The search for infrastructure capital: the Railway Supply Institute has devised a tax-credit-based plan for financing passenger and freight rail projects. Here's how it would work

Railway Age, June, 2003 by William C. Vantuono

Under TEA-21, highway, aviation, and transit programs account for 70% of federal transportation investment, leaving the remaining 30% to be divvied up for all other purposes. Not surprisingly, intercity passenger and freight rail see very little federal investment. "SAFETEA," the Bush Administration's plan for TEA-21 reauthorization (p. 12), provides some tax-credit-based financing mechanisms that would benefit rail, but it doesn't offer much in terms of developing existing rail corridors.

The Railway Supply Institute Passenger Transportation Committee is proposing that Congress support formation of a private, non-profit, federally chartered corporation authorized to issue tax-credit bonds for capital investment in rail infrastructure not generally eligible for transportation trust fund expenditures under TEA-21. The plan's principal architact is Tim Gillespie, an independent consultant who was formerly vice president-government affairs at Amtrak.

The corporation, called the Bail Infrastructure Finance Corp. (RIFCO), would provide financial support for:

* "Developing higher speed (110-125 mph) intercity rail corridor passenger services, including infrastructure and equipment."

* "Meeting the backlog of capital needs on Northeast Corridor infrastructure."

* "Providing efficient rail access to ports."

* "Supporting development of intermodal terminals, transloading facilities, and rail access."

* "Facilitating high frequency rail access to airport terminals."

* "Improving capacity on the nation's rail freight network to enhance security, reduce congestion, improve air quality, and improve efficiency.

* "Supporting capital needs of short line and regional rail-roads for infrastructure improvements to serve rural and smaller communities and accommodate 286,000-pound freight cars."

* "Supporting relocation and/or consolidation of rail lines and facilities in urban areas."

The benefits to rail industry suppliers "are obvious," says Gillespie.

RIFCO, which RSI says "is a variation of the AASHTO approach, which proposes to create a Transportation Finance Corporation," is modeled on existing federally chartered entities such as Fannie Mae. It would be authorized to issue up to $50 billion in federal tax credit bonds to states and public/private partnerships to finance eligible rail-related capital projects. It would establish a principal sinking fund to secure payment of the principal at maturity. A 20% to 30% non-federal match (depending on what current interest rates may be), contributed by state, localities, or other project participants, would form the primary basis of the sinking fund for each bond issuance, supplemented by additional federal contributions. The corporation would be governed by a board of directors appointed by the President. It would be within the jurisdiction of the Congressional authorizing committees that currently have oversight responsibility of non-guaranteed programs, even though the legislation is in part a tax bill and would need to be approved by the tax committees. "These authorizing committees," says Tim Gillespie, "already have a long list of rail needs that they have been unable to fund through the authorization process, because no matter how much is authorized there is no room in transportation appropriations to fund these needs out of the 30% of funds left over after guaranteed spending programs are addressed." Also, RIFCO. "would remove some of the concerns expressed by states over accumulating more debt financing that arose when bonding authority was proposed to deal with Amtrak's needs."

"There are a number of ways that can be devised to repay tax credit bond principal," says Gillespie. "AASHTO uses a sinking fund with a portion of the bond proceeds. The original Amtrak proposal assumed states would contribute 30% matching funds deposited into escrow accounts/sinking funds to secure principal repayment. Under our proposal, the sponsor/borrower would be responsible for principal repayment only--effectively providing 0% borrowing. From the government's prospective, this is cheaper than a grant over the short term, and from the borrower's perspective, much more cost-effective than conventional borrowing or credit instruments like RRIF. The present value of every $1 borrowed is about 70 cents, while the cost to the government--tax revenue lost--is about 30 cents."

There are many reasons why such a program is needed, says Gillespie. "Most states are facing the prospect of large budget deficits, and there is little prospect that they will have the resources to undertake transportation infrastructure projects in this environment without a federal partner," he says. "The RIFCO concept provides a reasonable, cost-effective alternative to traditional grants or revenue sharing. It also encourages the type of PPPs that are essential if we are to meet the needs of those surface transportation projects not covered by the guarantees provided in TEA-21."

For freight railroads, says Gillespie, "financial markets require them to only make infrastructure investments where there is a reasonable rate of return, and discourage investments where the primary benefit is for the public good. The railroads are spending much of their political capital on seeking the repeal of the 4.3-cent fuel tax, which costs the industry about $170 million per year. Some policymakers are proposing the creation of a Rail Trust Fund that would use revenues from the railroad fuel tax for funding. Railroads are against this. Our concept would result in a source of capital assistance that would not depend on the fuel tax revenues."