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Reason Foundation

Surface Transportation Innovations #2

Topics include: accountability in privately developed build-operate-transfer (BOT) projects and Reason's new study to explore interstate reconstruction.

Robert Poole
April 1, 2002

In this issue:

Is Innovative Financing Squeezing Out Accountability?

In much of the world, public-private partnerships are producing real innovations in surface transportation, whether it's fully automated toll roads in Melbourne, Santiago, and Toronto or outsourced rail transit in Buenos Aires and Melbourne. But the U.S. tax code has reduced the potential of what the private sector can do in this country, as I explain in the attached column for Public Works Financing.

Briefly, the argument goes as follows. For major new projects (e.g., a new toll road), the inability of the private sector to issue tax-exempt revenue bonds puts privately developed build-operate-transfer (BOT) projects at a real disadvantage compared with public-sector projects. That has led to most such projects in recent years being developed via 63-20 nonprofit corporations. This "works" in the sense that the project gets financed with less-expensive tax-exempt debt. But it means that unlike the standard BOT model overseas, the project cannot be owned by the private developer/operator. It must be owned by the nonprofit corporation (which is usually mostly a contrivance for issuing the bonds). Sure, that corporation can contract with a private operator, but only on a short-term basis, and without the kind of profit incentives that incentivize long-term, entrepreneurial, customer-serving behavior. Take a look at my attached article and see if you don't agree that our current attempts to create an "operations vision" are missing something fundamental.

By the way, the way, the newsletter in which this piece originally appeared does a first-rate job of covering the emerging field of public-private partnerships in infrastructure. Public Works Financing is the creation of former Engineering News Record reporter Bill Reinhardt. While it covers all forms of infrastructure, not just surface transportation, it's a vital source of information for those interested in how we're going to pay for 21st-century transportation infrastructure. I'm sure Bill will send you a sample issue if you email him at PWFinance@aol.com.


New Study to Explore Interstate Reconstruction

This spring Reason Foundation has embarked on a new policy study, looking at the potential of toll financing and public-private partnerships for reconstructing key portions of the Interstate highway system.

It's no news to anyone reading this newsletter that America faces a massive problem over the next two decades. Much of the Interstate system—the backbone of this country's freight system and of most urban mobility—will be reaching the end of its useful life and will need to be rebuilt. A lot of it will also need modernization, to bring it up to current safety and other design standards. And of course, in many places additional lanes should be added to cope with recent and projected growth.

It's been evident for some time that current funding sources are nowhere near adequate to pay for this massive investment. Despite some increases in federal and state fuel taxes over the years, the real yield of this basic funding source, per vehicle mile traveled, is about one-third as much as was true in the 1960s. But can anyone believe that elected officials will double or triple the level of fuel taxes?

That's why some of us have concluded that toll financing will have to play a significant role in rebuilding the Interstates. But to make that prospect politically feasible, we at Reason Foundation believe (as I noted last issue) that tolling must be made far more customer-friendly. That means (1) abolishing 20th-century toll booths and toll plazas, and (2) eliminating double taxation, for projects newly financed with tolls.

Thanks to a timely foundation grant, Reason has an opportunity to test the political feasibility of this approach. Our study will make the case for rebuilding a major interchange in a specific Midwestern state, via toll finance and a long-term public-private partnership. The state in question wants the project done, but has not come up with a viable funding approach. Our study will test whether the above customer-friendly approach can overcome opposition to a dramatically different way of doing things. If it works, there will be many more opportunities around the country in coming years. We will keep you posted on our progress.


Robert Poole is Searle Freedom Trust Transportation Fellow and Director of Transportation Policy


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