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Mike

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Looking for ways to finance highway projects without hitting the public trough, the U.S. Congress appears set to pass a proposal to encourage private ownership of new toll roads.

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

While the proposal has broad support in Washington and the business community, the idea of private highways has incited grassroots opposition in some states, with some saying the government -- not a profit-seeking company -- is the proper owner of the public's roads.

Toll road owners such as Spain's Cintra (CCIT.MC) and Australia's Macquarie Infrastructure Group (MIG.AX) stand to benefit from the move to private infrastructure bonds, since their tax-exempt status would keep interest rates and funding costs low.

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

"The time has come for this," Sen. Jim Talent (news, bio, voting record), a Missouri Republican who co-sponsored the proposal, said in a telephone interview. "I think we have an excellent chance of the $15 billion bond issue coming out of conference."

MAJOR SHIFT

While highway spending has traditionally been the government's responsibility, many states faced with tight budgets have given corporations the right to build, operate and maintain roads.

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

Texas, California and Virginia are among the states at the forefront of the movement, one of the most significant changes to the interstate highway network since its inception in the 1950s.

Companies already own projects such as the Chicago Skyway Bridge and the 407 Express that rings Toronto, and interest in privatizing more of the U.S. highway infrastructure is increasing. One bottleneck, however, has been financing.

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

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

Cintra's proposal, which includes a new link on the congested Dallas-San Antonio route, has triggered some opposition, but the state transportation department is ecstatic.

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

TAPPING THE TAX ROLLS

But Ellen Danning, a law professor at Wayne State University in Detroit who has written on privatization, said private companies 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 system may be to roll back tax cuts that are squeezing the federal budget, Danning said.

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

And while the private-activity bonds will not require any outlay of public funds, the government would pay for the plan in the form of reduced tax rolls, estimated at $500 million over six years.

In a highway bill that would cost $275 billion or more in that time, $500 million is a small price to pay for a novel financing mechanism that could pay for dozens of projects, said Katherine Hedlund, an Arlington, Virginia-based partner at Nossaman, Guthner, Knox & Elliott LLP, which advises state governments on transportation issues.

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

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