Road Funding Problems Make Partnerships Attractive

Published December 1, 2008

September’s emergency transfer of $8 billion from the U.S. Treasury to the depleted Federal Highway Trust Fund was enough to restore its solvency for now. Many, however, saw the action as proof-positive that America’s method of funding its transportation infrastructure is obsolete.

“The current approach may have made sense 50 years ago,” said U.S. Secretary of Transportation Mary Peters in a statement to Congress concerning the transfer. “But it is ineffective and unsustainable when we are trying to reduce congestion and encouraging Americans to embrace more fuel-efficient cars.”

Highway Robbery

State and federal fuel taxes are the primary source of revenue for transportation infrastructure projects, with additional funding supplied through tolls, fees, and borrowing.

The system is no longer working, according to the Reason Foundation, a libertarian public policy research organization.

“We’re stuck in traffic today because we’re using the pay-as-you-go system,” said Reason’s director of government reform, Leonard Gilroy. “For transportation infrastructure that system is just stupid.”

Gilroy points out increasingly fuel-efficient cars and decreasing vehicle miles traveled because of high gas prices are starving the current funding system. In addition, he said, the system’s design breeds inefficiency.

“It’s basically a socialist redistribution scheme,” said Gilroy. “The bulk of gas tax revenues come from high-traffic metro areas. That money gets sent to Washington, DC. What doesn’t get earmarked gets sent to other states and funneled through a similar process. It’s precisely backwards on all fronts. You’re taking money from where you need it and sending it where you don’t. It’s a Robin Hood system that’s not going to get you the infrastructure you need where you need it.”

Politicization, Centralization

The Reason Foundation’s director of transportation studies, Robert Poole, agrees.

“The centralized, politicized tax-and-grant system has failed over the years, as it’s become ever more politicized and centralized. The fuel tax was supposed to be a pure user tax but has become more and more an all-purpose public works tax, in which political priorities far outweigh economic priorities,” explained Poole.

“The current system not only produces too little money but spends it on the wrong things, in the wrong places,” Poole continued. “We desperately need a far more market-driven system, using prices to balance demand with supply but also using return on investment criteria to decide what projects to invest in. That’s a night-and-day difference from the current system.”

Public-Private Partnerships

In his Innovation Briefs newsletter, transportation expert C. Kenneth Orski reported state officials are embracing private-sector financing and tolling “not because of any ideological commitment to ‘privatization’ or a philosophic attachment to market-driven solutions, but out of sheer fiscal necessity.”

Enter public-private partnerships, also known as “PPPs.” PPPs are long-term, contractual agreements between state or local governments and private firms for building and maintaining needed infrastructure. Through a competitive bidding process, public officials select the best firms to design, finance, build, operate, and maintain a tolled project for a period of 35 to 99 years.

According to Poole and Gilroy, using design/build firms creates efficiencies and cost savings not possible in the current system.

“An entity that designs, builds, operates, and maintains a toll road for 50 years has stronger incentives than a state DOT—living on annual appropriations—to design and build the road for long life, which minimizes life-cycle costs,” said Poole. “The DOT, by contrast, has incentives to build as cheaply as possible, to get as many new projects done for as many legislators’ districts as possible.”

Performance Guarantees

For quality assurance, performance requirements, incentives, penalties, and other such aspects are typically detailed in the agreement.

“Delivery and outcome expectations are set in the contract, and firms are obliged to make it work,” Gilroy explained. “You’ll never have private-sector firms building lower-quality projects, because they build it and they run it, so they’re going to build it right. It’s in their interest to minimize life-cycle costs.”

“The incentives of today’s politicized highway funding system are to short-change maintenance,” added Poole. “With toll projects it’s just the opposite. To attract people to a toll road, you have to maintain it to better standards than competing ‘free’ roads.”

Showdown in Washington

In 2009 Congress will debate another six-year reauthorization of the federal surface transportation program. Poole expects fireworks.

“There will likely be a major battle next year in Congress over PPPs,” Poole said. “The Policy and Revenue Commission actually called for expanded use of tolling and PPPs, but they also called for federal regulation and tripling the federal fuel tax, which would undercut tolling and PPPs.”

“The opposition won’t succeed,” Gilroy said. “There are too many people deriving value out of this. You’ve got politicians from both sides of the aisle begging for this, not to mention countries willing to pour hundreds of billions of dollars into our economy.

“It’s inevitable. The value the private sector brings far outweighs any public-sector issue you might have,” Gilroy concluded.

Brien Farley ([email protected]) writes from Genesee, Wisconsin.