Golden opportunity or fool’s gold?

| July 05, 2007

But P3 proponents are unapologetic about the profit potential. “The private sector is not in the business of philanthropy,” says Richard Norment, executive director of the National Council for Public-Private Partnerships. Because private entities run toll roads like businesses, “the people who are using the road can see a substantial improvement in service – enough to justify the toll increase,” Norment says.

For instance, P3 contracts spell out specific times to fix a pothole or remove a dead animal from the highway. P3s also can be quicker to adopt new technologies that can improve traffic mobility. After Cinqua-Maquarie leased the Chicago Skyway, it implemented electronic tolling within months, something the city had failed to accomplish in years.

Such benefits aren’t enough to offset the consequences of increasing toll rates, critics say. They warn that high tolls may push motorists onto alternate routes on local roads, causing congestion and jeopardizing safety. That happened on the publicly funded 241-mile Ohio Turnpike when it phased in toll increases for large trucks in the late ’90s. After years of truckers using secondary roads, Ohio rolled back the rates by about 25 percent in 2005.

P3 proponents use this example to make their case. Private investors cannot set toll rates unreasonably high, they argue, or motorists will opt for free access routes, leaving investors with no way to recoup their money. “There’s ultimately a sort of market test for rates not being unrealistic,” Poole says.

If private investors successfully can raise tolls, why can’t the public sector do it? Two words: “political opposition,” Poole says. Many state and local governments simply lack the stomach to back unpopular tolls or taxes. Before the lease agreement, the Indiana Toll Road went for 20 years without a toll increase; in real (inflation-adjusted) dollars, tolls actually decreased every year, Poole says. In some cases, the cost of collecting the toll was greater than the amount of the toll payment. “Long-term concession agreements provide the only way we know so far to make tolls keep pace with inflation so roads can be properly maintained over time,” Poole says.

Not so, says Enright, who analyzed the Chicago Skyway and Indiana Toll Road P3s. Indiana could have gotten a valuation $1 billion higher than the $3.85 billion paid by Cintra-Maquarie had it raised the money through tax-exempt bonds rather than private equity financing, Enright says. “It’s cheaper for public entities to borrow money than private entities.” Under such bond financing, toll increases would have been written into the contract between the bond holders and the toll authority, effectively taking politics out of the mix, Enright says.

Despite such possible alternatives, plenty of states already have opted for the P3 approach. As far back as the 1990s, seven states, including Alabama, Virginia and California, completed small P3 toll projects totaling $1.3 billion in new private capital investment, according to the Reason Foundation’s 2006 Annual Privatization Report. Four states – Illinois, Indiana, Michigan and Virginia – have privatized existing roads, totaling $6.4 billion. And six states had $25.7 billion in new private investment projects underway for new toll roads or toll lanes as of early last year. The trend has been encouraged by the Bush administration, which has drafted model legislation for states to adopt that would permit such partnerships.

The movement toward P3s has captured the attention of politicians in Washington. In a letter sent in May to governors, state legislators and state transportation officials, U.S. Rep Jim Oberstar, D-Minn., chairman of the U.S. House Committee on Transportation and Infrastructure and a subcommittee chairman, warned states not to rush into P3s involving national highways. The letter also threatened to take action against some P3s in the 2009 transportation bill. “The committee will work to undo any state P3 agreements that do not fully protect the public interest and the integrity of the national system,” it read.

“I interpret that as seeing their status quo threatened,” Poole says. While he admits the representatives no doubt have substantive policy concerns, “it’s also power, because states are making an end run around Congress” to expand the highway system.

The guiding hand of Washington is important, Oberstar told a hearing in February. “I am not convinced that 50 states, each pursuing its separate transportation priorities with their respective private-sector partners, will … produce a coherent, integrated, national surface transportation system.”

Proponents acknowledge that P3s have their potential pitfalls. For instance, Texas’ $90 million Camino Colombia toll road attracted only 13 percent of projected traffic – due partly to the $16 fee it charged for trucks to run the 22-mile route. The state bought it back in 2004 for a mere $20 million. In California, congestion forced county officials to buy the 91 Express toll lanes from the private investors that built them so that the county could expand adjacent non-toll lanes without violating a non-compete clause.

In those cases, proponents say, the problem stemmed not from the P3 concept, but from poorly formed agreements. “An enormous amount of public control” can be written into P3 contracts, which often contain detailed provisions limiting toll rates and allowing for adjustments to changing market conditions, Norment says.

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