The Facts About Toll Road Privatization and How to Protect the Public

U.S. PIRG Education Fund Private Roads, Public Costs The Facts About Toll Road Privatization and How to Protect the Public

U.S. PIRG Education Fund

Written by: Phineas Baxandall, Ph.D. U.S. PIRG Education Fund

Kari Wohlschlegel and Tony Dutzik, Frontier Group

Spring 2009 Acknowledgments

The authors thank Robert Puentes of the Brookings Institution, Ellen Dannin of the Penn State Dick- inson School of Law, Dennis Enright of NW Financial, and Michael Likosky of New York University’s Institute for Public Knowledge for their thoughtful review and insightful suggestions. Thanks also to Josh Bogus for his research support in the early phases of this project. Finally, thanks to Susan Rakov of Frontier Group and to Carolyn E. Kramer for their editorial assistance.

U.S. PIRG Education Fund thanks the Ford Foundation for making this project possible.

The authors bear responsibility for any factual errors. The recommendations are those of U.S. PIRG Education Fund. The views expressed in this report are those of the authors and do not necessarily reflect the views of our funders or those who provided editorial review.

With public debate around important issues often dominated by special interests pursuing their own narrow agendas, U.S. PIRG Education Fund offers an independent voice that works on behalf of the public interest. U.S. PIRG Education Fund, a 501(c)(3) organization, works to protect consumers and promote good government. We investigate problems, craft solutions, educate the public, and offer Americans meaningful opportunities for civic participation. www.uspirg.org

Frontier Group conducts research and policy analysis to support a cleaner, healthier and more democratic society. Our mission is to inject accurate information and compelling ideas into public policy debates at the local, state and federal levels. www.frontiergroup.org

For additional copies of this report, or to obtain a detailed listing of completed and proposed road privatization projects across the country, please visit www.uspirg.org.

Cover: Photo by Geoffrey Holman, istockphoto.com; photo modification by Harriet Eckstein

Traffic sign images that appear on pages 5, 6, 17, 27, 27, 29 and 37 are from the Manual of Traffic Signs, by Richard C. Moeur (http://www.trafficsign.us/) Copyright 1996-2005 Richard C. Moeur. All rights are reserved.

Design and layout: Harriet Eckstein Graphic Design Table of Contents

Executive Summary 1 Introduction 4 What Is Toll Road Privatization? 5 Privatization: Clarifying the Term 5 Practical Considerations: When Does Privatization Make Sense? 6 Defining Toll Road Privatization 6 The Rise in Toll Road Privatization 9 The Current State of Privatization 9 Why Privatization Proposals Have Become More Common 11 Vast Amounts of Private Money Are Seeking Toll Road Investments 16 The Pitfalls of Road Privatization 17 Loss of Public Control 17 The Public Will Not Receive Full Value 21 Private Companies Often Engage in Risky Financial Schemes 27 Problems Compounded By Excessively Long Contracts 29 Lack of Transparency 30 Inadequate Oversight Exists to Ensure the Public Interest is Protected 31 Protecting Against Bad Privatization Deals 35 Developing a General Approach to Toll Road Privatization 35 Principles to Ensure Any Deal Protects the Public Interest 37 Notes 39 Appendix A: Compensation and Non-Compete Clauses in Privatization Agreements 46

Appendices B and C of this report, which provide detailed lists of completed and proposed privatization projects, can be downloaded from www.uspirg.org/road-appendix

Executive Summary

oad privatization is a growing issue in Toll road privatization is becoming the United States as politicians and increasingly prevalent in the United Rtransportation officials grapple with States. budget shortfalls. Toll road privatization takes two forms: the lease of existing toll • Between 1994 and early 2006, $21 roads to private operators and the con- billion was paid for 43 highway facili- struction of new roads by private entities. ties in the United States using various In both instances, private investors are “public-private partnership” models. granted the right to raise and collect toll revenue, a right that can amount to billions • By the end of 2008, 15 roads had of dollars in profits for the shareholders. been privatized in 10 different states Though these privatization deals seem – either through long-term highway to offer state officials a “quick fix,” they lease agreements on existing highways often pose long-term threats to the public or the construction of new private toll interest. By privatizing roadways, officials roads. hand over significant control over regional transportation policy to individuals who • Currently, approximately 79 roads in are accountable to their shareholders rather 25 states are under consideration for than the public. Additionally, the econom- some form of privatization. ics of these deals are such that the upfront concession payments are unlikely to match • A few prominent examples of priva- the long-term value of the higher tolls that tized roads include: will be paid by future generations and not collected for public uses. o The Indiana East-West Toll Road, Public officials, therefore, should ap- which carries Interstate 90 approxi- proach the idea of private toll roads with mately 150 miles across northern great caution, knowing that the short-term Indiana and is a critical link be- benefits are unlikely to outweigh the long- tween Chicago and the eastern term costs. United States.

Executive Summary 1 Figure ES-1. Privatization Projects Completed, Underway or Proposed, by State

For a detailed listing of completed and proposed privatization projects by state, please download Appendices B and C of this report, available at www.uspirg.org/road-appendix.

o The Chicago Skyway, which links The upfront payments that states re- downtown Chicago with the Indi- ceive are often worth far less than the ana Toll Road. value of future toll revenue from the road. Analysis of the Indiana and Chi- o California’s SR 91 Express Lanes, cago deals found that private investors which were originally built by a would recoup their investments in less private entity to provide a speedier than 20 years. Given that these deals connection between Orange and are for 75 and 99 years, respectively, Riverside counties. the public clearly received far less for their assets than they are truly worth. Though privatization may offer short-term relief to transportation bud- • The public loses control over get woes, it often has grave implications transportation policy. Private road for the public. concessions in particular result in a more fragmented road network, less • The public will not receive full ability to prevent toll traffic from be- value for its future toll revenues. ing diverted into local communities,

Private Roads, Public Costs and often the requirement to com- • The public must receive fair value so pensate private operators for actions future toll revenues are not be sold off that reduce traffic on the road, such at a discount. as constructing or upgrading a nearby competing transportation facility. • No deal should last longer than 30 years because of uncertainty over fu- • Public officials cannot ensure that ture conditions and because the risks privatization contracts will be of a bad deal grow exponentially over fair and effective when leases last time. for multiple generations. No army of lawyers and accountants can fully • Contracts should require state-of-the- anticipate future public needs. Trans- art maintenance and safety standards urban, for example, has control over instead of statewide minimums. the Pocahontas Parkway in Virginia for 99 years. • There must be complete transparency to ensure proper public vetting of In order to protect the public inter- privatization proposals. est, public officials must adhere to six basic principles in all road privatization • There must be full accountability in agreements: which the legislature must approve the terms of a final deal, not just approve • The public should retain control over that a deal be negotiated. decisions about transportation planning and management.

Executive Summary 3 Introduction

ebates about the privatization of question of public versus private provision public services often devolve into of government services, it is a matter of Dideological squabbles about the where best to draw the line. There will proper role of government versus the always be a role for both public and private private sector. Advocates of privatization entities in meeting America’s transporta- point to examples of government waste and tion needs. It is up to elected officials to bureaucratic inertia to make the argument find the right balance to ensure that the that the private sector can deliver services public gets the value, efficiency and safety more efficiently. On the other side, op- it deserves from its transportation network ponents of privatization offer stories of – particularly at a time when our transpor- corrupt contracting and the insensitivity tation system is in dire need of repair and of private entities to the broader public when resources are scarce. interest to argue for broader government The task of government officials and the involvement. public is to evaluate privatization proposals Yet, all but the most extreme advocates rigorously – without ideological blinders of privatization will acknowledge that there – to ensure that any such deals benefit the are some circumstances in which govern- public interest. ment must provide certain services directly. Public officials must ask tough questions Few, for example, would feel comfortable if they are to safeguard the public interest. taking bottom-line responsibility for the In this paper, we evaluate one particular delivery of “justice” away from our court form of public-private partnership in trans- system and giving it to a private, for-profit portation – toll-road privatization – and corporation. Similarly, few opponents of suggest a series of guidelines public officials privatization would insist that government should adopt to ensure that any potential should never contract out to the private sec- private toll road deals benefit the public. tor – whether for maintenance of the copi- We hope this paper will help public of- ers in government offices or the production ficials navigate the difficult decisions sur- of concrete for government buildings. rounding toll-road privatization and make In other words, when it comes to the the right decisions to benefit the public.

Private Roads, Public Costs What Is Toll Road Privatization?

Privatization: the basic problem of persuading the public that the terms of the partner- Clarifying the Term ship are fair.1

overnment, the media, and the pri- The term “public-private partnership” vate infrastructure industry use a is particularly ubiquitous, and woefully Gvariety of terms to describe efforts imprecise. Virtually all public programs to transfer public services to the private have always involved some kind of partner- sector. As one long-time scholar of infra- ship between public and private sectors. structure privatization at Harvard notes, Medicare is a partnership between public privatization has been packaged under a financing and services by private medical variety of names. providers, for instance. All government departments of transportation likewise Governments have experimented with have a long tradition of using private ven- many variants of privatization, often dors for various kinds of service provision. coining special terms—such as “peo- Even transactions between two private plisation” (Sri Lanka), “capitalization” companies involve some kind of partner- (Bolivia), or “equitization” (Viet- ship with the public sector to underwrite nam)—to distinguish them from the risks, define property rights, and enforce standard fare. And many consultants contracts. Since “public-private partner- now prefer to use the term “public- ship” can mean virtually anything, the private partnerships” to emphasize term is of little descriptive value. that a wide variety of forms of pub- The term “privatization” is more pre- lic-private collaboration is possible. cise, denoting the transfer of traditionally Such changes in terminology may public services or property to the private be useful, but they do not eliminate sector.

What Is Toll Road Privatization? 5 Practical • Third, privatization only succeeds when private contractors’ perfor- Considerations: mance is disciplined by ongoing When Does competition. There must be multiple contractors capable of submitting Privatization bids, and contracts must be for a short Make Sense? enough period to allow for unsatisfactory performers to be readily replaced.4 Practically speaking, privatization makes sense for the public when certain condi- • Finally, privatization works best when 2 tions are met. the government officials making the decision to privatize can be held • First, privatization works best when accountable for the results of a private companies have a proven deal. comparative advantage over government agencies in providing a particular good or service. For instance, at least before recycling programs were created, a variety of exhaustive studies concluded that because smaller Defining Toll Road municipalities lack economies of scale, ? those that used competitive contract- Privatization ing for household garbage collection had lower costs than comparable mu- In this report, we focus on evaluating nicipalities that used public agencies proposals for toll road privatization to for collection.3 determine whether privatization of toll roads makes sense according to the criteria • Second, the services that are priva- described above. tized must be well defined, with Private toll road deals can involve lesser clear criteria for the evaluation of or greater degrees of privatization. On the success or failure. It is less prob- lesser side of the spectrum are small chang- lematic, for example, to contract for es such as the hiring of private contractors private delivery of a ton of cement or to mow grass or operate toll-collection sys- for office windows to be washed each tems. On the other side of the spectrum is Friday than it would be to contract out the construction of wholly privately owned “justice” from the courts. and operated highways.

Toll road privatization: When an existing roadway is leased to a private company for a concession fee, or when a private entity finances new road construction in exchange for the right to operate and collect rising tolls on that road.

Private Roads, Public Costs “Availability Payments” Versus Toll Concessions

y retaining the public’s right to set and collect tolls while more narrowly pre- Bscribing the private role, contracts that pay “availability payments” to private operators have a number of advantages over private toll concessions. The public retains greater control over transportation policy and will not be subject to non- compete clauses. Nor is the public liable to be sued for compensation when policies reduce toll traffic. Incentive clauses create a direct economic incentive to keep lanes available and in good repair. Availability payment deals still have many potential problems. Higher private borrowing costs mean that deals will still tend to lose the public money over the long term; and contract incentives still cannot anticipate future public needs. The public interest protections listed in this report would also apply to deals that involve availability payments. Moreover, the payments should not be overly generous compared to what it would cost the public to make these lanes available themselves.

This paper focuses on two types of ar- One example of such a deal is an rangements: when an existing roadway is agreement reached between the state of leased to a private company for a conces- Florida and the Spanish company, ACS, sion fee; and when a private entity finances for the construction and operation of new road construction in exchange for the express toll lanes alongside I-595. Under right to operate that route over a specified the arrangement, Florida will make annual period of time. These arrangements share “availability payments” to ACS over a two characteristics. First, the government 35-year span to compensate the company transfers rights tantamount to ownership for the cost of building and operating to a private entity. Second, the private the highway. The payments to ACS are entity receives access to toll revenues and incentive-based, but the state of Florida the right to raise tolls. retains the power to set toll rates and There are many types of arrangements collect the revenue.5 The Florida deal, that fall just outside of this definition while clearly a “public-private partnership” of toll road privatization. For example, with a strong private-sector component, governments have signed contracts with does not fit strictly within the definition of private entities to perform virtually all of toll road privatization used in this report. the services a government would perform Another complicating factor in defining in building and operating a highway privatization projects is the use of non- – ranging from design to financing to profit intermediaries to secure preferential ongoing maintenance – but without grant- treatment for privatization arrangements ing the private entities direct access to toll under the U.S. tax code, IRS Revenue revenues. In these cases, government still Ruling 63-20. Local governments have maintains ownership of the road as well as traditionally issued tax-exempt debt in a direct ability to withhold public funds order to build schools, court houses or from the private operator if the terms of hospitals. Today, however, private com- the contract are not upheld. panies establish these so-called “63-20”

What Is Toll Road Privatization? 7 non-profits so that privatized projects can 63-20s can fit into the definition of “priva- achieve the same favorable credit terms as tization” used in this report.6 public agencies. In order to establish a 63- Describing proposed toll road privati- 20, the local government must approve its zation projects with exactitude is difficult charter and the issue of its debt, giving the because the precise relationship between government title to its assets after the debt a government and a private entity in oper- is repaid. However, a loophole in the law ating a road may not be determined until allows an arrangement in which the gov- a contract is finalized. As a result, while ernment can then effectively disown the we have attempted in this paper to use a non-profit, which limits the government’s relatively narrow definition of privatization ability to be involved in the operations of for completed projects, our list of proposed the company. By law, 63-20s cannot make projects includes a much broader range of a profit, but private companies can cir- potential arrangements. While some of cumvent this restriction by receiving their these roads may end up as fully privatized compensation through development fees highways, others will not. Including the that are charged for consulting services. broad range of potential projects is valuable Though obviously an indirect way of earn- despite this problem because it conveys the ing a return on investment, this contriv- variety of potential privatization projects ance has nonetheless become a common across the country and the potential stakes way for private companies to seek publicly involved for the public. subsidized capital, and projects financed by

Private Roads, Public Costs The Rise in Toll Road Privatization

of public-private partnerships in highway The Current State of 7 CONSTRUCTION AHEAD construction and operation. Privatization As of the end of 2008, 15 roads had been privatized, and approximately 79 roads were either in the process of being hough rare only a decade ago, road built by private entities or being consid- privatization has become increasingly ered for privatization. (See “Tallying Up Tcommon in the United States. Cur- the Number of Privatization Projects.”) rently, 24 states and Puerto Rico have leg- This privatization activity represents a islation or regulations authorizing the use substantial amount of money: from 1994

Tallying Up the Number of Privatization Projects

n counting the number of privatization projects across the United States, we Iattempted to be as inclusive as possible, including projects at every stage of consideration from idle discussion to full-fledged proposals. Information about privatization proposals was gleaned from a variety of sources, which are described in detail in Appendices B and C to this report, which can be downloaded from www.uspirg.org/road-appendix. The privatization field is extremely fluid. Some proposed projects may have been dropped; others may have been put on hold. New projects may also have been proposed since the research for this paper was completed. Moreover, some proposals, particularly at the early stages, are vague about the role of private investment and involvement. In other words, the number of privatization projects described here represents a snap- shot in time and a relatively broad view of what constitutes a privatization project.

The Rise in Toll Road Privatization 9 Figure 1. Privatization Projects Completed, Underway or Proposed, by State

For a detailed listing of completed and proposed privatization projects by state, please download Appendices B and C of this report, available at www.uspirg.org/road-appendix.

to early 2006, $21 billion was paid during seeking to build infrastructure. Accord- this time period for 43 highway facilities ing to World Bank records, infrastructure in the United States using various models privatization outside of the United States (including models other than those consid- reached a peak of over $110 billion per year ered in this report).8 These numbers may in 1997 and 1998.11 rise as more states attempt to overcome Many infrastructure privatization deals severe short-term budget deficits and meet became high-profile failures. Two dozen unfunded transportation needs.9 private toll roads went bankrupt in Mexico Common in the less-developed world after 1994. The Thai government seized for the last couple of decades, infrastruc- one railroad that had been in private hands ture privatization had not taken root in the in 1993. Britain renationalized its rail sys- United States until recently.10 During the tem from Railtrack, the private company 1990s, infrastructure privatization became that had purchased the rail system, in increasingly popular in East Asia and in 2001.12 A World Bank study of over 1,000 Latin America, where Enron was a major infrastructure projects in Latin America investor. In those countries, unlike in the and the Caribbean between 1982 and United States, access to long-term capital 2000 found that 55 percent of privatiza- was a major problem for governments tion contracts in transportation and 75

10 Private Roads, Public Costs percent in water and sewer had been rene- budget, while money for major repairs is gotiated, most during the first few years.13 taken from the Division of Capital Asset Twenty-one toll road projects in Hungary, Management, a separate agency. This set- Indonesia, Mexico, and Thailand were sub- up clearly creates an incentive for the de- sequently taken over by the government.14 partment of transportation to under-invest By the early years of the current decade, the in road maintenance, because a separate volume of privatization deals had returned agency will be responsible for repairs.17 to the lower levels of the early 1990s. Additionally, even when federal funds for maintenance are provided, public officials often divert them to the construction of new roadways, as a ribbon-cutting cer- emony tends to carry more political weight than maintenance projects. The result is EXPRESSWAY AHEAD Why Privatization deferred maintenance which necessitates Proposals Have expensive repairs in the future. State governments today face immedi- Become More ate budget crunches due to rising health, Common pension, and unemployment costs, coupled with declining revenue. State legislators, who have already closed $40 billion in Despite these experiences, privatization budget gaps, face an additional $131 billion is becoming increasingly common in the shortfall between now and the end of the United States as state governments attempt 2010 fiscal year.18 According to William T. to overcome severe budget shortfalls. This Pound, executive director of the National trend has also been encouraged by federal Council of State Legislatures, “These policies meant to facilitate privatization budget gaps are approaching those seen agreements. in the last recession, which were the worst since World War II, and show every sign Budget Squeeze for of growing larger.”19 Transportation Rising costs and declining revenues Roads across the country are under strain limit states’ ability to use general revenue due to growing congestion and years of funds to address transportation needs. insufficient investment in maintenance. Meanwhile, gas taxes, the traditional The American Society of Civil Engineers mainstay of transportation funding, have has graded the overall condition of the not kept up with inflation. For example, nation’s infrastructure a “D,” and predicts states’ gas taxes lost 43 percent of their that $200 billion per year must be spent to value during the 1970s, 80s, and 90s.20 The maintain and improve the quality of the federal gas tax, last increased in 1993, has nation’s roads and bridges.15 This level of done only slightly better. To complicate investment will put a tremendous strain on matters, Americans have begun to drive state budgets, already experiencing short- less in the past year, further reducing gas falls due to declining revenue. tax revenue. Part of the problem is perverse rules Furthermore, over the past few years, that discourage investment in maintenance construction costs have been rising due to while encouraging construction of new rapid inflation in the price of construction roads.16 For example, in Massachusetts, materials and the increased consolidation the funds for highway maintenance come of the construction industry. Though the from the Department of Transportation’s recent financial crisis has led to a deflation

The Rise in Toll Road Privatization 11 in construction costs, the historical trends In the context of great investment needs have contributed to the current shortfall in and stagnant revenues, the huge upfront transportation budgets. Over the past five payouts of toll road privatization have obvi- years, the cost of materials for highway and ous short-term appeal. street construction, as measured by the Producer Price Index (PPI), has increased Political Benefits of Privatization by 63 percent, a rate far higher than the Privatization of roads offers elected of- general rate of inflation over the same ficials political benefits beyond the ability period.21 In particular the cost of crude to avoid potentially unpopular tax increases oil has led to very high costs for asphalt to pay for transportation. In the short and diesel, two of the most basic construc- term, privatization promises a huge budget tion materials used in highway and street windfall, especially for privatization of construction. existing roads, which creates budget slack While material costs have been increas- and an ability to dedicate resources to other ing, the number of bids that states receive favored projects. New private roads offer for contracts has been decreasing. While special opportunities for credit-taking and not as significant a factor as the cost of ribbon cutting ceremonies. In either case, materials, there has been a noticeable the long-term financial downside, particu- trend among states indicating that fewer larly the loss of toll funds and rising toll contractors are responding to requests for rates paid by drivers, often is overshadowed proposals. According to a survey of the by the short-term windfall.25 For instance, nation’s state transportation agencies, the the Indiana Toll Road deal used a 75-year reasons for this include 1) increased con- lease to finance a 10-year transportation solidation; 2) increased work with the same plan. Whatever structural budget shortfalls number of contractors; 3) downsizing of the Indiana faced before the deal will return construction workforce; and 4) increased in the 11th year , but the state will need to technical requirements in contracts.22 As face these shortfalls without revenue from fewer contractors respond to competitive its toll road. bid requests, states will be limited in their Privatization may also be attractive to choices to find the best contractor for the elected officials because it gives them po- lowest price, and prices will increase. Over litical cover for toll hikes they fear will be time this could become a more serious unpopular. Potential investors claim that factor behind highway construction cost by outsourcing toll collection to a private inflation. company, drivers’ anger will not be direct- As a result of revenue shortfalls and ed at the politicians who authorized the toll historically rising costs, states are increas- hikes. Moody’s bond rating agency, after ingly unable to build and maintain high- conceding that governments can generate ways at traditional levels. According to the these same upfront payments by borrow- American Association of State Highway ing against future toll collections without and Transportation Officials, the federal privatization, offers the counterpoint Transportation Trust Fund, used for state that, “If they pursue the option [without and local projects, is projected to run into privatizing], governmental authorities shortfall during 2009 and will need to re- must take responsibility for their own toll duce payments by 42 percent the following raising decisions, rather than distancing year unless new revenues are obtained.23 themselves from these decisions through Many state-level transportation trust funds a long-term concession to a private en- are also forecast to run into shortfall in tity.” 26 Fitch bond rating service, similarly, coming years.24 lists as a merit of toll road privatization, the

12 Private Roads, Public Costs ability to “distance government from toll holders of road concession deals that last increases.” The report explains that, “the longer than the expected life of a road political risk related to toll rate increases (normally 40 years or more) as owners for could be minimized by transferring the tax purposes and allows them to depreciate authority within an overall rate-setting the value of those assets at an accelerated framework to the private sector.”27 rate of 15 years. Senator Jeff Bingaman has described this as, “the tax tail wagging the Federal Rules Promote dog: Exceptionally long leases in order to Privatization recover capital outlays on an accelerated Policies by the Internal Revenue Service schedule.”31 As an overview study by the and particularly the Department of Trans- Transportation Research Board of the portation (DOT) have also promoted road National Academies concludes, “This privatization. amounts to a government subsidy to the The tax code encourages privatization in concessionaire that may significantly re- a number of often unintended ways. As dis- duce corporate taxes if the project proves cussed earlier, many private projects take profitable.”32 advantage of the IRS 63-20 rule to utilize The U.S. Department of Transporta- benefits meant for nonprofit organizations. tion also subsidizes private road projects The federal tax code also treats private in a number of ways. The Transportation

Aggressive Lobbying by the Private Toll Road Industry

oliticians across the country have been lobbied extensively by the toll road Pindustry hoping to profit off the public’s infrastructure. These lobbyists have made sizeable campaign contributions to numerous politicians across the country, hoping to encourage the adoption of road privatization projects.28 Though legal, these contributions raise the question of whether politicians can make an unbiased decision in the public’s interest when so much money is at stake. The following provides a sample of some of these contributions:

• Zachry Construction Corporation, a company competing for Trans Texas Corridor projects, contributed $888,996 to Texas politicians from 2003 to 2008.29

• J.P. Morgan Chase, a member of A2 Transportation Partners, a consortium bidding to operate the Alligator Alley, contributed $100,000 to the Florida Democratic Party in 2002, and another $15,000 in 2008.

• Abertis Infrastructures, a Spanish based road management company, spent $280,000 in 2007 and $465,000 in 2008 on lobbying efforts at the federal level.

• Employees of UBS, which was part of the financing team involved in the proposed bid for the Pennsylvania Turnpike, donated $13,000 to Governor Ed Rendell of Pennsylvania.30

The Rise in Toll Road Privatization 13 Infrastructure Finance and Innovation Act due to significant public opposition to the (TIFIA), passed in 1998, established funds project, TxDOT eventually rejected the for the federal DOT to spend on secured proposal in favor of a bid by the North (direct) loans, loan guarantees, and standby Texas Toll Authority (NTTA), a public lines of credit to attract private investment entity. The deal with the NTTA was esti- in surface transportation infrastructure.33 mated by some analysts to save the public The TIFIA website lists $5.8 billion in past $2.3 billion versus the bid from the private or pending financing provided by the de- vendor.37 In response, the FHWA sent partment as of February 2009, with most of a letter to TxDOT threatening to with- it devoted to highway projects.34 The DOT hold future federal funds for the project. also publishes model legislation for states FHWA argued that acceptance of NTTA’s and a newsletter to encourage privatization bid violated federal regulations requiring of roads.35 a “fair and open” competitive process and The biggest incentives are for private rules prohibiting public entities from bid- “green field” deals in which companies ding against private companies. While the construct a new toll road and then oper- FHWA eventually backed down from its ate it and collect tolls. The federal DOT threat, many in Texas saw the exchange allocates over $2 billion per year in credit as an unjustified use of federal powers to that can be used to subsidize private bor- influence state decisions.38 rowing for highway and surface freight In a more recent signal of its support for transfer projects by exempting private privatization, the Federal Highway Admin- bonds from taxes. The DOT also grants istration issued a rule in the Federal Regis- private projects special federal waivers ter requiring any future reorganization of that suspend normal requirements on public agencies to be justified on market contracting, project finance, compliance concession terms. What this essentially with environmental requirements, and means is that any time a state agency at- right-of-way acquisition. For example, tempts to reorganize or transfer authority Oregon and Texas both received federal over a toll road, it must first undergo an waivers allowing them to begin negotiating analysis to determine what price a private contracts before the environmental review company would bid to operate the highway process had been completed.36 under a concession agreement. When this In addition to passing favorable regula- concession price is determined, the public tions, the federal DOT under the Bush entity would be required to charge that Administration actively lobbied state amount to the other agency that is tak- governments to approve privatization ing over the roadway. Thus, if TxDOT agreements. Then-Secretary of Transpor- wanted to transfer authority over a road to tation Mary Peters traveled to numerous the NTTA because it thought the NTTA states to encourage their use of private was better suited to operate that highway, investment, and tolling became an official TxDOT would be forced to charge NTTA key component of the DOT’s congestion an amount equivalent to what a private mitigation initiatives. In one instance, the company would bid. After a large number Federal Highway Administration (FHWA) of private agencies and other stakeholders even threatened Texas for pulling out of an voiced concern during the public comment agreement with a private company. The period, the U.S. DOT revised the rule to Texas Department of Transportation (Tx- give agencies wide latitude to determine DOT) initially accepted a proposal from the criteria for market valuation. While Cintra, a private company, to construct the immediate effect of this ruling has and operate State Highway 121. However, been muted, it nonetheless set a troubling

14 Private Roads, Public Costs precedent by establishing private conces- been accusations of conflicts of interest by sion deals as the standard. companies which analyze these deals and prepare profit forecasts. In fact, a study of The Potential for Low-Risk Profits 10 private U.S. toll roads built since the In addition to the federal subsidies for mid-1990s found that half have not met green field deals, a number of factors their traffic projections.39 make road privatization attractive to in- Additionally, private infrastructure vestors. One is the relative reliability of deals often involve heavily leveraged debt toll revenues. Compared to stocks and and the trading of long-term risk, much other investments, toll road privatization like the mortgage industry in recent years. is considered a relatively secure source of Some analysts worry that such a model long-term revenue. In addition, once a toll will not be sustainable.40 A recent analysis road concession is signed, it is very difficult by PricewaterhouseCoopers describes the to undo under U.S. contract laws. Toll destabilizing pattern of leveraging debt and profits reduce investors’ portfolio risk as selling the risk to others that characterize well, because the returns on these invest- both the private infrastructure market ments depend chiefly on traffic flow, which and the now-infamous subprime mortgage has historically been “recession-proof.” industry: Though there have been signs recently of reduced driving, toll roads are still consid- In the early 2000s, an increas- ered a safe investment, especially in light of ing number of large project finance the current problems on Wall Street. lenders aggressively cut back on their There is some evidence that the reputa- project and infrastructure finance tion of infrastructure investments as “safe” lending business or amalgamated may be overstated. Many new private toll them into their wider leverage fi- roads have underperformed, and there have nance business. This led to the now

Governor Corzine of New Jersey decided not to privatize or lease the Atlantic City Expressway, Garden State Parkway, and New Jersey Turnpike (pictured here). Governor Corzine previously served as CEO for Goldman Sachs, which advised structuring of the road privatization deals in Indiana and Chicago. (Photo: Mark Gordon)

The Rise in Toll Road Privatization 15 well-practiced strategy of “originate investment funds raised $25 billion in and distribute,” often cycled through 2008, up tenfold from just $2.4 billion in the dedicated securitization struc- 2004 (though down from the peak invest- tures. … These were initially used ment of $34 billion in 2007).42 A total of to demonetize a bank’s balance sheet 77 such funds were active in the market but then took on a life of their own at the end of 2008, seeking $92 billion in as they became conduits for banks capital. 43 to originate business, take a fee, and The recent financial crisis has caused then sell on the exposure.41 investment in private infrastructure funds to dry up, and has eroded the stock prices Despite these concerns, there remains of many funds. Yet, some fund managers the perception that infrastructure invest- believe that the financial crisis will be ments are safe and sustainable. a boon to infrastructure investment in the long term. As Matthew Vickerstaff, the global head of infrastructure and asset based finance at Societe General in New York, explained in BNET Financial Vast Amounts of Services, “The current crisis is good for $ Private Money Are infrastructure funding because there will be increasing pressure on states, cities and Seeking Toll Road provinces to balance their budgets. They Investments will need to spend both for social and transportation infrastructure. They’ll need private money and private-public part- With all these factors favoring toll road nerships.”44 Thus, the number of private deals, it is no surprise that private investors road deals may increase as state and local have been trying to take advantage of the governments become more desperate for profit opportunities. Private infrastructure short-term infusions of cash.

16 Private Roads, Public Costs The Pitfalls of Road Privatization

he economics and governance of quality of the roads, the many costs of driv- privatized roads are highly problem- ing and car ownership, the availability of Tatic. For existing roads, outsourcing high-quality and affordable public transit borrowing against future toll revenue to alternatives, and the development of future a private entity is likely to generate less land-use patterns. What may seem benefi- money than a public entity could produce cial from a narrow profit perspective does with the same tolls. This is the case be- not necessarily benefit the broader public cause a private toll road operator will have interest.45 Public control of key toll roads higher borrowing costs and must divert is therefore necessary to ensure coherent some revenues to shareholder profits. In transportation planning and policy making addition to these fiscal problems, long-term over long periods of time. road contracts pose other serious threats Any driver knows how events that take to the public interest. These include frag- place on one road affect other connecting mentation and loss of public control over and alternative routes. Thus, toll rates, transportation policy, and the inability to maintenance and safety standards, as well as plan for future public needs in contracts congestion on a toll road affect the number that stretch over multiple decades. of cars using alternative means of transportation, including local roads and public transit. Decisions about how to operate and manage major roadways actually create traffic policy for an entire jurisdiction. New toll roads or additional lanes can have particularly profound consequences Loss of Public Control for future land-use and development practices as well as for a state’s energy and Transportation policy has tremendous im- environmental policies, including efforts to pacts on quality of life, health, and the cost reduce oil dependence, improve air qual- of living. It determines the level of traffic ity, and curb emissions of global warming congestion and air pollution, the safety and pollution.

The Pitfalls of Toll Road Privatization 17 Road privatization experiences across provisions are necessary for private entities the country have shown that a private to be able to sell bonds. If such a provision operator’s profit motives lead to different were not included, the state could eas- management decisions than government ily build a free, competing roadway that might pursue. Examples from recent road would divert traffic from the private toll privatization projects illustrate these po- road, eventually forcing the company into tential dangers. bankruptcy. This actually occurred in New Jersey with the Beesley’s Point Bridge. The Non-compete Clauses private bridge was originally built in 1927, Toll road investors want assurances that but in the 1950s a competing public bridge traffic levels will meet or exceed predic- was constructed only 300 yards away. Af- tions, even in the event of toll increases. ter the construction of the public bridge, Some privatization contracts therefore revenues from the Beesley’s Point Bridge explicitly limit states’ ability to improve plummeted, and the bridge was eventually or expand nearby transportation facilities. closed to traffic in June 2004. Recently, The U.S. Department of Transportation, Cape May County took over the bridge.48 in its Report to Congress on Public Private Even when privatization agreements do Partnerships (December 2004), strongly not include an explicit non-compete clause, supported the inclusion of such “non- there may be an understanding between compete” clauses to help attract private the state and the private operator. For investment. example, Virginia had an “understanding” In Colorado, one deal went so far as with the private operator of the Dulles to require adjacent municipalities to add Greenway not to make improvements on stop lights and reduce speed limits on competing roads ahead of schedule (though local roads as a way to reduce potential VDOT eventually reneged on this under- competition.46 Though the operator of the standing).49 Concession agreements in both road was technically a public entity, it was South Carolina (Southern Connector) and heavily financed by private investors who Virginia (Pocahontas Parkway) include demanded protection of future revenues. vague language that prohibits the state California, which used a private concession DOTs from pursuing activities that could deal to create new toll lanes in the median be considered competitive in nature.50 of State Road 91, was subsequently forced to buy back the road because non-compete Compensation Clauses clauses prevented the state from improv- In place of non-compete clauses, many ing the corridor and led to high-profile agreements now include compensation litigation. Similarly, Indiana is prevented provisions requiring the state to com- from building a four-lane, divided highway pensate the private operator if its actions more than 20 miles long (or expanding a negatively affect toll revenues. The Indiana current highway to Interstate standards) deal, for example, requires the state to pay within 10 miles of the East-West Toll investors compensation for reduced toll Road for at least 55 years without providing revenue when the state performs construc- compensation to the toll road operator for tion, such as adding an exit or building a lost revenue.47 mass transit line down the median. This Non-compete clauses are included in compensation would add significantly to many privatization contracts to protect the the cost of construction, and the state investors. A report by the Texas Legislative could potentially not afford to do the work Study Committee on Private Participation it would otherwise perform. As an added in Toll Contracts claims that non-compete complication, the exact level of these fu-

18 Private Roads, Public Costs ture payments might be subject to dispute for income lost from diverted vehicles. But and lawsuits. Already, the state of Indiana from the public perspective, the diverted has had to reimburse the private opera- traffic may clog local roads, increasing tor $447,000 for waiving toll collections congestion and pollution in local com- to assist in evacuations from flooding in munities. There was substantial traffic September 2008. Appendix A provides ad- diversion, particularly of trucks, after the ditional examples of these agreements. 1991 New Jersey Turnpike toll hike. New These compensation clauses are in- Jersey responded by rolling back some of imical to comprehensive transportation the toll hike for trucks to entice them back planning. Transportation policy should onto the Turnpike, a move that would not be made according to what is best for the have been possible under privatization, at public, not conditioned by avoiding extra least not without paying the private firm for payments to a private operator. the lost projected revenue. From a private toll road operator’s perspective, gridlock Profit-Driven Transportation and pollution on local roads may actually Planning be desirable because drivers will be more Some privatization deals include monetary likely to pay still-higher tolls. A study by incentives for the state to divert traffic to researchers at Penn State University and the toll roads or decrease safety standards Wayne State University found that the in an effort to boost profits. Decisions to private operation of toll roads could lead build new roads are supposed to be made in to increased accidents and maintenance on accordance with long-term regional plans. nearby public roads and lower quality of The Texas contract with Cintra-Zachry for life for residents on parallel roadways. The SH-130 contains incentives for the state to study also found large economic losses to raise the speed limit on the private road. nearby communities associated with diver- The contract says that if the speed limit sion of truck traffic.53 remains at 70 mph, the state will receive It is important to recognize just how 4.65 percent of revenue up to a certain much control over transportation policy threshold. However, if the state raises the is granted to private operators through speed limit to 80 mph, it would receive 9 toll hike schedules for private operators. percent of the revenues.51 Though state If the rules for increasing toll rates under officials have maintained they will not base the Chicago Skyway toll road deal had ap- speed limit decisions on monetary gain, plied to New York’s Holland Tunnel since this clause does create a strong incentive its inception, that roadway could presently for the state to toss aside safety, energy, and charge a one-way toll of more than $180.54 environmental policy in favor of cash. As a practical matter, an operator would be unlikely to charge that price because nearly Dangerous and Costly all drivers would instead take alternate Traffic Diversions routes. But the operator would be free to The goal of private toll operators is to find charge whatever the market would bear to the right balance of toll rates and traffic maximize profits. Most agreements allow to produce the maximum amount of rev- toll increases to match inflation or GDP, enue.52 Private toll operators can generally whichever is higher. This may not sound increase revenues by raising toll rates, even excessive. But according to Professors though the higher rates will cause some Peter Swan and Michael Belzer, nominal truck and car drivers to choose alternative GDP has increased an average of over 7 routes. For the private operator, the ad- percent for the past 50 years. Thus, with ditional toll rates may more than make up this average GDP growth, truck tolls could

The Pitfalls of Toll Road Privatization 19 increase 3,976 percent over the life of the outlays. Private investors want protection roadway under the terms of the Indiana against large increases in safety or main- Toll Road agreement.55 Moreover, in order tenance costs. As a result, road contracts to maximize profits, the toll operator can typically require private operators to meet also offer discounts to particular types of only generally applicable safety standards. motorists and encourage traffic between In order to obtain state-of-the-art highway certain exits or at certain times. Together, safety, Indiana must pay the additional these provisions enable the operator to cost of constructing and maintaining the dictate who drives on the toll roads and at road to the higher standards, as well as to what times. compensate the private company for any lost tolls caused by the construction. In the future, new standards may include Inability to Guarantee things such as new surfaces, embedded State-of-the-art Safety and road sensors, or technologies that are not Maintenance Standards currently envisioned. The Chicago De- The public may want major traffic arteries partment of Transportation, for example, to have cutting-edge safety technologies has recently conducted a study which found and traffic management. Private road that using a new type of road surface that operators, on the other hand, have an in- includes recycled rubber is slightly more centive to reduce costs by avoiding these expensive than regular asphalt but creates a

Loss of Public Control: Camino Colombia Toll Road

he Camino Colombia Toll Road is a prime example of problems with lack of Tpublic control associated with privatization. The Camino Colombia Toll Road, located in Texas, first opened to traffic in 2000. Completely financed by private investors at a cost of $90 million, this road was intended to support the increased traffic associated with the North American Free Trade Agreement.56 Politicians predicted the road would be a “generator of regional economic activity” and provide congestion relief. However, the road fell far short of its projections. An independent auditor predicted that the Camino Colombia road would generate $9 million in revenue within the first year, but instead it only received $500,000.57 By 2004, the toll road had failed and bondholders foreclosed on the remaining $75 million note. The road was sold at an auction for $12.1 million to John Hancock Financial Services Inc. TxDOT had initially bid $11.1 million for the road, but was unwill- ing to increase its offer. After purchasing the roadway, John Hancock Financial Services, Inc. immediately closed the road to all traffic. This move forced TxDOT to pay the private company $20 million to purchase the road, allowing it to finally reopen the route after five months.58 This clearly shows one of the pitfalls of privatization. Texas lost complete control of transportation along the toll road, while a private entity had the right to close the route regardless of the public consequences. Unfortunately, many transportation officials do not appear to have learned from this experience, and future privatization agreements may have similar results.

20 Private Roads, Public Costs number of public benefits. It reduces strain – be included with any contract; but they on sewers and other water infrastructure represent yet another area that govern- because the surface is porous enough to ment lawyers and accountants will need allow water to return back into the ground. to monitor. It also creates an outlet for used tires that are otherwise difficult and costly to dispose of. Despite the potential public benefits, a private operator would most likely be dis- suaded from upgrading to this standard by 59 TOLL The Public Will Not the extra costs. AHEAD Even if high maintenance standards Receive Full Value are specified in a contract, without proper oversight private companies will have Putting a fair dollar value on a long-term a monetary incentive to under-invest. toll road lease is difficult. As events of Private operators may seek investments the last year have shown, the state of the that help attract drivers, but these are not broader economy and financial markets can necessarily the kind of safety, environ- change quickly and dramatically, leaving mental, and other investments that public business plans and state budgets in ruins. policy requires. Unfortunately, states have The current crisis in state budgets makes exhibited an inability to properly oversee large up-front payments for toll roads dif- private contractors in the past. The Fed- ficult to resist. To give a sense of scale, the eral Highway Administration, in a review $1.8 billion sum paid for the 99-year lease of quality assurance activities, found on Chicago’s Skyway is enough to pay numerous deficiencies “such as a lack of every resident in Chicago a one-time sum independent sampling of highway materials of $643.61 The consortium that purchased for verification tests; inadequate statisti- a 75-year lease to operate the Indiana Toll cal comparisons of the test results; and Road paid an even greater sum: $3.8 billion. insufficient state control of test samples, Potential privatization deals for the New sampling locations, and testing data.” They Jersey and Pennsylvania turnpikes men- also found that pavement on highways is tioned payments between $10 billion and deteriorating faster than expected, which $30 billion. For elected officials struggling they attribute in part to the weaknesses in to plug chronic budget shortfalls, these oversight.60 short-term windfalls are enticing. Private operators will have a greater in- As impressive as the upfront payments centive not to invest in improvements and are, they pale in comparison to the likely maintenance as they come under financial value of the future tolls traded for them. distress or approach the end of a contract. The sums are smaller than public entities Private operators should be required to could generate doing the same financing provide prior safeguards against this pos- themselves. sibility. For instance, for I-495 in Virginia Financial analysis by experts in as- the operator is required to provide a letter set valuation confirms that privatization of credit or performance bond that the deals have failed to supply full value for DOT can use if the roadway is not returned the future tolls that private companies are in proper condition. Public agencies can expected to collect. also retain a portion of tolls during the final years of a contract and dispense them only • Analysis of the Indiana and Chicago if facilities are returned in good condition. deals by Dennis Enright of NW These kinds of measures can – and should Financial, a New Jersey investment

The Pitfalls of Toll Road Privatization 21 bank, found that the private inves- built within 20 miles. Due to outrage tors in those deals would likely recoup over the deal, one state senator initi- their investment in less than 20 years. ated hearings, which led to a tempo- That analysis is confirmed in at least rary moratorium on private deals and Indiana’s case by the company that provided the opportunity for the toll won the bid. The company, Mac- authority to bid. The public authori- quarie, sent investors a presentation ty’s bid offered an estimated $1.9 bil- asserting an “anticipated 15 year pay- lion in additional proceeds, calculated back to equity.”62 Given that Indiana’s on a net present value basis, despite deal is 75 years long, and Chicago’s the public entity’s higher estimated is 99 years, the analysis demonstrates investment for constructing the road that governments in these states itself.65 The state was able to cancel its received far less for their assets than initial contract with the private they are worth. operator.

• Economist and long-term valuation • A 2008 report prepared for the Vir- expert Roger Skurski at the University ginia Attorney General’s office said of Notre Dame found that the $3.85 of the experience with the Dulles billion Indiana Toll Road lease should Greenway, an early “green field” proj- have more reasonably been valued at ect, “it has been well known for some $11.38 billion.63 eighteen years that a private toll road would be significantly more expensive • A study by finance experts at Penn than a publicly funded project.”66 State and Harvard calculated that based on the same schedule of tolls on • In 1999, Ontario, Canada, received the Pennsylvania Turnpike, the public $3.1 billion for the lease of toll road could generate $26.5 billion over 50 407 ETR. In the following years, years compared with $14.8 billion commercial and residential devel- for a 50-year private asset lease.64 opment exceeded government pro- That same year, after deterioration jections, and the value of the road of private capital markets, a private increased. In 2002, a valuation con- consortium subsequently offered $12.8 ducted by an investor in the conces- billion for a 75-year lease. sion estimated that the road was actually worth $6.2 billion Cana- • In Texas, the Department of Trans- dian.67 portation (TxDOT) initially excluded a public toll authority from bidding to Figuring out the fair price for a toll road build and run a new toll road planned is a high-stakes guessing game. The long- near Dallas, even though it connected term value of the upfront payment itself to another one of the authority’s depends on predicting correctly the extent roads. Instead, TxDOT accepted to which inflation will erode the value of a $3.1 billion bid from the private those dollars and the rate of return inves- company, Cintra. The bid, though tors could have otherwise garnered with seemingly large, would have gener- the money. Expected revenues depend on ated an estimated 12.5 percent rate future toll rates and how many cars and of profit for Cintra and would have trucks will use the road, as well as what- required the public to compensate the ever lesser revenue may be obtained from company if a competing roadway was service area vendors and development of

22 Private Roads, Public Costs The Indiana Mis-Investment

overnor Mitch Daniels of Indiana promoted the concession of the Indiana Toll GRoad as a way to receive money upfront and invest it for future use. He argued that the interest from such a large investment could be used to fund future transportation programs, as well as other initiatives. Unfortunately, however, after only two years, revenue from the initial investment is already $138.6 million less than projected, leaving Indiana in a precarious position.71

future advertising and amenities. Private percent, the Indiana Toll Road by 45 per- concession deals attempt to reduce uncer- cent, the Chicago Skyway by 21 percent, tainty by indexing future toll rates to fac- and California’s South Bay Expressway tors such as inflation and the growth of the by 91 percent.69 Published reports have national economy, but much uncertainty suggested that Macquarie may even be at remains on the revenue side. Meanwhile, risk of defaulting on debt payments for the road operator’s costs will depend on the Indiana Toll Road and the South Bay factors such as future maintenance and Expressway due to lower-than-expected improvements, the number of workers that revenues from the highways.70 will be employed, and the cost of providing Concession agreements must include road safety and snow removal. All of these clear provisions to deal with the potential factors will themselves be influenced by for default – including provisions that future trends in transportation technol- guarantee ongoing maintenance of the ogy and demographics as well as the de- highway and the quick and orderly rever- gree to which the road operator can shift sion of the highway back to state control. costs onto the state. Furthermore, some (See page 27.) private investors may gain substantially But while both government and private by refinancing their projects after a deal is actors can fail to put an accurate value on completed. Sometimes allocation of these toll roads, the public is likelier to end up refinancing gains is included in the agree- getting the short end of the deal. ment; however, quite often they are not considered.68 To be fair, it is not only state govern- Private Investors Have Higher ments that have a difficult time estimating Costs of Capital the value of toll roads. Private investors Private companies have higher long-term – fueled by the speculative fervor of the borrowing costs than public entities. Ac- last decade – have also made big missteps. cording to analysis by Dennis Enright In late 2008, as a result of lower than pro- at the investment bank, NW Financial jected traffic and the repercussions of the Group, in 2007 public sector costs for financial crisis, Macquarie Infrastructure raising capital through debt were a full 35 Group was forced to write down the value percent less than the lowest cost a private of several of its toll road properties in the entity could hope to obtain.72 Other aca- United States. The company wrote down demic studies confirm these higher private the value of the Dulles Greenway by 13 capital costs.73

The Pitfalls of Toll Road Privatization 23 Today, due to the tighter private credit explaining the decision to forego private market, the disparity in financing costs funds, Bob Brendel, the transportation is wider than it was. A recent report by department outreach coordinator, noted PricewaterhouseCoopers found that in that it had become clear that the public countries with good credit ratings, the sector could borrow money more easily spread between the cost of public and than private citizens.78 private capital – once in the range of 0.6 Because government officials can issue to 0.8 percentage points – had increased tax-free bonds and bond traders are will- to 1 to 1.5 percentage points by late 2008. ing to accept lower interest rates on public “Funding for large brownfield monetiza- bonds, deals based on private capital are tions (like the Pennsylvania Turnpike at inherently more expensive than public $12 billion+) are finding credit margins financing. In light of the turmoil in the are well above 200 basis points [2 percent- credit market, it will probably become even age points],” the report states.74 Deloitte, more difficult for the state to get a bargain a major consultant on privatization proj- through private financing. Moreover, ap- ects, advises that, “with the maturing of proximately 20 percent of the financing the private finance market in the United for a private deal is typically done through Kingdom, the financing costs difference issuance of stocks or other private equity. between the private cost of capital and As even aggressive privatization advocates public borrowing is now in the range of concede, equity is typically more expen- only 1-3 percentage points.”75 The public- sive than debt.79 When investors purchase private spread is nothing new. For example, private infrastructure stocks, they take on back in 1997, Karen Hedlund of the law greater risk than if they purchase private firm Nossaman, Gunther, Knox & Elliott infrastructure bonds; therefore, they ex- similarly reported in Toll Roads News that pect higher rates of return. Thus, regard- the public sector enjoyed a 200 basis point less of whether private companies raise advantage over investors when borrowing capital through debt or equity, their costs long-term in the capital markets.76 will be higher than public financing. Due to these higher costs, Robert Poole, The higher private cost of capital director of transportation studies at the means that privatization deals will create Reason Foundation and a strong proponent significantly higher costs that get passed of road privatization, predicts that states onto taxpayers and drivers. Even when will receive lower bids for their roadways as multiple private companies bid for a public investors attempt to cover their costs.77 toll road, their higher long-term borrow- The financial crisis has already doomed ing costs will be passed on to the public in at least one privatization project. In 2008, the form of lower upfront payments than Missouri officials announced an ambitious the government could generate by bor- plan to repair or replace 802 bridges by rowing against the same future toll hikes 2014. The initial proposal envisioned using without using a private road operator as an private financing to pay for construction, intermediary. In other words, privatiza- with the state reimbursing the investors tion requires greater toll hikes to generate over a fixed period of time. However, the same up-front payment that could be when the credit market began to worsen in generated without privatization. Accord- September 2008, private financing became ing to the NW Financial Group study, infeasible. The Missouri DOT quickly published before the recent financial crisis, scrapped the private-financing scheme “doing such a deal with non-public own- and now intends to fund the entire project ership will result in tolls 20 to 30 percent through the sale of government bonds. In higher than a public deal of equal size.”80

24 Private Roads, Public Costs Privatization requires greater toll hikes to generate the same up-front payment that could be generated without privatization.

The previously mentioned study of public efficiency increases from private opera- and private options for the Pennsylvania tors. Relatively minor cost savings may be Turnpike similarly found that, “[f]or a gained by avoiding public-sector rules given upfront sum to be raised, tolls levied about hiring standards.83 Overall, how- in a Full Public Monetization may require ever, the potential savings are so limited only 71.5% of the tolls charged under a that Macquarie Infrastructure Group, for Corporate Lease.”81 example, reported to potential investors on There is no debate about whether public the Indiana deal, “no significant cost sav- borrowing costs are lower than the private ings envisaged.”84 The U.S. Government sector’s. Defenders of road privatization Accountability Office (GAO) reported may argue that private-sector efficiencies that the minor cost savings are often out- will offset the private sector’s higher bor- weighed by increased monitoring costs.85 rowing costs, but there is little evidence In sum, private operation cannot be ex- that those efficiencies, where they exist, can pected to produce sufficient cost savings to make up for the higher cost of capital. offset the high costs of privatization.

Potential for Minor Cost Savings Private Deals Must Also Cover on Existing Toll Roads Does Not Shareholder Profits Offset the Higher Cost of Capital While the high capital costs of privatization Privatization advocates often counter alone ensure the public cannot get as much concerns about the high capital costs of value from a private deal as it could from privatization by talking about potential a public one, public value is also reduced

Securitization without Privatization

ublic entities are able to securitize or “monetize” future toll road revenues without Pgoing through the process of privatization. In testimony before the New Jersey Assembly’s Transportation Committee, securitization expert Peter Humphreys explained that, without privatization, the state could generate a large up-front payment even without aggressive toll hikes. By securitizing future toll revenue, he calculated, the state could generate an upfront payment of $1.2 billion for each annual $100 million of future toll revenue it securitized for 15 years. Given that New Jersey tolls currently generate $700 million a year, a single deal without a single toll hike would then generate $8.4 billion over 15 years.82 Securitization is not always a wise option for state governments because it too is a form of borrowing from future toll payers, but states that pursue this option will at least generally get a better deal than if that same borrowing is done through privatization.

The Pitfalls of Toll Road Privatization 25 by the high profits the investors make. For maintenance; they must also pay for the instance, Cintra, one of the companies extra compensation of shareholders and purchasing the Chicago Skyway, revealed executives. Due to the large profit margins, that it anticipates bringing in a 12.5 percent operators of private roads are required return on equity.87 Analysis by Infrastruc- to raise much more revenue than public ture Management Group similarly found agencies. This extra revenue is achieved that investors in recent concession deals through higher tolls than would have been expected a long-term return rate of around charged without privatization. 12 percent on existing toll roads and 14 percent or higher for projects involving new construction.88 Transaction Costs Whatever the profit share allocated to Privatization deals also create significant shareholders, this is a net loss to the public. legal and monitoring costs for state or Drivers on private toll roads must not only local governments. For governments to cover the costs of road construction and avoid unintended consequences, they must

Highway Modernization can be Accomplished without Privatization

he decision to establish a private toll road should be distinguished from other Thighway modernization efforts that may be part of a private road proposal. Mod- ernization can be accomplished under either public or private auspices. A particular public toll authority may, for instance, be slow to adopt electronic tolling, while a potential private operator may promise to install the new technology promptly. In this case, elected officials have the power to instruct the toll authority to modernize, even if they have to pass new legislation or appoint new toll authority managers to speed the process. Alternately, the public could hire the private operator just to install the new system. The same is true of proposals for toll lanes that create discounts for carpoolers or for driving during non-peak hours. These approaches can be done with or without a private intermediary. The key distinction is that a privatized modernization program does not include a transfer of control over the roadway, with the associated long-term loss of public value. Modernization should similarly be distinguished from privatization in situations where the state seeks to build a new toll road or expand an existing one. There are potential gains and risks to outsourcing construction project design and oversight to a private firm. In some cases a private builder in a “design-build” project might better manage the risk of cost overruns. But, as problems with Boston’s Central Ar- tery “Big Dig” project managed by Bechtel/Parsons Brinckerhoff illustrate, private outsourcing can lead to its own problems with cost, safety, and quality.86 The point is that highway modernization projects should be distinguished from financing and long-term ownership. Giving greater discretion and incentives to a private builder or creating high-tech tolling options need not entail private ownership or private financing of the completed road.

26 Private Roads, Public Costs hire lawyers and analysts to conduct asset to operate the highway amidst a cloud of valuation, performance monitoring, and litigation. Private toll operators in both contract enforcement. Goldman Sachs, Texas and Virginia have already faced for example, was paid $20 million for bankruptcy, leading to the foreclosure of financial advice on the Indiana privatiza- Texas’ private road and subsequent auction. tion deal and $9 million for the Chicago Unfortunately, the purchaser of the road Skyway deal.89 Many of these costs would in Texas immediately closed the road to also be incurred if the government were traffic, forcing the state to purchase it at to use a public entity such as the turnpike an inflated price one year later. authority to securitize future toll revenues Like the mortgage industry, the pri- for an upfront payment. Under a private vate infrastructure industry often relies deal, however, additional state inspectors, on heavily leveraged debt and the trading financial experts and lawyers would be of long-term risk. Some infrastructure needed throughout the contract term to investors such as Australia’s Macquarie interpret the contract and potentially liti- have followed the mortgage broker model gate to ensure that the private operator is by repackaging infrastructure deals into upholding the terms of the deal. The state shares of listed infrastructure funds. Fi- of Virginia, for instance, has 30 engineers, nancial firms such as AIG and Goldman lawyers, and accountants dedicated to over- Sachs have followed suit. seeing its private road deals; and the state Public watchdogs are increasingly wary must still make use of additional outside of this trend. As James L. Oberstar and consultants.90 Peter DeFazio, the chairmen of the U.S. House Transportation and Infrastruc- ture Committee and the Subcommittee on Highways and Transit, respectively, warned, “The dependence of these firms on debt and asset inflation rather than in- Private Companies come or cash flows to finance acquisitions Often Engage in Risky and pay dividends to shareholders raises questions concerning the sustainability of Financial Schemes this model.”91 Typically, firms that have invested in Toll road deals are based on upfront toll roads acquired their investments with payments to the states or construction large amounts of borrowing. The peak of companies and a contract for the long these acquisitions occurred several years term maintenance and upgrading of the ago when credit was cheap. A few firms highway. This relationship assumes the even used credit to pay dividends to their private operator will have the available stockholders. Some of the biggest deals funds to meet these obligations. But what are financed with interest rates that start happens if it does not and cannot keep its low and balloon upwards over time, like part of the bargain? This is not a merely those infamous mortgages with low teaser theoretical question. rates. Jim Chanos, an early critic of Enron, If these business models prove unsus- warned in Fortune magazine about the tainable, the public may be left with a road strategies used by the largest infrastruc- operator in bankruptcy who will not invest ture firm, Macquarie, “Borrowing future in maintenance and upkeep, or who will growth to pay investors today bears the collapse at an untimely moment, leaving hallmarks of a Ponzi scheme.”92 government to figure out how to continue Regardless of whether such dire warnings

The Pitfalls of Toll Road Privatization 27 Figure 2, a-b. Stock Prices for Private Infrastructure Companies (in Australian dollars)94

Babcock & Brown Infrastructure

$1.40

$1.20

$1.00

$0.80

$0.60

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28 Private Roads, Public Costs are overstated, more expensive credit has Metropolitan areas have doubled their certainly hurt private toll operators’ bottom populations in the course of a few decades, lines. Most heavily hit on the private side creating huge changes in transportation are the Australian infrastructure financing needs. Massive, unforeseeable changes will groups, Babcock & Brown and Macquarie. likely take place for transportation tech- These firms are leaders of Australia’s well- nology, networks, demographics, and the developed infrastructure finance market. distribution of population over time frames Stock prices for the two Australian firms like those in the Chicago and Indiana deals. fell dramatically in the past months as In the face of such uncertainties, govern- investors began to worry that these firms ments cannot predict their transportation had far less liquidity than they suggested, needs, nor the revenue potential of their shown by the graphs on the previous page. toll roads, well enough to negotiate a deal The price of stock in the Babcock & Brown that fairly allocates risks, dictates policy, Infrastructure Fund had dropped to just 7 or sets a fair price. cents per share (Australian) by February No contract can be crafted well enough 2009.93 Many infrastructure funds have to solve these problems. Even the most been downgraded by rating agencies and public-minded elected officials with the analysts have posted warnings regarding best lawyers and consultants cannot draw these liquidity concerns. up a lease or concession contract that will predict the public’s needs and contingen- cies in the distant future. Ambiguities in the future interpretation of a contract under unforeseen circumstances may have huge stakes and may need to be litigated. Professor José Gómez-Ibáñez at Har- Problems vard, who has written numerous books on Compounded By infrastructure privatization, describes this problem as “the overuse of long-term con- Excessively Long cession contracts as the method of regula- Contracts tion.” He explains that, “the concession contract attempts to describe completely The loss of control and lost value from the obligations of the private firm to the privatization are greatly compounded by government and vice versa, and it can not be the fact that privatization contracts often changed unilaterally by either party. …The extend so far into the future. The Chicago main risk with concession contracts is that and Indiana lease deals will stretch for gen- an unforeseen event will make the contract erations: 99 years and 75 years, respectively. unworkable for one or both parties. In such Private investors prefer deals at least 50 cases, the parties face a difficult choice of years long, because that length allows them whether to renegotiate the contract or try to qualify for large tax subsidies. to live with its unsatisfactory terms until To appreciate how profound future the concession expires.”95 changes will be over these time frames, A study for the Organization for consider these transportation-related mile- Economic Cooperation and Development stones: Henry Ford introduced the Model (OECD) and the European Commission of T in 1908, 101 years ago and Congress cre- Ministries of Transport similarly concluded ated the interstate highway system in 1956, that toll road contracts beyond 30 and 35 53 years ago. Similarly, population changes years are “sub-optimal for taxpayers” and during these time periods can be dramatic. refers to the long-term losses of longer

The Pitfalls of Toll Road Privatization 29 deals as “mortgaging the future.”96 A FOG Lack of Transparency Federal Highway Administration study of AREA European experiences recommends against deals longer than 30-35 years. England and Given the profound implications of road France, according to this study, will require privatization, no deal should be approved private road contracts to be renegotiated at if the public has not had the opportunity the end of each 7.5 years.97 to review, question and comment upon it. Beyond the uncertainties inherent in Unfortunately though, many states lack a multi-generational time frame, an ad- legislation requiring transparency in pri- ditional issue of good government arises: vate road projects, such as making propos- disenfranchisement of future generations als available to affected communities. This of voters. Private investors in toll roads refusal to provide information is justified specifically seek out essential thorough- on the basis that private road builders and fares that lack attractive alternative routes. operators regard their own analysis and These highways are vital infrastructure, proposals as “proprietary” business secrets. integral to the daily lives of residents. So But such rules prevent full public review of long as the state, directly or through a the process and undermine both transpar- turnpike authority, retains control over its ency and the opportunity for full public toll roads, voters have the ability to hold participation.98 The Indiana and Chicago decision-makers accountable. Turning over leasing deals were finalized with very little control of the roads to private investors public deliberation or oversight. Texas eliminates that accountability and binds would have lost billions of dollars in rev- future voters to present-day decisions. enue if public hearings had not exposed the Doing so for several generations of voters higher payoff that could be offered by the is simply anti-democratic. public authority. The Florida Department

Cars lining up for the opening of the Pennsylvania Turnpike in 1940 (Photo: Pennsylvania Turnpike Commission).

30 Private Roads, Public Costs Strong Public Opposition to Road Privatization

cross the country, there is strong opposition to road privatization. A poll Aconducted by the National Association of Realtors found that 84 percent of Americans oppose the privatization of existing public highways. Two-thirds oppose letting private companies build, own and operate new roadways.99 Similarly, a 2009 survey by HNTB found that 92 percent of Americans said they most trusted either state, federal or local government to best manage and maintain infrastructure projects, compared to 7 percent who chose private sector companies.100 Surveys from states that have approved or proposed road privatization mirror these results. The data follow a trend, identified by Rod Diridon, Sr., executive director of the San Jose State University’s Mineta Transportation Institute, that people tend to become more skeptical about privatization the more they learn about a particular plan.101 For example, in Pennsylvania, 49 percent of those polled in March 2007 said they supported plans to privatize the Pennsylvania Turnpike. However, by August 2008, the level of support had dropped to 29 percent, with 60 percent of Pennsylvanians opposing Turnpike privatization.102

of Transportation is actually exempt from negotiated by the federal executive branch. undergoing review of its privatization con- Legislators who must defend their votes tracts by the Florida Council on Efficient will listen more closely to the public. If gov- Governments, a council created to review ernors need legislators’ approval, they will state contracts with private operators. Full also be more attentive to public opinion. transparency requires the public to have a meaningful opportunity to participate in public hearings plus timely disclosure of a potential deal’s terms and any related contracts and subcontracts well before a decision is made. DRIVE AT Inadequate Oversight YOUR OWN Likewise, citizens need to be able to hold RISK their representatives accountable for their Exists to Ensure decision to approve (or not approve) any the Public Interest privatization deal. Opinion polls show the is Protected public generally opposing road privatization. (See “Strong Public Opposition to State Level Road Privatization.”) In order to avoid a situation in which the executive branch ap- States do not Rigorously Evaluate proves a deal that legislators subsequently Privatization Agreements disavow, the legislature should also be In order to safeguard the public interest, required to vote on the final terms of any elected officials must rigorously examine potential deal. This is akin to the way that every aspect of a privatization agreement. Congress is required to ratify trade deals They must ensure that privatization is the

The Pitfalls of Toll Road Privatization 31 most appropriate means to deliver a par- failed to use comparisons with the public ticular project, and they must be certain sector to examine the long-term costs of that aspects of the public interest, such a project and the value of transferring as protecting taxpayers and the environ- risk to the private sector. In fact, Indiana ment, are not overlooked. Unfortunately, Governor Mitch Daniels did not even com- state governments have failed to develop mission an independent financial analysis systematic approaches to evaluating these of the concession until the deal was almost public interest concerns in privatization complete.106 Similarly, transportation of- agreements. Instead, public officials tend to ficials in other states, such as New Jersey, employ an ad hoc approach in which they Pennsylvania, and Illinois, admit that they may consider some aspects of the public have not developed a systematic approach interest, such as the impact on regional mo- to assessing public interest concerns.107 bility, but ignore other important aspects, The failure to use formal public interest such as equity concerns.103 tests may result in certain aspects of the Governments in other countries, such public interest being overlooked, such as as Australia and the United Kingdom, the value of foregone toll revenue. When have developed systematic approaches states have decided mid-course to conduct to identifying and evaluating the public thorough analysis, it has often changed interest before entering into privatization their decisions. In Texas, for example, agreements. Typically, these governments Harris County conducted a study in 2006 identify important elements of the public to examine the value of a long-term conces- interest and develop criteria for how to sion compared to retaining public control. consider potential deals. In Australia, for The county determined that it would gain example, the state of Victoria requires little through the concession, and that by all privatization agreements to be judged implementing more aggressive tolling, it according to eight specific public interest could realize similar or greater financial tests, including whether the rights and gains. Thus, Harris County opted to retain views of affected communities have been control of the toll roads.108 Similarly, when heard and protected, whether community Oregon hired a consultant to compare the health and safety are ensured, and whether estimated costs of private versus public there are sufficient safeguards to ensure sector financing, the state concluded that public access to the infrastructure.104 These the cost of the privately financed project public interest evaluations are conducted was not justified given the limited value often during the negotiations to adequately of risk transfer. Unfortunately, the study protect the public.105 was not conducted until after the private Unfortunately, these kinds of safeguards partners had already done substantial early have been used much less frequently in the development work.109 United States. In a recent report titled, Highway Public-Private Partnerships: More States Lack the Capacity to Rigorous Up-front Analysis Could Better Se- Independently Assess and cure Potential Benefits and Protect the Public Monitor Concession Agreements Interest, the U.S. Government Account- Private road contracts require ongoing ability Office notes that neither Chicago vigilance. Private operators have a mon- nor Indiana employed public interest tests etary incentive to underinvest if such un- prior to the leasing of the Chicago Skyway derinvestment will not affect their bottom or the Indiana Toll Road, such as ensuring line. For this reason, public oversight of transparency of negotiations and examin- transportation projects is essential to en- ing effects on regional mobility. They also sure that safety standards are maintained.

32 Private Roads, Public Costs But, while the budgets for transportation return, its Australian subsidiary’s mutual departments have increased over the past funds were investing in Macquarie Infra- five years, staffing levels have either de- structure Group (the concessionaire), be- clined or remained stagnant.110 This has coming de facto investors in the deal. These resulted in an unprecedented level of con- potential conflicts of interest, coupled with tracting out by state agencies, accompanied the lack of oversight by state officials, mean by a decline in oversight. that decisions may not be guided by what Long-term concession deals are ex- is best for the public.115 tremely complex, and state DOTs are unlikely to have the in-house expertise Federal Level needed to appraise, monitor, or oversee While the federal government in recent privatization agreements. The state must years has aggressively promoted road priva- also be ready to litigate when companies tization through new regulations, it has demand compensation for public deci- done little to develop or disseminate public sions that reduce toll traffic. In Georgia, interest protections for such deals. This has the DOT’s new commissioner put a hold particularly profound consequences when on all privatization agreements due to private funding replaces federal grants her staff’s lack of experience.111 In order that would have required public interest to manage these projects, state DOTs safeguards and reviews. are increasingly outsourcing engineer- The Bush administration Department ing, inspections and other tasks to private of Transportation actively promoted contractors and consultants. In 2006, the privatization agreements through various Federal Highway Administration found policies and practices, including programs that several state projects had been delayed that waive federal regulations and grant due to inadequate staff oversight capacity tax subsidies for privatization projects. For and expertise. Reviews of quality assurance example, the federal government waived activities have found numerous deficiencies regulations for projects in Texas and Or- in state oversight of consultants.112 Simi- egon that prevent private investors from larly, the U.S. Government Accountability being involved in a highway project until Office (GAO) finds that the trend toward federally mandated environmental review outsourcing erodes in-house expertise, has been completed. The U.S. Department which will further diminish the ability to of Transportation and the Federal High- oversee projects in the future.113 way Administration have also promoted Increasing reliance on outside con- privatization agreements to state officials tractors has also increased the potential through activities such as drafting model for conflicts of interest with private road legislation and creating a promotional operators. With the growing interest in website and newsletter.116 privatization among investment banking Despite these efforts at promotion, the firms, there is a possibility that a firm may administration and U.S. DOT did not provide financial advice to a state while seek to regulate privatization agreements, simultaneously engaging in investment even when national interests were affected. banking for the same deal.114 For example, When federal funds are used in highway Goldman Sachs was an advisor to Indiana construction, the projects are constrained on the concession of its toll road, but failed by numerous federal regulations. These to mention that it was also creating a fund regulations relate to issues such as prevailing whose sole purpose was to invest in infra- wages (Davis-Bacon), assistance for small structure. In fact, while it was supposedly and minority-owned businesses (disadvan- advising Indiana on how to get the best taged business enterprises), environmental

The Pitfalls of Toll Road Privatization 33 review (National Environmental Policy new expenditure of federal funds, there was Act), air quality improvement (clean air no requirement that the Federal Highway conformity), environmental mitigation Administration approve the lease. The law (wetlands), resource conservation (Endan- did require the FHWA to ensure that the gered Species Act), domestic job and indus- toll rates under the agreement represented trial base protection (Buy America), and a reasonable rate of return. However, accommodation for the disabled (Ameri- because federal officials had no standard cans with Disabilities Act).117 Regulations definition of a “reasonable rate of return,” similarly require that transportation plans they deferred to the state’s discretion.123 be developed in a transparent manner and Furthermore, though the federal gov- reflect the collective views of the com- ernment has the authority to oversee any munity.118 However, when federal funds project receiving federal aid, it does so are not used, no federal guidelines exist only rarely. Following the passage of the to regulate the projects. States can even Intermodal Surface Transportation Equity avoid public protections by separating out Act in 1991, the federal government has the specific portions of a project that would increasingly delegated oversight responsi- not pass federal muster and funding these bility to state departments of transporta- parts with private financing.119 tion.124 Unfortunately, many states lack the Even when federal funds have been ability to properly oversee projects. used for private projects, the federal gov- Ultimately, a lack of federal involvement ernment has avoided active involvement. in important transportation projects can be As the GAO notes, the Federal Highway detrimental for interstate transportation. Administration has yet to develop federal States may agree, for example, to long-term definitions of the “public interest,” and of- concessions that include non-compete or ficials have failed to provide guidance on concession clauses, which may hamper identifying and evaluating public interest the nation’s ability to respond properly to considerations.120 This creates the potential new transportation needs. Additionally, for national interests, such as interstate many of the transportation projects being commerce issues, to be neglected. For ex- considered include facilities in more than ample, federal officials did not review the one state, or projects that are located in one terms of the concession agreement for the area but benefit larger regions. If states act Indiana Toll Road, even though 60 percent in complete independence of each other, of the traffic on the highway is interstate without federal oversight, they are likely in nature.121 Such review was not required, to produce an uncoordinated and inef- according to federal officials, because the ficient transportation system.125 Thus it federal funds used for the road had been is essential for the federal government to repaid.122 Similarly, because the lease of take a more active role in regulating and the Chicago Skyway did not include any overseeing privatization agreements.

34 Private Roads, Public Costs Protecting Against Bad Privatization Deals

Developing a General • Government officials making the CAUTION decision to privatize can be held Approach to Toll accountable for the results of a deal. Road Privatization When evaluating toll road privatization arlier in this report, we suggested a according to these criteria, it is necessary series of criteria that could be applied to look separately at the two types of priva- Eto privatization proposals to deter- tization arrangements discussed in this mine whether they have the potential to report: the leasing of existing roads and the deliver benefits for the public. To recap, private construction of new roads. privatization may make sense when: Privatization of Existing Roadways: • Private companies have a proven A Bad Deal for the Public comparative advantage over gov- The privatization of existing toll roads ernment agencies in providing a fails to meet all of these conditions. Pub- particular good or service. lic entities, not private companies, have a clear and significant advantage when it • The services that are privatized are comes to the long-term cost of capital: well defined, with clear criteria for the ability to issue tax-free debt. Second, the evaluation of success or failure. while the operation of a toll road may be a well-defined task, the provision of overall • Private contractors’ performance mobility to the public is not. Non-compete is disciplined by ongoing competi- clauses and other provisions in concession tion, with multiple contractors ca- agreements – often considered necessary to pable of submitting bids and contracts attract private investment – can undermine of short enough duration to allow the ability to provide a robust and efficient for unsatisfactory performers to be transportation network. Third, toll road readily replaced. privatization creates a monopoly with no

Protecting Against Bad Privatization Deals 35 meaningful ongoing competition and deals expertise necessary to evaluate privatiza- last for several decades. Finally, the length tion agreements properly, and history has of these deals insulates them from public shown that it can be dangerous to rely accountability. The downsides of a deal are on outside analysts, who may suffer from likely to surface only after officials have conflicts of interest. Thus, departments of left office and the public has no recourse transportation must build up their own, to change the contract. in-house expertise to ensure they can fully As a result, in order to protect the examine the terms of an agreement before public interest, states should not agree to signing any long term deals. the privatization of existing roadways. Third, states must develop a systematic The evidence shows that concession approach to evaluating privatization pro- agreements for existing toll roads provide posals. If states continue with their ad hoc short-term benefits in the form of lump- approach, it is likely that important public sum payments. However, the basic eco- interest concerns will be neglected. State nomics of toll deals indicate that the value governments could adopt the model used of those upfront payments will be less than in other countries, such as Australia, where the value of future tolls that drivers will be officials are required to impose certain forced to pay, given the profit margins and standards for each agreement, such as higher capital costs of private operators. ensuring transparency, examining the effect on regional mobility, and protecting New Private Toll Roads: equity concerns. The U.S. Secretary of Proceed With Great Caution Transportation should assist in this process Private finance for the construction of by developing and submitting criteria for new roads could only make sense for identifying the national public interest in certain projects if public interest pro- privatization agreements. tections are greatly enhanced. Before Finally, the federal government must considering any privatization agreement, modernize its approach to transportation. federal and state governments should de- The Federal Highway Administration and velop systematic approaches to ensure the the U.S. Department of Transportation public interest is protected. should take a more active role in regulating First, any new roads or new lanes must privatization projects, even when federal be consistent with long-term transporta- funds are not used. Privatization agreements tion plans, as well as with broader gov- with interstate implications, for example, ernmental commitments to reduce oil must be rigorously evaluated by the federal consumption, protect air quality, or curb government to ensure the interests of the global warming pollution. Public officials nation as a whole are protected. Further- should not prioritize projects based on the more, the federal government needs to en- availability of private capital. Instead, they sure that private financing is not being used should focus on projects that meet true to bypass important federal regulations, public needs, regardless of whether private such as environmental and labor laws. investors see those projects as potential These general approaches to privatiza- profit opportunities. tion agreements will help ensure that the Second, state governments need to public interest is protected. However, the honestly evaluate their capacity to assess state and federal governments need to and monitor concession agreements to honestly examine their methods of priva- determine whether they can adequately tization and adopt systematic approaches protect their constituents. Many state to ensure the national public interest is transportation departments lack the safeguarded in all agreements.

36 Private Roads, Public Costs Principles to Ensure Transparency and accountability will force public officials to face difficult ques- Any Deal Protects the tions. Public officials will be less likely to Public Interest embrace road sell-offs as an “easy out” if they are forced to evaluate the plans Public officials considering privatization against these public interest principles. As proposals must screen those proposals us- the GAO notes, “there is no free money in ing public interest criteria and also compare public-private partnerships.”126 the costs and benefits of those proposals Increased transparency can reduce the with the cost and benefit of public financ- risk to the public of agreeing to a long- ing and operation. For “green field” deals term private toll road deal. Other measures to build new roads, public officials should – such as requiring private toll road opera- specify exactly how private entities might tors to share a portion of their profits if add value, and whether those more limited proceeds exceed anticipated levels – can tasks might be outsourced while retaining also safeguard the public from risk. broader public control and financing. By challenging privatization proposals Basic public interest principles can pro- to financially outperform what the public tect against bad privatization deals. The sector could produce with the same bor- following six guidelines can help public rowing and toll increases, privatization officials distinguish a lemon of a privatiza- proposals can be evaluated more pragmati- tion deal from one that might provide real cally. Promised operational efficiencies value to the public: can be evaluated on their own terms. And ideological claims that assert infrastructure • The public should retain control over privatization will “unlock the dormant decisions about transportation plan- value of public assets,” can be understood ning and management. as little different from taking out a second mortgage on one’s home. • The public must receive fair value so If it is established that the public toll road future toll revenues won’t be sold off authority or other public special-purpose at a discount. entities can deliver better financing than private bidders, this still does not mean • No deal should last longer than 30 that public “securitization” of future tolls years because of uncertainty over future is a good idea. It should be evaluated the conditions and because the risks of a bad way any bond issuance or other borrowing deal grow exponentially over time. would be: by judging whether the benefits of upfront investments would outweigh the • Contracts should require state-of-the- longer-term finance burden. art maintenance and safety standards Similarly, when considering any poten- instead of statewide minimums. tial privatization deal, it is important to spell out exactly where privatization would • There must be complete transparency be expected to generate increased value. to ensure proper public vetting of Government agencies may lack certain privatization proposals. kinds of technical expertise – for example, the capacity to install or manage electronic • There must be full accountability in toll collection systems or implement cer- which the legislature must approve the tain new bridge-building techniques. The terms of a final deal, not just approve government may even have less ability that a deal be negotiated. to contain construction costs. Once the

Protecting Against Bad Privatization Deals 37 specific public shortcomings have been more potential risks for the public. In either identified, it will be possible to consider case, no private deal should go forward whether the government might outsource unless the government is certain that the those activities separately or whether it identified benefits can not be purchased would be cost efficient for the public sector separately and that the benefits truly out- to build those capacities in-house. weigh the many associated downsides of For existing toll roads, there simply are road privatization. not enough potential efficiency gains for Finally, the federal government must toll concession deals to advance the public take a more active role in overseeing all interest. It is harder to make overall assess- privatization agreements that have national ments of potential deals for new road con- implications. Factors such as interstate struction through private companies that commerce must be considered to ensure would claim future toll revenues. There that we maintain a well-coordinated and is more potential for upsides, but also far logical interstate highway system.

For a detailed listing of completed and proposed privatization projects by state, please download Appendices B and C of this report, available at www.uspirg.org/road-appendix.

38 Private Roads, Public Costs Notes

1 José A. Gómez-Ibáñez, Dominique 4 Donahue’s broad survey of public Lorrain, and Meg Osius, The Future of versus private efficiency across a wide Infrastructure Privatization, Working range of services bears this out. He Paper, Taubman Center for State and observes, “Without a credible prospect of Local Government, Kennedy School of replacement, it is hard to harness private Government, Harvard University, June capabilities to public purpose.” See John 2004. D. Donahue, The Privatization Decision: 2 For more comprehensive discussion Public Ends, Private Means (NY: Basic of the preconditions for successful priva- Books) 1989. tization, see David Lowery, “Consumer 5 Christopher Conkey, “Highway Sovereignty and Quasi-Market Failure” Upgrade Goes Private,” Wall Street Journal of Public Administration Research Journal, 8 March 2009. and Theory, 1998, 137-172; John D. Do- 6 “US Tax The 63-20 Not-For- nahue, The Privatization Decision: Public Profit Contrivance,”Toll Roads News, 8 Ends, Private Means (NY: Basic Books, December 1997. 1989); Oliver Williamson, “Public and Private Bureaucracies: A Transaction 7 Federal Highway Administration, Cost Economics Perspective,” Journal State PPP Legislation, downloaded from of Law, Economics and Organization 15 www.fhwa.dot.gov/PPP/tools_state_ (1):306-342, 1999; Mildred E. Warner legis_statues.htm, 30 January 2009. and Amir Hefetz, “Pragmatism over 8 Deloitte Research, Closing America’s Politics: Alternative Service Delivery in Infrastructure Gap? The Role of Public Local Government, 1992-2002,” chapter Private Partnerships, 2007. in , Inter- The Municipal Year Book 2004 9 The states with recent legislation national City County Management As- to facilitate privatization are: Alabama, sociation, 2004. Arkansas, Arizona, California, Colorado, 3 John D. Donahue, The Privatization Delaware, Florida, Georgia, Indiana, Decision: Public Ends, Private Means (NY: Louisiana, Maryland, Minnesota, Basic Books), 1989. Mississippi, Missouri, Nevada, North

Notes 39 Carolina, Oregon, Puerto Rico, South Infrastructure Privatization, working pa- Carolina, Tennessee, Texas, Utah, per, Taubman Center for State and Local Virginia, Washington, and West Government, Kennedy School of Gov- Virginia. ernment, Harvard University, June 2004. 10 One reason privatization of infra- 14 Gisele F. Silva, Toll Roads, World structure has been modest in the United Bank, Public Policy for the Private States is simply because the U.S. never Sector, Note 224, December 2000. had much public infrastructure to speak 15 American Society of Civil Engineers, of in the industries where privatization 2009 Report Card for America’s took place: no state telecommunica- Infrastructure, downloaded from www. tions company, energy company, civilian asce.org/reportcard/2009/grades.cfm, 25 shipyards, airline, or electricity genera- February 2009. tion and transmission. See note 3, p. 6. Municipalities in the United States have 16 See, for example, David Westerling experimented with privatized service and Steve Poftak, Our Legacy of Neglect: delivery. While these moves make head- The Longfellow Bridge and the Cost of lines, the overall trend is more ambigu- Deferred Maintenance, Pioneer Institute ous because challenges with monitoring White Paper, No. 40, July 2007. and a desire to better steer the process 17 David Westerling and Steve Poftak, often prompt municipalities to subse- “A Legacy of Neglect,” The Boston Globe, quently contract these services back in. 31 July 2007. For a discussion, see M.E. Warner with 18 National Conference of State Mike Ballard and Amir Hefetz, “Con- Legislatures, Update on State Budget Gaps: tracting Back In - When Privatization Still Bleak (press release), 3 February Fails,” The Municipal Year Book 2003, 2009. International City County Management Association, 2003, 30-36. 19 National Conference of State Legislatures, New National Survey Reveals 11 Based on the World Bank’s Public Escalating Budget Crisis for States (Press Private Infrastructure database (PPI) Release), 4 December 2008. which counts only privatizations that grant operational control to a private 20 Robert Puentes and Ryan Prince, firm. See note 1. Current levels of “Fueling Transportation Finance: A privatization in developing countries Primer on the Gas Tax,” Brookings have revived behind telecommunications Institute, March 2003. deals, but the total is still 30 percent 21 U.S. Department of Labor, Bureau below its peak in real terms. See “Revival of Labor Statistics, Producer Price Index of Private Participation in Developing Industry Data: Highway and Street Country Infrastructure,” Gridlines Note Construction, extracted from www.bls.gov, # 16, January 2007. 25 February 2009. 12 See note 1. 22 Jim McDonnell, Survey on 13 José Luis Guasch, “Concessions of Construction Cost Increases and Competition, Infrastructure Services: Incidence and Review of the Highway Construction Determination of Renegotiations—An Cost Conference, American Association Empirical Evaluation and Guidelines of State Highway and Transportation for Optimal Concession Design”, manu- Officials, 11 September 2007. script, World Bank, May 2002, cited 23 American Association of State in José A. Gómez-Ibáñez, Dominique Highway and Transportation Officials, Lorrain, and Meg Osius, The Future of Transportation: Invest in Our Future;

40 Private Roads, Public Costs Revenue Sources to Fund Transportation Special Comment, June 2007, 2. Needs, April 2007. 27 Fitch Ratings, Special Report: U.S. 24 For instance, Transportation Finance Toll Road Privatizations: Seeking the Right in Massachusetts: An Unsustainable System, Balance, 22 March 2006. Findings of the Massachusetts Transpor- 28 For a statistical analysis showing tation Finance Commission, 28 March that public-private contractor campaign 2007; Regional Plan Association, Putting contributions are timed with contracting the Trust Back into the New Jersey Trust decisions, see Roland Zullo, “Public- Fund, July 2005; Matt Sundeen and James Private Contracting and Political B. Reed, Surface Transportation Funding: Reciprocity,” Political Research Quarterly Options for States, National Council of 2006; vol. 59. State Legislators, December 2006. 29 Laura Bloomer, “Politicians Get 25 Governments may become less reluc- Burned Paving Texas Backwards, From tant to hike tolls as a result of electronic the Top Down,” Texans for Public Justice, tolling technologies, such as EZ Pass. 7 January 2009. Tolls around the country are increasingly paid through electronic transpon- 30 Information on campaign ders that withdraw funds electronically contributions comes from: The National from drivers’ bank accounts. Electronic Institute on Money in State Politics, tolling makes toll collection and process- Follow the Money, downloaded from ing more efficient and convenient, while www.followthemoney.org; Center allowing cars to pay tolls without coming for Responsive Politics, OpenSecrets, to a complete stop. Research suggests downloaded from www.opensecrets.org. that electronic tolling also makes toll 31 Senate Chairman Jeff Bingaman, hikes more politically palatable. MIT Subcommittee on Energy, Natural Re- economist Amy Finkelstein examined sources & Infrastructure, Opening State- data at 123 tolling facilities around the ment at Hearings on Tax and Financing U.S. and found that electronic tolling Aspects of Highway Public-Private Partner- (such as EZ Pass) results in governments ships, 24 July 2008. raising tolls more quickly. Automated 32 National Cooperative Highway tolling results on average in tolls that rise Research Program, Public Sector Decision at a rate 75 percent faster than manual Making for Public-Private Partnerships, tolling would over time. One strong NCHRP Synthesis 391, Transportation piece of evidence that drivers don’t Research Board, 2009. notice electronic tolls as much is that an increase in electronic toll rates reduces 33 U.S. Department of Transportation, driving only 11 percent as much as the The Transportation Infrastructure Finance same increase reduces driving for manu- and Innovation Act downloaded from tifia. ally collected tolls. See Amy Finkelstein, fhwa.dot.gov, 25 February 2009. The E-ZTax: Tax Salience and Tax Rates, TIFIA statute was enacted as part of the NBER Working Paper No. 12924, Feb- Transportation Equity Act for the 21st ruary 2007. The author tests a number of Century (TEA 21, Public Law 105-178, alternative hypotheses for why else this §§1501-04), as amended by the TEA 21 might be the case. Restoration Act (Title IX of Public Law 105-206) and the Safe, Accountable, 26 Moody’s Investor Service, “Mon- Flexible, Effective Transportation Equity etizing” and Other Creative Solutions for Act: A Legacy for Users (SAFETEA-LU, Financing U.S. Transportation Capacity: Public Law 109-59). The substance of Multiple Roads to the Same Destination, the legislation is codified within sections

Notes 41 601 through 609 of title 23 of the United Infrastructure Be the Next Big Thing?” States Code (23 U.S.C. §§601-609), with BNET Financial Services, 26 November supporting regulations appearing in 2008. part 80 of title 49 of the Code of Federal 45 See also the position paper, Public Regulations (49 CFR 80). Interest Concerns of Public-Private 34 U.S. Department of Transportation, Partnerships by the House Transportation Transportation Infrastructure Finance, and Infrastructure Committee TIFIA Projects, updated 13 February Chair, James Oberstar, available at 2009. transportation.house.gov/media/file/ 35 See note 33. press/ppp%20guidelines%20veritas.pdf 36 JayEtta Z. Hecker, U.S. Government 46 “Road Fight is Hardy Perennial,” Accountability Office, Highway Public Rocky Mountain News, 12 December Private Partnerships: Securing Potential 2005. See also, Daniel Sorid, “Colorado Benefits and Protecting the Public Interest Highway ‘Slowdown’ Sparks Debate on Could Result from More Rigorous Up- Toll Roads,” Reuters, 11 August 2005. Front Analysis, Testimony before the 47 Indiana Finance Authority and ITR Subcommittee on Energy, Natural Concession Company LLC, Indiana Toll Resources, and Infrastructure, Road Concession and Lease Agreement, 12 Committee on Finance, U.S. Senate, 24 April 2006. July 2008. 48 “Cape May County NJ Takes Over 37 Dennis Enright, Texas Hold ‘em: Private Beesley’s Point Bridge,” Toll Roads Will the State Go All In to Public-Private News, 30 December 2008. Partnerships (“CDAs”) and Lose $2 Billion?, 49 United States Government NW Financial, April 2007. Accountability Office, Report to 38 “TxDOT Severs Ties With Cintra Congressional Requesters, Highways and Over SH121 Project: Agency Feared Transit: Private Sector Sponsorship of and Loss of Federal Aid,” The Bond Buyer, 30 Investment in Major Projects Has Been August 2007. Limited, March 2004. 39 Dean Foust, “So You Think Munis 50 Ibid. Are Safe?” Business Week, 5 August 2002. 51 Ben Wear, “Kickoff Close for Also, Chuck Plunkett, “Roads to Riches First (and only?) Private Tollway,” The Paved with Bad Projections,” Denver Post, Statesman, 3 January 2009. 28 May 2006. 52 This simplified characterization does 40 James L. Oberstar and John L. Mica, not include the relatively small ways that US House of Representatives Committee increases in traffic also increase costs. on Transportation and Infrastructure, Letter to Secretary of Transportation Mary 53 Peter F. Swan and Michael H. Belzer, Peters, 4 November 2008. Empirical Evidence of Toll Road Traffic Diversion and Implications for Highway 41 PricewaterhouseCoopers, Infrastructure Privatization, 1 November Infrastructure Finance – Surviving the 2007. Credit Crunch, December 2008. 54 Dennis J. Enright, Testimony of 42 Cezary Podkul, “Infrastructure Dennis J. Enright Before United States Funds Raise $24.7 Billion in 2008,” Infra- Senate Subcommittee on Energy, Natural structure Investor, 13 January 2009. Resources and Infrastructure, 24 July 2008. 43 Ibid. 55 See note 53. 44 Peter Galuszka, “Could Financing

42 Private Roads, Public Costs 56 “Camino Colombia Toll Road Sold Transactions Between Toll Road Investors at Auction,” FleetOwner, 8 January 2004. Partnership II, LLC and Macquarie Group 57 “Toll Road Study Hires Traffic Limited Affiliated Entities, prepared for Forecaster with Fractured Crystal Ball,” the Office of the Attorney General of The Muckraker, 3 February 2006. Virginia, July 2008. 58 Chuck Plunkett, “No 2-Way Street,” 67 U.S. Government Accountability The Denver Post, 25 October 2006. Office, Highway Public Private Partnerships: More Rigorous Up-Front 59 The Chicago Skyway deal is not Analysis Could Better Secure Potential public record, so we cannot say for sure Benefits and Protect the Public Interest, what provisions it contains. Speculation Report to Congressional Requesters, here is based on the fact that, under February 2008. public criticism, the government has not divulged any public interest provisions. 68 Ibid. 60 U.S. Government Accountability 69 Macquarie Infrastructure Group, Office, Federal-Aid Highways: Increased Management Information Report for the Six Reliance on Contractors Can Pose Oversight Months Ended 31 December 2008, undated. Challenges for Federal and State Officials, 70 Scott Rochfort, “MIG Taps Reserves Report to the Chairman, Committee to Cover Debt on Toll Road,” Brisbane on Transportation and Infrastructure, Times, 19 February 2009. House of Representatives, January 2008. 71 Bill Ruthhart, “Slump Takes 61 The 2005 Census lists a Chicago Bite Out of Road Fund,” IndyStar, 11 population of 2.8 million people. December 2008. 62 Macquarie Investment Group, 72 Dennis J. Enright, The Public Versus Indiana Toll Road, PowerPoint Private Toll Road Choice in the United presentation, slide 5. States, NW Financial Group, LLC, June 63 Roger Skurski, Professor of 2007, 8. Economics, University of Notre Dame, 73 Paul A. Grout, “Public and Private report prepared for trial testimony Sector Discount Rates in Public-Private May 15, 2006 in Bonney, et al. v. Indiana Partnerships,” The Economic Journal, Vol. Finance Authority, et al, St. Joseph 113, Mar. 2003, pp. C62–C68. Available County, Indiana Superior Court. at www.bristol.ac.uk/cmpo/publications/ 64 Gary Gray, Patrick Cusatis and John papers/2003/wp59.pdf Foote, For Whom the Road Tolls: Corpo- 74 See note 41. rate Asset or Public Good: An Analysis of 75 Deloitte Research, Closing America’s Financial and Strategic Alternatives for The Infrastructure Gap? The Role of Public Pennsylvania Turnpike, a study was com- Private Partnerships, 2007. missioned by the Democratic Caucus of the Pennsylvania House of Representa- 76 See note 6. tives, February 2008. Available at www. 77 Leslie Williams, “FDOT Postpones paturnpike.com/I80/pdf/For_Whom_ Deadline to Bid on Alligator Lease,” the_Road_Tolls_Final_2-23-081_FI- Naples Daily News, 24 December 2008. NAL.pdf 78 Brian Krebs, “MoDOT to Begin 65 See note 37. Safe and Sound Bridge Campaign,” The 66 Technical Associates and Bryan, Missourian, 4 January 2009. Truesdale, Adkins and Williams, 79 See note 77. Report on An Inquiry into the Financial

Notes 43 80 See note 72. As home buyers know Magazine, 2 October 2007. well, a percentage point or two can 93 Data from Yahoo Finance, make a huge difference in a long-term downloaded from finance.yahoo.com, 26 mortgage. February 2009. 81 See note 64. 94 Ibid. 82 Peter Humphreys is a partner at 95 See note 1. the law firm of McDermott, Will & Emery, where he heads the securitization 96 David Stambrook., Final Report: practice. McDermott, Will & Emery is Successful Examples of Public-Private the 13th largest law firm in the country. Partnerships and Private Sector Involvement in Transport Infrastructure Development, 83 National Association of State Virtuosity Consulting for the OECD/ Highway and Transportation Unions, ECMT Transport Research Centre, 28 Highway Robbery II: The Many Problems May 2005. Available at www.internation- With Outsourcing Design, Engineering, altransportforum.org/jtrc/infrastruc- Inspection & Supervision of Federally- ture/Investment/PPPsuccessStories.pdf Funded Transportation Projects: Increased Costs, Reduced Quality & Safety, May 2007. 97 John P. Jeffers, et al., Audit Steward- ship and Oversight of Large and Innovatively 84 See note 62, Slide 22. Funded Projects in Europe, FHWA-PL-07- 85 See note 60. 001, Federal Highway Administration, 86 See note 83. Washington, D.C., 2006, available at international.fhwa.dot.gov/pubs/pl07001/ 87 See note 72. 98 James L. Oberstar and Peter A. 88 Sasha Page, Helping the Public Sector DeFazio, Public Interest Concerns of Public- Analyze the Valuation of Concessions from Private Partnerships, Position Paper by Multiple Perspectives, presented at the 87th the Chairmen of the House Committee Annual Meeting of the Transportation on Transportation and Infrastructure Research Board, Washington, D.C., 13- and the Subcommittee on Highways and 17 January 2008. Transit, 4 June 2007, Transportation. 89 Daniel Schulman and James house.gov/Media/File/press/ppp%20guid Ridgway, “The Highwaymen,” Mother elines%20veritas.pdf, 7. Jones, January/February 2007. 99 Smart Growth America, Survey 90 Malcolm Kerley and Thomas Shows Americans Prefer to Spend More on Pelnick, “Virginia’s Public Private Mass Transit and Highway Maintenance, Partnership Act Six Completed Projects Less on New Roads, 25 October 2007. Later,” HNTB Transportation Point, 100 HNTB, Mapping the Road to Fall 2008, available at www.hntb.com/ Stimulus Success, Survey Fact Sheet, documents/pdf/TransPoint_050908_ 2009, at www.hntb.com/assets/hntbcom/ FINAL.pdf documents/SurveyFactSheet.pdf 91 James L. Oberstar and Peter 101 Katie Worth, “Road Privatization DeFazio, US House of Representatives Finds Favor,” The Examiner, 11 April Committee on Transportation and 2008. Infrastructure, Letter to Secretary of Transportation Mary Peters, 4 November 102 Quinnipiac Poll of 1,187 Pennsyl- 2008. vania voters; conducted between March 19th and March 25th, 2007; overall mar- 92 Bethany McLean, “Would You gin of error +/-2.8%; and Quinnipiac Poll Buy a Bridge from This Man?” Fortune of 1,580 Pennsylvania voters; conducted

44 Private Roads, Public Costs between July 30th and August 3rd, 2008; Scrap All Toll Road Projects,” Atlanta overall margin of error +/-2.5%. Journal-Constitution, January 10, 2008. 103 Ellen Dannin, “To Market, To 112 See note 60. Market: Privatizing and Subcontracting 113 Ibid. See also note 103. Public Work,” Maryland Law Review, 60:249, 2001. 114 See note 98. 104 U.S. Government Accountability 115 See note 89. Office, Highway Public Private 116 See note 36. Partnerships: More Rigorous Up-Front 117 See note 98. Analysis Could Better Secure Potential Benefits and Protect the Public Interest, 118 Ibid. Report to Congressional Requesters, 119 Ibid. February 2008. 120 See note 36. 105 Ibid. 121 See note 67. 106 See note 89. 122 Ibid. 107 See note 67. 123 Ibid. 108 Ibid. 124 See note 60. 109 See note 36. 125 See note 98. 110 See note 60. 126 See note 36. 111 Ariel Hart, “New DOT Chief May

Notes 45 Appendix A Compensation and Non-Compete Clauses in Privatization Agreements

STATE TOLL ROAD COMPENSATION CLAUSE

California CA 125 The agreement prevents the state from building or improv- ing competing roads that were not already included in the state’s 20-year plan. A provision was included to require the state to compensate the private operator if such actions were taken.

Colorado Northwest Parkway The concession agreement contains a compensation clause requiring the highway authority to compensate the concessionaire if any unplanned road or transit projects are built in the corridor and hurt revenues. If the authority can’t pay, the private entity can keep any revenue sharing money, increase tolls beyond limits, or extend the lease. Currently the state is considering a proposed realignment and extension of West 160th Avenue, which the concessionaire considers a “probable adverse action” necessitating compensation. The highway authority claims this project does not violate the compensation clause.

Colorado E-470 Commerce City signed a non-compete agreement with the toll authority requiring them to intentionally slow traffic on the nearby Tower Road. The speed limit was changed to 40 mph from 55 mph, and traffic lights were added at three intersections, including on a dirt road. The restric- tions were eventually rescinded and the speed limit was raised to 50 mph, though the traffic lights remain.

Indiana East-West Toll Road Indiana is required to pay the investors for reduced toll revenue when the state performs construction on the road.

Texas SH 130 Segments 5&6 The contract includes a provision that TxDOT will pay Cintra-Zachry for lost profits if state projects reduce toll traffic, such as the widening or building of competing roads. The state can earn credit for pushing traffic to the toll road, such as by lowering the speed on I-35.

Virginia Capital Beltway The state is required to compensate the concessionaire for lost toll revenue if the number of HOVs encroach upon tollable capacity beyond a certain threshold.

46 Private Roads, Public Costs U.S. PIRG, Federation of State PIRGs 44 Winter Street, 4th floor Boston, MA 02108