What Does the Infrastructure & Investment Act Mean for U.S. DOT’s Build America Bureau? A Conversation with Executive Director Dr. Morteza Farajian

Matt Neuringer:

Welcome to the Orrick Infrastructure Podcast. I'm Matt Neuringer, an attorney in Orrick's Energy and Infrastructure practice. Orrick is an international law firm with over 1,300 lawyers worldwide and 143 of which are focused on Energy and Infrastructure. I'm here with Morteza Farajian, the executive director of the United States Department of Transportation’s Build America Bureau. At the Bureau, Morteza is responsible for billions of dollars of credit programs and loan guarantees that support development of large-scale and multi-modal transportation infrastructure and for promoting and implementing with state and local governments innovative project delivery solutions. Prior to serving as the executive director, Morteza served as the acting deputy secretary of transportation and was director of private-public partnerships at the Virginia Department of Transportation. There he had a procurement financing contract negotiation for multiple, multi-modal transportation projects, totaling $10 billion. Morteza, thank you so much for being here today. We're excited to have this discussion with you.

Morteza Farajian:

Thank you very much Matt for inviting me to this podcast.

Matt:

So, we want to just get cracking right into the details quickly, because we're at a time in our history where we have one of the most significant Infrastructure Investment Acts that have passed, and you are squarely at the center of the implementation of the many critical provisions that passed in the recent infrastructure investment act. And so, I know many in the industry are interested to understand what your top priorities are, so if you could just give us a quick overview of some of your top two or three priorities that are coming out of the Infrastructure Investment Act for the Build America Bureau to implement, that'd be great.

Morteza:

Well thank you very much Matt for that question. I should just start with the fact that this is a historic bill in legislation now, actually we should call it legislation as you mentioned because it is huge in terms of the amount of the investment into transformative projects. This is not just another type of reauthorization to build projects the way that we were building them in the past, but it is a new era – it’s investing in transformative projects that would modernize U.S. infrastructure and get us ready for the future. For example, the amount of investment that is going to transit, to rail projects, to transit oriented development projects, to clean energy, it's just amazing. For us, there are different areas that this legislation is going to change for us. One of them is expanded legislative authorities that we will have. For example, under our TIFIA programs now, we are going to have new projects that will be eligible to borrow from us. We will have airports, that is a new category for us so we need to understand how we can quickly change our policies, procedures, guidelines to make sure that airport projects that are eligible under this new legislation will be able to apply for TIFIA loans. We have expanded eligibility under activity provisions both for TIFIA and with new types of projects will be eligible. It's really important to first identify those types, understand exactly what types of projects we're dealing with and then reach out to those who would be eligible, but we can take advantage of this new legislation. That's the other piece that's really important to make sure that we educate them to make sure that they understand about this new opportunity that they have to take advantage of. As well as a couple of new programs that are not necessarily in terms of expanding eligibility criteria, but more geared, more focused for providing technical assistance to those who are not familiar with innovative financing and delivery models. One of those concepts the legislation is asset recycling. It's a concept that has been around, people have been talking about it, but not many states have taken advantage of it. We are talking about assets that governments at the state level and local level own. Those assets are not being operated at the best capacity with the most efficiencies that they can have, and there might be an opportunity there for private sector to step in, to partner with public entities and project sponsors and to unlock value from those assets, and perhaps operate them, maintain them at a more efficient level. We have $20 million in this new legislation each year that will receive and we’ll be able to create a pool of advisors to help these public entities, who are not as familiar or as experienced with this topic to have access to this consultant and be able to identify those assets, evaluate them, look at them and hopefully make the best decision that would provide the best value for taxpayers. We have additional capacity under our Private Activity Bonds program. That's a program that we have a $15 billion capacity, but we pretty much use all of the $15 billion in the past so we were right at the cap and this new legislation is going to give us another $15 billion. And as you know Private Activity Bonds, they're really instrumental especially in public private partnerships when a private entity is trying to invest in infrastructure projects. So that's another big change in the programs we have in terms of receiving additional capacity. So, we talked about new eligibility, we talked about some of the new programs like technical assistance that we can provide not only for asset recycling but forgot to mention there's also provision for tribal communities for example. The other area of the legislation is the requirements that some of the projects will need to follow such as value for money analysis that now would be required for certain types of projects. So that's another area that we have seen some changes in this new legislation. And in terms of priorities, I think all of those are important topics. All of them are really critical for us. We would like to push them forward as quickly as possible but of course we need to have resources internally. We need to have people, we need to have an organization that is capable and has the bandwidth to work on all of these new programs, eligibility criteria and new requirements of the program that we need to issue guidance for them so people know how to implement them in the projects. That's one area that over the last couple of months I have been specifically spending a lot of time to make sure that we can hire dedicated people, qualified people, experienced people who can help us implement this legislation. And the other part of it is really reaching out to our partners at the state level, local level and private sector partners, to make sure that as we implement these concepts and new programs, we are all aligned and we are educating them on how they will be implemented in terms of timeline in terms of requirements. These infrastructure projects, as you know, go through years and years of project planning and design and procurement and it's really hard to make changes in the process if you're in the middle of the process. So, we don't want anyone to be surprised, we don't want to have any unwanted consequences that would slow down these projects, quite opposite of that, we want to try to find the most efficient way to implement these new changes to help these projects move forward faster and more efficiently.

Matt:

So, there's a couple of requests from the industry there. One is if you are someone who wants to help change the world with Morteza, send in your job application, I see there is regular postings for opportunities to do that. Some of these programs, like the one that Morteza mentioned regarding the rural and tribal assistance pilot program require implementation within 180 days. So, there's opportunity to really hit the ground running and make a material impact quickly it sounds like to join a team. The other is, I'm interested to get your thought on, is there going to be any type of formal or informal way for the industry to help provide, I know it’s in some of the legislation that there's a clear guidance from Congress that they want the Bureau to reach out to industry or industry to reach out. For example, the asset monetization recycling grant program described, I know there's some discussion and chatter in the industry about how there's some restrictions in those provisions that might make that program a little tricky to implement. And so how can the industry help provide some thoughts around technical corrections or otherwise to try and ensure that these programs really do carry out the intent that Congress had when enacting it?

Morteza:

That's a very good question. Yes, we don't want to work separate from the industry or from our partners at the local and state level, we definitely want to work in partnership. We welcome any suggestions, any discussions, any feedback that they may have for us. As a matter of fact, we already started having meetings with them, my door is always open people calling me and set up meetings and start sharing their thoughts and ideas about how this new legislation can be implemented in a more efficient and more effective way. We always welcome those conversations. As you mentioned, there are always challenges in the implementation side. It's one thing to write a legislation and to pass it. It's quite another thing to implement it because when you get to that level and you start working on the details, there are always challenges that we need to work together. We need to make sure that whatever foundation we create for these programs would be a foundation that is going to help deliver what was intended by the Congress and bring the outcomes of these programs as quickly and efficiently as possible. There are times that will be conflicting objectives, some objectives and goals that certain stakeholders may have may be conflicting with what other stakeholders may have or with the spirit of the legislation. We need to really work through all those details and make sure that whatever we put in this foundation is what the legislators intended and what really is going to help us achieve the policy, goals, objectives of this legislation.

Matt:

That's great to hear. I'm sure you will get a number of calls and emails from folks because I know we have a very active and engaged industry. So just getting into the weeds a little bit, and I know it's still very early days for you and your team in analyzing how to implement, but on the instances of the various value for money requirements that have been put into law, section 11-508 for example, which pertains to projects over $500 million or more receiving federal credit assistance or the new requirement that is much broader than that, where if you are seeking a TIFIA loan or RRIF loan and the project costs more than $750 million and you’re in a state with P3 legal authority to do a public private partnership and that instance you have to have done a value for money analysis or equivalent in order to be eligible for a TIFIA loan. Just interested to get your thoughts on, particularly on the kind of context of how you already have some guidance on the Build America site for value for money, how the Bureau plans to try and implement its view and perspective on what value for money means in this context.

Morteza:

Great question Matt. As you know under Fast Act, we also had some provisions that would require value for money analysis from certain project sponsors. So, this is not something new we have had in the past. As a matter of fact, the Bureau published some guidance on value for money analysis, I believe it was sometime around 2019 if I remember it right. But as you mentioned when we refer to value for money analysis in the legislation, right after that we say “or a comparable analysis.” So, the word value for money analysis, I know it has certain meaning in the industry and people are familiar with it, but the goal here really is to encourage and, in some cases, require project sponsors to look at different options that they have on table before they make a decision and really compare those options and see which one of those options would give them the best value and of course, is in the interest of taxpayers. That process is what we call the value for money analysis or a comparable analysis. It is really important for larger projects as you mentioned especially states that have the legislation to do a P3 delivery, to look at a P3 model, look at other models and compare them and we both know that there are a lot of assumptions that go into this analysis and a lot of people don't really look at value for money analysis as a study that is going to do some calculations based on assumptions and give you numbers at the end that tells you this model is better than that model. That's not really the goal of the analysis. The goal of the analysis is to make sure that we identify all options. We go through this process with eyes wide open with considering pros and cons and looking at risks and looking at the opportunities and really do a comparative analysis between all of those elements to figure out which one of those delivery models would give us the best value, would give the taxpayers the best value and especially would deliver those best values in the policy, goals and objectives that the project sponsor has. And as we know, those policy, goals and objectives could vary from project to project. So that's really in my view what is intended here, that the legislators wanted to make sure that especially for these larger projects that have high impact on many stakeholders, that process is followed. And decisions are being documented and being made based on evidence, based on the analysis that we just talked about by considering risks and rewards and pros and cons of different options. How we are going to implement it, as I said, we already have guidelines for value for money analysis, but we may need to go back and look at those guidelines and see if we need to modify them. I don't know yet, my team is looking at it, that's a high priority for us. We know that some projects are going through the planning phase and even maybe they're getting ready to launch their procurement and because now this is a requirement for some of those projects, they want to know how they should meet this requirement. We are aware of that need and we are doing everything we can to provide guidance as soon as possible so they know how we're going to treat value for money analysis.

Matt:

That's great I appreciate that, and we have clients that are certainly thinking about this now as well so I'm sure they will appreciate it as well. So, you've mentioned TIFIA and RRIF changes before – what are your thoughts, sort of generally and in particularly also in the context of airports and transit oriented development, and what these changes are going to mean for the Bureau and what these changes are going to mean for projects in the industry at large?

Morteza:

So, there are a couple of positive changes that are being made in our TIFIA and RRIF programs. For the first time now, RRIF is getting annual budgets. I think that is really important because a lot of RRIF projects are going to benefit from it, as well as on the TIFIA side, we are seeing new eligibilities. We are seeing TIFIA projects for example, that in the past we were able to finance them, but we had a very narrow window of opportunity for those projects, just airport terminals that had transit access were eligible before, but now it's a whole different world. A lot of airport projects would be eligible to receive a loan under the TIFIA program and as we all know, these loans are no interest rate, are very flexible and are particularly for assets like airports that have a long life. They can be very beneficial. While we are on the topic of assets with long life, I should mention that now TIFIA can issue loans, we can approve loans that are up to 75 years in terms of loan term after substantial completion of the project and sometimes projects take five to six years to be designed and built, after we give them the loan and then we can go 75 years after that. Which if you add 75 years and five to six years of construction, you get to a loan that could be around 80 years. That is almost double what we can do today which is 35 years after substantial completion, which could mean a loan that is up to about 40 years from the design stage of the project. That's a great opportunity, of course, for those projects to pay the loan over almost double the timeline that they had in the past and that of course increases their borrowing power and decreases the annual payments that they have to make for loan debt service. So that's one important change, especially for bridges, tunnels and those types of assets that are meant to last more than 75 years. Some of them are designed for 100 years or even more that can be a massive advantage. I mentioned transit oriented development in the past. That's one of the programs that we put a lot of emphasis on this year, even before this new legislation was passed. Earlier this year, we issued guidance for all transit oriented development projects both for under RRIF and TIFIA. We have a very good, robust pipeline of projects already and this new legislation what it does is it’s even expanding eligibility in many areas under both of those programs, so definitely that's going to be a positive boost in that pipeline that we already have, and we're going to see more and more of those transit oriented development projects. When I talk about transit oriented development, I want to make sure that people understand, for example, it can include real estate development around railway stations. We're talking about commercial, residential mixed-use development so it doesn't have to be necessarily a public infrastructure. It doesn't have to be a library or a government building or a civic center, but it can also be residential development and mixed-use development. If folks have any of those projects, I encourage them to go and look at the guidance they mentioned that was issued earlier this year, it is available on our website. And that’s pretty general, a lot of projects could possibly qualify under the guidance as I mentioned under this new legislation that expands eligibility under what we already have. Then we talked about technical assistance, I think that is another big element. It has always been a high priority for me to make sure that people know about what programs we have in the Bureau. I started my state trips before the pandemic. I tried to go and talk to people in different states and explain to them what project finance can do for them. What innovative delivery models, innovative financing methods can do for them. How they can combine different projects, bundle them, how they can prevent phasing which costs an unnecessary amount of money because of delaying one phase of the project and paying additional costs for construction cost escalation or some of the other soft costs like mobilization/immobilization, bonding and so on – how they can use project finance to prevent something like that and build two phases at once. It was very successful, Matt, when I was talking to people and of course a lot of state DOTs are not familiar with these concepts. They are still thinking about project funding, they are still thinking about the traditional way of getting these projects done, but with the technical assistance we were able to provide educational workshops, we were able to persuade a lot of states that have never used TIFIA in the past, more than half of the states in the U.S. have never used TIFIA in the past, which was a surprise to me and to you and a lot of other people as well. But through conversations, we now have 11 of those states considering borrowing from TIFIA and they are in our pipeline and hopefully we can close a loan for them within the next year or so. I think it's up to all of us now, and especially with this new legislation and with the new resources that we have with our technical assistance, to wrap up our efforts to make sure that people are aware of some of those innovative approaches, and they can take advantage of them to advance their projects faster and, of course, more efficiently and effectively.

Matt:

That's great. That's all really spot on and the type of things that people are thinking about right now. Just as a quick follow up on the airports – obviously, this will be the first time administering a program that is expressly authorized for airports, is the idea for revenue risk airport projects, say a terminal project, that TIFIA is going to think about these projects in the same way that it thinks about revenue risk toll road projects with the same types of flexibilities and way to sculpt the repayment curve to meet the ramp of a new terminal? Have you started to think about these things yet?

Morteza:

We have started thinking about them Matt, but I can't tell you that we have got to the final conclusion of how the program is going to work and what type of flexibilities we may or may not be able to provide. Of course, airport terminals are different then highway projects, but if you look at our TIFIA program in general, we have projects that are not necessarily highway projects. One of the advantages of TIFIA legislation is that it's flexible enough for us to look at different types of projects and be able to tailor our loans to the specific needs and characteristics of the projects we have, and the same thing can happen for TIFIA projects. If you look at, for example, the new projects that we are closing, we have closed two or three of them in California under our rural project initiative. Bus maintenance facilities that are specifically designed for electric buses, those projects are different than a P3 project that has tolling involved and it has multiple stakeholders and is very complicated in terms of commercial agreements. We are able to find both of those categories for RPI projects that I just mentioned for bus maintenance facilities, they are simpler, easier. We were able to come up with a template type of agreement that can be used in different projects that more or less fall under that category and as a result of that they're able to close the loans within six months or so. That's very fast, that's quick. For toll roads that are procured under a P3 model, there are multiple stakeholders and entities involved, of course we can't use the same approach because it's more complicated and the loan needs to be tailored very specifically for that type of project, so it takes a little bit longer, it's a little more difficult and the type of flexibilities that we may provide could be different. So the same concept would apply to airports. We have to really look at different types of projects within the airports. Some projects might be a little more challenging and more complicated. It might be a little more difficult for us when we are underwriting those projects. Some other projects could be easier like the RPI projects that I mentioned. I can't just give you a straightforward answer that would generalize all airport projects. I do anticipate that in general airport projects will not be as risky as toll road projects because, especially the type of airport projects that came to us and talked to us in the past, the revenue sources that they have, it does look like that they are a little bit simpler, so they might fall somewhere in the middle between those straightforward, cookie cutter type of deals that I mentioned earlier and the very complicated, complex type of P3 revenue risk projects that folks often deal with.

Matt:

Okay that's great. That's helpful insight I appreciate it. So, the last question we have for you before closing out our podcast for today is – given some of the new programs we talked about already regarding providing grant programs for pre-development activities, should government agencies who are thinking about P3 or design build or other alternative delivery, should they start to think about preparing themselves to respond to some type of a grant request in 2022 and start to think about building that into their budgets? What are your expectations for rollout and accessibility to the market?

Morteza:

So, I'm assuming you're talking specifically about the asset recycling grant because that's the one that is the major pre-development grant program activity that the Bureau is going to administer. For that particular program, we are going to move forward as quickly as possible. But for us to establish that program, we need to go out and hire advisors because the idea there is to create a pool of advisors that would be qualified and experienced and we go out and hire them. When project sponsors come to us and they have good projects, and they need the help of these advisors to analyze these projects, we provide these advisors to them, so they don't have to go to the process of hiring these advisors on their own – which in many cases they wouldn't even know how to do it or if they know how to do it, it's going to take time for them to do it. So, we provide advisors to them that would save them time. And of course, resources up front and will expedite the process by months. We will pay for those advisors, there will be a formula that will pay for the first part of the bill for those advisors and at some point, after a certain amount, we are going to share the expenses, but the idea is that the advisors would work for them directly, but we pay their invoices. So that concept, I am still optimistic that we can implement it in 2022 and will be able to accept applications for those who may have good projects, good ideas, and good concepts that we want these advisors to help them to evaluate. But as you know, sometimes these procurements could take some time, but we will move forward as quickly as possible. Our goal is to implement as quickly as possible because we know that these pre-development activities are key to identify opportunities, to identify good projects and hopefully years from now, we will see those projects moving forward and getting to the finish line. So, we don't want to waste any minutes in terms of getting the dollars out and providing the services as quickly as possible for the project sponsors who want to move forward.

Matt:

That's exciting. I know many project sponsors out there who are considering this already. Orrick put out an industry alert on the legislation outlining some of these programs. The one that Morteza was just describing is section 21-205 as well as section 71-001 and so you have multiple programs where the Bureau’s able to provide grants and/or direct technical assistance through technical advisors. And it's definitely an important leap forward for the Bureau in providing that technical assistance and helping really important and complicated projects get off the ground. So, we're excited about that and looking forward to working with the industry and sponsors and the Bureau to help implement. So Morteza, thank you so much for your time today. This has been extremely insightful, I know the industry appreciates you taking the time to provide your insights today and we look forward to coordinating with you in the future.

Morteza:

Thank you very much for the time that you gave to me, Matt today to talk about this topic. It's a time to work together. We really need to work together, all of us. It’s a good time to make big things happen, transformative ideas and concepts happen, and we can only do that if we all work together. So, thank you very much for this time. I look forward to future conversations and discussions with you and others in the industry.