Privatizing roads - to foreigners even!

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Having lived in Latin America for much of my life, I am used to highways being operated by foreign companies. Though here in the US the news that the state of Indiana has agreed to lease a toll toad to a Spanish-Australian joint venture has caused considerable comment:

Amy Goldstein:

Half a century after President Dwight D. Eisenhower persuaded the nation to build the interstate highway system, the allure of privatization is a rethinking of the relationship between the government and its roads. It reverses the view of highways as a public responsibility, ingrained since the first half of the 19th century, when states took over roads, bridges and canals that had gone bankrupt in private hands.

Daniel Gross:

Leasing or selling a public asset is a classic one-shot short-term measure that bolsters the balance sheet today but that can't be repeated. While politicians… focus on getting through the next few fiscal years with minimum pain, foreign companies are thinking about how to get rich off of tolls for the next three-quarters of a century… there's a troubling unwillingness to align governmental resources with the express goals and responsibilities of government.

Richard Posner:

The idea of privatizing toll roads is an attractive one from an economic standpoint. Private companies are more efficient than public ones, at least in the limited sense of economizing on costs… Against all this it will be argued--it is an argument emphasized by opponents of leasing the Indiana Toll Road--that privatization, at least when it takes the form of a sale or long-term lease of government property for a lump sum, beggars the future by depriving government of an income-producing asset. The argument, at least in its simplest form, is unsound, because the state is not disposing of an asset but merely changing its form: from a highway to cash. The subtler form of the argument is that, given the truncated horizons of elected officials, the state will not invest the cash wisely for the long term, but will squander it on short-term projects. This is a danger--how great a one I do not know.

Gary Becker:

The arguments given by Posner strongly imply that highways, along with postal systems, trains, airports, ports, and other infrastructure, including even some security activities, should be privately rather than publicly operated. The main challenge arises when it is more difficult to stimulate competition for the privatized company because of so-called "natural monopoly" conditions in the industry. Due to economies of scale, it may not be efficient, for example, to have another highway built across Indiana to compete against the Indiana toll road. Yet even in that case, it would still be desirable to privatize the toll road, but controls could be imposed on the prices and other conditions that can be levied imposed on consumers by the privatively owned road.

Max Sawicky:

When a government takes a lump sum in exchange for permitting a private firm to manage a road and levy tolls, it is not only privatizing. It is borrowing, worsening its fiscal position… The Gov could just as easily contract out operations and management, but keep the tolls for itself… Tolls are good for congestion and enviro control. The inconvenience can be eliminated with technology. Giving them over to a private firm is dumb.

Mark Thoma:

Selling Yellowstone Park to private developers would raise a lot of money too, but that doesn't mean we should do it. There are arguments both ways here, and some of my concern is reduced by recent research showing that toll lanes are used predominantly by people pressed for time, people late for daycare pickups, that sort of thing, not just higher income individuals. Still, equity considerations are a concern.

Joe Mysak:

Now that Indiana has sold its toll road, get ready for everyone else to do the same… We are going to see more of these transactions, and the numbers are going to get bigger and bigger. It was estimated last year that New Jersey might get $30 billion for the state's Turnpike and Parkway, for example…. Merrill Lynch estimated that the New York State Thruway Authority might be worth something like $20 billion. So now the cry will go up: Sell the roads!

I wonder if their comments would change if we were talking about Chile, Poland or India - instead of Indiana during an election year?

Out of curiosity I looked up data on private participation in toll roads in low- and middle-income countries. Between 1990-2004, 31 countries privatized 371 strips of road generating over $65bn in investments. As would be expected, most of these projects were concessions or greenfield investments – only 14 where of the management-and-lease variety done by Indiana. One alarming find was that 32 projects, representing 17% of the total investments, where canceled or are under duress – that number is higher than almost all other infrastructure sectors with the exception of (no suprise) water . For more, see the Highways Privatization toolkit, this CATO note, or the World Bank Roads & Highways site.

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