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What Is the Railroad Rehabilitation and Improvement Financing (RRIF) Act?
The Railroad Rehabilitation and Improvement Financing program (RRIF) act was first established as part of the Transportation Equity Act for the 21st Century of 1998, and has been revised several times since then. Most recent changes were the result of the Fixing America’s Surface Transportation (FAST) Act of 2015. The RRIF program authorizes the Department of Transportation to make direct loans and guarantee loans up to $35 billion for the development of railroad infrastructure. Between 1998 and 2015, RRIF loans totaled only about $2.7 billion, and no loan guarantees were made. Consequently, the FAST Act included a number of changes intended to increase utilization of the RRIF program to improve railroad infrastructure.
RRIF financing can be used for a number of railroad infrastructure development purposes, such as buying, improving, and upgrading rail equipment or facilities, developing new intermodal or railroad facilities, refinancing outstanding loans for railroad infrastructure projects, and financing other transit-oriented development projects. Railroads, state and local government entities, government-sponsored authorities, certain freight shippers, and public private partnerships (P3s) are eligible for loans and loan guarantees from the RRIF program.
RRIF can make direct loans for up to 100% of the cost of a railroad project, with loan terms of up to 35 years. The interest rate on an RRIF direct loan cannot exceed the cost to the government of borrowing the funds.
RRIF vs. TIFIA
RRIF loans and the financing available through the Transportation Infrastructure Financing and Innovation Act (TIFIA) loan programs have much in common. But there are two significant differences. TIFIA loans require the borrower to pay a credit risk premium, while RRIF loans do not. And, while RRIF borrowers pay an interest rate that covers the government’s cost of lending, TIFIA covers that cost using government appropriations. Some railroad infrastructure projects are financed through a combination of RRIF and TIFIA loans.
Examples of projects with RRIF funding include:
- Massachusetts Bay Transit Authority (2018): Implementation of positive train control technology and associated supporting infrastructure
- Dallas Area Rapid Transit (DART) System (2019): Implementation of the Cotton Belt Corridor Regional Rail System, a 26-mile passenger railroad from Dallas-Fort Worth (DFW) International Airport to the Plano/Richardson area, including the construction of ten new stations.
- Marine Terminal Rail Improvements at the Port of Everett (2019): Expansion of on-terminal rail capacity to increase the amount of cargo that can be processed through the Port of Everett in the state of Washington.
These and other projects financed at least in part through RRIF loans represent significant opportunities for construction contractors and subcontractors. In order to take advantage of such opportunities, contractors need to meet the bonding requirements mandated for construction projects that involve federal funding.
Why Are Surety Bonds Required?
The Federal Miller Act of 1935 requires contractors to furnish both performance and payment bonds -sponsored contracts involving for federally funded construction projects valued in excess of $150,000. Project owners, whether they are government entities or public/private partnerships (P3s), may require other types of construction bonds as well. The bonding requirement provides financial protection for project owners in the event that a contractor fails to live up to the terms of the construction contract.
A performance bond ensures that a project owner will not be left holding the bag, so to speak, if a contractor fails to complete a job satisfactorily or defaults on the contract without finishing the work. Instead of paying out of pocket to remediate the situation, the project owner (the bond’s “obligee”) can file a claim against the bond and be compensated for damages sustained as a result of the contractor’s failure to perform.
A payment bond obligates a contractor to pay subcontractors, workers, and suppliers according to the contractual payment schedule and terms. Failure to do so gives an injured party the right to file a claim against the payment bond and be compensated for monetary damages.
Other types of surety bonds that may be required for government-funded projects, such as those financed by RRIF loans, include bid bonds, supply bonds, maintenance bonds, and others deemed necessary by the project owner(s).
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