Soon, Roads Could Start Tolling for Carlyle

The company hasn't sealed any infrastructure deals yet, but a spokesman said several are in the works.

"What we bring is capital," Dove said. "Maryland could raise taxes, put up sales tax and raise municipal bonds to build the intercounty connector. An alternative could be to say to the private sector, 'You build that, you run it in partnership with us and we [Maryland] will use the money to build schools, hospitals or health-care facilities.' Virginia is a state that does this now."

Carlyle raised the $1.15 billion for its infrastructure fund in 15 months from clients around the world. That money will allow Carlyle to borrow another $2.5 billion from banks to buy infrastructure. The firm hired John Flaherty, who was senior assistant to then-Transportation Secretary Norman Y. Mineta, to help run the operation and look for opportunities to partner with utilities and transportation agencies.

Preference for Partnership

Some toll roads, such as the Dulles Greenway, are owned and managed by private companies. But the push by private equity is different because buyout firms prefer to partner with municipalities rather than run the projects on their own. This type of relationship is more appealing to state and local governments and is expected to spark the privatization of huge swaths of infrastructure, transportation analyst say.

"The word is spreading and the climate of opinion has changed significantly in the last five years or so in that the public accepts tolls now much more readily than they used to," Ken Orski, who writes a newsletter on transportation and has worked in the field for more than three decades. "They don't necessarily love them, but view them as inevitable given the shortage of funds and the public's dislike of increasing the gas tax."

In October, Australia's Macquarie Bank led a foreign consortium that purchased Puget Energy in the Pacific Northwest, which regulators are expected to approve. In the first privatization of an existing U.S. road, Macquarie in 2005 led a group that paid the city of Chicago $1.83 billion for the right to operate and maintain the Chicago Skyway, a 7.8-mile toll road, for 99 years.

Other big Wall Street firms, such as J.P. Morgan Chase, Goldman Sachs and Lehman Bros., have made deals or are looking for similar ones for their investors, most of whom are pension funds, foreign governments, endowments and wealthy families and individuals.

Private companies have been running toll roads throughout Europe for decades. Toll roads in France, Italy and Portugal -- and increasingly Eastern Europe -- have turned to private firms to finance infrastructure. The Chunnel, the tunnel that runs under the English Channel, is also partly financed with private money.

"Private-equity funds invested heavily in public purpose infrastructures in Europe," Orski said. "Toll roads, water systems and other utility-like assets produce predictable streams of revenue, and this is what private equity is looking for."

Trading Contracts for Cash

As the U.S. highways age and the costs of repairing infrastructure exceed the revenue from highway trust funds, public authorities are looking to partner with private firms such as Macquarie to get upfront cash.

Virginia has been at the forefront of public-private partnerships for transportation projects, entering into long-term operations and maintenance contracts with private companies in return for upfront cash.

One project that appears off the table for now is Dulles Rail. Virginia Secretary of Transportation Pierce R. Homer said yesterday that he has received numerous unsolicited proposals and expressions of interest from private equity firms who want to run the project after it is built. But state officials turned them down and gave control of the project to the Metropolitan Washington Airports Authority, which is responsible for overseeing its financing and construction. The authority could bring private partners into the Dulles Rail project later, Homer said.

Virginia Deputy Secretary of Transportation Barbara W. Reese said her office typically seeks to finance 20 percent of its needs through public-private partnerships.

The department finalized agreements on Dec. 20 with private operators for a $1.4 billion project, including $409 million in public money, to expand the stretch of the Capital Beltway between Springfield and the America Legion Bridge.

The project includes 56 miles of roadway and high-occupancy vehicle toll lanes. It is due to open around 2013 and will be run by a consortium that includes Fluor, a private U.S. company, and a U.S. subsidiary of Australian company Transurban.

Reese said the state sets performance standards and technical requirements that the private investors must adhere to throughout the life of the contract. Unforeseen events such as weather, earthquakes or the collapse of a bridge that raise liability issues are dealt with jointly through the agreement.

"To have a private partner that is willing to help you with that is a good thing," Reese said. "It's like a marriage. You have to work together."