Privatized Toll Roads Offer Quick Fixes but Pose Long-Term Threats, Study Says

This story appears in the April 20 print edition of Transport Topics.

Privatizing toll roads may give cash-strapped states a quick budget fix, but such deals, especially for existing highways, “pose long-term threats to the public interest,” according to a new study by an advocacy group.

The short-term benefits don’t outweigh the long-term costs, said the study by the Public Interest Research Group, which has offices in Boston and Washington. “Public officials, therefore, should approach the idea of private toll roads with great caution,” the study said.

PIRG found that privatization deals shortchange the public because the full value of the toll revenues is lost for decades into the future. Also, the study says, privatization takes control over transportation away from the public and undermines sound policymaking.

“The roads that are going to be built are the ones that have the greatest potential for paying customers, which are not necessarily the right ones from a kind of regional planning point of view,” said Phineas Baxandall, senior analyst for the PIRG study.

Another key failing of privatization is that the operating

contracts are written for “excessively” long periods of time, which makes them attractive to investors but problematic for the public, the study said.

The lease deal for Interstate 90 in Indiana, for example, lasts 75 years. The Chicago Skyway lease is for 99 years.

“We can’t know what we’re going to need a generation from now, much less in two generations, three generations from now,” Baxandall said. “You think about a contract back 99 years ago, you might have said things like, ‘After the frost, put new gravel down on the road and remove the horses when they die within two weeks.’ ”

PIRG’s study was partly funded by the Ford Foundation. Itfocused on the two most common approaches to toll road privatization.

The first approach is to lease existing roadways to private entities for a concession fee; the second is to have a private entity pay for a new road and get operating rights for a period of time.

In both cases, the private entity gets the toll revenues and can raise the tolls.

But under both approaches, the public loses out financially, because it costs private groups more to borrow money for the projects than it costs the government to borrow via bonding, Baxandall said.

To make up for their higher borrowing costs and to repay in-vestors, private groups set tolls higher than the government would, he said.

Jim Runk, president of the Pennsylvania Motor Truck Association, commented on efforts by Gov. Edward Rendell (D) to lease the state’s tolled turnpike to a private group.

“I don’t think there’s any question,” Runk said. “If you would privatize, then obviously the people who are going to get the first takeout are going to be the investors.”

Eventually, private bidders for the Pennsylvania Turnpike faded away when the economy turned sour.

PIRG said the public interest fared worst in deals for existing roads.

It said concession agreements for existing toll roads have provided short-term benefits in the form of lump sum payments to governments.

However, the economics of toll deals made the value of the payments less than the value of the tolls drivers must pay to cover the private group’s costs, PIRG said.

The study also warned governments to proceed with caution when negotiating privatization deals to build new toll roads, such as those popular in Texas and Florida.

To protect the public, the study said, the private group must have a “proven comparative advantage over government agencies,” and services to be privatized must be well-defined and subject to an evaluation process.

Many private groups should compete for the contracts, PIRG also said, and public officials who vote to privatize should be held accountable for the outcome.

Privatization of toll roads used to be uncommon, but the PIRG study found 24 states now have legislation or regulations that allow for privatizing roads.

Shrinking tax revenues and a public disdain for infrastructure taxes and spending have driven states to embrace privatization, Baxandall said.

Questioning privatization is especially critical now, he said, because state finances are worse because of the economic slowdown, while groups making privatization deals are having a harder time offering as much money as earlier because credit is tight and they can’t borrow as much.

“So, the deals [they] offer . . . have to be worse deals,” Baxandall said. “But the states and localities are more desperate to find these deals.”

Pennsylvania’s Runk said he knows the problem firsthand, because he serves on a state committee looking for ways to mend Pennsylvania’s fraying transportation funding system.

The state needs money just to maintain and improve what it’s already got in infrastructure, Runk said, but fuel taxes would have to be raised “10, 12, 13 cents [per gallon] to get the millions [of dollars] necessary.”