On Aug. 25, Reason Foundation released a study asking whether state governments should consider long-term P3 leases of their existing toll roads, as five governments (including the state governments in Indiana and Chicago) did over a decade ago.
To illustrate the possibilities, my study looked at nine major state-owned toll road systems and estimated their gross asset value, using a range of cash-flow multiples from global transactions for toll-road leases. After paying off each system’s outstanding bonds (as required by federal tax law), the net proceeds ranged from a high of $17.4 billion for the New Jersey Turnpike system to $1.1 billion for the Kansas Turnpike. You can see some of the media coverage in Bond Buyer and local coverage of the specific states with toll roads examined in the study, including Florida, Illinois, New York, New Jersey, Ohio, Oklahoma and Pennsylvania.
The study provided context for 19th century U.S. and U.K. private toll-road franchises, the conversion two decades ago of state-owned toll agencies in Europe to long-term concessions that were auctioned off and growing experience with such transactions in India, Australia and Latin America. It suggested that if the lease proceeds are provided as a one-time lump sum, they should be used responsibly for balance-sheet purposes, such as paying for major (but currently unfunded) transportation infrastructure projects, reducing state debt, or reducing the unfunded liabilities of public pension systems.
Back in 2016 when I was writing my book, Rethinking America’s Highways (University of Chicago Press, 2018), I wrote that there was little likelihood of further long-term leases of existing U.S. toll roads, after the controversy over Gov. Ed Rendell’s attempt to lease the Pennsylvania Turnpike and the dismissal of similar proposals in Florida, Illinois, Texas and Virginia. But by 2018, the idea of “infrastructure asset recycling” re-emerged, thanks to a successful national program in Australia. Panel discussions took place at infrastructure investment conferences and at the annual American Road & Transportation Builders’ Association (ARTBA) P3 conference.
The Australian embassy publicized that country’s success in using lease proceeds for new transportation investments. The White House infrastructure plan drafted by D. J. Gribbin (February 2018) included incentives for state and local government to consider making the best use of existing revenue-generating infrastructure, and the idea was picked up by the U.S. Department of Transportation’s (DOT’s) Office of the Secretary. Because of this renewed interest, I researched and published an Oct. 2018 Reason policy study called “Asset Recycling to Rebuild America’s Infrastructure.” It included some hypothetical value estimates for U.S. airports, toll roads, seaports, water and wastewater systems and university parking.
Continued interest led to the idea of a more detailed study of toll road public-private partnership (P3) leasing. The research began late last year—before there was any inkling of the COVID-19 pandemic and the large fiscal consequences it would have for state and local governments. The pandemic and recession gave new urgency to the idea that governments should look into which of their assets might attract interest from well-qualified companies to operate, manage and improve them under long-term regulatory oversight according to the terms of a very detailed long-term P3 agreement.
Alas, it turns out that the response from some existing toll agencies was not welcoming. A long-time friend who works with the toll industry told me that the study had given rise to a “firestorm” of criticism and concern among some toll agencies, whose response may be likened to a well-known company being suddenly confronted by the threat of a hostile takeover. I was not prepared for this, having previewed the forthcoming study the week before its start on the weekly Café IBTTA. So in the rest of this article, I want to take up two questions: What’s in it for current management and staff of a toll agency? And what’s in it for toll road customers?
On the first question, the study went to some lengths to explain that the likely bidders would be world-class toll-road companies, a dozen of which are profiled. They would have no trouble making job offers to current managers and staff, as was done in the Indiana Toll Road lease. For those not wanting to leave civil service, the government would most likely offer lateral transfers to other state jobs. Private-sector companies pay market-rate compensation that may include profit-sharing. And for senior managers, working for a global toll-road company would offer career opportunities not to be had in a state agency.
Another difference would be to insulate the toll road from legislative efforts to treat it as a cash cow—which is unfair to its customers, frustrating to its managers and detrimental to its bond rating. An egregious case in point is the Pennsylvania Turnpike, which was saddled by the Legislature last decade with a mandate to divert $450 million a year to the state DOT for transit subsidies, primarily in Philadelphia and Pittsburgh. That mandate has required large annual toll increases and has ballooned the Turnpike’s debt from about $3 billion at the time of the 2008 lease offer to nearly $14 billion today. That added annual expense has reduced the Turnpike’s ability to replace the 80-year-old pavement.
Customers would benefit by avoiding sudden major hikes in toll rates (like the 36% increase approved in May for the New Jersey Turnpike). Nearly all long-term toll road leases limit annual toll rate increases to an inflation index such as the Consumer Price Index (as do some recent policies at state toll roads, including Florida’s Turnpike). The toll road’s finances would be more resilient in times of recession. That’s because instead of 100% debt finance, the toll road company would use a mix of debt and equity. For example, if only 70% of the financing is revenue bonds that require annual debt service payments, the equity providers may have to hold off on any returns for a year or two during a recession, but the smaller debt service is more likely to be covered by the reduced toll revenue. And the long-term P3 lease agreement would include an array of performance measures, with penalties for failing to meet them, which should also benefit the customers.
These are early days. The toll industry, globally as well as in the United States, consists of two organizational forms: government toll agencies and investor-owned toll companies operating under long-term toll concessions. Government remains the roadway owner in both, and in the P3 case is also the regulator, using detailed provisions in the long-term agreement. Infrastructure asset recycling is a global phenomenon that will be part of the future of tolling—and potentially part of the trillion-dollar effort to rebuild and modernize our aging Interstate highway system and begin the transition to mileage-based user fees. Both organizational models have roles to play in these transitions, as I explained in my book and continue to advocate. The largely-government U.S. toll industry should be part of an active discussion of the pros and cons of leasing existing toll roads under a new governance model. It will likely be a better fit in some cases than others, but I think it has an important role to play in America’s transportation future.
Robert Poole is director of transportation policy at Reason Foundation, a public-policy think tank.