July 1, 2005

Congress seen paving way for private toll roads

By Daniel Sorid

SAN FRANCISCO (Reuters) - The next road you travel -- andpay a toll to use -- could be privately owned.

Looking for ways to finance highway projects withouthitting the public trough, the U.S. Congress appears set topass a proposal to encourage private ownership of new tollroads.

The provision, part of the highway spending bill now beinghammered out by a Senate and House conference committee, wouldallow private companies to raise up to $15 billion for highwayprojects with bonds that are exempt from federal income taxes.

While the proposal has broad support in Washington and thebusiness community, the idea of private highways has incitedgrassroots opposition in some states, with some saying thegovernment -- not a profit-seeking company -- is the properowner of the public's roads.

Toll road owners such as Spain's Cintra andAustralia's Macquarie Infrastructure Group stand tobenefit from the move to private infrastructure bonds, sincetheir tax-exempt status would keep interest rates and fundingcosts low.

The move would also bring lucrative fees to Wall Streetbanks and others for underwriting and trading tax-exempt debt.

"The time has come for this," Sen. Jim Talent, a MissouriRepublican who co-sponsored the proposal, said in a telephoneinterview. "I think we have an excellent chance of the $15billion bond issue coming out of conference."


While highway spending has traditionally been thegovernment's responsibility, many states faced with tightbudgets have given corporations the right to build, operate andmaintain roads.

States have the right to regulate toll rates or limitprofits, but generally give operators wide latitude to run theroads as they see fit, which concerns some commuters.

Texas, California and Virginia are among the states at theforefront of the movement, one of the most significant changesto the interstate highway network since its inception in the1950s.

Companies already own projects such as the Chicago SkywayBridge and the 407 Express that rings Toronto, and interest inprivatizing more of the U.S. highway infrastructure isincreasing. One bottleneck, however, has been financing.

Jose Lopez De Fuentes, director of Cintra's U.S. and LatinAmerican operation, said private road builders currently facecomplex regulations governing the issuance of tax-exempt bonds.

The provision expected to emerge from Congress would helpCintra raise funds to finance such projects as a proposed $7billion investment in the Texas highway system, he said.

Cintra's proposal, which includes a new link on thecongested Dallas-San Antonio route, has triggered someopposition, but the state transportation department isecstatic.

"That's a pretty good deal any way you slice it," said GabyGarcia, a spokeswoman with the Texas department. "They'll coverthe table with $7 billion and say, 'We'll raise that money onour own without any help from you."'


But Ellen Dannin, a law professor at Wayne State Universityin Detroit who has written on privatization, said privatecompanies are not necessarily more efficient at running roads,and their tolls amount to a regressive tax on highway building.

A better solution to public underfunding of the road systemmay be to roll back tax cuts that are squeezing the federalbudget, Dannin said.

"One of the things to ask yourself is, why doesn't thegovernment have the money to spend on the infrastructure thatwe need?" she said.

And while the private-activity bonds will not require anyoutlay of public funds, the government would pay for the planin the form of reduced tax rolls, estimated at $500 millionover six years.

In a highway bill that would cost $275 billion or more inthat time, $500 million is a small price to pay for a novelfinancing mechanism that could pay for dozens of projects, saidKaren Hedlund, an Arlington, Virginia-based partner atNossaman, Guthner, Knox & Elliott LLP, which advises stategovernments on transportation issues.

"Federal funding through gas taxes and state and localtaxes are no longer sufficient to maintain our highway assetsand to build the additional assets we need to get ourselves outof congestion," Hedlund said.

Private road builders and public-private partnerships canpay out less interest on tax-exempt bonds, reducing thefinancing costs of projects by 20 percent, she said.

Ed Mortimer, director of transportation infrastructure atthe U.S. Chamber of Commerce, said an additional $15 billion infinancing could fund 20 or 30 highway projects.

The proposal could provide a special boost to projects toexpand connections between ports or industrial sites and thehighways. Such roads are less popular -- but no less important-- than routes used by commuters.

"Sometimes," Mortimer said, "those projects are the hardestones to get funded."