Magazine article Regulation

A New Approach to Private Roads: Using an Innovative Method for Awarding Franchise Rights, States Can Entice More Effective Private Investment in Highways. (Transportation)

Magazine article Regulation

A New Approach to Private Roads: Using an Innovative Method for Awarding Franchise Rights, States Can Entice More Effective Private Investment in Highways. (Transportation)

Article excerpt

DURING MOST OF THE TWENTIETH century, highways, tunnels, and bridges were viewed as public goods that government must provide. By the end of the century, however, chronic budgetary problems had led governments to allow some participation of private firms in financing, building, and operating infrastructure projects. For example, worldwide private investment in transport infrastructure went from almost nothing before 1990 to $10 billion in 1990-91 and almost $30 billion in 1997-98. Massive projects like the Second Severn Bridge in Great Britain, the Guangzhou-Shenzen highway in China, or the 1,000 miles of upgraded Panamerican Highway in Chile have been financed and are being operated by private firms. Even in the United States, cash-strapped Orange County, Calif., resorted to private funding and operation when it was unable to provide for needed expansion of the Riverside Freeway in the early 1990s.

In light of those trends, it is remarkable that only two private toll roads were built in the United States during the twentieth century: the Dulles Greenway in Virginia and Orange County's State Route 91 Express Lanes. That contrasts with the early days of the United States; beginning in the 1790s and continuing throughout the nineteenth century, more than 2,000 companies financed, built, and operated toll roads with a combined extension of more than 10,000 miles in 1821.

Are there any advantages to privatizing roads? Before comparing private and public provision of transport infrastructure, it is useful to clarify what is meant by those terms. Under public provision, the government designs, finances, and operates the infrastructure project. Private firms may participate in the building stage and may even be selected in competitive auctions. But once the facility is built, the government operates and maintains it. Taxpayers pay construction costs and, even when users pay tolls, the revenues are not directly related to construction costs. By contrast, when roads are privatized, a concessionaire finances, builds, and maintains the facility. The franchise owner collects tolls until the concession term ends, and the facility is transferred to the government usually 20 to 30 years later. Such Build-Operate-and-Transfer (BOT) contracts can be awarded either through direct negotiations between the transit authority and an interested firm or through a competitive auction for the right to franchise a well-defined project.

Road privatization offers many potential benefits, including:

* No need for new taxes to finance the BOT projects.

* Having the same firm in charge of construction and maintenance provides better incentives to build a road that lasts longer.

* Private firms usually are better at managing and more efficient than state-owned companies.

* Cost-based tolls are easier to justify to the public when infrastructure providers are private.

* Those who benefit from the infrastructure pay for it.

* In stark contrast to public provision, the BOT scheme uses the market mechanism instead of central planning to screen projects, which reduces the probability of white elephants.

Unfortunately, the advantages of private highways are not automatic. For example, in the early 1970s, France awarded four concessions, three of which went bankrupt after the oil shock and were bailed out by the government. Around the same time, several of the 12 highway franchises in Spain had higher costs than anticipated, while traffic was much lower than expected. Three highways went bankrupt and the remaining contracts required renegotiation. More recently, the "private" Mexican highway concession program cost Mexican taxpayers more than $8 billion after renegotiation of the initial contracts.

Those examples illustrate a common experience: Most private infrastructure concession contracts are renegotiated. J. Luis Guasch examined more than 1,000 concession contracts awarded during the 1990s in Latin America and found that, within three years, terms had been changed substantially in over 60 percent of the contracts. …

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