21st-Century Tolling: Unexpected Result of PPP Controversies

Private sector innovations stand to transform highway finance

An amazing thing has happened during debates on PPP toll concessions during the first half of 2007. The old 20th-century model of tolls as simply the minimum amount needed to pay off construction bonds (which implies flat-rate tolls that remain unchanged for long periods of time) is being cast aside. In its place we are seeing robust, market-based tolling, increasingly viewed as a permanent funding source with powerful traffic-management capabilities. This change is profoundly important for highway finance.

The conventional wisdom among highway finance people over the last few years is that, yes, of course, tolling and PPPs can play a modest supplemental role in filling the huge funding gap in highway finance. But we have to be realistic: tolls currently provide only 8% of all U.S. highway revenue. So even with good PPP enabling legislation and removal of legal obstacles, we’d be doing great if we could double tolling’s share of highway revenues over, say, the next 20 years.

But that conventional wisdom was based on conventional (20th-century) flat-rate tolling. It ignores two crucial innovations introduced by the private sector: value pricing (pioneered by the private concession company that developed the 91 Express Lanes in Orange County, California) and inflation-indexed tolling (introduced in the long-term concessions for both Chicago Skyway and Indiana Toll Road). Both concepts lead to dramatically higher toll revenues over time, potentially dwarfing what would have been predicted based on traditional flat-rate tolling.

While value pricing has had to fight the “Lexus lane” battle over the past decade, thanks in part to solid research demonstrating the popular appeal of having an alternative to being stuck in awful congestion, the Managed Lane approach has gained widespread support. Inflation-indexed tolling has likewise had a rough introduction. In his several critiques of toll concessions, Dennis Enright has produced scary, but misleading, projections of several-hundred-dollar toll levels, thanks to the magic of compound interest over very long time periods. And tolling opponents like Rep. Peter DeFazio (D, OR), before whose Highways & Transit Subcommittee Enright and I both testified in February, has seized on such numbers to attack toll road concessions. That has also been the theme of American Trucking Associations president Bill Graves in his increasingly vocal attacks on tolling and PPPs.

But while all that shouting has been going on at the national level, out in the states where legislators and DOTs are actually trying to grapple with the funding shortfall, a very different take on 21st-century tolling has emerged. The epic battle over toll concessions in Texas this spring is a major case in point. What began as a populist attack on both tolling and foreign companies, ended up in a compromise for concessions and a huge victory for 21st-century tolling.

That battle began last year as rural land-owners, upset by potentially large property takes for the grandiose Trans Texas Corridor, were egged on by right-wing populist conspiracy mongers who see the TTC as part of a plot to merge Canada and Mexico with the United States, abolishing the border. (TTC, these folks maintain, would be part of a NAFTA Superhighway for uncontrolled entry of Mexican trucks and workers-and worst of all, would be “owned” by some unaccountable foreign company.) As momentum grew for some kind of legislative restraint on toll roads and concessions, the well-run local toll agencies in Houston (HCTRA) and Dallas (NTTA) began to see themselves as threatened by the private sector, which they feared would grab the most lucrative new toll projects, leaving them with the dregs.

When the dust finally settled, the compromise bill gave first-dibs on new toll projects to local toll agencies, suspended new toll concession projects for a two-year time-out (except for a whole raft of projects that were already in some stages of competition), and made a number of other changes in how tolling and PPPs can be done. The most significant of these is the new requirement for a Market Valuation for every new toll project. TxDOT and the local toll agency must agree at the outset on a starting toll rate, a toll-increase formula, and a traffic & revenue forecast, which are used to establish the project’s Market Valuation. On the basis of that, the agency must commit to invest that market value in transportation projects in the region. Or, if the agency decides not to do the project, TxDOT can take it over, either via a toll concession (if the legislature reauthorizes them after the two-year time-out) or via an availability payments concession.

Basically, what this does is to institutionalize 21st-century tolling in Texas, whether done by local toll agencies, by private firms under toll concessions, or by TxDOT doing the tolling on a project but paying the concession company via availability payments. On the basis of this new framework, TxDOT on June 14th released an ambitious list of 87 toll projects, estimated to cost $56 billion. And both HCTRA and NTTA are moving forward with their planned projects, assuming inflation-indexed tolls from now on. So what began as a populist revolt against tolling and private companies has ended up solidifying tolling as the major source of highway capital spending in Texas, and retaining a large role for the private sector.

And it’s not just Texas. We already have inflation-indexed tolls on the Chicago Skyway and Indiana Toll Road, thanks to their long-term leases. And all the HOT and Managed Lane projects moving through the approval process in various metro areas depend on value pricing. Beyond that, the revisions to Florida’s PPP law signed by Gov. Charlie Crist in mid-June require all toll roads in the state to inflation-adjust their tolls on a regular basis. And the competing plans being debated in Pennsylvania for leasing or otherwise “monetizing” the Pennsylvania Turnpike all assume inflation-indexed tolls. And it’s highly likely that if similar plans move forward in Illinois or New Jersey, they will also be based on inflation-indexed tolls.

In short, the 21st-century tolling revolution is well under way, thanks to the role played by private companies over the past few years. All previous estimates of how much of the highway funding shortfall can be dealt with via tolling need to be re-done, to take this major change into account. This item should be high on the agenda of the new National Surface Transportation Infrastructure Financing Commission.