Paving the way: private capital can be leveraged to fund the construction of new infrastructure.

Gov. Arnold Schwarzenegger's $222 billion plan for expanding and improving California s infrastructure needs legislative approval, and it is by no means certain that he will get it. But if he should be turned down, all is not lost. Much can be accomplished by tapping the vast reservoir of private capital available in the U.S. and abroad.

Through the use of innovative financing techniques, many more miles of toll lanes could be added to existing freeways and new toll roads can be built without saddling the taxpayers with debt. All that's needed is for the California Legislature to authorize the formation of public-private partnerships to build such infrastructure.

This need not involve the privatization or tolling of any existing public roads and bridges, as has happened recently in some other states. Rather, California can leverage private capital to finance the construction of new infrastructure.

Historically, private participation in the financing of infrastructure projects has been rare in the U.S.; California, like most other states, has relied on taxes and issues of public bonds for this purpose. But during the last thirty years, because of tax cuts, recessions and an emphasis on "small government," there has been a severe under-investment in infrastructure.

This neglect can't be allowed to continue. As the governor cautioned in his State of the State speech, "We cannot bury our heads in the sand and say, 'If we don't build it, they won't come.' California stopped building three decades ago, and the people came anyway."

If California is to stop playing an endless game of catch-up in dealing with traffic congestion, it will have to stop relying solely on its traditional source of funds for building and improving roads. And the only visible additional source is private investment.

A good example of how infrastructure can be financed with a combination of public and private money is State Route 125, which is being built to reduce congestion near the Mexican border in San Diego County. Motorists will have to pay to use a 10-mile segment of this new road, which runs from Route 54 in Bonita to Otay Mesa. Local supporters have said that tolls are a small price to pay for shaving time off their commutes.

The financing for SR125 was structured to deal with problems that can be encountered if a toll road doesn't generate the revenues that have been projected for it. The $773 million to build this road came from three sources: a loan of $154 million from the federal government, $160 million of equity from an Australian investment firm that specializes in the development of toll roads and airports around the world, and $321 million in senior secured debt from a group of European banks.

The federal government came into this arrangement as a co-lender, just as the banks did. Federal money was made available under a program called TIFIA, under which the government is saying, in effect, "To encourage private investment in this project, we will take a back seat to the banks when it comes to repaying our loan."

Thus when SR125 opens later this year, toll revenues after the deduction of operating expenses will be distributed quarterly in this order: First in line will be the banks, then TIFIA, and finally the private investors. Should revenues fall short of projections, reserves that have been set aside will be tapped. And if the reserves should be depleted, the first to go unpaid will be the private investors, then TIFIA, and lastly, the banks.

What will it take to foster more public-private partnerships?

As a first step, business and civic leaders should encourage the Legislature to revive Assembly Bill 850. This bill, which was introduced last year but died in committee, would have authorized CalTrans to solicit proposals and enter into development franchise agreements with public and private entities for the construction of transportation projects.

That's good as far as it goes. But the Legislature should follow up with laws that will clear the way for public-private partnerships in all types of infrastructure projects. As the financing arrangements for SR125 indicate, there is plenty of private money available for such projects; all California has to do is reach out and take it.

Allan T. Marks is a partner in the Los Angeles office of Milbank Tweed Hadley & McCloy LLP. His law firm has worked on the development and financing of toll roads in California and other states.