Private Roads, Public Costs

Executive Summary

Road privatization is a growing issue in the United States as politicians and transportation officials grapple with budget shortfalls. Toll road privatization takes two forms: the lease of existing toll roads to private operators and the construction of new roads by private entities. In both instances, private investors are granted the right to raise and collect toll revenue, a right that can amount to billions of dollars in profits for the shareholders.

Though these privatization deals seem to offer state officials a “quick fix,” they often pose long-term threats to the public interest. By privatizing roadways, officials hand over significant control over regional transportation policy to individuals who are accountable to their shareholders rather than the public. Additionally, the economics of these deals are such that the upfront concession payments are unlikely to match the long-term value of the higher tolls that will be paid by future generations and not collected for public uses.

Public officials, therefore, should approach the idea of private toll roads with great caution, knowing that the short-term benefits are unlikely to outweigh the long-term costs.

Toll road privatization is becoming increasingly prevalent in the United States.

• Between 1994 and early 2006, $21 billion was paid for 43 highway facilities in the United States using various “public-private partnership” models.

• By the end of 2008, 15 roads had been privatized in 10 different states–either through long-term highway lease agreements on existing highways or the construction of new private toll roads.

• Currently, approximately 79 roads in 25 states are under consideration for some form of privatization.

A few prominent examples of privatized roads include:

• The Indiana East-West Toll Road, which carries Interstate 90 approximately 150 miles across northern Indiana and is a critical link between Chicago and the eastern United States.

• The Chicago Skyway, which links downtown Chicago with the Indiana Toll Road.

• California’s SR 91 Express Lanes, which were originally built by a private entity to provide a speedier connection between Orange and Riverside counties.

Though privatization may offer short-term relief to transportation budget woes, it often has grave implications for the public.

• The public will not receive full value for its future toll revenues. The upfront payments that states receive are often worth far less than the value of future toll revenue from the road. Analysis of the Indiana and Chicago deals found that private investors would recoup their investments in less than 20 years. Given that these deals are for 75 and 99 years, respectively, the public clearly received far less for their assets than they are truly worth.

• The public loses control over transportation policy. Private road concessions in particular result in a more fragmented road network, less ability to prevent toll traffic from being diverted into local communities, and often the requirement to compensate private operators for actions that reduce traffic on the road, such as constructing or upgrading a nearby competing transportation facility.

• Public officials cannot ensure that privatization contracts will be fair and effective when leases last for multiple generations. No army of lawyers and accountants can fully anticipate future public needs. Transurban, for example, has control over the Pocahontas Parkway in Virginia for 99 years.

In order to protect the public interest, public officials must adhere to six basic principles in all road privatization agreements:

• The public should retain control over decisions about transportation planning and management.

• The public must receive fair value so future toll revenues are not be sold off at a discount.

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

• Contracts should require state-of-theart maintenance and safety standards instead of statewide minimums.

• There must be complete transparency to ensure proper public vetting of privatization proposals.

• There must be full accountability in which the legislature must approve the terms of a final deal, not just approve that a deal be negotiated.