Last month the state Senate and Assembly transportation committees held a joint hearing looking into the aborted sale of the 91 Express Lanes project in Orange County. The private company that financed, built and operates the project wanted out, and attempted to sell it to a newly created nonprofit corporation, at a negotiated price. Last-minute political opposition forced the deal to be cancelled, just a day before the bonds were to be sold. At the hearing, some opponents portrayed the attempted sale as evidence that California’s private toll road program has failed.
Questions can certainly be raised about the proposed 91 transaction. It’s impossible to tell if the proposed price was more or less than would have emerged from open bidding. If it was higher, then financing the purchase,even at nonprofit rates,might have made future toll rates higher than would have resulted from simply refinancing the road’s old debt (even at taxable rates).
But the idea of selling a toll road is hardly unprecedented. Three such sales took place last year in the rapidly growing global toll road industry. Last May the government of Ontario, Canada sold the 43-mile Highway 407 toll road to an international consortium for $2.1 billion. The new owners agreed to add a planned 23 miles to the highway at their own expense, and to fully maintain Highway 407 for the entire 99 years of their operating franchise. Last year Portugal privatized its state toll agency, BRISA, selling 86% ownership to stockholders for $2 billion. Similarly, Italy sold 87% of Autostrade, the state-owned company that operates that country’s main north-south toll road system, for $6.7 billion.
These governments were not being taken advantage of by capitalist sharpies. Rather, they made deliberate policy decisions that large-scale toll roads are better provided by regulated private businesses than by the state itself. Similar reasoning lies behind decisions during the 1990s by governments in Australia, England, France, Israel and much of Latin America to use the private sector to finance, develop and operate most of their new inter-city and urban expressway capacity.
Governments are shifting to private toll roads for several reasons:
n In nearly every country, the need for more and better highway capacity is far outrunning available public-sector funding sources. It turns out that private capital is more than willing to finance, build, and operate toll roads, if governments create the right conditions for making such long-term and somewhat risky investments.
n There is growing evidence that private firms,in seeking to serve paying customers,will be more responsive to those customers’ needs. A toll road that closes lanes for repairs and maintenance loses revenue for every hour that the lanes are closed, so it is likely to fast-track such projects and schedule them during night hours when few people will be inconvenienced.
n The private sector has developed innovative electronic toll-collection systems that eliminate the need for toll booths altogether (as on Toronto’s Highway 407 and OC’s 91 Express Lanes).
n Because a private firm has to maintain the road over the long term, it will choose more-expensive, higher-quality pavement at the outset (as the builders of the 91 Express Lanes did), because that ends up costing less over the road’s useful life.
But to obtain these benefits, government must create conditions under which companies can do business. Toll roads are not taco stands. They are major, long-lived investments, with significant risk of not generating enough revenue to pay back their investors for many years. Long-term franchise agreements must be drafted to protect both the private firm (e.g., from unpredictable changes in regulations) and the public interest.
To have a viable private toll road industry, governments must allow companies to have an “exit strategy.” Unless there is freedom for firms both to enter and to leave the industry, few will decide to risk their capital in the first place.
In the case of the 91 Express Lanes, the majority owner was a traditional public works infrastructure firm which, in the 1990s, shifted its business focus away from public works and into fiber optics. The Express Lanes project, which was intended to be the company’s prototype for similar projects across the country (when it was a public works company) became an orphan, one-of-a-kind project when the company became a fiber-optics company. So naturally, it decided to sell.
Unfortunately, the otherwise well-conceived law that permitted four pilot toll projects in California failed to address this issue explicitly. It left it up to Caltrans to say yes or no to any changes in ownership during the life of the franchise, with no criteria on which to judge whether such a change was in the public interest or not. A successor measure must address this issue and provide a formula for valuing a toll road at any point before its franchise expires.
I said successor measure intentionally. Because it’s very clear that with California’s population projected to increase by 50% over the next 20 years, and something like $100 billion in transportation needs, projected revenue from gas taxes and registration fees won’t come anywhere close to meeting our mobility needs. California needs to tap into the global billions being invested in toll roads,not only in Europe, Australia, and Latin America but also in fast-growing states like Florida, Texas, and Virginia, each of which has a modern public-private toll road law.
Without major new funding sources of this kind, California’s once-grand highway system will grind to a halt. But with tolls and public-private partnerships, we can restore our highway system’s former glory.
Robert Poole is president of the Reason Foundation and director of transportation studies at the Reason Public Policy Institute. He served on the Governor’s Commission on Transportation Investment in 1995.
