The tragic bridge collapse in Minneapolis is a stark reminder that too much of our transportation infrastructure is not well-maintained and requires extensive, costly investments to be fixed or even, in some cases, completely replaced.
Nearly a fifth of America's roads are now considered in poor shape and about one-in-four bridges is rated "structurally deficient." The U.S. Department of Transportation estimates that the cost to fix these problems is a staggering $460 billion. The tab grows far larger when you add in the hundreds of billions to build the new transportation infrastructure that's needed to handle the country's growth.
Part of the problem is that big increases in state and local spending for politically popular programs, especially Medicaid and education, as well costly public employee pensions and benefits, have crowded out infrastructureâ€”even as some traditional sources of financing for roads and bridges, such as the proceeds from gas taxes, haven't kept pace with demand.
It's unlikely that public funds alone will supply what's needed. Rising gasoline prices have made it politically unpalatable to increase fuel taxes, while some state and local budgets are already groaning under the weight of decades of borrowing, making massive new debt offerings more and more difficult. More federal transportation money? The problem is that 98% of our bridges and 97% of our roads are owned and operated by state and local governmentsâ€”and that these governments have often used past increases in federal transportation aid simply to replace their own infrastructure spending.
Instead, a few states and cities are now creatively turning to the private sector for help. They are partnering with private investors to build from scratch new toll roads, bridges and other infrastructure that the private ownersâ€”not governmentâ€”will finance and operate. A few cash-strapped cities and states are also replenishing their transportation trust fundsâ€”so that they can pour more money into repair and maintenanceâ€”by auctioning off existing toll roads and bridges to private operators, who are bidding far more for these assets than most experts would have predicted.
Tapping private investors to build and operate public roads and bridges is nothing new around the rest of the world. Starting with 1955 legislation which allowed the government to select local groups to build toll roads, France licensed private investors to construct and operate some 5,500 kilometers of inter-city autoroutes.
In Britain, Margaret Thatcher's privatization movement in the 1980s spurred both the sale of existing government assets and public-private construction projects. Later, the fall of the Soviet Union produced a vast round of privatization of public assets in formerly Eastern bloc countries. The U.S. Department of Transportation estimates that world-wide there have been more than 1,100 public-private deals in the transportation field alone in the last 20 years, with a value of some $360 billion.
Only recently have a few intrepid U.S. politicians tested the waters, with startling results. Confronting a $3 billion transportation-funding shortfall, Indiana Gov. Mitch Daniels in 2006 auctioned off the rights to operate the Indiana Toll Road to a private consortium for a staggering $3.85 billion.
In effect, the private operators gave the state a fat up-front payment in exchange for the right to collect tolls for 75 years. The agreement requires the private operator to invest in rebuilding the road over time, and as well to follow a lengthy list of operating standards, from how best to fill potholes to how quickly to clear roadkill. The agreement also limits toll increases, setting out a schedule of fee hikes over the years that the new owner must adhere to.
The winning bidderâ€”a consortium of Cintra of Madrid and Macquarie Infrastructure Group of Sydneyâ€”agreed to these conditions and still offered far more than anyone expected. This demonstrates a basic principle that anyone who has ever sold something on eBay readily understands: The true worth of something is what someone is willing to pay for it.
Using traditional means of valuing a public assetâ€”which is to calculate how much in municipal financing could be raised by floating bonds backed by the road's tollsâ€”Indiana pegged the road's value at $1.8 billion. Instead, the nearly $4 billion that Indiana got has replenished the state's transportation fund and allowed the state to embark on an aggressive program of new building and maintenance.
Mr. Daniels is not the only public official to tap the market. Chicago Mayor Richard Daley garnered $1.8 billion auctioning the city's Skyway to the same partners who purchased Indiana's Toll Road. He's now trying to sell Midway Airport, which could fetch up to $3 billion. As in the Indiana deal, Chicago discovered that its roadway, whose worth the city's advisers had pegged at $900 million, was far more valuable to private investors. The vast disparity in valuation highlights essential differences between the private and public sectors.
For starters, private financiers in these dealsâ€”mostly managers of international pension funds with enormous sums to investâ€”often have a greater taste for risk than the typical conservative investor in municipal bonds. The winning consortium in the Chicago Skyway auction estimated that traffic would grow annually by about 3%. The city's own study used a more conservative 1% growth rate. The small difference, stretched out over decades, resulted in a vastly greater valuation.
Moreover, the Skyway sale transfers risk from the taxpayer to the private owner. If the road's traffic doesn't grow as anticipated, investors must accept a lower rate of return. Thus incentivized, the Skyway's new owners quickly installed an electronic toll-collection system and assigned additional collectors during rush hour to reduce wait times and expand use of the road.
The success of the Chicago and Indiana sales now has some political leaders scrambling to find other privatization possibilities. There are some estimates that several dozen deals could transpire in the next two years, yielding up to $80 billion for governments.
But selling existing assets may turn out to be only a small part of the story. Budget-squeezed governments are also accepting bids by private investors to finance, build and operate new roads.
Texas has made private capital a key ingredient in a vast road-building project known as the Trans-Texas Corridor. The state has already entered into a build-and-operate deal with an international consortium (Zachry American Infrastructure and Cintra) to construct a 320-mile toll road for an upfront payment of $1.3 billion to the state and the right of the private owners to operate the toll road for 50 years. In California, a private company is building a nearly 10-mile, $800-million extension of Route 125 south of San Diego in exchange for a 35-year lease to operate the road and collect tolls.
Such deals bring welcome benefits to the transportation sector. A 2002 government study in Britain, where public-private transactions are more common, found that while 70% of construction undertaken by the government came in late, just 24% of projects contracted by government to private builders finished behind schedule.
Nevertheless, opponents of privatizations and private-public partnerships argue that private operators can only make money "at the expense of" taxpayers, and that the new owners will skimp on maintenance and repair work in order to squeeze profits out of these operations. These objections typically ignore the significant restrictions and operating requirements written into the contractsâ€”here in the U.S. and around the worldâ€”which allow governments to cancel the deals, take back the roads and bridges and keep the cash if operators don't live up to the terms.
Taxpayers are protected by an even more powerful mechanism, namely consumer choice. The majority of toll roads, to take one example, are built as high-speed alternatives to already existing routes. If the roads become too expensive or unpleasant to drive, their owners risk losing business that they are counting on to make their investments successful.
Some objections to private ownership are simply cynical ploys by politicians looking to maintain their hold on public assets, especially since roads and bridges operated by transportation authorities are often job-patronage mills. Politicians from both parties in New Jersey railed against a recent study recommending leasing some of the state's toll roads, claiming such a deal would shortchange taxpayers. Of course, the state government is among the most bloated and costly for taxpayers in the countryâ€”and the Reason Foundation recently rated New Jersey roads worst in the nation. Yet the politicians worried that an auction, which could have raised some $20 billion for the fiscally challenged Garden State, might allow a private operator to take advantage of its citizens.
Transparent as they are, anti-privatization arguments can resonate with taxpayers who wonder whether such complex transactions will prove too good to be true. Public officials will need to spell out the benefits of these deals, hold buyers to exacting standards, and explain the steep cost of the alternatives: either allowing infrastructure to languish at the risk of tragedy, or hiking taxes. Public officials will also have to resist efforts to funnel privatization proceeds to politically popular programs or to short-term budget fixes, instead of using the money to further enhance their transportation infrastructure.
Difficult political battles are ahead. But for the first time in over a generation, America's mayors and governors are looking at a realistic way to jumpstart spending they've neglected for too long. The stakes are high. Traffic congestion already costs our economy about $65 billion a year in lost productivity. Research also suggests that every $100 million invested in road maintenance and repair will save about 145 lives over the next decade.
As Gov. Daniels told critics at a Congressional hearing last year: "Does no one notice the risk of inaction?"
Steven Malanga is senior editor at the Manhattan Institute's City Journal, from whose summer issue this is adapted.