
Highways and transit Multimodal facilities
Air/rail Truck/rail
Volume cap exemption Permits second advance refunding to reduce
financing costs upon completion of construction and end of ramp up
Attempts to attach Davis-Bacon requirements could cost Republican support – would be only tax-exempt bond category subject to federal prevailing wage requirement
Multitrans – Future Prospects?
Contact
Karen J. HedlundPartner
Nossaman Guthner Knox & Elliott LLPPhone: (213) 612-7854 Fax: (213) 612-7801
Email: [email protected]