WASHINGTON -- President Bush yesterday signed into law a $151 billion highway and mass transit program that bond analysts say will increase municipal bond issuance by billions of dollars and spawn a cottage industry of Wall Street financiers in search of creative forms of transportation financing.

The most immediate spur to the municipal bond market will be increased issuance by states next year as they seek to raise their 20% matching share for the $11 billion of federal highway funds provided in fiscal 1992 under the bill, according to the Public Securities Association.

Beyond that, the law's large spending levels will stimulate further state and local issuance as governments around the country gear up for a higher level of road and mass transit building activity, analysts said.

The law also contains major new public-private partnership provisions -- many of which were added during the final weeks of drafting in Congress last month -- allowing an unprecedented blending of efforts from all sectors to finance and build transportation projects.

One such provision, for example, allows the states to funnel a "substantial portion" of the $119 billion designated for highway funding over the next six years as loans to private contractors, rather than as traditional grants, said John Giraudo of the law firm Skadden, Arps, Slate, Meagher & Flom.

As the loans are repaid to the states, the funds will be recirculated into additional highway projects, in effect creating transportation infrastructure "revolving loan funds" within each state, he said.

"It's a major coup. This may end up the same way as the [Clean Water Act] revolving loan funds," which the 50 states have used in recent years to leverage $9 billion of state and municipal bonds for water cleanup infrastructure, he said.

But while the law has "enormous potential" for spawning creative ways of leveraging federal dollars, Mr. Giraudo and others familiar with the intricate new public-private partnership provisions said most experts are just beginning to sort out the financial implications. Developing hybrid forms of transportation financing undoubtedly will become a big business, they said.

"Wall Street has begun to develop a brand new market for financing privately build and operated infrastructure," President Bush said as he signed the highway bill yesterday. "Investors know a winner when they see it."

Mr. Bush predicted that the public-private sector provisions will enable the federal government to "leverage more dollars into the transportation infrastructure and create even more jobs."

A lot of the new financing activity generated by the law is likely to be taxable, because the Internal Revenue Code restricts the use of tax-exempt financing by private contractors working for the government, said Karen Hedlund of Skadden Arps.

But because of the way the law blurs previous distinctions between the public and private sectors and mixes public and private funding, the highway law "down the road" could spawn a rethinking of those restrictions, she said.

"The tax code restrictions on tax-exempt bonds were written when these types of projects had not been conceived of," she said. "I think once the policymakers take a look at the leveraging potential of this program, they may want to go back and re-examine the rules to see if there's any way that tax-exempt financing can be used to finance the whole project," not just the state and municipal portions of a project, she said.

In the meantime, investment bankers will try to find ways to "maximize" the use of tax-exempt financing to save as much money as possible in executing the new public-private projects authorized by the law, she said.

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