For Whom the Road Tolls

Communities with traffic problems turning to a pay-as-you-go system for highways

Last year may be remembered as the beginning of the toll-road revolution. At the beginning of the year, Chicago received a $1.83 billion check from a global consortium for a 99-year lease of the Chicago Skyway toll road. In March, the Texas DOT accepted a preliminary proposal to invest $7.2 billion in the first Trans-Texas Corridor (TTC), a 325-mile toll road parallel to congested 1-35. By the end of the year, privately proposed toll projects worth $20 billion were under review.

What accounts for the new enthusiasm for toll roads? As is so often the case in the public sector, the answer is money. While the number of miles cars and trucks have traveled nearly doubled over the past 25 years, less than 5 percent of capacity has been added to the highway system.

Funding for road repair and expansion is not meeting current demand. Today’s federal and state fuel taxes raise between two and three cents per mile – about half the level of fuel taxes during the 1960s when interstate highway construction was in full swing. The era of bulldozing entire neighborhoods to construct new freeways is over, but the need for more highway capacity is reflected in ever-worsening freeway congestion. With large increases in gas taxes unlikely, building toll roads becomes a viable alternative to fund highway investment. Few states have billions of dollars to invest in new capacity building, but the private capital markets do. New technology, such as high-speed, nonstop electronic toll collection, also has made paying tolls less troublesome to drivers, so new toll roads and toll lanes will be more appealing.

Private investors signed a 99-year lease on the 7.8-mile Chicago Sky way toll road last year for $1.83 billion. The arrangement was the first of its kind in the United States.

Foreign companies won the bids to lease the Chicago Skyway and to build TTC-35 based on their experience owning and operating toll roads. Europeans developed toll roads based on necessity following World War II because they did not have a system of dedicated fuel taxes and highway trust funds. Fuel taxes in Europe were, and still are, general revenue sources. Thus, France, Italy, Spain and Portugal all turned to the 19th-century turnpike model, under which private firms were awarded long-term franchises, called concessions, to design, finance, build and operate toll roads, bridges and tunnels for 30 to 75 years. Originally called build-operate-transfer, the scheme is generally referred to as the concession model.

Originally, a number of European toll companies were partly or mostly state-owned. However, since 1999, nearly all have been privatized, with France completing the sale of its remaining shares in three toll companies at the end of 2005 for $17.8 billion. Today, a dozen or more global toll road companies, including Australian firms, are pursuing opportunities in the United States.

Last year, the Chicago Skyway and TTC-35 transactions got the attention of many governors, mayors, legislators and state departments of transportation (DOT), and eventually, a number of existing toll roads were offered to the private sector for long-term leases. In addition, states with tolling/public-private partnership (PPP) laws proposed new toll projects often using the concession model.

For example, Indiana Gov. Mitch Daniels, the former federal director of the Office of Management & Budget, proposed a “Major Moves” program to double transportation investment in the state. But to avoid increasing the gas tax, Daniels proposed leasing the Indiana Toll Road and building the largest new project in the state – the extension of I-69 from Indianapolis to Evansville, Ind. – as a PPP toll road. The state issued a request for proposals for the toll road lease in September 2005, with a proposal deadline of January 2006. When the bids were opened, the winner, bidding $3.85 billion, was the same team that now operates the nearby Chicago Skyway.

Proposals to lease the New Jersey Turnpike, several toll roads in Delaware and even the New York Thruway also were made during 2005, though it is not clear if any of those has sufficient support from elected officials in those states. However, responding to an unsolicited proposal by a U.S./global consortium to lease the Dulles Toll Road for the equivalent of $1 billion – including funding for the state’s share of extending the Washington Metro to Dulles Airport – four additional proposals were submitted to Virginia’s DOT. As the agency was reviewing four of them, the Metropolitan Washington Airports Authority, which owns the land on which the toll road is built, submitted a last-minute proposal, which complicates the decision.

Also, the Houston toll road system, developed and managed by the Harris County Toll Road Authority and valued at between $3 billion and $7 billion, may be privatized. Harris County hired Dallas-based First Southwest to conduct a feasibility study, targeted for conclusion in June 2006.

Electronic toll collection technology, like the kind used on Orange County, Calif.’s express lanes (below), can eliminate toll booths and plazas (left) and make toll roads less troublesome for drivers who are willing to pay to take more convenient – and possibly less congested – express routes.

Last year, several proposals were made to add toll lanes to congested freeways and to develop new toll roads using the concession model. In the two winning bids in Virginia – High Occupancy Toll (HOT) lanes on the Washington Beltway and on 1-95 – the vendor offered 100 percent toll-supported financing, rather than relying on the state to partially fund the project. There, the investors were willing to put in a significant amount of their own equity, in addition to the borrowed amount, because at 50 years each, those were long-term concession projects. By the end of 2005, private sector projects for new toll roads or lanes, either under construction, financed or in the bidding process, totaled in excess of $20 billion and encompassed California, Georgia, Oregon, Texas and Virginia.

The concession model, however, is not the only method being used to add highway capacity. In the last several years, the Colorado and North Carolina legislatures have created state toll authorities, which can both develop new toll projects themselves and work cooperatively with the private sector.

Continued interest in developing tollways abounds. The Colorado Tolling Enterprise in Denver has sponsored a statewide toll feasibility study, the Atlanta-based State Road and Tollway Authority conducted a regional study of the potential for hot lanes and truck-only toll lanes, and Minnesota has reviewed the possibility for hot lanes and express toll lanes in the Twin Cities area. Other similar regional studies are under way in Dallas, Houston, Seattle, and Washington, D.C.

While it is unknown how many existing toll roads will be leased or how many new toll road and hot lanes projects will be able to secure financing, only the states with legislation enabling tolling and PPPs will have access to global capital to invest in their highway systems. In the meantime, the obvious problems on congested roadways will continue to beg for a solution.

Robert Poole is director of transportation studies at Reason Foundation based in Los Angeles.