The federal transportation reauthorization passed by the U.S. Senate earlier this month is notable for its (relative) bi-partisanship and for putting in place several key reforms. The bill’s new dedicated freight program, more efficient project delivery mechanisms, and increased in funding for innovative finance programs are all important and laudable, setting the stage for a truly transformative six-year bill in 2013. One amendment, however, disrupted that good feeling and highlighted the difference in how states finance their programs.

The amendment proposed by Senator Jeff Bingaman of New Mexico lowers federal highway aid for states that privatize their roads. The reasoning is that states like Illinois and Indiana that received upfront payments for concessions shouldn’t continue to receive aid for that portion of the state’s highway lanes and vehicle miles travelled. Although not completely privatized, the state no longer spends federal dollars on those roads, so they shouldn’t be factored into formulas that allocate money from Washington.

Some are crying foul, and with good reason. In this time of fiscal constraint, budgets at the federal and state level are severely stretched. More and more states are looking to engage the private sector in infrastructure investment, and many investors are cautious about getting involved in a market where levels of sophistication, goals, and political will vary from state to state. The amendment, in effect, sends a signal to states that they have to choose a side when coming up with a finance strategy for infrastructure. Instead, Washington should be encouraging states to use a combination of available financing and project delivery resources to fill gaps.

Federal programs, like TIFIA, fill finance gaps by providing supplemental and subordinate capital to leverage private funds—but only for the capital costs of new projects, not the operation and maintenance that is needed for existing assets. Concessions are a way to harness the private sector’s expertise in project delivery and share the risk and cost of maintenance and operation. States can use their upfront payment and federal aid to a pay for infrastructure assets that are necessary but need higher subsidies, like transit or other road projects. For example, the concession received for the Indiana Toll Road went in part to capitalize the Northwest Indiana Redevelopment Agency for investments in places like Gary that need it, but are a less attractive investment opportunity to the private sector.

About the Bingaman amendment, former Pennsylvania Governor Rendell said that it “absolutely would stop private investment in infrastructure.” While that may be overstating it a bit, one institutional investor publication recently spoke with private investors who echoed the sentiment that private-public partnerships in the U.S. have not taken off as they have in the UK, Canada, and Australia because the U.S. is not comfortable with public assets in private hands. “It turns out that Americans are not wild about seeing infrastructure transferred to private hands, nor do they appreciate the price bump that has come with many of them.” A September report by the OECD found that the U.S. infrastructure market is immature and has not provided many deals to investors because of the “historical negative public perception of private investment in (certain) infrastructure sectors,” and “infrastructure investment is perceived as too risky.”

The true effect of the Bingaman amendment remains to be seen. As it stands right now, the money lost by states with privatized highways will be reapportioned, furthering encouraging states to keep their highways publically operated. Perhaps a compromise would be to put the “lost” Federal aid into a fund that can be competitively bid on to finance operation and maintenance projects around the country. As the House and Senate continue to work on transportation legislation, let’s hope they keep sending signals to the market that they support private sector investment in infrastructure. While not a panacea, it is fundamental to helping the U.S. build and upgrade the nation’s assets in the future.