Using future earnings to accelerate construction of infrastructure projects

Gilcrease Expressway

Context

• Most public infrastructure investments in the US are made by individual states rather than the federal government
• Highway projects such as the Gilcrease Expressway in Oklahoma — a USD 261M construction of a bridge and four-lane highway — have funding requirements beyond the capabilities of local governments

Problem

• States face fiscal constraints limiting their ability to issue municipal bonds to fund future infrastructure investments
• Project-backed bonds perceived as risky by US capital markets investors due to past high profile defaults

Innovation

• GARVEEs (Grant Anticipation Revenue Vehicles) are bonds used to finance highway projects with bond repayment funded by federal proceeds from motor vehicle use (e.g., federal motor fuel taxes)
• GARVEEs provide investors with confidence as although they are state- issued, they are backed by future federal transportation funding for the issuing state

Stakeholders Involved

• Department of Transportation (individual states) — Issued the GARVEE bonds
• Federal Highway Administration — Ensures eligibility rules are followed

Results/Impact

• GARVEEs are currently used in 29 states and territories, with over USD 24B in total issuances since inception in 1998
• C. USD 13B in GARVEE bonds were outstanding in 2012
• Florida plans to issue USD 1.3B of GARVEE bonds over five years (FY20-23) to help fund an estimated USD 50B five-year work program
• GARVEEs are typically used for larger projects where cost of delay outweighs cost of borrowing, and no direct revenue stream (e.g., local taxes or tolls) is present

Key lessons learnt

• GARVEEs allow for local governments to identify and manage required infrastructure investments while utilizing federal government's funding power
• Successful implementation requires strong communication between local governments identifying projects and the federal entity supplying funding, to ensure that projects are mutually beneficial and qualify for federal aid
• Federal reimbursements timed with repayment of debt rather than actual construction costs allow for cash flows to be predictably spread over time, better facilitating the project management process