King of the Road: Who Owns The Highway

In the past few decades, states having a hard time balancing their checkbooks have looked for creative ways to avoid costs and produce revenue. One choice these states have been turning to is the option to privatize their highways. This alternative to fully public funded construction and maintenance allows states to cut costs in production and gain significant revenue from the selling or leasing of the highways (see right). However, some detractors are afraid of giving the private sector too much control over the roads and worry that maintenance will decline.
Lately, states like California and Texas have used privatization to create roads and revenue in one swoop. With the war and the general overspending of the current administration, the budget belt for states has been cinched tight, and states have been worrying where they can cut costs or generate revenue. In addition, the infrastructure of many existing highways has been called into question especially in light of the summer’s collapse of a bridge in Minneapolis. An article in Newsweek quotes the American Society of Civil Engineers estimating a cost of about $1.6 trillion over the next five years to bring highway infrastructure up to date. Needless to say, states that need to expand or renovate their highways do not have the money to fund these projects. If public funds come up short, who can bridge the gap? Companies like the Australian based Macquarie and Spanish based Cintra do not need any encouragement. In the past few years, Macquarie and Cintra have built and leased back highways in Indiana, Texas, and California with some projects having price tags upwards of a billion dollars like the new Chicago Skyway (see bottom right) which earned $1.8 billion for the city after being leased back to Maraque for 99 years. In total, about $25 billion dollars in projects are in development with private firms states a Wall Street Journal article. States set the terms and “force the owner (or leaser) to provide certain levels of service and maintenance and to keep tolls and other costs under control.” The companies then build the highways and sign ownership over to the government. Almost immediately, the government leases the toll roads back to the private companies for a certain amount of money upfront, which they can use for whatever reasons. The companies get a long-term cash cow, and the government gets liquid capital to use upfront. Using an economic model, the privatization should promote competition between firms. This would lower final costs and increase efficiency on the roads, as private firms would want greater quantities of people using their roads instead of an alternative. The firms might produce a solution to traffic the government has not cared too.
All in all, this solution sounds like it works out for both the private firms and the state governments with firms getting profits and the government getting revenue and cutting the costs of maintenance on highways. However, critics argue that private firms might raise tolls to high and drive motorists back onto the already overloaded public highways, and Newsweek cited Fortune magazine’s Bethany McLean “raising questions about the sustainability of Macquarie’s business model.” Selling these highways is a one shot deal for states and promises no future funding for state governments. As a way to make a quick buck for states and perhaps promote efficiency in the construction and maintenance of highways, this model has been fairly successful; however, I think state governments need to find a more permanent solution for the problem they think they are fixing. I doubt owners of highways will raise tolls enough for drivers to avoid them all together. In the end, these private firms want to make money and gain nothing if people do not travel on their highways. Privatization may clean up highways, decrease traffic, and promote efficiency on a general basis; however, I believe state governments are making a mistake in banking on highways to fill their coffers.