Toll road update
The new year got off to a quick start for the US private toll road market.
The winning bidder was selected for the Indiana toll road, which will be the largest privatization of an existing asset in the United States to date, and the Texas Department of Transportation unveiled two new projects for which it will solicit proposals this spring.
Texas also announced the preliminary terms for a standardized “comprehensive development agreement” that it would like to use for all of its public-private partnerships, and the US Department of Transportation solicited applications for the use of tax-exempt private activity bonds for projects utilizing private financing.
Indiana Toll Road
Governor Mitch Daniel’s plan to lease the Indiana turnpike to the private sector for 75 years is almost a reality. On January 23, the governor announced the winning bidder for the concession, a Macquarie-Cintra consortium that offered an upfront payment for the privatization of $3.85 billion.
The Indiana legislature must still approve the proposed concession agreement with the winning bidder. The House passed it by a 52-to-47 vote on February 1. It must still pass the Indiana Senate.
The current legislative session is scheduled to end by March 14. Not surprisingly, some state lawmakers were waiting to see the proposals, and specifically the amount of money that would be paid to Indiana up front, before taking a position. The $3.85 billion winning proposal from Macquarie-Cintra seems to have helped push many of these lawmakers toward privatization.
The governor appears willing to compromise to win support. The governor has apparently earned the support of the Indiana Motor Truck Association by agreeing to spread over the next several years an increase in truck tolls on the Indiana turnpike instead of implementing the increase all at once this spring. The governor has also agreed that certain revenue from the deal would be used to jump start improvements to the I-31 corridor, which had been delayed until 2011.
One state senator said that prioritizing the I-31 corridor is the “carrot we need to even consider this deal.” Proposals for the lease were solicited and short-listed by Indiana at the end of last summer, and the deadline for submitting detailed proposals was January 20. The governor continues to stress that the state intends to move quickly on the lease.
Two Texas Projects
The Texas Department of Transportation (TxDOT) announced in mid-January that it will be launching two new projects over the next three to four months.
An initial request for qualifications from TxDOT is expected in March for the TTC-69, or trans-Texas corridor/I69 project. TTC-69 will be part of a 1,600 mile national highway system connecting Canada, the United States and Mexico. The section comprising TTC-69 would extend approximately 650 miles from Texarkana and Shreveport (along the Texas border with Arkansas and Louisiana) to Mexico. TxDOT indicated that it is looking for a long-term strategic partner for this corridor, and the state’s standardized “comprehensive development agreement” for the project is likely to be similar to the agreement signed with Cintra-Zachry in connection with the I-35 corridor — meaning a pre-development agreement that gives rise to a number of additional procurements as the full scope of the corridor is nailed down. Texas expects to have the comprehensive development agreement negotiated and executed by the end of 2007.
The second project TxDOT announced is a procurement for SH161 that is expected to be initiated in May 2006. The SH161 project would be an extension of SH161 west of Dallas from SH183 north of Dallas to I-20 south of Dallas through the cities of Irving and Grand Prairie. The right-of-way for this project has already been acquired and environmental approval has been secured, but is being updated to incorporate tolling. An unsolicited proposal for this project was received in August 2005.
TxDOT has created a public master schedule of all comprehensive development agreement projects and will update each project’s status as it progresses.
TxDOT hosted a workshop entitled “Launching the Next Generation of CDA Projects” in mid-January.
The state emphasized that it is “open for business,” and expressed a desire to create a streamlined program that speeds up the process and saves developers money. By providing greater consistency in the procurement process and using a standardized “CDA” (comprehensive development agreement), Texas hopes to bring consistent and predictable deal flow to the market.
At the workshop, TxDOT distributed a CDA term sheet that summarizes the key terms and conditions, including the risk allocations, Texas would like to see in a CDA for a roadway concession. TxDOT asked for industry comments on the term sheet by February 8. The term sheet contains provisions for developer and TxDOT compensation, toll rates, tolling systems, financing and refinancing, environmental risk, design and construction, operations and maintenance, insurance and bonding, excused performance, defaults, disputes and termination.
TxDOT indicated that the CDA concept will apply to a broad range of public-private partnership models in addition to roadway concessions. CDA agreements will also be used for “pre-development” projects. An example is use of a CDA for the TTC-35. The CDA model will be modified to fit specific project requirements in accordance with the nature of the project.
To further streamline the request-for-proposals process, TxDOT plans to apply in advance for TIFIA funding. TIFIA — the Transportation Infrastructure Finance and Innovation Act of 1998 — provides public and private sponsors of road projects with supplemental subordinated credit, loan guarantees or loans of up to 33% of project costs from the federal government. TxDOT will take the lead in procuring conditional loan approvals for projects from the TIFIA office in the US Department of Transportation before projects are put up for bid. This will give bidders an early sense of whether TIFIA financing will be available for a project and some idea of the terms and conditions on which such financing would be available.
TxDOT indicated that it will make similar efforts to determine whether tax-exempt private activity bonds are available for a project before putting the project up for bid. TxDOT expects to analyze whether tax-exempt bonds make sense on a project-by-project basis and to be the conduit issuer of bonds for Texas projects that mix tax-exempt financing with private financing.
Private Activity Bonds
The massive federal highway bill that was enacted last August authorizes $286.4 billion in spending over the next six years on highway and transit programs. While most of this money will be spent on roads funded exclusively with federal, state and local government money, the new law also makes available a new category of tax-exempt private activity bonds that can be used for certain highway and rail-truck transfer facilities that are privately financed. Private activity bonds are bonds issued by state or local governments to finance facilities that will be put to private business use. Tax-exempt bonds are usually supposed to be limited to use for schools, hospitals, free-access highways and other public facilities.
The bonds will be exempted from general state volume caps on private activity bonds, but there is a $15 billion national cap on the aggregate amount of such bonds that can be issued over the next 10 years. Before the highway bill, tax-exempt financing was not available for highway projects over which a private party has a concession.
The US Department of Transportation published a notice in January soliciting requests for allocations of scarce bond authority. (The highway bill gives the secretary of transportation authority to allocate the bonds.) While the standard rulemaking process usually includes an official comment period after which the rules will be revised, the department will be collecting public comments on the bond allocation process on an ongoing basis.
The department did not explain in the January notice what standards it will use to evaluate applications. Applications must comply with relevant statutory requirements and the department will take into account taxexempt authority otherwise available for the type of project and location, but the secretary of transportation has broad decision-making authority in making bond allocations. The notice said the department is “particularly concerned that once it makes an allocation, tax-exempt facility bonds are issued in a timely fashion.” If agreed-upon financing schedules are not met, then allocations may be withdrawn.
There is also no prescribed form for applications, but the notice asks for the following information to be included in the application: the amount of allocation requested, the proposed date of bond issuance, the date of inducement by the bond issuer (including a copy of the state or local resolution authorizing the issuance), a draft bond counsel opinion letter, information about the financing and development team, information about the borrower, a description of the project, the proposed project schedule, the financial structure of the project (including a breakdown of the sources and uses), a description of federal funding that the project is already receiving or that the project is due to receive, project readiness and signatures and declarations. Applications should be submitted with 10 copies to: Mr. Jack Bennett, US Department of Transportation, Office of the Assistant Secretary for Transportation Policy, P-20, Room 10305E, 400 7th Street SW, Washington, DC 20590.
While the bond program is fundamentally designed to encourage private investment in transportation projects, a number of its provisions may prove restrictive.
One such provision is the requirement that each project applying for a bond allocation must include federal assistance in its financial structure. This requirement is restrictive because any project receiving federal assistance must comply with additional federal rules, such as Davis-Bacon wage rate requirements, Buy America Act requirements and federal-aid procurement regulations. Under the Davis-Bacon Act, federal contracts worth more than $2,000 for the construction, alteration or repair of public buildings or public works (including roads and bridges) must contain provisions ensuring that certain minimum wages be paid to various classes of workers employed under the contract. Wages are determined by a listing of wage rates and fringe benefit rates determined by the US Department of Labor. The Buy America Act provides a preference for domestically-produced goods over foreign goods in US government procurements. Under the federal-aid procurement regulations, state and local agencies must adhere to certain requirements — for example, using a competitive bidding process to award construction contracts — when procuring projects with federal-aid highway funds.
Another statutory restriction that may prove a hindrance to private investment is that companies benefiting from bonds are not able to use an accelerated depreciation schedule to realize certain tax benefits that might otherwise be available. Whether the savings on lower interest rates provided by the bonds will offset the lost tax savings to be gained from use of an accelerated depreciation schedule will probably need to be analyzed on a case-by-case basis. In general, there are three situations in which the savings to be gained by the lower interest payments associated with tax-exempt financing would be worth the lost tax subsidies of accelerated depreciation schedules: where the interest savings exceed the lost tax savings, where the developer cannot use the tax subsidy because of an inadequate tax base, and where the road is not considered privately owned but rather the private party has a concession to maintain the road and collect tolls. If the concession does not confer ownership, then there is no loss of depreciation when improvements are financed with tax-exempt debt because the concession owner was not entitled to claim accelerated depreciation in any event.
One issue related to the bonds that has not been addressed yet by the transportation department is whether private developers or operators may receive bond allocations for privatizations of existing public roads. So far there has been no agreement on this in the transportation sector, although some have suggested that the purchase of existing public roads will not be allowed under the new private-activity bond guidelines. This issue may become important as more and more states consider privatizing their existing assets on the heels of the Chicago Skyway lease in 2005, the potential privatization of the Indiana turnpike discussed earlier and the potential privatization of the Dulles toll road in Virginia.
The highway bill last August also requires that 95% of the net proceeds from a bond issuance must be spent within five years of the date of issuance. Otherwise, the issuer has 90 days from the end of the five-year period to use all unspent proceeds from the bond issuance to redeem the bonds. An exception to this rule is established for circumstances beyond the control of the issuer, but this provision may still prove to be problematic. An effective five-year call on the bonds is not typical in capital markets and may create pricing issues that offset any benefit to be gained from tax-exempt financing.