The American Recovery and Reinvestment Act (ARRA), also known as the economic stimulus package, provides significant funds for transportation infrastructure projects. The amounts allocated, however, come nowhere close to addressing transportation needs across the country. The ARRA provides a combination of increased direct federal spending for transportation projects and tax incentives. The direct spending provisions include:

• $27.5 billion in highway funds
• $1.5 billion for new discretionary grants (including $200 million for the TIFIA loan programme)
• $9.3 billion for high-speed rail, intercity passenger rail service and Amtrak
• $8.4 billion for transit programs
• $1.3 billion for aviation and airport programs
• $100 million for grants to small shipyards
• $20 million to the Inspector General of the Department of Transportation for increased oversight activities

Some in the industry have been critical of the funding amounts, citing a tremendous need to upgrade the country's transportation infrastructure. As state transportation budgets, already insufficient, have seriously deteriorated in large part because of the economic downturn, the ARRA funds will only partially compensate for the shortfalls at the state level. The package, however, does include some pleasant surprises, particularly the $8 billion authorisation for high-speed rail, which will be available until 30 September 2012. This amount is substantially more than the $2 billion authorised in the Senate version of the bill.

Spend it quickly

Since the funds are intended to stimulate the US economy, the ARRA requires that half of the authorised infrastructure funds be used on work that can be started within 120 days of the bill's signing on 17 February (180 days in the case of transit projects). Highway and transit agencies are subject to even tougher rules: if they do not obligate at least 50% of their allotments within the prescribed period after apportionment by the US Department of Transportation, the bill directs the DOT to take away the unused money and redistribute it to other states.

Since the ARRA provides no relief from existing planning, project development, environmental review or other requirements, most of these funds will be spent either on shovel ready projects that have already complied with most requirements, or on smaller projects that pose little likelihood of creating environmental impact or controversy. The funds were apportioned via established formulas to states and local jurisdictions responsible for entering into contracts.

Active PPP projects the winners

Because of the need to obligate funds quickly on federally approved transportation projects, PPP highway and transit projects already well along in the procurement process will benefit most from the ARRA funds.

One of the big winners under the statute was the State of Texas which received $2.8 billion, mostly for roads and bridges. Shortly after passage of the ARRA, the Texas Transportation Commission awarded a design/build contract to develop, design and construct the DFW Connector, a 22.5km corridor located near Dallas/Fort Worth (DFW) International Airport to NorthGate Constructors, a group led by Kiewit and Zachry. The Texas Department of Transportation (TxDOT) has the option to retain the team to provide maintenance services upon completion. Originally, TxDOT and the region had identified $667 million in funding for the project, but ARRA funding came in quickly enough that government could commit an additional $250 million to the Connector. As of this writing, the parties are negotiating how best to use the new funding to increase the scope and size of the project.

Concurrent with the DFW Connector project award, the Commission selected a preferred bidder for a long-term comprehensive development agreement to design, develop, finance, and collect toll revenues from the North Tarrant Express managed lanes project, part of a regional highway network which includes the DFW connector project. Although no ARRA funding has been designated for the NTE project, ARRA funding could have the effect of enhancing the viability of the long-term concession agreement by generally improving mobility in the region.

Many in the US transit industry were disappointed by the $8.4 billion that the ARRA made available for bus and light rail projects. The American Public Transit Association had identified over 787 shovel-ready "projects across the country in a 2008 survey. Among the PPP projects that ARRA funding will revive is a 5.15km automated guideway system connecting the Coliseum Station owned and operated by the Bay Area Rapid Transit District (BART) with the Oakland International Airport in Oakland, California. The project, which had been approved in 2002, was to use a full availability payment concession until negotiations broke down at the end of 2008. BART recently announced the project would be re-procured, after an additional $70 million of ARRA funds became available.

High-speed rail proponents were more than pleasantly surprised at the ARRA's $8 billion authorisation, along with another $5 billion over next five years in President Obama's proposed budget. One of these rail corridors, the San Francisco to Anaheim/Los Angeles California High Speed Rail System, has announced over $2 billion worth of projects that could benefit from this funding. According to the latest financial plan from the California High Speed Rail Authority, a third of the overall cost of the project is expected to be paid for with private funds. Stimulus money for design, right-of-way acquisition, track and station improvements, as well as grade separations will go a long way to make the project ready for private developer/operator procurement.

TIFIA and PAB changes

As much as $200 million of discretionary funding under the ARRA can be made available by the US DOT Secretary for the federal credit assistance program known as TIFIA, after the Transportation Infrastructure Financing and Innovation Act. Under TIFIA, the federal government can make loans, lines of credit or guarantees available for eligible transportation projects. The TIFIA programme's primary benefits include an interest rate pegged to Treasuries and attractive repayment provisions. One of the criteria for approving projects for TIFIA assistance is the amount of private sector participation in the project delivery and financing. Given past experience with the program's multiplier effect, $200 million of ontract authority llocated to the program could generate as much as $6 billion in project expenditures.

With the meltdown in the financial credit markets in 2008, TIFIA became an even more attractive lender for many transportation projects. TIFIA had become so attractive, that in late 2008, the office administering the programme announced that all of its contract authority to make loans until 30 September 2009 had been exhausted. The most recent project to close with the benefit of a TIFIA loan was the Florida Department of Transportation's I-595 managed lanes project near Ft. Lauderdale. The TIFIA programme provided a $655 million loan, which proved an essential component of the final debt structure for the transaction. The I-595 financing closed on 3 March 2009, becoming the first in the US to employ a long-term availability payment concession agreement.

Other eligible PPP highway and transit projects must wait to see if the some or all of the $200 million is allocated.

Aside from funding transportation projects directly, the ARRA includes tax code changes that create incentives for private capital investment. Several years ago Congress allowed highways and multimodal facilities to benefit from the issue of private activity bonds (PABs). The US DOT Secretary may allocate up to $15 billion worth of PABs, provided the projects meet a number of tax code restrictions. One restriction requires that any PABs investor include the interest income in the calculation of the alternative minimum tax (AMT), a provision of the federal tax code originally designed to ensure that wealthy individuals would not escape payment of taxes on investment income. According to many in the municipal bond market, the AMT added as much as 150bp to the interest cost paid by the private borrower, significantly reducing the cost effectiveness of the financing technique. The ARRA provides an exemption from the AMT for all PABs, including bonds issued in 2009 and 2010 for other infrastructure classes such as docks and wharves, airports, commuter rail and high-speed rail facilities.

In the last year and a half, the disruption in credit markets has had an adverse affect on the US municipal bond market. In a flight to safety, bond investors have bid down the cost of Treasuries, widening the spread between taxable and tax exempt investments to the point that tax-exempt bond yields are higher than their taxable equivalents. These increased borrowing costs, along with a drastic reduction in the availability of highly-rated third party guarantors such as monolines, caused a virtual standstill in the US municipal bond market. Recognizing this disparity, Congress created several categories of tax credit bonds that can be issued by state and local governments to pay for public improvements, including surface transportation facilities. For improvements featuring significant private participation, however, tax credit bonds can only be issued to finance facilities in designated economic recovery zones, or areas experiencing higher than average unemployment rates, subject to statutory caps. The designation of these zones and the allocation of caps on such bonds await further government action.

Several other tax changes that would benefit PPP transportation projects are modest changes to existing provisions rather than completely new provisions. High-speed rail advocates applauded the change to the PAB provisions for high speed rail projects. These projects are defined more loosely as projects with trains that can attain a top speed of at least 150 miles per hour, rather than trains operating in excess of 150 miles per hour.

A 2005 tax withholding provision applicable to government contractors was pushed to 2012 as opposed to an outright repeal of the provision contained in the original House of Representatives version of the bill.

Beyond the stimulus

The ARRA authorizations are not the last word on transportation funding policy, and additional resources and strategies will be necessary to assist transportation agencies. The National Surface Transportation Infrastructure Financing Commission, which issued its final report to Congress on 26 February, concluded that transportation-related revenues from federal fuels taxes are insufficient and unsustainable, as increasing fuel efficiency means they are no longer closely tied to the use of the transportation system*. The report presented a number of recommendations supportive of PPPs, including: federal support for state and local governments' use of congestion pricing, expansion of existing federal credit programs such as TIFIA and PABs, and new incentives for states to tap into private sector capital to address transportation funding shortfalls.

On the same day the Commission released its report, President Obama released the Administration's proposed budget, hinting at support for PPPs with the following language: "Surface transportation programs are at a crossroads. The current framework for financing and allocating surface transportation investments is not financially sustainable; nor does it effectively allocate resources to meet our critical national needs. The Administration intends to work with the Congress to reform surface transportation programs to put the system on a sustainable financing path and to make investments in a more sustainable future... To do so, the Administration will emphasize the use of economic analysis and performance measurement in transportation planning. This will ensure that taxpayer dollars are better targeted and spent."

Additionally, reauthorisation of the federal surface transportation programs will be a major issue for the current Congress. The current authorisation, known by its acronym SAFETEA-LU, expires on 30 September 2009. The reauthorisation effort will likely include discussions of a comprehensive transportation funding strategy, and consideration of the recommendations of both the financing commission and the National Surface Transportation Policy and Revenue Study Commission. In addition to addressing the depleted Highway Trust Fund and exploring the creation of a national infrastructure bank and related proposals, many expect the reauthorisation will provide greater opportunities for PPPs, including through an increased commitment to TIFIA and PABs.

The ARRA was passed to further an economic stimulus policy rather than advance any particular transportation agenda, so the direct spending provisions and tax incentives included in the bill represent a welcome but modest beginning in addressing the larger transportation needs. Congress and the administration still have much work to do in the upcoming reauthorisation of the Surface Transportation Act to address the role of the federal government in advancing the PPP approach to project delivery.

*Download fnal report at: http://financecommission.dot.gov/Documents/NSTIF_Commission_Final_Report_Advance%20Copy_Feb09.pdf