Toll Roads, Principles of Efficient Congestion Pricing, and Feckless Politicians

Leslie Miller notes the debate on the privatization of American toll roads:

WASHINGTON (AP) – Roads and bridges built by U.S. taxpayers are starting to be sold off, and so far foreign-owned companies are doing the buying … Some experts welcome the trend. Robert Poole, transportation director for the conservative think tank Reason Foundation, said private investors can raise more money than politicians to build new roads because these kind of owners are willing to raise tolls. “They depoliticize the tolling decision,” Poole said … John Foote, senior fellow at Harvard’s Kennedy School of Government, said the government can take over a highway in an emergency. But he objects to selling roads to raise cash.

Robert Poole has been pushing this idea ever since his 1988 paper, which yielded support for= California’s landmark private tollway law (AB 680), which authorized four pilot toll projects including the successful 91 Express Lanes in Orange County. His paper does a nice job of summarizing William Vickrey’s Principles of Efficient Congestion Pricing.

Poole also advocates that the toll roads be privately owned rather than publicly owned for specious reasons as far as I can tell – and certainly a different view from that of Max Sawicky:

The Gov could just as easily contract out operations and management, but keep the tolls for itself. The fact that the money is earmarked to new projects – investment – is irrelevant. It’s still borrowing. You could just as easily keep the roads and float a bond – also borrowing – for the new projects. The leasing is not necessary. The political onus against explicit borrowing can warp decisions.

Is Max and Poole assuming the toll rates will be set optimally in terms of a Vickrey model? We will return to the question of whether actual toll rates are set optimally, but note Richard Posner countered:

Against all this it will be argued – it is an argument emphasized by opponents of leasing the Indiana Toll Road – that privatization, at least when it takes the form of a sale or long-term lease of government property for a lump sum, beggars the future by depriving government of an income-producing asset. The argument, at least in its simplest form, is unsound, because the state is not disposing of an asset but merely changing its form: from a highway to cash.

Posner is assuming that the government received as much in terms of the purchase price as it would have received in terms of the present value of future tolls. As you may recall, I have my doubts. Posner and Gary Becker discussed efficiency issues that went well beyond the claim that the private sector runs things more cheaply, which brings me to the testimony of John H. Foote (Senior Fellow, Mossavar-Rahmani Center for Business and Government, Kennedy School of Government before the Highways, Transit and Pipelines Subcommittee of the House Transportation and Infrastructure Committee :

It is also supposed that the people who use the Skyway are winners because the private owner will provide better service than the City, such as the introduction of electronic toll collection. While it is true that the long-awaited electronic tolling was implemented by the private owner, this service enhancement could have been implemented by the City as has been the case with dozens of publicly-owned toll roads in the United States. There are many examples of public toll roads being operated efficiently and with an eye to service. Better service is not a good reason, in most cases, to privatize our highways. While there are winners, there are also losers. In the case of the Skyway, the losers are the Skyway users who will be paying significantly higher tolls than they would have paid under City ownership. The other loser is the region. First, the Skyway users: Under private ownership and with the agreement of the City, tolls on the Skyway will more than double in the next twelve years and continue to increase through the term of the concession. The increased revenues resulting from these toll increases will be used by the private owner to service the debt and equity that financed the $1.8 billion purchase price. In effect, the future tolls collected on the Skyway have been monetized to fund the operating budget of the City of Chicago. Further, the toll proposition is based on the users’ willingness to pay a toll in return for receiving a service. In this case, users will see ever increasing tolls and ever increasing revenues being banked by the private investor, with, at best, only modest improvements in service. Interestingly, the City has required the private investor to file annual financial reports for Skyway—we can only conjecture about public’s reaction in ten years when the sale proceeds have been spent but the earnings of the private investor continue to increase in step with higher tolls. The other loser is the region. First, not one dollar of the sale proceeds realized by the Chicago was earmarked for investment in transportation projects, despite the fact that Chicago is one the country’s most congested urban areas. The City also has abdicated the control of a major transportation artery and along with it the ability to manage the regional transportation network in a coordinated fashion. To see how this might adversely impact the public interest, it is important to recognize that the private investor’s sole motive is profit maximization. That is not a bad thing, but it does color how the toll road will be managed. Let me cite two illustrations of this point: Under the concession agreement, the private owner has the ability to use time of day pricing to discourage trucks from using the Skyway during day time hours. One possible consequence of this is to force trucks onto neighboring roads, generating externalities—traffic, congestion and pollution—for which the private owner is not accountable and does not have to concern itself. Second, the alternative routes for drivers who do not want to use the Skyway are non-tolled limited access roads that are operating currently at or near capacity, thus allowing Skyway to operate, in effect, as a monopoly. Even if it was believed that lower tolls on the Skyway would lessen congestion on the alternative routes, the private investor, again, is motivated only by maximizing revenues on its road. And what happens if the decision is made in the next several years to toll these alternative free roads in order to manage congestion? To do this effectively requires a coherent and coordinated regional toll policy. With Skyway out of the public’s control, this is no longer possible. Further the imposition of tolls on these free roads will likely increase the revenues to be realized by the private owner with no subsidiary benefit to the region.

Foote was more complimentary to the Indiana toll road proposal and he finished with:

The last point I want to make is that it is important for all of us to understand why investors are willing to pay large sums for these concessions. The reason is simply that these investors have been granted a franchise to increase tolls – an action that state and local governments are reluctant to take. The last toll increase on the Skyway was in 1993 and on the Indiana Tollroad in 1986. In both cases, the new owners, pursuant to agreements with the City and the State, will increase tolls immediately upon signing the concession agreements and every year thereafter for the term of the concessions. These increases are not be subject to voter approval, and are the consequence of what has been tagged, the outsourcing of political will.

Outsourcing of political will reminds me of the Brad DeLong line about feckless politicians. The only real advantage to selling our roads to foreign firms seems to be that our politicians do not have the courage to raise toll rates to the Vickrey optimal price. Heck – Congress wants to lower fuel taxes even as we are concerned we consume too much oil. But if we turn over pricing to a monopolist, we will likely see toll charges in excess of the Vickrey optimal price – unless governments put restrictions on these toll rates. Of course, if the toll rates are regulated, private firms will offer less for these rights.