99 years: the Road to Financial Wellville?

Over the last thirty years, it feels like the worst of our political system has driven our financing of transportation infrastructure. No one has had the political will to raise gas taxes, established in 1993, and therefore grotesquely inadequate. [Who among us would be satisfied with a 1993 budget for our own households?] And many of the significant infrastructure projects that have been financed by Federal funds have risen to the top based on politics rather than merit.

The result is that every state’s transportation infrastructure is in financial crisis. One of the proposed – pushed – solutions coming out of Washington is to privatize public highways and bridges. This is a solution that ducks the fundamental problem of a broken financing system, and gives states another few years to avoid the central problem.

[Quick definition: road privatization is when a section of road is transferred to a private company for a term of contract, typically in exchange for an up-front payment and a fraction of future toll revenues. The private company is responsible for all road maintenance and repair and has prescribed abilities to increase tolls over the years.]

I’m told by a colleague who does this sort of thing (Henry Lee at Harvard) that my issues could be solved with the right contracts. Perhaps. If that is the case, here are the major problems with privatizing public roads as it is now practiced (Indiana and Chicago) and hopefully these snakepits can be avoided:

• Term of Contracts Too Long. These privatization contracts have enormously long terms – 75 and 99 years. That is just too long in the extremely dynamic world in which we live. One of the bankers brokering these deals told me his primary job was to make sure the contract could accommodate any eventuality. Then he went on to deride me that he couldn’t “predict the future.” Exactly. So don’t make the contracts so long. How about 15-20 years?

• Loss of Network Integrity. One of the beautiful things about all networks is that they are connected. When you put a chunk of it under someone else’s control – even 2% -- the system as a whole is devalued and the network loses future flexibility. For example, over the course of 99 years, you might decide to take advantage of the extended rights of way to run fiber optic cables, or decide that certain sections would make great wind farms (NIMBYism wouldn’t be an issue). Implementation of these ideas would be dramatically complicated by having a separate owner for a piece of the ROW.

• Private ROI trumps Public Good. Over the course of 99 years (yes, I’ll repeat that clause again and again), it may turn out that it is in the public interest to find a higher user for the ROW than the contracted revenue stream it gets from the private company. For example, it might be in the public’s interest to convert a lane to a high speed bus lane or light rail in order to maximize people throughput per vehicle or lane, or to minimize CO2 emissions per person. This desire would run counter to the private owner’s focus solely on vehicle count.

• Valuation of Assets too Low. In a 99-year contract, you’ve basically discounted the future down to nothing, meaning you have basically sold the asset (yes, yes, I know the state gets it back after 99 years). But the lump up front sum -- that is so incredibly appealing to states ($3.85b in Indiana; $1.8b in Chicago) -- is nothing like what it would cost to actually build these stretches of highways or bridges from scratch. The costs of amassing the land and the rights of way alone, would be cost as much, even before we add in construction costs. These deals are selling off – sorry, “leasing” – our public assets at a fraction of their value. See commentary re Indiana.

One of the very sad facts about road privatization, is that the public is ill-informed about what it means. The carrot of the large sum of cash upfront is tantalizing (and programmed to be spent in usually less than 10 years leaving 89 years without the carrot), and the rising tolls is presented as a non-issue over a short fixed period of time. But as residents of Toronto discovered after they privatized a highway, tolls were eventually raised and so they complained. It should be interesting for politicians to note that they can't hide behind the private sector company doing the dirty work: most Torontoans put the blame squarely on the government that cut the deal. In a January 2008 article in Governing magazine, the same is said of the Governor of Indiana, who privatized a significant part of that state’s highway system and lost control of his state house in a subsequent election.

At the end of the day, we have to and will pay more to drive. The private companies will increase the tolls, or the government can do it. The path of doing nothing is what we have followed for the last few decades. The question for the public, and for states contemplating privatization: What serves the public interest in the long-term? Say, over the next 99 years.