My Way or the Highway?
Last month, Indiana announced that it would lease its state-owned tollway system to a private company for a term of 75 years for the price of $3.8 billion. The Spanish-Austrian consortium Cintra-Macquarie operates 37 toll roads around the world, according to a report by Diantha Parker of Chicago Public Radio. According to Indiana Governor Mitch Daniels, the state’s tollway has been losing money for a long time, and the $3.8 billion in cash would not only cover the state’s $2.8 billion budget deficit, but would also remove a money-losing operation from the state’s books. This announcement follows on the heels of Chicago’s leasing of its Chicago Skyway to the same company earlier this year. According to Parker, some 35 other tollway systems in the US are considering similar leases.
Private operation of highways is a hot button political issue in the Midwest, where suburban drivers already face higher gas prices for their work-day commutes. In fact, Illinois Governor Rod Blagojevich has disavowed an earlier statement that he is interested in leasing the Illinois Tollway. According the an article in the Chicago Tribune, the 274-mile tollway system would fetch a price of $15 billion, but would represent a very dangerous political obstacle to Blagojevich’s re-election hopes.
In general, economist prefer the private operation of infrastructure over public operation. State-run tollways are expensive to operate and maintain, and they generally lose money. Cash-strapped governments can lease the asset and help shore up budget shortfalls. The private firm has an incentive to keep the roads well-maintained and make sure the product is as good as possible in terms of speed, safety, and cost of driving the tollway.
There are, however, many caveats to this scenario. The ideal performance of the market solution depends on competition. If there is competition for drivers, the private toll road will need to produce a quality product and a low price, or drivers will simply take their business elsewhere. In the case of a toll road, the most efficient provision is a monopoly: it makes sense for there to be one toll road as it would be impractical and undesirable to have many competing highways. Since the toll system is a monopoly (there is only one I-90 through Indiana), the rules of competition do not hold. Instead the tollway can raise its prices (which is not necessarily bad or inefficient).
The biggest drawbacks of a government-allowed monopoly, which is essentially what a privately run tollway amount to, is that there is no competition on quality grounds. Similar monopoly systems such as cable TV, electricity, local telephone service, and garbage collection have all suffered the same low quality criticisms. The solution to this in most of these cases has been to allow for competition in the industry. There is no reason to think that restricting competition in the toll road industry will not result in similar quality problems. A second issue is not about efficiency, per se, but about distribution. Different groups will bear the costs of toll increases differently. The trucking industry drives a lot of miles down the Indiana Tollway, and will bear a large burden of any toll increases. This means higher costs to ship things and, ultimately, higher prices for you and I. In addition, suburbanites who commute longer miles over the tollway will bear more of the cost relative to city dwellers, who do not use the tollway extensively. Again, this is not necessarily a bad thing, but we should be aware of it.
A final point is that Cintra-Macquarie could be wrong. The paid $3.8 billion for the road thinking that the present value of the profit they earn over the next 75 years will outstrip what they pay for it. Another outcome is that the tollway is a money loser for them, just like it has been for the state of Indiana. What if they fail to maintain the highway to save costs, but that cost savings is not enough and the firm defaults on its payments or goes bankrupt? In that case, the state would have a poorly-maintained, money-losing tollway system fall right back into its lap with very little prospect of leasing it again.
The fast funds from leasing a tollway system are appealing for a state with a budget shortfall. Unfortunately the long term leases leave a lot of questions with very few answers. I will leave you with this thought, brought up by Dave Schulz of Northwestern University: Think back to 75 years before today, say 1931. Would people in 1931 have any idea what the transportation system would be like in 2006? Do we have any idea what will be the long term consequences of leasing major ground transportation infrastructure 75 years from now?
