United States: Federal Surface Transportation Reauthorization Bill Largely Positive For US Public-Private Partnership Market

Keywords: Highway Trust Fund, FAST Act

For the first time in a decade, Congress has passed, and the President has signed, a long-term surface transportation reauthorization bill, providing approximately $305 billion of funding for highway and transit projects over the next five years and revising federal transportation policy on a number of important topics. This update provides an overview of the Fixing America's Surface Transportation Act ("FAST Act"), H.R. 22, and examines the Act's positive impact on the burgeoning US public-private partnership market.

The Highway Trust Fund

The Highway Trust Fund, supported largely through user fees by way of federal gas tax revenues, serves as the primary mechanism for states to fund road and transit construction and maintenance projects. The Highway Trust Fund has a growing gap between revenue and expenditures because the federal gas tax rate has not been raised since 1993 and is not indexed to inflation, while the cost of maintaining and improving US surface transportation infrastructure continues to rise and increasingly fuel-efficient cars use fewer gallons of gas per mile travelled.

The FAST Act generally maintains the existing federal transportation funding model—distributing more than 90 percent of federal funding to state departments of transportation ("DOTs") through formulas—while boosting highway spending by about 15 percent over existing levels, and increasing transit spending by about 18 percent. After dozens of recent short-term patches of the Highway Trust Fund through transfers from the general revenue fund, the FAST Act closes a five-year roughly $70 billion gap through creative one-time budget mechanisms such as transfers from Federal Reserve accounts and the sale of oil from the Strategic Petroleum Reserve.

While state DOTs have praised the predictability of the FAST Act in contrast to recent legislative brinksmanship, the modest increase in overall spending levels will not fully address the looming US infrastructure backlog. For example, the American Society of Civil Engineers estimates that the United States needs to invest approximately $1.8 trillion in surface transportation projects by 2020 to maintain a state of good repair. Additionally, the FAST Act does not provide a long-term sustainable solution (such as a gas tax rise or a vehicle-miles traveled fee) for fully funding the Highway Trust Fund beyond the Act's five-year term.

Public-Private Partnerships and Innovative Financing

For decades, US states relied almost exclusively on Highway Trust Fund transfers, state gas tax revenue and municipal bonds to fund new projects, delivering such projects through a design-bid-build model whereby the state DOT developed design specifications then solicited the lowest bid for the construction of a project. In an effort to improve mobility and build new highway and transit capacity in a funding-constrained environment, US states have increasingly turned to public-private partnership ("P3") delivery models that include project risk transfer from states to private entities, efficient and integrated delivery of design, construction and maintenance project components, and an infusion of up-front private equity. US states are also using more project-based revenue sources, such as user fees and tolls, and innovative federal finance tools such as the Transportation Infrastructure Finance and Innovation Act ("TIFIA") federal credit program and private activity bonds.

On balance, by providing a relatively stable but still under-funded federal revenue stream, the FAST Act is largely positive for the continued use of the P3 delivery model by US states. The FAST Act will end much of the short-term funding uncertainty that caused states to postpone or cancel projects during prior weeks- or months-long Highway Trust Fund patches, but the lack of fully-realized surface transportation funding will encourage states to continue to seek project delivery efficiencies and private funding sources through P3s.

Toll Policy

The FAST Act takes a mixed approach towards federal tolling policy. User fees, usually in the form of tolls for highway projects, are often essential elements of the funding and financing package for P3 projects. While federal law only allows tolling on interstate highways where additional lanes are constructed, the Interstate System Reconstruction & Rehabilitation Pilot Program allows three states to experiment with tolling existing interstate highways.

Created in 1998, the pilot program has long been fully subscribed, but the three participating states (Virginia, Missouri and North Carolina) have not yet implemented any tolling of existing facilities under the program. While P3 and tolling proponents had urged Congress to expand the number of slots in the pilot program, the FAST Act instead encourages the existing participants to expedite their projects, requiring the three existing states to move forward with a tolling project within one year (with a potential one-year extension). If the participants fail to comply, their slot will expire and other states will be eligible. The FAST Act also requires new states to have legislative authority to implement the tolling of an existing facility, and any new participants must complete their projects within three years.

TIFIA Funding Levels and Policy Tweaks

The FAST Act reduces funding levels for the TIFIA program (utilized by many P3 projects) from $1 billion over the last two years to $275 million in FY2016, rising to $300 million for FY2019 and FY2020. However, TIFIA had not made full use of its authorized funds in the last two years, causing $639 million in TIFIA funds to be transferred back to the Highway Trust Fund in 2015. The FAST Act eliminates the requirement that the TIFIA program transfer such uncommitted balances.

While the TIFIA funding cut is not ideal, it should not have an acutely adverse effect on P3 projects due to the lack of market support over the last two years for the $1 billion annual level and the steady increases in funding over the five-year life of the FAST Act. The FAST Act also allows states to use an increasing array of funding sources to pay the subsidy and administrative costs associated with TIFIA credit assistance, expands eligibility to include smaller projects and transit-oriented development projects, creates a streamlined process for TIFIA loans under $100 million, and increases funding levels for the US Department of Transportation's ("USDOT") administration of the program. Additionally, the FAST Act wisely confirms and codifies existing USDOT practice by allowing costs related to P3 projects using an availability payment concession model to be eligible for federal reimbursement.

WIFIA Fix

The FAST Act fixes a widely criticized element of the Water Infrastructure Finance and Innovation Act ("WIFIA") program introduced in 2014 by eliminating a prohibition on financing water infrastructure improvements with financing packages that include both WIFIA loans and tax-exempt debt such as municipal bonds.

Innovative Finance Bureau and Investment Center

The FAST Act also establishes a National Surface Transportation and Innovative Finance Bureau within USDOT, which is intended to serve as a "one-stop-shop" for states and local governments to receive federal financing or funding assistance, as well as technical assistance. The nascent Build America Transportation Investment Center introduced this year by the Obama administration appears to have an overlapping mandate, and it remains to be seen how these two entities will interact. While the Bureau and Center may not provide enormous benefits for state DOTs with extensive P3 experience, their existence reflects a general positive attitude by both Congress and the Obama administration towards P3s and innovative finance.

Nationally Significant Freight and Highway Projects Program

The FAST Act creates a new grant program, the Nationally Significant Freight and Highway Projects Program, funded at $4.5 billion over five years, for "nationally significant" projects costing more than $100 million that improve the movement of both freight and people, increase competitiveness, reduce bottlenecks, and improve intermodal connectivity. USDOT will award projects competitively based on statutory criteria, similar to the popular existing "TIGER" competitive grant program administered by USDOT. The FAST Act limits the federal share of project costs to 60 percent, and only $500 million of the $4.5 billion can be awarded to freight rail and freight intermodal projects.

Long-Distance Intercity Passenger Rail Routes

In addition to the highway and transit provisions, the FAST Act contains a passenger rail title that reauthorizes and funds Amtrak intercity passenger rail operations for a five-year period. Included among the passenger rail policy prescriptions is a new pilot program that would allow a public entity (such as a State or a joint powers authority) or a private rail carrier to bid to operate up to three long-distance (more than 750 miles) passenger rail routes that are currently run by Amtrak. While Amtrak turns a profit on its heavily-used Northeast Corridor service, many of Amtrak's long-distance routes are unprofitable.

Originally published 4 December 2015

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This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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