California Law Provides Lessons for Private Transportation

Published February 1, 2005

Private toll roads are in much wider use in some parts of Europe and Asia than in the United States, but private funding to help solve traffic congestion may soon become more common here, according to University of California, Irvine professors Marlon G. Boarnet and Joseph F. DiMento.

Boarnet and DiMento made the prediction in the Fall 2004 issue of Access magazine, in an article titled “The Private Sector’s Role in Highway Finance: Lessons from SR 91.”

Boarnet is professor of planning, policy, and design and economics and chairman of the Department of Planning, Policy, and Design in the School of Social Ecology at the University of California, Irvine. DiMento is professor of planning, policy, and design, criminology, law and society, and management in that department.

Funding Gaps Will Widen

Boarnet and DiMento argue the gap between the need for highway construction and maintenance and available resources will widen in the years ahead, because the major source of highway funding is motor fuel taxes. As gas-stingy hybrid automobiles, which run on electricity and gasoline, become more popular, and as alternative fuel sources are developed, that revenue source will decline, they say.

They believe the private sector can help plug the funding gap, and they point to SR 91 as an example for future private-public arrangements.

State Route 91 is a 10-mile stretch of toll lanes in California’s Orange County. A limited partnership composed of subsidiaries of several corporations involved in highway construction was formed to build the road, and California granted a 35-year franchise to the partnership in 1990. The highway opened in December 1995.

County Bought Private Highway

“The SR 91 toll lanes were innovative in several respects,” Boarnet and DiMento note. “They were the first U.S. implementation of peak/off-peak road pricing (often called congestion pricing). The lanes have no toll booths; all tolls are collected electronically. While detailed financial information on the privately held CPTC [California Private Transportation Company] has not been released to the public, experts generally agree that toll revenues likely met the private firm’s expectations.”

Boarnet and DiMento say the highway was viewed as a public benefit in its early years of operation, but that perception had shifted, mainly because a non-compete clause barred public agencies from increasing highway capacity on other roads within a one-and-one-half-mile corridor of SR 91. Worsening traffic congestion and the lack of additional highway capacity started to turn public opinion against the private road.

“The debate was resolved when OCTA [Orange County Transportation Authority] purchased the toll lanes from CPTC in early 2003 (for $207.5 million). The lanes are now operated by OCTA, which still charges peak/off-peak tolls. But the non-compete clause was eliminated, and the issue of public mobility competing with private profit-making interests has receded. What had been one of the nation’s most visible examples of a privately owned toll road is now owned and operated by a public agency.”

Strong Public Partner Essential

Boarnet and DiMento summarized the lessons from the SR 91 experience as follows:

“1. Private-sector funding may work, but only as part of a public-private highway financing partnership.”

“2. Balancing public and private interests will be fundamental.” They argue that non-compete clauses are “too inflexible to balance public and private interests over a span of decades.”

“3. The public sector must be institutionally strong.” They say the SR 91 experience shows that the “complicated nature of public-private highway partnerships requires a well-trained, well-staffed, institutionally strong public-sector partner.”

“4. High-occupancy vehicle lanes (carpool lanes) provide an early opportunity to pioneer some public-private highway partnerships.” The authors add that “carpool lanes, typically adjacent to unpriced highway lanes, provide an opportunity to involve the private sector. Public cost sharing will often be needed to lower private investment to levels that allow profitability.”

Agreeing in large part with Boarnet and DiMento is Robert Poole, director of transportation studies at Reason Foundation, who worked on the creation of SR 91.

“By and large, I agree with Boarnet’s and DiMento’s assessment,” Poole said. “The 91 express lanes have been a huge success in economic and transportation terms, but encountered political problems due to special circumstances. And for several reasons, opportunities to do pure private toll roads like this one seem to be few and far between.”

Fully Private Projects Unlikely

Poole noted that the limited partnership was able to lease land for the lanes from the OCTA for one dollar a year. Environmental approval for carpool lanes also had been obtained before the franchise discussions began, giving the investors far lower start-up costs than private firms likely could obtain anywhere else.

Poole cited high development and construction costs in urban areas, uncertainty about eventual approval, and “tax-code discrimination that lets the public sector but not the private sector finance such projects at tax-exempt bond rates” as factors working against a totally privately funded project of similar magnitude.

“So for the short- to medium-term, I have concluded that the best way forward is the kinds of public-private partnerships the authors recommend,” Poole said. “This assessment applies to cases of developing brand new capacity, whether an entirely new toll road or specialized toll lanes are added to an existing freeway.”

He cited the Chicago Skyway, an eight-mile toll road recently leased from Chicago by an overseas consortium of investors, as an example of an appropriate public-private arrangement for an existing toll system. The city received $1.8 billion for the 99-year lease.

“For existing tolled facilities like the Chicago Skyway, full-fledged private ownership and operation–a 99-year lease is the functional equivalent of ownership–seems quite feasible,” Poole said.

Steve Stanek ([email protected]) is managing editor of Budget & Tax News.