Road Privatization: Explaining the Trend, Assessing the Facts, and Protecting the Public

9/18/2007

Executive Summary

Privatization of toll roads is a growing trend. During 2007, sixteen states had some privatized road project formally proposed or underway. In the last two years Indiana and Chicago signed multi-billion dollar private concession deals for public roads for 75 years and 99 years respectively. As a result of these deals, toll rates on these roads will increase steadily and revenues will be paid to private company shareholders rather than to the public budget.

Encouraged by the enormous anticipated profits that private road operators will reap from these deals, Wall Street investors and high-priced consulting firms have promoted similar deals to other states and local governments. Although offering a short-term infusion of cash, privatization of existing toll roads harms the long-term public interest. It relinquishes important public control over transportation policy while failing to deliver the value comparable to the tolls that the public will be forced to pay over the life of the deal.

Proposed deals to construct new roads or bridges that would be privately operated are a more complicated matter. There may be instances where private companies can deliver services that the public sector currently lacks and can not efficiently create. However, private deals for new construction should also follow the principles outlined below to adequately protect the public interest. Any potential advantages of privately construction should be weighed against the disadvantages of private financing and control.

Governments have a long history of outsourcing service delivery on public thoroughfares. Private companies, for instance, operate gas stations and food service at public rest stops. But the public interest is best served by outsourcing only those functions where public capacity is lacking and where continual competition exists for privately provided service.

In general, privatization makes sense only for activities where the private sector has a clear comparative advantage over public provision of those same services. The common characteristics of road privatization deals are that they enlist a private intermediary to borrow large sums of money backed by a schedule to collect multiple decades of steadily increasing toll rates. Private proposals should thus be judged according to the relative costs and benefits of enlisting this intermediary to borrow and to hike tolls. Governments can borrow upfront sums at substantially lower cost than can private companies. Government is also more democratically accountable than private companies when it comes to setting tolls. (In fact, according to a chorus of investment analysts, a chief contribution of the private intermediary is precisely that it can diminish public accountability for future toll hikes.) Thus toll road concessions are a bad idea precisely because they outsource activities where the private sector is less capable of serving the public.

In addition to an inability to ensure that the public will receive the full value for its future toll revenues, privatization of toll roads entails a number of additional problems. Over the long-term, these may be of even more serious concern:

• Loss of public control of transportation policy due to a fragmented road network, and an inability to prevent toll traffic from being diverted to local communities, or to change traffic patterns on toll roads without paying additional compensation to road operators.

• An inability to ensure fair or effective privatization contracts due to leases that last for multiple generations and therefore can not fully anticipate future public needs.

• The upfront privatization payoff is a short-term budget fix that does not address long-term budget problems and requires drivers and taxpayers to pay more over the long term.

For both existing toll roads and new construction, the safeguards to protect the public interest against bad privatization deals can be expressed in seven basic principles:

• Public control retained over decisions about transportation planning and management;

• Fair value guaranteed so future toll revenues won’t be sold off at a discount;

• No deal longer than 30 years because of uncertainty over future conditions and because the risks of a bad deal grow exponentially over time;

• State-of-the-art maintenance and safety standards instead of statewide minimums;

• Complete transparency to ensure proper process;

• Full accountability in which the Legislature must approve the terms of a final deal, not just approve that a deal be negotiated; and

• No budget gimmicks because a deal must make long-term budgetary sense, not just help in the short term.