The Facts About Toll Road Privatization and How to Protect the Public - U.S. PIRG Education Fund
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The Facts About Toll Road Privatization
and How to Protect the Public
U.S. PIRG Education Fund
Private Roads, Public Costs
The Facts About Toll Road Privatization
and How to Protect the Public
U.S. PIRG Education Fund
Written by:
Phineas Baxandall, Ph.D.
U.S. PIRG Education Fund
Kari Wohlschlegel and Tony Dutzik,
Frontier Group
Spring 2009
Acknowledgments The authors thank Robert Puentes of the Brookings Institution, Ellen Dannin of the Penn State Dick- inson School of Law, Dennis Enright of NW Financial, and Michael Likosky of New York University’s Institute for Public Knowledge for their thoughtful review and insightful suggestions. Thanks also to Josh Bogus for his research support in the early phases of this project. Finally, thanks to Susan Rakov of Frontier Group and to Carolyn E. Kramer for their editorial assistance. U.S. PIRG Education Fund thanks the Ford Foundation for making this project possible. The authors bear responsibility for any factual errors. The recommendations are those of U.S. PIRG Education Fund. The views expressed in this report are those of the authors and do not necessarily reflect the views of our funders or those who provided editorial review. Copyright 2009 U.S. PIRG Education Fund With public debate around important issues often dominated by special interests pursuing their own nar- row agendas, U.S. PIRG Education Fund offers an independent voice that works on behalf of the public interest. U.S. PIRG Education Fund, a 501(c)(3) organization, works to protect consumers and promote good government. We investigate problems, craft solutions, educate the public, and offer Americans meaningful opportunities for civic participation. www.uspirg.org Frontier Group conducts research and policy analysis to support a cleaner, healthier and more democratic society. Our mission is to inject accurate information and compelling ideas into public policy debates at the local, state and federal levels. www.frontiergroup.org For additional copies of this report, or to obtain a detailed listing of completed and proposed road priva- tization projects across the country, please visit www.uspirg.org. Cover: Photo by Geoffrey Holman, istockphoto.com; photo modification by Harriet Eckstein Traffic sign images that appear on pages 5, 6, 17, 27, 27, 29 and 37 are from the Manual of Traffic Signs, by Richard C. Moeur (http://www.trafficsign.us/) Copyright 1996-2005 Richard C. Moeur. All rights are reserved. Design and layout: Harriet Eckstein Graphic Design
Table of Contents Executive Summary 1 Introduction 4 What Is Toll Road Privatization? 5 Privatization: Clarifying the Term 5 Practical Considerations: When Does Privatization Make Sense? 6 Defining Toll Road Privatization 6 The Rise in Toll Road Privatization 9 The Current State of Privatization 9 Why Privatization Proposals Have Become More Common 11 Vast Amounts of Private Money Are Seeking Toll Road Investments 16 The Pitfalls of Road Privatization 17 Loss of Public Control 17 The Public Will Not Receive Full Value 21 Private Companies Often Engage in Risky Financial Schemes 27 Problems Compounded By Excessively Long Contracts 29 Lack of Transparency 30 Inadequate Oversight Exists to Ensure the Public Interest is Protected 31 Protecting Against Bad Privatization Deals 35 Developing a General Approach to Toll Road Privatization 35 Principles to Ensure Any Deal Protects the Public Interest 37 Notes 39 Appendix A: Compensation and Non-Compete Clauses in Privatization Agreements 46 Appendices B and C of this report, which provide detailed lists of completed and proposed privatization projects, can be downloaded from www.uspirg.org/road-appendix
Executive Summary
R
oad privatization is a growing issue in Toll road privatization is becoming
the United States as politicians and increasingly prevalent in the United
transportation officials grapple with States.
budget shortfalls. Toll road privatization
takes two forms: the lease of existing toll • Between 1994 and early 2006, $21
roads to private operators and the con- billion was paid for 43 highway facili-
struction of new roads by private entities. ties in the United States using various
In both instances, private investors are “public-private partnership” models.
granted the right to raise and collect toll
revenue, a right that can amount to billions • By the end of 2008, 15 roads had
of dollars in profits for the shareholders. been privatized in 10 different states
Though these privatization deals seem – either through long-term highway
to offer state officials a “quick fix,” they lease agreements on existing highways
often pose long-term threats to the public or the construction of new private toll
interest. By privatizing roadways, officials roads.
hand over significant control over regional
transportation policy to individuals who • Currently, approximately 79 roads in
are accountable to their shareholders rather 25 states are under consideration for
than the public. Additionally, the econom- some form of privatization.
ics of these deals are such that the upfront
concession payments are unlikely to match • A few prominent examples of priva-
the long-term value of the higher tolls that tized roads include:
will be paid by future generations and not
collected for public uses. o The Indiana East-West Toll Road,
Public officials, therefore, should ap- which carries Interstate 90 approxi-
proach the idea of private toll roads with mately 150 miles across northern
great caution, knowing that the short-term Indiana and is a critical link be-
benefits are unlikely to outweigh the long- tween Chicago and the eastern
term costs. United States.
Executive Summary Figure ES-1. Privatization Projects Completed, Underway or Proposed, by State
For a detailed listing of completed and proposed privatization projects by state, please download
Appendices B and C of this report, available at www.uspirg.org/road-appendix.
o The Chicago Skyway, which links The upfront payments that states re-
downtown Chicago with the Indi- ceive are often worth far less than the
ana Toll Road. value of future toll revenue from the
road. Analysis of the Indiana and Chi-
o California’s SR 91 Express Lanes, cago deals found that private investors
which were originally built by a would recoup their investments in less
private entity to provide a speedier than 20 years. Given that these deals
connection between Orange and are for 75 and 99 years, respectively,
Riverside counties. the public clearly received far less for
their assets than they are truly worth.
Though privatization may offer
short-term relief to transportation bud- • The public loses control over
get woes, it often has grave implications transportation policy. Private road
for the public. concessions in particular result in a
more fragmented road network, less
• The public will not receive full ability to prevent toll traffic from be-
value for its future toll revenues. ing diverted into local communities,
Private Roads, Public Costsand often the requirement to com- • The public must receive fair value so
pensate private operators for actions future toll revenues are not be sold off
that reduce traffic on the road, such at a discount.
as constructing or upgrading a nearby
competing transportation facility. • No deal should last longer than 30
years because of uncertainty over fu-
• Public officials cannot ensure that ture conditions and because the risks
privatization contracts will be of a bad deal grow exponentially over
fair and effective when leases last time.
for multiple generations. No army
of lawyers and accountants can fully • Contracts should require state-of-the-
anticipate future public needs. Trans- art maintenance and safety standards
urban, for example, has control over instead of statewide minimums.
the Pocahontas Parkway in Virginia
for 99 years. • There must be complete transparency
to ensure proper public vetting of
In order to protect the public inter- privatization proposals.
est, public officials must adhere to six
basic principles in all road privatization • There must be full accountability in
agreements: which the legislature must approve the
terms of a final deal, not just approve
• The public should retain control over that a deal be negotiated.
decisions about transportation
planning and management.
Executive Summary Introduction
D
ebates about the privatization of question of public versus private provision
public services often devolve into of government services, it is a matter of
ideological squabbles about the where best to draw the line. There will
proper role of government versus the always be a role for both public and private
private sector. Advocates of privatization entities in meeting America’s transporta-
point to examples of government waste and tion needs. It is up to elected officials to
bureaucratic inertia to make the argument find the right balance to ensure that the
that the private sector can deliver services public gets the value, efficiency and safety
more efficiently. On the other side, op- it deserves from its transportation network
ponents of privatization offer stories of – particularly at a time when our transpor-
corrupt contracting and the insensitivity tation system is in dire need of repair and
of private entities to the broader public when resources are scarce.
interest to argue for broader government The task of government officials and the
involvement. public is to evaluate privatization proposals
Yet, all but the most extreme advocates rigorously – without ideological blinders
of privatization will acknowledge that there – to ensure that any such deals benefit the
are some circumstances in which govern- public interest.
ment must provide certain services directly. Public officials must ask tough questions
Few, for example, would feel comfortable if they are to safeguard the public interest.
taking bottom-line responsibility for the In this paper, we evaluate one particular
delivery of “justice” away from our court form of public-private partnership in trans-
system and giving it to a private, for-profit portation – toll-road privatization – and
corporation. Similarly, few opponents of suggest a series of guidelines public officials
privatization would insist that government should adopt to ensure that any potential
should never contract out to the private sec- private toll road deals benefit the public.
tor – whether for maintenance of the copi- We hope this paper will help public of-
ers in government offices or the production ficials navigate the difficult decisions sur-
of concrete for government buildings. rounding toll-road privatization and make
In other words, when it comes to the the right decisions to benefit the public.
Private Roads, Public CostsWhat Is Toll Road Privatization?
Privatization: the basic problem of persuading the
public that the terms of the partner-
Clarifying the Term ship are fair.1
G
overnment, the media, and the pri- The term “public-private partnership”
vate infrastructure industry use a is particularly ubiquitous, and woefully
variety of terms to describe efforts imprecise. Virtually all public programs
to transfer public services to the private have always involved some kind of partner-
sector. As one long-time scholar of infra- ship between public and private sectors.
structure privatization at Harvard notes, Medicare is a partnership between public
privatization has been packaged under a financing and services by private medical
variety of names. providers, for instance. All government
departments of transportation likewise
Governments have experimented with have a long tradition of using private ven-
many variants of privatization, often dors for various kinds of service provision.
coining special terms—such as “peo- Even transactions between two private
plisation” (Sri Lanka), “capitalization” companies involve some kind of partner-
(Bolivia), or “equitization” (Viet- ship with the public sector to underwrite
nam)—to distinguish them from the risks, define property rights, and enforce
standard fare. And many consultants contracts. Since “public-private partner-
now prefer to use the term “public- ship” can mean virtually anything, the
private partnerships” to emphasize term is of little descriptive value.
that a wide variety of forms of pub- The term “privatization” is more pre-
lic-private collaboration is possible. cise, denoting the transfer of traditionally
Such changes in terminology may public services or property to the private
be useful, but they do not eliminate sector.
What Is Toll Road Privatization? Practical • Third, privatization only succeeds
when private contractors’ perfor-
Considerations: mance is disciplined by ongoing
When Does competition. There must be multiple
contractors capable of submitting
Privatization bids, and contracts must be for a short
Make Sense? enough period to allow for unsatisfac-
tory performers to be readily
replaced.4
Practically speaking, privatization makes
sense for the public when certain condi- • Finally, privatization works best when
tions are met.2 the government officials making the
decision to privatize can be held
• First, privatization works best when accountable for the results of a
private companies have a proven deal.
comparative advantage over gov-
ernment agencies in providing a par-
ticular good or service. For instance,
at least before recycling programs
were created, a variety of exhaustive
studies concluded that because smaller
municipalities lack economies of scale, ? Defining Toll Road
those that used competitive contract- Privatization
ing for household garbage collection
had lower costs than comparable mu- In this report, we focus on evaluating
nicipalities that used public agencies proposals for toll road privatization to
for collection.3 determine whether privatization of toll
roads makes sense according to the criteria
• Second, the services that are priva- described above.
tized must be well defined, with Private toll road deals can involve lesser
clear criteria for the evaluation of or greater degrees of privatization. On the
success or failure. It is less prob- lesser side of the spectrum are small chang-
lematic, for example, to contract for es such as the hiring of private contractors
private delivery of a ton of cement or to mow grass or operate toll-collection sys-
for office windows to be washed each tems. On the other side of the spectrum is
Friday than it would be to contract out the construction of wholly privately owned
“justice” from the courts. and operated highways.
Toll road privatization: When an existing roadway is leased to
a private company for a concession fee, or when a private entity
finances new road construction in exchange for the right to operate
and collect rising tolls on that road.
Private Roads, Public Costs“Availability Payments” Versus Toll Concessions
B y retaining the public’s right to set and collect tolls while more narrowly pre-
scribing the private role, contracts that pay “availability payments” to private
operators have a number of advantages over private toll concessions. The public
retains greater control over transportation policy and will not be subject to non-
compete clauses. Nor is the public liable to be sued for compensation when policies
reduce toll traffic. Incentive clauses create a direct economic incentive to keep lanes
available and in good repair.
Availability payment deals still have many potential problems. Higher private
borrowing costs mean that deals will still tend to lose the public money over the
long term; and contract incentives still cannot anticipate future public needs. The
public interest protections listed in this report would also apply to deals that involve
availability payments. Moreover, the payments should not be overly generous com-
pared to what it would cost the public to make these lanes available themselves.
This paper focuses on two types of ar- One example of such a deal is an
rangements: when an existing roadway is agreement reached between the state of
leased to a private company for a conces- Florida and the Spanish company, ACS,
sion fee; and when a private entity finances for the construction and operation of
new road construction in exchange for the express toll lanes alongside I-595. Under
right to operate that route over a specified the arrangement, Florida will make annual
period of time. These arrangements share “availability payments” to ACS over a
two characteristics. First, the government 35-year span to compensate the company
transfers rights tantamount to ownership for the cost of building and operating
to a private entity. Second, the private the highway. The payments to ACS are
entity receives access to toll revenues and incentive-based, but the state of Florida
the right to raise tolls. retains the power to set toll rates and
There are many types of arrangements collect the revenue.5 The Florida deal,
that fall just outside of this definition while clearly a “public-private partnership”
of toll road privatization. For example, with a strong private-sector component,
governments have signed contracts with does not fit strictly within the definition of
private entities to perform virtually all of toll road privatization used in this report.
the services a government would perform Another complicating factor in defining
in building and operating a highway privatization projects is the use of non-
– ranging from design to financing to profit intermediaries to secure preferential
ongoing maintenance – but without grant- treatment for privatization arrangements
ing the private entities direct access to toll under the U.S. tax code, IRS Revenue
revenues. In these cases, government still Ruling 63-20. Local governments have
maintains ownership of the road as well as traditionally issued tax-exempt debt in
a direct ability to withhold public funds order to build schools, court houses or
from the private operator if the terms of hospitals. Today, however, private com-
the contract are not upheld. panies establish these so-called “63-20”
What Is Toll Road Privatization? non-profits so that privatized projects can 63-20s can fit into the definition of “priva-
achieve the same favorable credit terms as tization” used in this report.6
public agencies. In order to establish a 63- Describing proposed toll road privati-
20, the local government must approve its zation projects with exactitude is difficult
charter and the issue of its debt, giving the because the precise relationship between
government title to its assets after the debt a government and a private entity in oper-
is repaid. However, a loophole in the law ating a road may not be determined until
allows an arrangement in which the gov- a contract is finalized. As a result, while
ernment can then effectively disown the we have attempted in this paper to use a
non-profit, which limits the government’s relatively narrow definition of privatization
ability to be involved in the operations of for completed projects, our list of proposed
the company. By law, 63-20s cannot make projects includes a much broader range of
a profit, but private companies can cir- potential arrangements. While some of
cumvent this restriction by receiving their these roads may end up as fully privatized
compensation through development fees highways, others will not. Including the
that are charged for consulting services. broad range of potential projects is valuable
Though obviously an indirect way of earn- despite this problem because it conveys the
ing a return on investment, this contriv- variety of potential privatization projects
ance has nonetheless become a common across the country and the potential stakes
way for private companies to seek publicly involved for the public.
subsidized capital, and projects financed by
Private Roads, Public CostsThe Rise in Toll Road Privatization
of public-private partnerships in highway
CONSTRUCTION
The Current State of construction and operation.7
AHEAD
Privatization As of the end of 2008, 15 roads had
been privatized, and approximately 79
roads were either in the process of being
T
hough rare only a decade ago, road built by private entities or being consid-
privatization has become increasingly ered for privatization. (See “Tallying Up
common in the United States. Cur- the Number of Privatization Projects.”)
rently, 24 states and Puerto Rico have leg- This privatization activity represents a
islation or regulations authorizing the use substantial amount of money: from 1994
Tallying Up the Number of Privatization Projects
I n counting the number of privatization projects across the United States, we
attempted to be as inclusive as possible, including projects at every stage of
consideration from idle discussion to full-fledged proposals. Information about
privatization proposals was gleaned from a variety of sources, which are described
in detail in Appendices B and C to this report, which can be downloaded from
www.uspirg.org/road-appendix.
The privatization field is extremely fluid. Some proposed projects may have been
dropped; others may have been put on hold. New projects may also have been pro-
posed since the research for this paper was completed. Moreover, some proposals,
particularly at the early stages, are vague about the role of private investment and
involvement.
In other words, the number of privatization projects described here represents a snap-
shot in time and a relatively broad view of what constitutes a privatization project.
The Rise in Toll Road Privatization Figure 1. Privatization Projects Completed, Underway or Proposed, by State
For a detailed listing of completed and proposed privatization projects by state, please download
Appendices B and C of this report, available at www.uspirg.org/road-appendix.
to early 2006, $21 billion was paid during seeking to build infrastructure. Accord-
this time period for 43 highway facilities ing to World Bank records, infrastructure
in the United States using various models privatization outside of the United States
(including models other than those consid- reached a peak of over $110 billion per year
ered in this report).8 These numbers may in 1997 and 1998.11
rise as more states attempt to overcome Many infrastructure privatization deals
severe short-term budget deficits and meet became high-profile failures. Two dozen
unfunded transportation needs.9 private toll roads went bankrupt in Mexico
Common in the less-developed world after 1994. The Thai government seized
for the last couple of decades, infrastruc- one railroad that had been in private hands
ture privatization had not taken root in the in 1993. Britain renationalized its rail sys-
United States until recently.10 During the tem from Railtrack, the private company
1990s, infrastructure privatization became that had purchased the rail system, in
increasingly popular in East Asia and in 2001.12 A World Bank study of over 1,000
Latin America, where Enron was a major infrastructure projects in Latin America
investor. In those countries, unlike in the and the Caribbean between 1982 and
United States, access to long-term capital 2000 found that 55 percent of privatiza-
was a major problem for governments tion contracts in transportation and 75
10 Private Roads, Public Costspercent in water and sewer had been rene- budget, while money for major repairs is
gotiated, most during the first few years.13 taken from the Division of Capital Asset
Twenty-one toll road projects in Hungary, Management, a separate agency. This set-
Indonesia, Mexico, and Thailand were sub- up clearly creates an incentive for the de-
sequently taken over by the government.14 partment of transportation to under-invest
By the early years of the current decade, the in road maintenance, because a separate
volume of privatization deals had returned agency will be responsible for repairs.17
to the lower levels of the early 1990s. Additionally, even when federal funds for
maintenance are provided, public officials
often divert them to the construction of
new roadways, as a ribbon-cutting cer-
emony tends to carry more political weight
than maintenance projects. The result is
EXPRESSWAY
AHEAD
Why Privatization deferred maintenance which necessitates
Proposals Have expensive repairs in the future.
State governments today face immedi-
Become More ate budget crunches due to rising health,
Common pension, and unemployment costs, coupled
with declining revenue. State legislators,
who have already closed $40 billion in
Despite these experiences, privatization budget gaps, face an additional $131 billion
is becoming increasingly common in the shortfall between now and the end of the
United States as state governments attempt 2010 fiscal year.18 According to William T.
to overcome severe budget shortfalls. This Pound, executive director of the National
trend has also been encouraged by federal Council of State Legislatures, “These
policies meant to facilitate privatization budget gaps are approaching those seen
agreements. in the last recession, which were the worst
since World War II, and show every sign
Budget Squeeze for of growing larger.”19
Transportation Rising costs and declining revenues
Roads across the country are under strain limit states’ ability to use general revenue
due to growing congestion and years of funds to address transportation needs.
insufficient investment in maintenance. Meanwhile, gas taxes, the traditional
The American Society of Civil Engineers mainstay of transportation funding, have
has graded the overall condition of the not kept up with inflation. For example,
nation’s infrastructure a “D,” and predicts states’ gas taxes lost 43 percent of their
that $200 billion per year must be spent to value during the 1970s, 80s, and 90s.20 The
maintain and improve the quality of the federal gas tax, last increased in 1993, has
nation’s roads and bridges.15 This level of done only slightly better. To complicate
investment will put a tremendous strain on matters, Americans have begun to drive
state budgets, already experiencing short- less in the past year, further reducing gas
falls due to declining revenue. tax revenue.
Part of the problem is perverse rules Furthermore, over the past few years,
that discourage investment in maintenance construction costs have been rising due to
while encouraging construction of new rapid inflation in the price of construction
roads.16 For example, in Massachusetts, materials and the increased consolidation
the funds for highway maintenance come of the construction industry. Though the
from the Department of Transportation’s recent financial crisis has led to a deflation
The Rise in Toll Road Privatization 11in construction costs, the historical trends In the context of great investment needs
have contributed to the current shortfall in and stagnant revenues, the huge upfront
transportation budgets. Over the past five payouts of toll road privatization have obvi-
years, the cost of materials for highway and ous short-term appeal.
street construction, as measured by the
Producer Price Index (PPI), has increased Political Benefits of Privatization
by 63 percent, a rate far higher than the Privatization of roads offers elected of-
general rate of inflation over the same ficials political benefits beyond the ability
period.21 In particular the cost of crude to avoid potentially unpopular tax increases
oil has led to very high costs for asphalt to pay for transportation. In the short
and diesel, two of the most basic construc- term, privatization promises a huge budget
tion materials used in highway and street windfall, especially for privatization of
construction. existing roads, which creates budget slack
While material costs have been increas- and an ability to dedicate resources to other
ing, the number of bids that states receive favored projects. New private roads offer
for contracts has been decreasing. While special opportunities for credit-taking and
not as significant a factor as the cost of ribbon cutting ceremonies. In either case,
materials, there has been a noticeable the long-term financial downside, particu-
trend among states indicating that fewer larly the loss of toll funds and rising toll
contractors are responding to requests for rates paid by drivers, often is overshadowed
proposals. According to a survey of the by the short-term windfall.25 For instance,
nation’s state transportation agencies, the the Indiana Toll Road deal used a 75-year
reasons for this include 1) increased con- lease to finance a 10-year transportation
solidation; 2) increased work with the same plan. Whatever structural budget shortfalls
number of contractors; 3) downsizing of the Indiana faced before the deal will return
construction workforce; and 4) increased in the 11th year , but the state will need to
technical requirements in contracts.22 As face these shortfalls without revenue from
fewer contractors respond to competitive its toll road.
bid requests, states will be limited in their Privatization may also be attractive to
choices to find the best contractor for the elected officials because it gives them po-
lowest price, and prices will increase. Over litical cover for toll hikes they fear will be
time this could become a more serious unpopular. Potential investors claim that
factor behind highway construction cost by outsourcing toll collection to a private
inflation. company, drivers’ anger will not be direct-
As a result of revenue shortfalls and ed at the politicians who authorized the toll
historically rising costs, states are increas- hikes. Moody’s bond rating agency, after
ingly unable to build and maintain high- conceding that governments can generate
ways at traditional levels. According to the these same upfront payments by borrow-
American Association of State Highway ing against future toll collections without
and Transportation Officials, the federal privatization, offers the counterpoint
Transportation Trust Fund, used for state that, “If they pursue the option [without
and local projects, is projected to run into privatizing], governmental authorities
shortfall during 2009 and will need to re- must take responsibility for their own toll
duce payments by 42 percent the following raising decisions, rather than distancing
year unless new revenues are obtained.23 themselves from these decisions through
Many state-level transportation trust funds a long-term concession to a private en-
are also forecast to run into shortfall in tity.” 26 Fitch bond rating service, similarly,
coming years.24 lists as a merit of toll road privatization, the
12 Private Roads, Public Costsability to “distance government from toll holders of road concession deals that last
increases.” The report explains that, “the longer than the expected life of a road
political risk related to toll rate increases (normally 40 years or more) as owners for
could be minimized by transferring the tax purposes and allows them to depreciate
authority within an overall rate-setting the value of those assets at an accelerated
framework to the private sector.”27 rate of 15 years. Senator Jeff Bingaman has
described this as, “the tax tail wagging the
Federal Rules Promote dog: Exceptionally long leases in order to
Privatization recover capital outlays on an accelerated
Policies by the Internal Revenue Service schedule.”31 As an overview study by the
and particularly the Department of Trans- Transportation Research Board of the
portation (DOT) have also promoted road National Academies concludes, “This
privatization. amounts to a government subsidy to the
The tax code encourages privatization in concessionaire that may significantly re-
a number of often unintended ways. As dis- duce corporate taxes if the project proves
cussed earlier, many private projects take profitable.”32
advantage of the IRS 63-20 rule to utilize The U.S. Department of Transporta-
benefits meant for nonprofit organizations. tion also subsidizes private road projects
The federal tax code also treats private in a number of ways. The Transportation
Aggressive Lobbying by the Private Toll Road Industry
P oliticians across the country have been lobbied extensively by the toll road
industry hoping to profit off the public’s infrastructure. These lobbyists have
made sizeable campaign contributions to numerous politicians across the country,
hoping to encourage the adoption of road privatization projects.28 Though legal,
these contributions raise the question of whether politicians can make an unbiased
decision in the public’s interest when so much money is at stake. The following
provides a sample of some of these contributions:
• Zachry Construction Corporation, a company competing for Trans Texas
Corridor projects, contributed $888,996 to Texas politicians from 2003 to
2008.29
• J.P. Morgan Chase, a member of A2 Transportation Partners, a consortium
bidding to operate the Alligator Alley, contributed $100,000 to the Florida
Democratic Party in 2002, and another $15,000 in 2008.
• Abertis Infrastructures, a Spanish based road management company, spent
$280,000 in 2007 and $465,000 in 2008 on lobbying efforts at the federal
level.
• Employees of UBS, which was part of the financing team involved in the
proposed bid for the Pennsylvania Turnpike, donated $13,000 to Governor
Ed Rendell of Pennsylvania.30
The Rise in Toll Road Privatization 13Infrastructure Finance and Innovation Act due to significant public opposition to the
(TIFIA), passed in 1998, established funds project, TxDOT eventually rejected the
for the federal DOT to spend on secured proposal in favor of a bid by the North
(direct) loans, loan guarantees, and standby Texas Toll Authority (NTTA), a public
lines of credit to attract private investment entity. The deal with the NTTA was esti-
in surface transportation infrastructure.33 mated by some analysts to save the public
The TIFIA website lists $5.8 billion in past $2.3 billion versus the bid from the private
or pending financing provided by the de- vendor.37 In response, the FHWA sent
partment as of February 2009, with most of a letter to TxDOT threatening to with-
it devoted to highway projects.34 The DOT hold future federal funds for the project.
also publishes model legislation for states FHWA argued that acceptance of NTTA’s
and a newsletter to encourage privatization bid violated federal regulations requiring
of roads.35 a “fair and open” competitive process and
The biggest incentives are for private rules prohibiting public entities from bid-
“green field” deals in which companies ding against private companies. While the
construct a new toll road and then oper- FHWA eventually backed down from its
ate it and collect tolls. The federal DOT threat, many in Texas saw the exchange
allocates over $2 billion per year in credit as an unjustified use of federal powers to
that can be used to subsidize private bor- influence state decisions.38
rowing for highway and surface freight In a more recent signal of its support for
transfer projects by exempting private privatization, the Federal Highway Admin-
bonds from taxes. The DOT also grants istration issued a rule in the Federal Regis-
private projects special federal waivers ter requiring any future reorganization of
that suspend normal requirements on public agencies to be justified on market
contracting, project finance, compliance concession terms. What this essentially
with environmental requirements, and means is that any time a state agency at-
right-of-way acquisition. For example, tempts to reorganize or transfer authority
Oregon and Texas both received federal over a toll road, it must first undergo an
waivers allowing them to begin negotiating analysis to determine what price a private
contracts before the environmental review company would bid to operate the highway
process had been completed.36 under a concession agreement. When this
In addition to passing favorable regula- concession price is determined, the public
tions, the federal DOT under the Bush entity would be required to charge that
Administration actively lobbied state amount to the other agency that is tak-
governments to approve privatization ing over the roadway. Thus, if TxDOT
agreements. Then-Secretary of Transpor- wanted to transfer authority over a road to
tation Mary Peters traveled to numerous the NTTA because it thought the NTTA
states to encourage their use of private was better suited to operate that highway,
investment, and tolling became an official TxDOT would be forced to charge NTTA
key component of the DOT’s congestion an amount equivalent to what a private
mitigation initiatives. In one instance, the company would bid. After a large number
Federal Highway Administration (FHWA) of private agencies and other stakeholders
even threatened Texas for pulling out of an voiced concern during the public comment
agreement with a private company. The period, the U.S. DOT revised the rule to
Texas Department of Transportation (Tx- give agencies wide latitude to determine
DOT) initially accepted a proposal from the criteria for market valuation. While
Cintra, a private company, to construct the immediate effect of this ruling has
and operate State Highway 121. However, been muted, it nonetheless set a troubling
14 Private Roads, Public Costsprecedent by establishing private conces- been accusations of conflicts of interest by
sion deals as the standard. companies which analyze these deals and
prepare profit forecasts. In fact, a study of
The Potential for Low-Risk Profits 10 private U.S. toll roads built since the
In addition to the federal subsidies for mid-1990s found that half have not met
green field deals, a number of factors their traffic projections.39
make road privatization attractive to in- Additionally, private infrastructure
vestors. One is the relative reliability of deals often involve heavily leveraged debt
toll revenues. Compared to stocks and and the trading of long-term risk, much
other investments, toll road privatization like the mortgage industry in recent years.
is considered a relatively secure source of Some analysts worry that such a model
long-term revenue. In addition, once a toll will not be sustainable.40 A recent analysis
road concession is signed, it is very difficult by PricewaterhouseCoopers describes the
to undo under U.S. contract laws. Toll destabilizing pattern of leveraging debt and
profits reduce investors’ portfolio risk as selling the risk to others that characterize
well, because the returns on these invest- both the private infrastructure market
ments depend chiefly on traffic flow, which and the now-infamous subprime mortgage
has historically been “recession-proof.” industry:
Though there have been signs recently of
reduced driving, toll roads are still consid- In the early 2000s, an increas-
ered a safe investment, especially in light of ing number of large project finance
the current problems on Wall Street. lenders aggressively cut back on their
There is some evidence that the reputa- project and infrastructure finance
tion of infrastructure investments as “safe” lending business or amalgamated
may be overstated. Many new private toll them into their wider leverage fi-
roads have underperformed, and there have nance business. This led to the now
Governor Corzine of New Jersey decided not to privatize or lease the Atlantic City Expressway,
Garden State Parkway, and New Jersey Turnpike (pictured here). Governor Corzine previously
served as CEO for Goldman Sachs, which advised structuring of the road privatization deals in
Indiana and Chicago. (Photo: Mark Gordon)
The Rise in Toll Road Privatization 15well-practiced strategy of “originate investment funds raised $25 billion in
and distribute,” often cycled through 2008, up tenfold from just $2.4 billion in
the dedicated securitization struc- 2004 (though down from the peak invest-
tures. … These were initially used ment of $34 billion in 2007).42 A total of
to demonetize a bank’s balance sheet 77 such funds were active in the market
but then took on a life of their own at the end of 2008, seeking $92 billion in
as they became conduits for banks capital. 43
to originate business, take a fee, and The recent financial crisis has caused
then sell on the exposure.41 investment in private infrastructure funds
to dry up, and has eroded the stock prices
Despite these concerns, there remains of many funds. Yet, some fund managers
the perception that infrastructure invest- believe that the financial crisis will be
ments are safe and sustainable. a boon to infrastructure investment in
the long term. As Matthew Vickerstaff,
the global head of infrastructure and as-
set based finance at Societe General in
New York, explained in BNET Financial
Vast Amounts of Services, “The current crisis is good for
$ Private Money Are infrastructure funding because there will
be increasing pressure on states, cities and
Seeking Toll Road provinces to balance their budgets. They
Investments will need to spend both for social and
transportation infrastructure. They’ll need
private money and private-public part-
With all these factors favoring toll road nerships.”44 Thus, the number of private
deals, it is no surprise that private investors road deals may increase as state and local
have been trying to take advantage of the governments become more desperate for
profit opportunities. Private infrastructure short-term infusions of cash.
16 Private Roads, Public CostsThe Pitfalls of Road Privatization
T
he economics and governance of quality of the roads, the many costs of driv-
privatized roads are highly problem- ing and car ownership, the availability of
atic. For existing roads, outsourcing high-quality and affordable public transit
borrowing against future toll revenue to alternatives, and the development of future
a private entity is likely to generate less land-use patterns. What may seem benefi-
money than a public entity could produce cial from a narrow profit perspective does
with the same tolls. This is the case be- not necessarily benefit the broader public
cause a private toll road operator will have interest.45 Public control of key toll roads
higher borrowing costs and must divert is therefore necessary to ensure coherent
some revenues to shareholder profits. In transportation planning and policy making
addition to these fiscal problems, long-term over long periods of time.
road contracts pose other serious threats Any driver knows how events that take
to the public interest. These include frag- place on one road affect other connecting
mentation and loss of public control over and alternative routes. Thus, toll rates,
transportation policy, and the inability to maintenance and safety standards, as well as
plan for future public needs in contracts congestion on a toll road affect the number
that stretch over multiple decades. of cars using alternative means of trans-
portation, including local roads and public
transit. Decisions about how to operate and
manage major roadways actually create traf-
fic policy for an entire jurisdiction.
New toll roads or additional lanes can
have particularly profound consequences
Loss of Public Control for future land-use and development
practices as well as for a state’s energy and
Transportation policy has tremendous im- environmental policies, including efforts to
pacts on quality of life, health, and the cost reduce oil dependence, improve air qual-
of living. It determines the level of traffic ity, and curb emissions of global warming
congestion and air pollution, the safety and pollution.
The Pitfalls of Toll Road Privatization 17Road privatization experiences across provisions are necessary for private entities
the country have shown that a private to be able to sell bonds. If such a provision
operator’s profit motives lead to different were not included, the state could eas-
management decisions than government ily build a free, competing roadway that
might pursue. Examples from recent road would divert traffic from the private toll
privatization projects illustrate these po- road, eventually forcing the company into
tential dangers. bankruptcy. This actually occurred in New
Jersey with the Beesley’s Point Bridge. The
Non-compete Clauses private bridge was originally built in 1927,
Toll road investors want assurances that but in the 1950s a competing public bridge
traffic levels will meet or exceed predic- was constructed only 300 yards away. Af-
tions, even in the event of toll increases. ter the construction of the public bridge,
Some privatization contracts therefore revenues from the Beesley’s Point Bridge
explicitly limit states’ ability to improve plummeted, and the bridge was eventually
or expand nearby transportation facilities. closed to traffic in June 2004. Recently,
The U.S. Department of Transportation, Cape May County took over the bridge.48
in its Report to Congress on Public Private Even when privatization agreements do
Partnerships (December 2004), strongly not include an explicit non-compete clause,
supported the inclusion of such “non- there may be an understanding between
compete” clauses to help attract private the state and the private operator. For
investment. example, Virginia had an “understanding”
In Colorado, one deal went so far as with the private operator of the Dulles
to require adjacent municipalities to add Greenway not to make improvements on
stop lights and reduce speed limits on competing roads ahead of schedule (though
local roads as a way to reduce potential VDOT eventually reneged on this under-
competition.46 Though the operator of the standing).49 Concession agreements in both
road was technically a public entity, it was South Carolina (Southern Connector) and
heavily financed by private investors who Virginia (Pocahontas Parkway) include
demanded protection of future revenues. vague language that prohibits the state
California, which used a private concession DOTs from pursuing activities that could
deal to create new toll lanes in the median be considered competitive in nature.50
of State Road 91, was subsequently forced
to buy back the road because non-compete Compensation Clauses
clauses prevented the state from improv- In place of non-compete clauses, many
ing the corridor and led to high-profile agreements now include compensation
litigation. Similarly, Indiana is prevented provisions requiring the state to com-
from building a four-lane, divided highway pensate the private operator if its actions
more than 20 miles long (or expanding a negatively affect toll revenues. The Indiana
current highway to Interstate standards) deal, for example, requires the state to pay
within 10 miles of the East-West Toll investors compensation for reduced toll
Road for at least 55 years without providing revenue when the state performs construc-
compensation to the toll road operator for tion, such as adding an exit or building a
lost revenue.47 mass transit line down the median. This
Non-compete clauses are included in compensation would add significantly to
many privatization contracts to protect the the cost of construction, and the state
investors. A report by the Texas Legislative could potentially not afford to do the work
Study Committee on Private Participation it would otherwise perform. As an added
in Toll Contracts claims that non-compete complication, the exact level of these fu-
18 Private Roads, Public Coststure payments might be subject to dispute for income lost from diverted vehicles. But
and lawsuits. Already, the state of Indiana from the public perspective, the diverted
has had to reimburse the private opera- traffic may clog local roads, increasing
tor $447,000 for waiving toll collections congestion and pollution in local com-
to assist in evacuations from flooding in munities. There was substantial traffic
September 2008. Appendix A provides ad- diversion, particularly of trucks, after the
ditional examples of these agreements. 1991 New Jersey Turnpike toll hike. New
These compensation clauses are in- Jersey responded by rolling back some of
imical to comprehensive transportation the toll hike for trucks to entice them back
planning. Transportation policy should onto the Turnpike, a move that would not
be made according to what is best for the have been possible under privatization, at
public, not conditioned by avoiding extra least not without paying the private firm for
payments to a private operator. the lost projected revenue. From a private
toll road operator’s perspective, gridlock
Profit-Driven Transportation and pollution on local roads may actually
Planning be desirable because drivers will be more
Some privatization deals include monetary likely to pay still-higher tolls. A study by
incentives for the state to divert traffic to researchers at Penn State University and
the toll roads or decrease safety standards Wayne State University found that the
in an effort to boost profits. Decisions to private operation of toll roads could lead
build new roads are supposed to be made in to increased accidents and maintenance on
accordance with long-term regional plans. nearby public roads and lower quality of
The Texas contract with Cintra-Zachry for life for residents on parallel roadways. The
SH-130 contains incentives for the state to study also found large economic losses to
raise the speed limit on the private road. nearby communities associated with diver-
The contract says that if the speed limit sion of truck traffic.53
remains at 70 mph, the state will receive It is important to recognize just how
4.65 percent of revenue up to a certain much control over transportation policy
threshold. However, if the state raises the is granted to private operators through
speed limit to 80 mph, it would receive 9 toll hike schedules for private operators.
percent of the revenues.51 Though state If the rules for increasing toll rates under
officials have maintained they will not base the Chicago Skyway toll road deal had ap-
speed limit decisions on monetary gain, plied to New York’s Holland Tunnel since
this clause does create a strong incentive its inception, that roadway could presently
for the state to toss aside safety, energy, and charge a one-way toll of more than $180.54
environmental policy in favor of cash. As a practical matter, an operator would be
unlikely to charge that price because nearly
Dangerous and Costly all drivers would instead take alternate
Traffic Diversions routes. But the operator would be free to
The goal of private toll operators is to find charge whatever the market would bear to
the right balance of toll rates and traffic maximize profits. Most agreements allow
to produce the maximum amount of rev- toll increases to match inflation or GDP,
enue.52 Private toll operators can generally whichever is higher. This may not sound
increase revenues by raising toll rates, even excessive. But according to Professors
though the higher rates will cause some Peter Swan and Michael Belzer, nominal
truck and car drivers to choose alternative GDP has increased an average of over 7
routes. For the private operator, the ad- percent for the past 50 years. Thus, with
ditional toll rates may more than make up this average GDP growth, truck tolls could
The Pitfalls of Toll Road Privatization 19increase 3,976 percent over the life of the outlays. Private investors want protection
roadway under the terms of the Indiana against large increases in safety or main-
Toll Road agreement.55 Moreover, in order tenance costs. As a result, road contracts
to maximize profits, the toll operator can typically require private operators to meet
also offer discounts to particular types of only generally applicable safety standards.
motorists and encourage traffic between In order to obtain state-of-the-art highway
certain exits or at certain times. Together, safety, Indiana must pay the additional
these provisions enable the operator to cost of constructing and maintaining the
dictate who drives on the toll roads and at road to the higher standards, as well as to
what times. compensate the private company for any
lost tolls caused by the construction.
In the future, new standards may include
Inability to Guarantee things such as new surfaces, embedded
State-of-the-art Safety and road sensors, or technologies that are not
Maintenance Standards currently envisioned. The Chicago De-
The public may want major traffic arteries partment of Transportation, for example,
to have cutting-edge safety technologies has recently conducted a study which found
and traffic management. Private road that using a new type of road surface that
operators, on the other hand, have an in- includes recycled rubber is slightly more
centive to reduce costs by avoiding these expensive than regular asphalt but creates a
Loss of Public Control: Camino Colombia Toll Road
T he Camino Colombia Toll Road is a prime example of problems with lack of
public control associated with privatization. The Camino Colombia Toll Road,
located in Texas, first opened to traffic in 2000. Completely financed by private
investors at a cost of $90 million, this road was intended to support the increased
traffic associated with the North American Free Trade Agreement.56 Politicians
predicted the road would be a “generator of regional economic activity” and provide
congestion relief. However, the road fell far short of its projections. An indepen-
dent auditor predicted that the Camino Colombia road would generate $9 million
in revenue within the first year, but instead it only received $500,000.57 By 2004,
the toll road had failed and bondholders foreclosed on the remaining $75 million
note. The road was sold at an auction for $12.1 million to John Hancock Financial
Services Inc. TxDOT had initially bid $11.1 million for the road, but was unwill-
ing to increase its offer. After purchasing the roadway, John Hancock Financial
Services, Inc. immediately closed the road to all traffic. This move forced TxDOT
to pay the private company $20 million to purchase the road, allowing it to finally
reopen the route after five months.58
This clearly shows one of the pitfalls of privatization. Texas lost complete control
of transportation along the toll road, while a private entity had the right to close the
route regardless of the public consequences. Unfortunately, many transportation
officials do not appear to have learned from this experience, and future privatiza-
tion agreements may have similar results.
20 Private Roads, Public Costsnumber of public benefits. It reduces strain – be included with any contract; but they
on sewers and other water infrastructure represent yet another area that govern-
because the surface is porous enough to ment lawyers and accountants will need
allow water to return back into the ground. to monitor.
It also creates an outlet for used tires that
are otherwise difficult and costly to dispose
of. Despite the potential public benefits, a
private operator would most likely be dis-
suaded from upgrading to this standard by
the extra costs.59
TOLL
AHEAD
The Public Will Not
Even if high maintenance standards Receive Full Value
are specified in a contract, without proper
oversight private companies will have Putting a fair dollar value on a long-term
a monetary incentive to under-invest. toll road lease is difficult. As events of
Private operators may seek investments the last year have shown, the state of the
that help attract drivers, but these are not broader economy and financial markets can
necessarily the kind of safety, environ- change quickly and dramatically, leaving
mental, and other investments that public business plans and state budgets in ruins.
policy requires. Unfortunately, states have The current crisis in state budgets makes
exhibited an inability to properly oversee large up-front payments for toll roads dif-
private contractors in the past. The Fed- ficult to resist. To give a sense of scale, the
eral Highway Administration, in a review $1.8 billion sum paid for the 99-year lease
of quality assurance activities, found on Chicago’s Skyway is enough to pay
numerous deficiencies “such as a lack of every resident in Chicago a one-time sum
independent sampling of highway materials of $643.61 The consortium that purchased
for verification tests; inadequate statisti- a 75-year lease to operate the Indiana Toll
cal comparisons of the test results; and Road paid an even greater sum: $3.8 billion.
insufficient state control of test samples, Potential privatization deals for the New
sampling locations, and testing data.” They Jersey and Pennsylvania turnpikes men-
also found that pavement on highways is tioned payments between $10 billion and
deteriorating faster than expected, which $30 billion. For elected officials struggling
they attribute in part to the weaknesses in to plug chronic budget shortfalls, these
oversight.60 short-term windfalls are enticing.
Private operators will have a greater in- As impressive as the upfront payments
centive not to invest in improvements and are, they pale in comparison to the likely
maintenance as they come under financial value of the future tolls traded for them.
distress or approach the end of a contract. The sums are smaller than public entities
Private operators should be required to could generate doing the same financing
provide prior safeguards against this pos- themselves.
sibility. For instance, for I-495 in Virginia Financial analysis by experts in as-
the operator is required to provide a letter set valuation confirms that privatization
of credit or performance bond that the deals have failed to supply full value for
DOT can use if the roadway is not returned the future tolls that private companies are
in proper condition. Public agencies can expected to collect.
also retain a portion of tolls during the final
years of a contract and dispense them only • Analysis of the Indiana and Chicago
if facilities are returned in good condition. deals by Dennis Enright of NW
These kinds of measures can – and should Financial, a New Jersey investment
The Pitfalls of Toll Road Privatization 21You can also read
