Transportation Solutions News

By Phineas Baxandall
For the Journal-Constitution
Published on: 08/03/08

Facing persistent budget shortfalls, many public officials show growing interest in privatizing toll roads. These deals depart from the traditional method of highway finance and operation. Normally, the state borrows money to pay contractors and cover the cost of building a public freeway or toll road. With private toll roads, a group of private investors borrows money to build and manage a new toll road on public land. The investors then generate profits over many decades by charging escalating tolls to drivers.

Unfortunately, these deals are often not in the public's long-term interest. They share many characteristics with no-down-payment mortgages, or could be likened to a 70-year no-escape contract with an HMO.

Much like the recent spate of no-money-down mortgages, private toll road deals are driven by a profitable new industry that offers politicians a quick solution to short-term cash-flow problems. The new highway merchants offer upfront cash and innovative financing and tolls that typically start low and grow steeply over time. Profits increase with greater traffic, higher tolls and less investment in the roadway —- interests at odds with those of the public. The toll road industry asks to be trusted to better handle the public's financial risks. And like the mortgage brokers, they also typically sell the investment to other financial traders while continuing for decades to impose restrictions and collect hidden fees from the public.

It's these last characteristics that make private toll roads like signing a 70-year contract with an HMO. Like an HMO, privatization contracts run for hundreds of pages to anticipate any unexpected contingency. The contracts are peppered with references to "compensation events." These refer to situations in which the government may be forced to pay the road operator for actions that may have reduced their flow of traffic. For instance, if the state requires new safety measures or if emergency vehicles enter the toll road, the private toll company may be able to force the government to compensate them for reduced traffic. Monitoring and ongoing litigation over the contract will require a team of lawyers at great expense.

The problem is not simply that the state will take on added costs, or that for generations public officials will be forced to make decisions based on what's in the contract, rather than what's best for the public. More troubling, the public will lose control over planning its own transportation infrastructure.

The pitfalls of private toll road deals are magnified by their extraordinary length. The Chicago Skyway concession stretches 99 years; the Indiana toll road deal lasts 75 years.

Tax laws dictate the length of these deals. Private road companies can realize highly lucrative tax benefits from such contracts, but only if the contract lasts 50 years or more. What's more, the companies can then package these tax benefits as securities and sell them.

None of these problems are inherent to the private sector. Privatization can make sense under certain circumstances. Private companies should have a proven comparative advantage over the public in providing a particular good or service. Second, the public should fully know what services it needs to contract for. Third, there should be ongoing competition, either between simultaneous providers or by ensuring that contracts are short enough that unsatisfactory performers can be readily replaced. Finally, privatization works best when the public officials making the decision to privatize can be held accountable for the results of a deal.

Most private toll road deals fail to meet any of these conditions.

Public entities, not private companies, have a clear and significant advantage when it comes to long-term borrowing: the ability to issue tax-free debt, which yields a significantly lower cost of capital than private borrowers can obtain. Second, tax laws make toll leasing deals so long that it's impossible to reasonably predict future transportation needs. Third, toll road privatization creates a monopoly with no meaningful ongoing competition and deals last for several decades. Finally, the length of these deals insulates them from public accountability. The downsides of a deal are likely to surface only after the officials who brokered it have left office and the public has no recourse to alter the contract.

Georgia should continue to use private contractors when they can provide discrete services better and more cheaply. But seeing privatized toll roads as an easy way to balance state budgets is a mistake. Like a 70-year HMO contract or an "innovative" mortgage, if a deal seems too good to be true, it probably is.

Phineas Baxandall is a senior analyst for tax and budget policy at the Georgia Public Interest Research Group.