June 23 (Bloomberg) -- The power of U.S. states to set highway tolls and lease roads to private investors would be subject to federal regulation under a transport-financing bill being reviewed in Congress.

The bill, which faces final consideration by a House highways and transit subcommittee in Washington tomorrow, would create the Office of Public Benefit to regulate state toll rates and so-called public-private partnerships, in which companies operate state or city assets under leases.

“Without sufficient public protections, toll projects hold the potential to impose costs on those least able to pay,” says the Surface Transportation Authorization Act, which would institute a $400 billion six-year program to help states finance road improvements and construction.

The federal government would review states’ plans to raise tolls on highways that receive U.S. aid under the bill. Use of toll revenue would be restricted to debt service, return on investment, operations, maintenance and other transport projects, the bill says.

States face a $230 billion gap between spending needs and expected revenue in the budget year ending in 2011, a survey by the National Governors Association and the National Association of State Budget Officers found. States and cities have leased public assets to private investors as a way to obtain lump sum payments to meet expenses.

Public-Private Partnerships

Chicago leased its Skyway toll road in 2005 to private investors for 99 years, in exchange for a $1.8 billion upfront payment used to retire debt and pay other expenses. The lease calls for tolls to double over the first 10 years, which the transport bill cites as a reason for proposing regulation.

“It is likely that tolls on a privately operated highway will increase to a greater extent than they would on a publicly operated toll road,” the bill says, quoting a report by the Government Accountability Office. “There is no ‘free’ money” in public-private partnerships, the GAO report says.

The House bill, sponsored by James Oberstar, a Minnesota Democrat who’s chairman of the Transportation Committee, would require private entities operating highways that receive federal aid to allow the public to undo road leases with compensation to the private operators.

Concerns About the Past

It would also prohibit clauses in leases that prevent states from improving or expanding nearby roads that could compete with a privately run highway, and it would mandate public comment on private leases before they’re made final.

“The chairman has some concerns over public-private partnerships and the way they’ve been executed in the past,” said Jim Berard, spokesman for the Transportation Committee. “When a road gets federal aid, the federal government has the obligation to see that people are getting what they paid for and aren’t paying for it twice.”

Twenty-three states have laws enabling private leasing for transportation projects, according the Federal Highway Administration. Earlier this month, a special New York commission recommended that a state agency be created to implement more partnerships.

The House bill “could be a serious impediment to construction of almost any public road in the country,” said Richard Norment, executive director of the National Council for Public-Private Partnerships, an industry group in Arlington, Virginia.

Private-Sector Dismay

“The private sector is going to be very hesitant to approach a partnership,” Norbert said. “The money that’s waiting to invest will go elsewhere.”

Transportation Secretary Ray LaHood said in an interview last week that Congress probably won’t pass a six-year transport law by Sept. 30, when the current $286.5 billion program expires. He said he would favor an 18-month funding bill to help states with transport projects.

Berard said Transportation Committee leaders oppose a short-term bill. “When the states don’t have the ability to look down the calendar to see how much federal money they have coming in, they won’t start planning projects,” he said. “Infrastructure doesn’t fix itself, so delaying a decision isn’t the best way to go.”

To contact the reporter on this story: Jerry Hart in Miami at jhart@bloomberg.net.

Last Updated: June 23, 2009 16:21 EDT