On heels of new P3 law, Tennessee hires advisors and eyes PABs

Debt-shy Tennessee is eying private activity bonds under its newly authorized public private partnership program.

Gov. Bill Lee signed the Transportation Modernization Act into law last April, supported by a $3 billion general fund infusion, making Tennessee the latest state to authorize P3s. The alternative delivery method will be used to build four toll lanes to ease congestion across the fast-growing state.

The so-called choice lanes will be additional lanes added to congested urban highways that give drivers the option of paying a voluntary user fee, which is expected to be variable depending on traffic.

As a state traditionally opposed to both issuing bonds and raising taxes, private activity bonds are a tool for lower-cost financing for the design, build, finance, operate and maintain agreements, said Bryan Ledford, the state’s executive director of public private partnerships.

“Tennessee is one of a very small number of ‘pay-as-you-go’ states,” Ledford said. “However, we expect private activity bonds will be one of the financing tools to be explored by the private sector for choice lanes projects.”

As gas tax purchasing power dwindles, several states are turning to alternatives like P3s and electric vehicle annual fees, which are a key part of Tennessee’s new transportation law. Combined with Tennessee’s new law, major P3 projects in Georgia and a recently re-launched bridge replacement in Louisiana have pushed the southeast region to the forefront of P3 activity in the toll road sector.  

The state in December released a 10-year transportation plan that outlines $15 billion of investment over the next decade and is the first “fiscally constrained” transportation plan that relies on revenues expected to be available during that time.

Fifty-five percent of the funding will go toward 90 projects to be accelerated across all four regions of the state and 45% will fund traditional TDOT statewide investment programs that are decided on annually.

Tennessee hopes to leverage the $3 billion from the TMA into $15 billion from a mix of state, local, federal, and private funds, Ledford said.

“Our mission is to provide a safe and reliable transportation system to support economic growth and quality of life for all Tennesseans,” he said. “To accomplish this, we need a program that brings in private sector partners to help address urban congestion, freeing up additional dollars for rural projects.”

The first toll lanes project, which will include widening the road, is set to be the Interstate 24 corridor between Nashville and Murfreesboro, he said. The goal is to reach commercial close on a DBFOM agreement by mid- to late-2026.

Other potential toll lanes locations are I-65 between Nashville and Spring Hill; I-40 west of downtown Knoxville; and on I-24 in the Chattanooga region.

TDOT expects to issue the first Request for Qualifications in late 2024, with a draft RFP floated in early 2025 and a final RFP in early 2026, Ledford said.

The state has hired KPMG as its financial advisor, Hunton Andrews Kurth as its legal advisor and HNTB as technical advisor.

The Transportation Modernization Act is “the most significant state transportation law passed in the country in the last five years,” Baruch Feigenbaum, senior managing director at Reason Foundation, said in a blog post when the law was enacted last year. Feigenbaum and other Reason colleagues advised the governor’s staff and House and Senate transportation committee members on best practices for P3s.

The law is significant in part because it allows for variably-priced lanes and because it requires electric vehicles to pay a road usage fee — $200 annually in the early years — that is comparable to a gas tax, Feigenbaum said.

“While many states have added variably- priced lanes to their largest metro areas, no state has attacked congestion in a systematic, statewide manner like Tennessee,” he said. By not issuing debt or raising taxes to pay for transportation infrastructure, the law “moves Tennessee in line with—and in some ways surpasses—the transportation laws in peer southern states like Florida, Georgia, North Carolina, Texas, and Virginia.”

The five-member Transportation Modernization Board will meet for the first time this year with “a goal to have the first choice lanes project approved for further development,” Ledford said. The first meeting is set for Feb. 26.

As part of the law, an annual $200 electric vehicle fee and $100 hybrid fee went into effect in January. The EV fee will rise to $274 in 2027.