Toll Roads: Public, Private, or Leased?

After Chicago received $1.83 billion to lease the Chicago Skyway and Indiana received $3.85 billion for the Indiana Tollway — both significantly more than expected — other cities and states got interested in public-private partnerships for their tollways. But now a backlash has set in and some advocates of private tollroad operations are facing strong resistance.

A recent poll by AAA (which, ironically, has not strongly supported congestion relief for urban motorists) found that 70 percent of Pennsylvania and New Jersey drives oppose selling public tollroads to private operators. But this is a deceptive poll, because no one is proposing to sell the roads. The poll found that only 40 percent opposed leasing the roads.

Such polls always depend on how they are worded. What if AAA had asked, “Would you support leasing the Pennsylvania Turnpike to a private operator who would quickly act to relieve congestion and allow you to get to work faster?” I suspect support would be a lot greater than 60 percent.

Are we willing to pay the cost for less congestion? Flickr photo by Lull_in_Traffic.

Among the reasons cited in opposition to tollroad leases are:

1. We shouldn’t sell public assets to foreigners (the winning bidders of the Chicago and Indiana roads are a consortium of Spanish and Australian companies);
2. Tollroad leases give private companies the right of eminent domain;
3. Tollroad leases will lead to huge increases in tolls;
4. If private companies can make money running the tollroads, why can’t the government?

Let’s take a look at the Indiana Tollway contract to see just what these leases are like. The actual contract is 102 pages long and I haven’t read it. Fortunately, my friend Peter Samuel, publisher of Tollroads News, reviewed the contract in detail. Here is what he says is in it.

The company pays the state $3.85 billion up front for the right to collect tolls for seventy-five years. (Samuel opines that it would be more accurate to call this a concession rather than a lease.) The state retains the title to the road and gets any revenues from using the right of way for power lines and other activities.

The company is required to apply the tolls it collects to operations and maintenance before it pays any returns to its investors. In return, the state promises not to build competing roads.

The company also has to keep the road congestion-free — in engineering terms, level of service C (up to 1,600 vehicles per hour in each lane) in rural areas and level of service D (up to 2,000 vehicles per hour) in urban areas. If congestion increases above these levels, the company has to make roadway improvements to relieve congestion.

The contract also specifically requires the company to make certain immediate improvements, including building about ten new lane miles by 2010. The company also has to implement electronic tolling, which was not previously used in Indiana, and it has already begun to do so. And it has to pay for policing at the same level as provided on other state roads.

Through mid-2010, the company cannot raise auto tolls above 5.1 cents per mile (they are currently about 3 cents a mile). After that, tolls cannot increase by more than the greater of 2 percent per year, the growth of the consumer price index, or growth in per-capita gross domestic product.
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So from this we can see that the road wasn’t sold, it was leased. Samuel points out that there are private tollroads in various parts of the country, but even many of them are concessions, meaning that after so many years the title reverts to the public.

As for the foreign aspect, we often sell bonds to foreigners, so why should we care about leasing property to foreigners? Allowing foreigners to bid increases the pool of investors and management expertise. After all, if you owned a rental property and a property management company offered to pay you to run the property and promised to improve it as well, would you turn them down because they happened to be from Spain?

Nothing in the leases gives the companies right of eminent domain. The leases also specify maximum toll rates that the companies can charge.

The fourth argument is a little more tricky. Why can’t government work as well as private companies? The basic answer is that the incentives are different.

Take, for example, the Pennsylvania Turnpike. Last month, a Pennsylvania state senator and several co-conspirators were indicted for defrauding taxpayers of at least a million dollars. One of the co-conspirators is married to the chair of the Pennsylvania Turnpike Commission, and the indictment alleges that the conspirators diverted hundreds of thousands of dollars in turnpike tolls to various cronies who did no work for the turnpike authority.

Of course, private companies have also been known to commit fraud. But when they do, the people who lose are usually investors, not consumers or taxpayers. Even aside from fraud, many economists believe private companies can act more efficiently than public agencies because they have to meet the strict expectations of investors — i.e., their spending has to meet a market test — while public agencies have to satisfy politicians whose priorities are something other than efficient management.

Beyond the efficiency argument, private companies can do things without the years of planning and red tape that government agencies are often regrettably required to follow. For example, they can easily borrow money without asking for bonding authority. In essence, leasing is a way of getting around many of the obstacles that anti-auto forces have set up that prevent state and local highway departments from relieving congestion.

The real problem with leasing tollroads is where the money goes. If it goes to more highways, then there is at least an indirect link between users and producers. That is, the possibility of leasing gives transportation agencies an incentive to design and build facilities that people really need; no private company will bid on a tollroad that no one uses. But if the money from leasing goes to transit or some other purpose, that link is broken. The AAA polls found that people are much more likely to support leases if they know the money is going to highways rather than being diverted to other slush funds.

One way to avoid many of these arguments is to reduce the length of the leases. Nobody gains from granting 75- or 99-year concessions. The states run the risk of locking up valuable public resources for many decades into the future. Investors run the risk that people won’t drive as much 50 years from now — what if we really do run out of oil?

Most leases in Europe and Australia, says Samuel, are for 25 to 30 years, renewable if the company does a good job. Samuel adds that experience in Mexico suggests that 10 years is too short. While Texas is considering 50-year leases, I would say that 25 to 30 is optimal.

At a 7-percent interest rate and a presumption that toll revenues will increase by 2 percent per year, someone would bid 74 percent as much for a 25-year concession, and 80 percent as much for a 30-year concession, as for a 75-year concession. Similarly, they would pay a 72 percent as much for a 25-year concession, and 79-percent as much for a 30-year concession, as for a 99-year concession. Over 100 years, highway departments could get nearly three times the revenue from 25-year concessions as from 99-year concessions. Shorter leases might also alleviate public concerns about turning public assets over to private operators.

Personally, I don’t see anything wrong with selling roads. But since the states are talking about leases, not sales, it is disingenuous for opponents to argue against sales. At least some of those opponents no doubt have a hidden agenda: They don’t want to see more auto capacity, but they will agree to leases if a significant share of the money is diverted to transit or some other more politically correct use. The states should not cave into this extortion.