The Case for Public-Private Roads

California motorists are stuck in endless traffic congestion because the state’s highway funding system has run out of gas. Since federal and state fuel tax rates have not been increased for nearly 20 years, these highway user taxes barely cover the cost of maintaining our existing highways. And because our population and driving have continued to grow, but highway capacity has not, the result is ever-worsening congestion.

The good news is that possible relief is in sight. Large amounts of private capital are available to be invested in new highway capacity . . . if Californians are willing to pay tolls to use that new capacity. Some $180 billion has been amassed over the past three years in global infrastructure investment funds. And some of that money has recently funded billion-dollar scale public-private toll road projects in Florida, Texas, and Virginia. Gov. Schwarzenegger finally succeeded in getting workable enabling legislation enacted for California, in February.

Now that the mechanism and the funding exist, the question on the table is this: Should California go down this road? Based on my experience working with federal and state departments of transportation around the country, I recommend that we do so. But I also understand that many people have concerns. So let’s take a brief look at the potential benefits and possible drawbacks of public-private partnership (PPP) toll roads.

Four potential benefits are particularly important:

1. Fewer Boondoggles: Elected officials often champion projects that yield political benefits but have costs greater than their benefits. But with PPP toll projects, nobody will invest unless the benefits exceed the costs to the extent that they can project a positive return on their investment. That’s a powerful safeguard against boondoggles.
2. Avoiding “Big Dig” Disasters: Large-scale “mega-projects” like Boston’s notorious Big Dig are prone to large cost over-runs and schedule delays. In a well-structured PPP project, those risks can be transferred to the private sector, shielding taxpayers from those costs.
3. Cost Minimization: Traditional highway projects are built by the lowest-bidder, which often means they are built cheaply and need lots of expensive maintenance over their lifetimes. But a PPP toll highway must be maintained for decades at the private company’s expense. Hence, it has every incentive to build it right to begin with, to minimize total life-cycle cost.
4. Sustainable Congestion Relief: If you add ordinary freeway lanes, they tend to fill up and become congested. But today’s urban toll lanes use variable pricing (as on the 91 Express Lanes) to keep traffic flowing smoothly on a long-term basis.

Despite those benefits, many people have concerns over letting for-profit companies provide highways. The most common concern is loss of public control. In other states and other countries, this is dealt with via detailed performance and oversight requirements built into the long-term PPP agreement (which is typically several hundred pages long). Toll rate formulas, provisions for early termination, requirements for ongoing pavement quality, and numerous “what-if” situations are all dealt with in detail.

Another concern is over “non-compete” provisions, which proved to be the downfall of the PPP agreement under which the 91 Express Lanes were originally developed. Nowadays, rigid provisions preventing the state from building anything that might compete with a PPP toll road are taboo. Instead, the typical agreement says that everything in the region’s long-range transportation plan can be built, but that if the government builds a currently not-planned route within a few miles of the PPP toll road and the company can show a specific amount of lost traffic, some degree of compensation can be provided. California’s new PPP law encompasses this type of limited protection.

Another concern is that many of the current PPP toll projects are being developed by foreign companies. The reason is simple: the USA has no existing toll road industry, but Australia, France, Italy, and Spain do. If you want companies with a proven track record, that’s who has it. But we already see joint ventures of U.S. and foreign companies, and before long, purely domestic PPP developers will emerge. These are still early days.

A final concern is over bankruptcy if the new toll road doesn’t generate enough customers to pay its bills. Here again, the long-term agreements provide for this unlikely (but possible) event, allowing the state to take over and keep the road in operation while the financing is restructured and a new operator is found. In the past decade, this has happened once in the United States and once in Australia, and in both cases the roads remained in operation serving their customers.

On balance, then, I think there is a strong case for making maximum use of California’s new PPP toll road law. It could bring serious relief from traffic congestion in our major urban areas. One way to do this is to convert existing carpool lanes to high occupancy toll (HOT) lanes like the 91 Express Lanes. Both San Diego and the San Francisco Bay Area have a network of HOT lanes in their long-range transportation plans, and the Los Angeles/Orange County region’s planners are looking into the idea. A HOT Network can do double-duty, offering congestion relief to drivers as well as providing an uncongested guideway for region-wide bus rapid transit.

A second type of project is to fill in missing links in the current freeway system. A number of these could be done as deep-bore tunnels, such as the gap in I-710 through South Pasadena, an extension of the Glendale Freeway as a tunnel under the mountains to Palmdale and its airport, and the proposed tunnel between Riverside and Orange Counties.

A third type of project would add truck-only toll lanes to the state’s most important truck routes. These include I-5 through the Central Valley, I-580 from the Port of Oakland to I-5, and I-710 and SR 60 from the Ports of Los Angeles and Long Beach to the Inland Empire. These toll truckways would increase safety by separating cars from heavy trucks and would double or triple the productivity of trucking in urban areas like Los Angeles.

Despite the strong case for PPP toll roads, some free-market purists object to the government having any role in such projects. While I don’t have room for a detailed answer here, I will point out that today the government owns and operates 100% of California’s roadway system—and we suffer mightily from insufficient capacity and ever-growing congestion. There is zero chance for enlisting the private sector on a purely laissez-faire basis to address these problems, so the purist approach—in practice—means accepting the status quo for a long, long time. On the other hand, the private sector has a good track record of developing, operating, and maintaining high-quality toll roads in Australia, Canada, France, Italy, Portugal, Spain, and elsewhere.

While PPP toll projects will not solve all of California’s transportation woes, they are well-suited to the costly and generally high-risk mega-projects that would make a big difference. Since we finally have the enabling legislation in place, I think we should make the most of it.

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Robert Poole is director of transportation policy and Searle Freedom Trust Transportation Fellow at Reason Foundation, the free market think tank he founded. Poole, an MIT-trained engineer, has advised the previous four presidential administrations on transportation and policy issues.