What Now for Tolling and PPPs?

Movement towards privatization is a bipartisan effort

The historic Democratic sweep of Election Day 2006 has sent a chill through many advocates of the new paradigm of investor-owned tollroads as the wave of the future. In the House, the powerful Transportation & Infrastructure Committee will likely be chaired by Rep. James Oberstar, a long-time foe of tolling (and friend of organized labor). Indiana voters shifted control of the state House from the GOP to the Democrats, in what was seen as a backlash against Gov. Mitch Daniels’ privatization of the Indiana Toll Road. And pro-tolls-and-PPPs Gov. Robert Ehrlich of Maryland was defeated for re-election.

My reaction to this news is to get a grip, because the fundamentals for our new paradigm still look very good. And even the politics are not that bad. First, several key champions of the new approach—especially Texas Gov. Rick Perry—got re-elected. Florida’s pro-tolls Jeb Bush will be succeeded by his friend, Republican Charlie Crist. Pro-PPP Sonny Perdue was re-elected in Georgia.

The second thing to keep in mind is that the changeover in Congress does nothing to alter the ongoing momentum for tolling and PPPs in the states, which will continue to be supported by the great team in place at the U.S. DOT and the positive provisions of SAFETEA-LU.

Third, the fundamentals driving the move toward tolling and PPPs are all still with us—ever-worsening urban traffic congestion, fast-growing truck traffic, and the inability of fuel taxes to fund much more than adequate maintenance and repair of the existing highway system.

And fourth, remember that the movement toward privatization has been supported by Democrats as well as Republicans. In Illinois, it was Mayor Richard Daley who pushed to privatize the Skyway, and it’s Democratic state senator Jeff Schoenberg leading the effort to do likewise for the state toll road system. My sources also tell me to expect continued interest in toll road PPPs from Democratic governors Ed Rendell (PA), Jon Corzine (NJ), and probably even newly elected Eliot Spitzer (NY)—at least to the extent of authorizing a PPP to replace the aging Tappan Zee Bridge.

It will likely be easier for Democrats to support toll-based PPPs for new (and replacement) facilities than for the lease of existing toll roads. As former Congressman Dick Gephardt put it in a pre-election op-ed piece published in Texas, projects like the Trans-Texas Corridor —reflect a progressive and democratic tradition of pragmatic public works that have served working people well and driven the state’s prosperity.— He also addressed the issue of non-U.S. firms’ involvement, pointing out correctly that getting overseas investors to put billions of dollars into U.S. infrastructure is a kind of —reverse outsourcing— that we all should welcome.

But while Gephardt also praised Daley and Daniels for creatively mining their existing toll road assets to meet pressing governmental needs, I am still chastened by the anti-privatization backlash in Indiana, a generally conservative, Republican state. As a reader of this newsletter and a transportation professional, you probably share my view that in the overall process of creating an investor-owned toll roads industry, getting under-performing state-owned toll roads into commercial hands is a positive thing:

  • It helps break down the old 20th-century idea of tolls as flat rate and temporary (till the initial bonds are paid off);
  • It helps create a market for financing toll projects, and demonstrates the availability of large amounts of global capital for the U.S. tollway market;
  • It brings world-class toll road management and marketing to a sector that, with some exceptions, has been stodgy and politicized.

But those are points only policy wonks and financial analysts can appreciate. They are hard to get across to reporters, legislators, and voters. Which leads me to suggest that we need to think about new approaches to privatizing existing toll facilities. Highway users (who are also voters) may perceive that there could be some gains for them from privatization: more customer-friendly management, more timely widenings, more predictable (and modest) toll increases rather than years of flat rates followed by huge increases. But the one thing they know will be a consequence of privatization is higher tolls than would likely be the case under continued state ownership and operation. Is there any way to compensate for that perceived negative?

This dilemma faced Margaret Thatcher in the 1980s, as her government was privatizing Britain’s electricity, gas, water, telecommunications, and airport industries. While there were some prospects of lower rates, where competition would be introduced, there were also very real prospects of rate increases, after many decades of non-market operations of these enterprises. One of the key tools in the Thatcher tool-box was therefore widespread public share offerings. In other words, you, the utility customer, might face somewhat higher bills, but you also stand to get dividends and capital gains as a shareholder. In many cases, major tranches of shares in the IPO of such an enterprise were reserved for individual investors (and smaller amounts for employees). Since share-ownership was not a common middle-class phenomenon in the U.K. in those days, each IPO was preceded by a major marketing campaign aimed at explaining the specifics to individual investors.

One could imagine a similar effort at the state level, led by Democratic governors doing long-term concessions. Gov. Rod Blagojevich might be persuaded to liberate the $24 billion (Credit Suisse estimate) locked up in the Illinois Tollway system if, say, one-third of the shares could be offered first to Illinois residents. Since it would still be important to have a highly qualified company at the helm, a controlling interest could still be offered to whichever pre-qualified consortium made the best bid for that portion of the shares in the concession. The balance could then be offered to all other investors—individuals nationwide, plus institutional investors worldwide.

IPOs have been used overseas for toll road concessions—Autostrade in Italy, BRISA in Portugal, and several green-field toll roads in Australia. So this is hardly a radical idea. And it just might make a significant difference in the new political climate, post Election Day 2006.

Robert Poole is director of transportation at Reason Foundation. He has advised the last four presidential administrations and is author of a new report on how to reduce Atlanta’s traffic congestion online here. An archive of Poole’s work is available here and Reason’s transportation research and commentary is here.