Policy Brief

Commercializing Highways

A "Road-Utility" Paradigm for the 21st Century

Most people consider the modern auto-highway system a great success. In the United States, automobiles provide 95% of all individual surface trips, and trucks transport an ever-larger majority of all freight. The U.S. highway system more than pays for itself via user taxes.

In fact, however, our highway systems are in trouble. They face four main problems:

1. Traffic Congestion. In the 68 largest U.S. metro areas, motorists lose a total of $72 billion per year in wasted fuel and time, due to traffic congestion;

2. Lack of Expansion. From 1987 to 1997, U.S. vehicle miles traveled increased 34%, yet only 3% more lane-miles were added;

3. Funding Shortfalls. In 1997, the U.S. invested $43 billion in rebuilding and capacity additions, but to simply to maintain the system’s asset value, we should have spent $51 billion-to keep pace with growth would have required $83 billion; and

4. Anti-highway Politics. A large coalition of environmental, urban planning, and transit organizations opposes highway expansion and advocates shifting highway funds to public transit, bikeways, etc. Their mantra is: “We can’t build our way out of congestion.”

The U.S. highway system is failing to satisfy its customers, and its ability to do so is more constrained with each passing year. We need a new highway paradigm for the 21st century.

Transport economist Gabriel Roth calls the present highway paradigm “Soviet-style.” By this, he means a system that:

  • Is centrally planned, in a top-down fashion;
  • Has its resources allocated by political rather than economic criteria; and
  • Almost completely avoids the use of pricing.

Roth contrasts highway systems with telecommunications systems. Both are network utilities, in which users traverse interconnected networks developed and operated by various providers. There the similarity ends, however. Today’s telecom system is market-driven-owned by profit-making firms, using market prices to equate supply and demand, and directing investment to where it is most needed to satisfy customer demand.

A number of other transport experts have reached the conclusion that it is time to consider modeling highway systems after telecom systems; to pursue a new “road utility” paradigm. Among these experts are a former policy administrator of the U.S. Federal Highway Administration (FHWA), the current FHWA executive director, the former World Bank senior administrator for infrastructure, several current World Bank transport economists, various investment bankers, and even some environmental groups.

II. What Other Countries Have Done

The idea of highway systems evolving into road utilities has entered serious discussion in several countries around the world. National studies have been conducted in New Zealand, the Netherlands, and the United Kingdom. In New Zealand, the previous government’s transport ministry focused its large planning study on how to divest all highways to a small set of government-owned but commercially run highway corporations.

Over the past decade, several dozen countries have adopted the build-operate-transfer (BOT) model of competitively awarding long-term concessions to private consortia to finance, design, build, and operate major new highways as toll roads. The pioneers of this model are the toll-road systems of France and Italy, which were developed in the 1960s and 1970s. During the 1990s, BOT highways were built in other countries in Europe, Israel, South Africa, in Australia, in most of Latin America, and in much of Asia (and, in a limited way, in a number of states in the U.S.).

In 1999, Canada, Italy, and Portugal went even further, actually selling off existing state toll-road owner-operators. In each case, they sold the physical facilities plus a long-term franchise to operate them (ranging from 33 to 99 years). Other operators were also allowed into the toll-road market.

III. The Benefits of Shifting to a Commercial “Road-utility” Paradigm

A. Traffic Congestion Relief

These modest beginnings already show how this new commercial paradigm can address our serious highway problems. Traffic congestion, for one, can be tamed by variable pricing. Several French toll roads now charge higher prices during the weekend hours when Parisians are returning to the city-and as a result those travel peaks have flattened and decongested. Variable pricing is also being used on Toronto’s all-electronic Highway 407. On two busy commuter freeways in Southern California, SR-91 in Orange County and Interstate 15 in San Diego, tolled express lanes vary their prices by hour of the day and day of the week, ensuring free-flowing traffic right next to stop-and-go traffic in the regular lanes. Studies show that the actual “throughput” is as high on the tolled lanes as on the congested lanes.

B. Increased Traffic Capacity

Private developers around the world are now addressing the difficult issue of adding capacity in urban areas. In Toronto, there was no room for toll plazas on an urban toll road with dozens of on-ramps and off-ramps, so a private-sector team developed the world’s first fully automated toll road, using both electronic toll tags and video license-plate imaging. As for the Melbourne CityLink in Australia, this technology completely eliminates the need for toll booths. In the suburbs of Paris, a private firm came up with a breakthrough solution for the missing link in the A-86 ring road: instead of bulldozing through historic Versailles, the firm is tunneling deep beneath it. Here in the U.S., Los Angeles planners are considering double-decking portions of several freeways in order to add truck-only toll lanes without having to commandeer expensive additional land on which to widen the existing roadway.

C. Available Capital

These kinds of capacity additions are more costly than traditional freeways, but the $72 billion annual cost of congestion is one measure of what U.S. customers might pay for relief if offered the chance. Large sums of capital are available in global markets for highway projects that meet real needs-$1.8 billion for the Paris A-86 tunnels, $1.3 billion for the Melbourne CityLink, and $1.2 billion for the Cross-Israel Highway. The new road-utility paradigm taps into pools of capital-revenue bonds and shareholder equity-that previously have been little used for highways. As an added benefit, the requirement that each project must pass muster with investors serves to weed out highways built for political rather than economic reasons.

D. Addressing Political Obstacles

As one might expect, there are therefore several political obstacles to phasing in the road-utility paradigm. One is people’s innate dislike of paying tolls. Part of their dislike stems from their unhappiness with toll booths and the stop-and-start congestion, fumbling for coins, and rear-end collisions that pausing to pay for tolls often entails. However, as new electronic toll-tag technology makes toll booths obsolete, these problems will disappear. The other part of their dislike is opposition to perceived “double taxation.” Since most U.S. gas taxes have historically been highway-user fees, trucking and automobile organizations oppose paying both fuel taxes and tolls for the same roadway. Rebates of fuel taxes for miles driven on toll roads could address this problem.

Another price-related concern is that tolls are unfair to low-income people. However, even inconclusive data shows that the amount of driving increases greatly with the level of income. In addition, the principal funding sources for U.S. highways-fuel taxes (and, to some extent, sales taxes)-are themselves “regressive.” Here again, the road-utility paradigm should help, as few people object to direct pricing (and a choice of price/service options) in air and rail travel, electricity and telecom service, and letter and parcel service. Once roads are understood as network utilities, pricing will come to be seen as the normal way of doing business.

A popular U.S. misconception that tolls should pay for the large up-front cost of building a road should be removed once the initial investment is recovered. This misconception ignores the substantial costs of properly maintaining and rebuilding the highway. Tolls can and should be a permanent, ongoing funding source-just like electric utility and telecom bills. A shift to investor-owned road utilities, using generally accepted accounting principles, will help educate highway users about highway economics.

One final obstacle is the emerging opposition between highways and public transit. Today’s anti-highway coalition seldom distinguishes between free roads and toll roads-if anything facilitates auto travel, the coalition is generally against it. Proponents of commercialized highways, on the other hand, defend auto-mobility as inherently a good thing because enhanced mobility in general is a good thing-and people appear willing to pay billions of dollars to obtain it. As long as they are paying their way, most people would agree they should have it. (To be sure, when roads are perceived as “free,” people may use them more than if they are directly priced, so people’s perception of exactly how they are priced needs to evolve.)

On another level, pricing and commercialization will create a far more level playing field between public transit and highways. A market-driven system, where users cover all the costs, will lead to a new allocation between private auto use and public transit, tailored to the specifics of each metro area. Moreover, the congestion reduction brought about by pricing urban expressways will make long-distance express commuter buses a far more attractive option. Because of this, several environmental groups have become advocates of pricing and even of the complete road-utility concept.

IV. How the New Paradigm Will Come to Pass

A paradigm shift doesn’t occur overnight. Australia and the United States need to create suitable legal and tax-code frameworks for the emergence of road utilities (Australia seems to be further along than the US.). In both countries, we will see the continued gradual expansion of new private-concession toll projects, rather than a sweeping change of existing public highways to private-sector ownership. Such private-concession toll projects include adding express toll lanes to congested freeways, adding truck toll lanes to highly commercial highways, and adding costly but necessary missing links to urban expressway systems.

Once state agencies become more comfortable dealing with highway concession companies on a large scale, and the capital markets have more experience financing a variety of tolled projects, the next stage will be turning over existing highways, for rebuilding and modernization as toll roads, with value-added electronic services. By that point, the entire higher-level limited-access road system will have become the responsibility of the emerging road utility industry. Road-user taxes, if any, can then be limited to paying for local streets and roads, since the higher levels of the roadway system will have become self-supporting businesses. The new commercial highway paradigm will have arrived.

About the Author

Robert W. Poole, Jr. is the founder and acting president of Reason Foundation in Los Angeles, and has over 22 years of public policy research experience. A former aerospace engineer, he hold B.S. and M.S. degrees from M.I.T. He has authored a number of peer-reviewed policy studies on airport and air traffic control issues, been the featured speaker at conferences around the country and in many news programs on television, has spoken before the Senate on transportation issues, and advised both the Reagan and Clinton Administrations on air traffic control reform. He is the Director of the Transportation Program at Reason Public Policy Institute.