UCI Center for Urban Infrastructure The New Generation of Transportation Financing in California

1. Tax-Exempt FinancingforPublic-Private Transportation Projects UCI Center for Urban InfrastructureThe New Generation of Transportation Financing in California Karen J. Hedlund, Esq. Nossaman Guthner Knox & Elliott LLP March 7, 2003

2. Virginia Greenway SR 91 Express Lanes Acquired by OCTA SR 57 Franchise terminated SR 125 AB Macquarie investment Few Equity Projects in the U.S. Have Gone Forward

3. Few Asset Sales in U.S. • Privatizations mostly in water/wastewater sector • Airport demonstration program – a dud • Chicago Skyway auction expected in April 2003

4. Equity Investments in Tollroad Projects US v. World(Macquarie Infrastructure) Source: Macquarie Infrastructure Group

5. Cause: Federal tax code discourages private investment in highway and transit projects!

6. Tax-Exempt Bonds Preclude Private Investment—With Exceptions • Since 1969 interest on “private activity bonds” subject to federal income tax • Except: “exempt facilities” • Most “exempt facilities” bonds subject to statewide volume caps • not airports, ports

7. Long-term Management Contracts Constitute “Private Use” • Safe harbor for “fixed fee” contracts • 15-year max term • No compensation based on net revenues • “One-time” incentive compensation payment allowed

8. Airport Terminals – No volume cap Port Facilities – No volume cap Water/Wastewater – Subject to cap Solid Waste – Leases exempt High Speed Rail – Special provision Rationale: no private involvement in highways in 1970s when PAB exceptions legislated No “Private Activity Bond” Exception for Highway/Transit

9. Non-profit Pocahontas Parkway S.C. Southern Connector Las Vegas Monorail Result: “Private” Deals Convert to “63-20” Non-profit Structures Private to non-profit converted to fully public financing: • Tacoma Narrows

10. Do We Need Private Equity? “Equity Is More Expensive!” • Equity supports higher risk • Equity cushions debt – makes debt cheaper or more saleable • Projects selected on feasibility/need v. politics • Attracts world-wide experienced owner/operators

11. Advantages of Tax-Exempt Debt • 20% lower interest cost – millions over the life of the project • More favorable market • Longer maturities • Less stringent covenants • General comfort level with governmental issuers

12. Solution:Congress must create a level playing field for private investment

13. 1997/99 – “HICSA” • “Highway Innovation and Cost Savings Act” first introduced by Sen. Chafee in 1997 • Reintroduced in 1999 • $15 b in bonds for up to 15 highway demonstration projects • Budget “scoring” only $102m – 2000-2009 • Included in Tax Bill that passed House and Senate –vetoed by Pres Clinton

14. Multimodal Transportation Financing Act – introduced by Chrm. Bob Smith (NH) May 2001 Highways and transit Multimodal facilities Air/rail Truck/rail Volume cap exemption Permits second advance refunding to reduce financing costs upon completion of construction and end of ramp up Attempts to attach Davis-Bacon requirements could cost Republican support – would be only tax-exempt bond category subject to federal prevailing wage requirement 2001/2002 – S. 870 “Multitrans”

15. Multitrans – Future Prospects?

16. Contact Karen J. Hedlund Partner Nossaman Guthner Knox & Elliott LLP Phone: (213) 612-7854 Fax: (213) 612-7801 Email: khedlund@nossaman.com www.nossaman.com