Highway Tolling Projects Enter the Mainstream

Published December 1, 2007

Highway tolling has entered the mainstream and has begun to influence local transportation decisions throughout the country.

Some recent headlines tell the story: “Florida Governor Crist Considers Toll Concessions,” “South Bay [San Francisco] Toll Lanes Plan Moves Ahead,” “Legislature Authorizes Study of Tolls on Maine’s Interstate Highways,” “Massachusetts Transportation Finance Commission Urges Larger Role for Tolls,” “Alabama Governor Riley Considers Tolls to Pay for Road Construction,” “South Carolina Begins Plans to Build I-73 Under a New Pilot Program for Tolling Interstates,” “I-80 Tolls May Be Inevitable, [Pennsylvania] Turnpike Chief Says,” “Virginia DOT Approves Toll Concession for Capital Beltway HOT Lanes,” “North Carolina Turnpike Authority Plans a Series of Toll Roads,” “Tolls Studied for Managing Seattle Highways,” “Private Sector Ready to Bet Billions on Georgia Toll Roads,” “Texas DOT Plan Would Convert Some Interstates to Toll Roads.”

Need for Resources

The increased interest in highway tolling is a response to the growing mismatch between transportation needs and available resources. With maintenance and reconstruction of existing facilities consuming most of the available transportation funds, little prospect of significant increases in state and federal fuel taxes, and the balance in the Highway Trust Fund approaching zero, tolls have become a more attractive source of revenue with which to finance future transportation capacity.

Using toll revenue bonds and private equity capital, states can fund new transportation facilities that otherwise would remain on the drawing board for years to come.

Several Factors

A combination of factors has helped to propel highway tolling into the mainstream:

  • Growing transportation budget shortfalls have been keeping the tolling option front and center before governors, state legislatures, and state transportation officials. The needs for highway infrastructure investment are enormous–$3.1 trillion over the next 30 years, according to “Future Options for the National System of Interstate Highways,” a National Cooperative Highway Research Program (NCHRP) report by Parsons Brinckerhoff.

Texas Gov. Rick Perry (R) observed in a July 2 letter to U.S. Reps. James Oberstar (D-MN) and Peter DeFazio (D-OR), “Congress has failed to come up with adequate resources to help states meet their infrastructure funding needs, so states are moving on their own to fill the vacuum. For many states this means resorting to tolls to supplement existing sources of transportation revenue and soliciting private-sector help to finance future highway capacity.

“States have come to this conclusion,” Perry continued, “not because they are ideologically committed to ‘privatization’ but because, pragmatically, they view the prospects for significant increases in the fuel tax–both at the state and federal level–as remote in these times of record high fuel prices.”

The U.S. Department of Transportation, under the leadership of Secretary Mary Peters, has been encouraging this posture.

“A substantial increase in the nation’s gas tax is ill-advised,” Peters wrote in The Washington Post on August 25, in response to an editorial calling for a gasoline tax increase. “Of far greater promise than traditional gas taxes is direct pricing of road use similar to how people pay for other utilities.”

  • Private capital markets, especially institutional investors with long-term horizons such as pension funds, have discovered transportation infrastructure to be an attractive investment opportunity. Toll facilities in particular produce a steady cash flow that is relatively unaffected by economic downturns, and they offer stable, long-term returns with relatively low risk.

Although states have other ways to raise money, notably through the tax-exempt municipal bond market, the needs are so great that ignoring the tolling option and the willingness of global capital markets to fund infrastructure would be “a tragic mistake,” in the words of one investment bank executive quoted about infrastructure funds in a September 2007 Fortune magazine article by Bethany McLean.

While toll road investments have long enjoyed popularity with public pension funds in Canada, Australia, and Europe, they have only recently begun to attract the attention of U.S. pension funds.

CalPERS, the nation’s largest public pension fund ($246 billion in assets), may have been the harbinger of the new mindset when it announced in September it was creating a $2.5 billion pilot infrastructure program and establishing a new asset class focused on investments in new roads, bridges, airports, and other utilities.

  • The attractiveness and popularity of toll road investments have been enhanced by the willingness of state legislatures and public authorities to recognize the need for periodic toll increases to keep up with inflation.

Traditionally, state legislatures and toll authorities have been reluctant to raise tolls and often let them remain unchanged for many years so long as toll receipts covered existing bond repayment obligations and current operating expenses.

Inflation-indexed tolls, first introduced in the long-term concession agreements for the Chicago Skyway and Indiana Toll Road, and recently adopted in Florida by legislation, will allow future toll roads to be placed on a more businesslike basis.

The growing acceptance of automatic toll increases geared to inflation is a key reason private capital markets now consider toll roads to be a sound long-term investment.

  • Contributing to the public sector’s embrace of tolling has been a willingness of private toll concessionaires to accept availability payments and toll revenue-sharing as methods of financial compensation. From the government’s perspective, these arrangements have several advantages over outright concessions.

They allow the state to retain the toll revenue–an arrangement that is politically more defensible than letting a private concessionaire keep the toll proceeds. Second, by tying payments to the volume of traffic, the state creates a profit incentive for the private concessionaire to manage the facility efficiently and attract a maximum number of customers. Third, the state owes money to its private-sector partner only to the extent the facility generates revenue. If traffic is lower than forecast, the private partner bears the risk.

  • Unlike the politically unpopular private leases of existing public toll roads (as exemplified by the Indiana Toll Road and Chicago Skyway deals), concession agreements involving new toll roads have received a positive reception. Even Oberstar, certainly no friend of toll roads and privatization, conceded in a May 10 letter to the nation’s governors, “public-private partnerships that expand capacity and provide a service that otherwise cannot be provided by public resources may be a good idea.”

Realistic Response

In a May 2003 Brief titled “It’s Time to Take a Fresh Look at Highway Tolls,” we speculated, “tolls may assume a dominant role in the funding of new highway capacity perhaps as early as the next decade.” We think that prediction is still on the mark.

Our conclusion does not stem from an ideological preference for “privatization” nor from a libertarian impulse to seek a reduced federal presence in the nation’s transportation program. Rather, it is grounded in the reality that every last cent we can raise through the gas tax will be needed to maintain and modernize our aging infrastructure.

Using tolls and private capital to help finance future highway capacity is not only the logical way–it’s the only way to ensure the growth and long-term vitality of our surface transportation system without imposing an unacceptable tax burden on the American people.

Ken Orski ([email protected]) is editor and publisher of Innovation Briefs, a transportation newsletter in its 18th year of publication. This article is adapted and reprinted by permission from the October 1, 2007 issue (http://www.innobriefs.com).

For more information …

“Future Options for the National System of Interstate Highways” [Project 20-24(52)], National Cooperative Highway Research Program, is available through PolicyBot™, The Heartland Institute’s free online research database. Point your Web browser to http://www.policybot.org and search for document #22165.