Even as private equity has become a dirty word with congressional tax writers, another form of private financing has aroused the ire of transportation committee leaders.

Reps. James Oberstar (D-Minn.) and Peter DeFazio (D-Ore.), who run the House highways subcommittee, are threatening to amend federal highway law to “undo” some forms of private financing of state highways that are not in what they claim is the public interest.

Over the past 15 years, major foreign companies with experience operating toll roads have joined with U.S. construction companies to form consortiums that have paid states billions of dollars for long-term highway leases, and raised those payments by selling bonds, obtaining bank loans and raising money through equity deals.

Five highways have been built via private equity deals since 1990, when the first, the Dulles Greenway in Virginia, was built. But these public/private partnerships, called P3s or PPPs, have become much more attractive to state governors and legislatures in the past few years as state gas tax revenues have plunged and highway “to do” lists have lengthened.

“The state of Georgia adopted P3 legislation and has been inundated with unsolicited proposals,” said Paul Yarossi, president of HNTB Holdings, which is working with a number of states to lay the groundwork, legislatively and otherwise, for highway PPPs. Florida Gov. Charlie Crist signed a bill in June allowing PPPs in his state. Pennsylvania Gov. Edward Rendell sent legislation to his legislature in May which, if passed, would clear the way for a PPP for the Pennsylvania Turnpike.

“U.S. highways are emerging as an attractive asset class for investors because of their barriers to entry, steady operating characteristics and predictable cash flow,” said Robert Collins, head of infrastructure M&A for Morgan Stanley. “On highway infrastructure leases, investors are looking for 9% to 13% equity returns using a 6% to 7% cost of debt. This all can translate into a weighted cost of capital comparable on an after-tax basis to the tax-exempt rates that municipalities pay.”

However, some of the past private equity deals for highway leases have had multiple problems, leading to Mr. Oberstar’s and Mr. DeFazio’s concerns, which have been heightened by complaints from environmentalists, truckers, small business groups and others, who have criticized the deals.

Michael Replogle, transportation director of Environmental Defense, told a House committee in May that his group’s primary concern is that there is no framework to ensure that environmental policies enacted by state and federal government apply to PPPs.

“Unless new and more effective federal and state policies toward PPP road projects are adopted, PPP road projects insulated by decades-long concession contracts could become an out-of-control source of greenhouse gas emissions that defies needed accountability,” he said.

And while the Bush administration has been an enthusiastic advocate of PPPs, establishing a pilot program in October 2004 called SEP-15 that gives states more negotiating room with private consortiums, a growing resistance to them appears to be developing outside Washington.

For example, Texas Gov. Rick Perry signed a bill in mid-June that severely limits private equity deals for highways in Texas.

The objections to highway projects in Texas range from opposition to paying tolls on heretofore free highways, concerns about emergency vehicles being stopped at toll plazas and condemnation of private property.

The Texas bill forbids local and state tolling authorities from allowing private companies to operate, maintain or lease any of the 80-plus state roads that have been on a “privatization potential” list. The bill does allow for private capital to build Texas roads, however, and for that investment to be repaid by the tolling authority out of toll revenue.

In New Jersey, the administration of Democratic Gov. John Corzine had been studying a potential sale, lease or other transaction involving state assets, including roadways. Unveiling his fiscal 2008 budget at the end of June, Mr. Corzine, however, said he would not sell any roadway or lease one to a for-profit or foreign company.

While there may be differing opinions as to whether highway P3s are in the public interest, there doesn’t seem to be much doubt that they are in the private interest.

A spokesman for Australia’s Macquarie Infrastructure Group (MIG), who asked not be identified, said, “MIG continues to believe that the U.S. market is a source of opportunities.”

MIG purchased the concession for the Dulles Greenway in Virginia in 2005 for $617.5 million. In addition, it subsequently participated in consortiums that successfully bid for the lease of the Chicago Skyway and the Indiana Toll Road. Those were the two biggest P3 projects of the past few years.

The deal Chicago officials signed in January 2005 with the Skyway Concession Co., a consortium owned jointly by MIG and Mexico’s Cintra Concesiones de Infraestructuras de Transporte, involved a 99-year lease of a 7.8-mile stretch of 48-year-old roadway. The contract price for the concession was $1.83 billion.

Six months later, Skyway Concession refinanced the entire deal. That was done, according to the MIG spokesman, to restructure the loan repayment amounts and repayment schedule to match the amount and timing of the cash flow coming in from the road. The package received investment-grade ratings from Moody’s and Standard & Poor’s.

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