On 14 March, the Indiana state legislature voted to sell the Indiana Toll Road to Cintra and Macquarie for $3.8 billion. The result of the vote was never in doubt – both the Republican-controlled legislature and Governor Mitch Daniels were solidly behind the process. And both Goldman Sachs, which made $20 million from advising Indiana, and other states, impressed by the total raised, are likely to repeat the process.

For now, there is a financing to assemble for the acquisition – a nine-year $3.279 billion term loan to cover the sale price (the remainder of the price will be met with equity) and $800 million in capex and liquidity facilities. The size of the loan will likely spark wailing and gnashing of teeth in the New York syndication market, as well as griping about the pricing on offer. According to sources examining the process, the arrangers pitched the deal at initial pricing of below 100bp over Libor, although it is likely to drift back to around 110bp.

Still, this compares favourably with the 125bp on the Chicago Skyway acquisition loan, which closed early in 2005. And while some banks in US project finance, and even one or two Cintra relationship banks, are not represented on the ITR debt, there is a good spread of European lenders on offer, as well as all three major powers in Spanish project lending.

The financing, therefore, is likely to draw fairly heavily on the ability of Spain SA's constituent parts to support each other. Tapping the network of smaller savings banks represented by Caja Madrid, for instance, looks particularly smart. And whether the ITR financing can exploit a pool of subordinated capital, in the way that Skyway did, may well determine whether the buyers can reach their stated rate of return of 12.5 %.

The selling proposition

But the sponsors' wider public relations effort centres on persuading the states that a private owner can operate toll roads more efficiently, as well as funnelling billions towards less robust projects. ITR needs to have electronic tolling in place by 2008, and increasing throughput on assets has been the key to effectively exploiting concessions, as Stephen Allen, Macquarie Infrastructure Group's CEO, points out.

Some states are looking at outright sales – Texas and Missouri are frequently mentioned as possible sellers, and Virginia actually has an offer on the table. It received, and had started evaluating, four proposals from Dulles Corridor Mobility Initiative (Macquarie, Autostrade, John Laing and IIG), Cintra, Dulles Express (Franklin L. Haney Co.), and Dulles SmartLink (Transurban and Goldman Sachs).

However, in December 2005, Virginia's Department of Transportation (VDOT) also received a proposal from the Metropolitan Washington Airports Authority (MWAA) to take over the road, and for the MWAA to raise money against the road to fund the rail link. After a delay in the evaluation process for the private proposals, Virginia has decided to hand the road over to the MWAA.

The proposal has not resulted in universally good press for VDOT, since taking over the road only arguably falls within MWAA's mandate, and the MWAA, which is a public body whose board members are appointed by regional government, is not constrained from raising tolls. Several legislators have complained that transfer would also not result in any cash proceeds for the state government, a sign that the money on offer from private sector operators is now the main consideration for local politicians.

How to derail PPP

Nevertheless, the denouement demonstrates that US politicians have a strong attachment to keeping transport assets under their control. In New Jersey, the state's two toll major road assets – the New Jersey Turnpike and the Garden State Parkway, are frequently mentioned as candidates, not least by the state's former acting governor, Richard Codey.

But the recently-elected governor, John Corzine, has ruled out even a partial concessioning of the routes, even though his state's Transportation trust fund is projected to run a $4.5 billion deficit. Corzine, formerly a senior Goldman Sachs banker, has said that he would prefer to refinance the fund's outstanding debt to longer maturities.

New Jersey's transportation officials are unusual in their lack of interest in private transportation structures – at present, the nearest the state has come is a proposal for a corporatization and eventual sale of a minority stake in the roads. But several other states operate under similar restrictions – the New York State's legislature has defeated a bill allowing public-private partnerships, as its Department of Transportation's downstate area integrator, Tim Gilchrist, acknowledged. Gilchrist and the NYDOT are currently trying to persuade their legislature to reconsider the proposal, but it is likely that the state's plans for upgrades to its huge public transport system will have to work around current legislation.

Nevertheless, New York State's DOT has been in discussions with the private sector over possible joint ventures (talks with Macquarie over the New York State Thruway were at one point relatively far advanced). And it hosted private sector developers at the state capital in Albany (the day after Project Finance's 7 March meeting).

Capital capture

But retrenchments and setbacks and modifications will be an enduring part of the US PPP experience. This will particularly be true for the lengthier, and more fraught, process of developing greenfield road concessions. Aside from the SR125 road in Southern California, these have been much less numerous, attract a little less private equity interest, a less comment in the press. But they are much more important to the state DOTs, and involve the US' fearsome procurement rules.

So will the presence of additional government inducements, which bring complications in equal measure to their potential benefits, adds another dimension. For instance, the expansion of the use of private activity bonds in transport, part of 2005's federal highway bill, allows sponsors to apply for tax-exempt financing even if they are for-profit owners.

The bonds, however, are likely to come with some restrictions on the use of proceeds and the depreciation allowances available to sponsors. They also require the use of federal assistance, and thus would involve restrictions on the hiring terms for construction workers, and the use of unspent proceeds. But there is $15 billion in bond issuance available under the programme for patient and creative sponsors.

Moreover, the future of not-for-profit PPP structures, another instrument in which Virginia has pioneered only to later disappoint, is still in play. The most prominent non-profit is the Pocahontas Parkway, established by design-build contractosr Fluor as a 63-20 non-profit and the first under Virginia's Public-Private Transportation Act. Traffic levels have been disappointing, and Transurban, with backing from DEPFA, has entered negotiations to take over the road.

For the time being, however, the operator, the Pocahontas Parkway Association, has increased tolls to ensure debt service on the asset's $354 million in bond debt.

But the 62-30 structure is not yet dead. According to Robert Prieto, senior vice-president at Fluor, "they do have a future. In the not-for-profit market there are now more instruments available, such as sub-debt structures and private activity bonds. We'll offer both for-profit and non-profit, and in the end it comes down to the preferences of the states. But politics, and the politics around tolling, will push some of these deals to the non-profits."

Michael Kulper, who founded and heads the North American business of Transurban, says that "there's going to be a considerable blurring between taxable and tax-exempt. Drawing the distinction will get more difficult." The point is well made – some of the larger projects, such as the Miami Airport Intermodal project, have made use of a mixture of commercial, municipal, and TIFIA funds.

Federal feuding

TIFIA funding, or subordinated debt available from the Federal Highways Administration, has been a marginal presence in recent PPP financings, if only because these have mostly been privatisations. TIFIA (for more, search at www.projectfinancemagazine.com), carries a number of conditions, including requiring an investment grade rating and the notorious springing lien.

But TIFIA has its fans. The Texas Department of Transportation, for instance, is applying for TIFIA funding in advance of bringing its Comprehensive development Agreements (CDAs) to market. As one Federal official noted, however, "many states have steered clear of federal funding because of the Buy American provisions attached. But some projects have been seeded in advance with Federal money, and so deals then have to be deseeded."

Heading the list of current headaches for developers at the federal level is the threat of legislation against the foreign ownership of essential infrastructure. The Dubai Ports World takeover of P&O Ports sparked a massive, unexpected, and to many foreign observers disproportionate, political row.

Among the legislation that has followed is HR 4959, introduced by Congressman Duncan Hunter, which would prohibit foreign ownership of "critical infrastructure" (and this explicitly includes transport assets) if the owner's home country does not do likewise, and Hunter's HR 4881, which would preclude all foreign ownership of assets on a "national defense critical infrastructure list."

There are ways round such legislation, which would hit different actors in the market differently. A player like Macquarie, which manages money for more than a few US investors, and has been hiring well-connected US staff where necessary, might squeak through. Cintra, which uses management transferred from Madrid, and which, while listed, has a heavy European shareholder base, might find it harder to operate.

Taxing times

The current xenophobia might abate, or it might flare up in advance of mid-term elections in November. But scrutiny of the prices paid will persist, strengthened by studies such as that by the EDEHC business school, which suggested that the French government left Eu10 billion on the table when selling its stake in toll road operator ASF. It came to this conclusion based on its estimate of the opportunity cost to the government of using different cost of capital assumptions than it should have.

But the potential for legislation that targets what the framers would see as excessive profits is there. This potential, highlighted by Freshfields partner Kent Rowey, would follow successive waves of pressure on the UK government to take more of a hard line against the gains made by refinancings and secondary market equity sales.

Likewise for the concept of a fixed-return concession along the lines of those developed in Chile and Portugal. These concessions assuage some government worries about super-profits, although the logistical challenges are immense.

Olivier Garnier is a managing director at FSA tasked with developing its business in the Americas, and worked on the Rutas del Pacifico deal in Chile, which featured a fixed NPV level. He notes "the fixed return concept is an interesting idea, but it's not necessarily one that's easy to finance – investors will make you pay for the uncertainty in the management schedule."

There are also tax considerations to work around with a variable length concession, since the uncertain length might make it more difficult to claim ownership of an asset for tax purposes. The depreciation benefits attached to ownership of such long-lived assets are substantial. They can, according to one observer, amount to hundreds of millions of dollars.

Shadow administration

The ins and outs of real toll concessions aside, many of the European entrants circling US concessions hope that more US assets will proceed along an availability-based route. So far, only one department of transportation is out and proud in its desire to progress an untolled PPP project. Florida is running a request for qualifications for the Miami Port Tunnel project.

According to William Thorp, the chief financial officer at Florida's Turnpike Enterprise, part of the state's DOT, the project is suited to an availability-based structure, because of the technical challenges of tolling within the limited available space. The project will link Interstate 395 and the MacArthur Causeway on Watson Island with Port of Miami facilities on Dodge Island. But the ground is potentially treacherous, and the work would take place in a heavily-trafficked and economically busy part of the US.

The project is certainly a challenging proposition – the most frequently asked question at www.portofmiamitunnel.com is whether an extension to the bid deadline is possible. This deadline is set for 12 April, and so far FDOT has declined to extend it further. The public sector wants a shortlist of qualified bidders ready by May, a request for proposals out in June, and to award the contract by the end of the year.

The process has attracted a mixed bag of responses – tunnels are amongst the most challenging pieces of civil engineering work imaginable, as Boston's epic Big Dig attests. Several European sponsors are understood to be wary of the geotechnical risk, a wariness that FDOT has attempted to assuage with an accelerated testing programme.

The forthcoming series of concessions coming out of Texas and Oregon look more promising, in part because the respective DOTs are both moving forward with early-stage development partners, which will shape the concessions and then get a chance to move ahead with them. Oregon chose Oregon Transportation Improvement Group, comprising Macquarie, Mott Macdonald and Preston Gates, as its development partner, and the two are now establishing the scope of three identified projects (for more, search "Oregon DOT" at www.projectfinancemagazine.com).

In Texas, Cintra and Zachry are still working on a final outline for the Trans-Texas Corridor (TTC-35). The $7 billion development programme, split into up to 7 concessions, is still undergoing structuring, and the route of the development is still subject to modifications.

The state recently issued a draft environmental impact statement, which identified a section slightly to the east of the current I-35 corridor. The statement is not final – the state is currently holding meetings at locations along the proposed route, and hopes to identify a final route shortly.

Despite the still tortuous process of brining concessions towards financing, the momentum is clearly on the side of PPP proponents. Of 14 states with dedicated public-private partnership legislation, according to Transurban's Kulper, five have completed PPP deals. Still, legislation has been the key to completing successful projects, and tends to make concession operators less nervous.

Cintra's head of its north American and Latin American business, Jose Maria Lopez de Fuentes, who is also former CEO of the 407 Highway in Ontario, has a more measured take on the market. 407 has only just emerged from a bruising legal battle with the Ontario government, one that has consumed much of the period since the road was privatized in 1999. "The big lesson we have learned is don't overhype a market."