Moving Toward a Private Transportation System

0:00What motivated this research is actually some other work I've done, but my becoming aware that there's a fairly widespread view out there in the state of Pennsylvania and elsewhere that we are facing a transportation funding crisis. And I think to the extent there is a transportation funding crisis, even if there isn't, it needs needs to be viewed as part of the broader government fiscal crisis as we see state governments and the federal government becoming something like insolvent. So in any case, my basic thesis is that in light of the transportation funding crisis and the broader government fiscal crisis, that the road and highway networks should to be sold to private entrepreneurs.

0:53And I'm not only arguing that it's a good idea, but that the current environment, particularly the financial crisis situation of the government at the federal and state level may provide an opportunity for a movement in this direction that in fact it may be easier to accomplish in the next 20 or 30 years than it would have been in the past. So just briefly, my paper is fairly broad, but I want to focus on really part of it. The first part of the paper I talk about the question in what way does government transportation funding fall short. And just a quick summary, I think if you think about the fact that almost All. And my focus really is roads and highways, although you can't completely understand the situation with roads and highways without understanding other competing forms of surface transportation. But the problem, if you think about congestion in particular, you see that when you have something that's not priced in the market, you've got a problem that

2:05that isn't going to be solved, that could be solved with market prices and it's not merely the problem of resource allocation of allocating highway space which leads to congestion but there's also the problem of the failure of government to build and maintain highways in a way that is consistent with driver preferences, with people's actual demand for mobility and so my basic argument is that private provision could So my focus today, at least what I want to focus on in my presentation to you, is how can the privatization of roads in the United States be reduced or eliminated.

3:05How do we get from here to there? And I want to start with some lessons from history. First of all, there's a number of interesting historical examples, and I'm going to focus on three. First, roads and highways were largely privately funded in Britain from the Middle Ages until the 19th century. Now, there was some variation over that time, but private funding was quite common, and at the same time, unfortunately, the government was often interfering with whatever mechanism or whatever organizations might have privately funded those roads and highways, and so it didn't always work all that well, whether it was the monasteries who played a very major The government was interfering in a variety of ways in terms of regulating tolls and of course in the battle between the church and the state which ultimately led to the government taking over the property of the monasteries and of course that didn't help in terms of their willingness to fund roads and highways.

4:29But in any case, there was a largely private system in Britain. And not only that, but as you may be aware, in the early U.S. history, particularly the early 19th century, privately funded turnpikes were quite extensive, and in spite of some conventional wisdom, that system actually worked fairly well for a number of years. And in fact, the evidence is that people continue to invest in private turnpikes in the U.S. in spite of the fact that they earned low rates of return. In many cases, the rates of return might have been negative, yet there were still businessmen willing to do so.

5:20In addition, and the reason, of course, is because they recognized that there were secondary benefits beyond the rate of return that they could have earned from those roads and highways. And by the way, a lot of this has been documented by the work of, I think, some worker, Bruce Benson and others. Also, the third example is, you know, it's fine to talk about roads and highways, but what about local streets? You can easily limit access to roads and highways, and you can charge tolls, but what about local streets? Well, at least in the U.S. during the 19th century, there is a good example in the city of St. Louis, where many of the streets for a number of years were privately constructed and maintained.

6:05Now, why did all these systems of private roads and highways, being so common as they were, decline in importance? I would argue for two main reasons. First of all, government regulations made it hard for turnpikes to be self-supporting. And secondly, as government started using tax money to subsidize competing modes of transportation in the US, it was canals and railways, I think there were similar things happening in Great Britain, and also sometimes paying for roads and highways in the Highways, partly due to the fact that they did have financial problems, so the government stepped in after usually being the cause of the financial problems in the first place.

6:55As more and more government funding happened, people didn't want to pay twice, so they used the government-funded highways instead of the private ones. At the same time, though, I think it's helpful to consider that specific historical conditions gave rise to private highways in the past. That is, there were periods of time when government supplied some roads and highways and then the private sector actually stepped in for reasons that you might be able to guess. For example, failure of government funding to result in good quality streets was a big factor in the city of St. Louis. Failure of government Funding, various government funding attempts in Great Britain prior to the 19th century, or central government attempts to coerce local governments into providing the roads and highways that went through that particular area also didn't work very well and that gave rise to private entrepreneurs stepping in when there was sufficient demand for a good road and Highway or Highway Between Locations. Secondly, an interesting case at least in

8:12the US was most people are familiar with the private turnpikes in the early 19th century but what you may be less familiar with, there was actually a period of time in the mid-19th century around 1850 or so when in a number of states or localities in states like New and New York again privately funded plank roads and that particular period of time I think reflected a debt crisis that is New York and other states had spent so much money on canals and I guess railroads but particularly on internal improvements, money which they didn't have in terms of taxes and suddenly they faced basically Debt Crises, and in response to that debt crisis, there was a decision, you know, not to fund further internal improvements, so if you wanted a decent road, and these were particularly communities that were far away from the canals, so they needed access to the canals, private Entrepreneurs again built a number of basically turnpikes made of planks.

9:36I think history reveals that private roads have been viable in the past. On the other hand, what about the present? We've seen in recent years a number of attempts to sell There have been a number of attempts to sell highways to private firms or to charge people to use existing highways, which is at least something like what you might see in a market. And most of those attempts have provoked political opposition, considerable political, or I would say intense political opposition. And so, we do have some examples today, as you know, of highways that are privately run or at least quasi-private.

10:21They are owned or leased to private firms. And I'm sure you're aware of some of the examples, the Chicago Skyway and the Indiana Toll Road. One of the more interesting examples is a private firm that built or constructed express lanes in a California freeway as well as the private firm that built a new expressway from Dulles Airport in the Virginia suburbs of Washington D.C. Those are the two most prominent examples that I'm aware of. There may be other ones. I know there are a couple of examples are one example of an attempted private highway that went bankrupt and didn't get built. But they've been few and far between and a lot of other proposed private highways have been shot down by the voters or by the political establishment. And in fact, one of the best examples I mentioned, the State Route 91 in California, which was actually funded or which which actually involved charging variable tolls based on congestion. That was actually bought back by the Orange County government from the private firm. So even that

11:40privately owned highway didn't stay private. The other thing we need to recognize is while we can talk about private highways, none of these so-called privately owned highways are fully private. are better described as public-private partnerships. Government regulates the tolls that may be charged and also regulates things like design and safety features to protect the public from entrepreneurs who would supposedly take advantage of them by building unsafe roads. So we don't really have, even in the limited number of examples, fully private highways. The question I want to ask though is, why do people oppose private highways? At least some of the reasons are not really inherent in the very nature of private highways, but they relate to the way the system works right now. Namely, if many private highway agreements, The best-made with local governments include non-compete agreements or perhaps even implicit non-complete agreements, not necessarily explicit, that the private highway, the government agrees not to expand capacity of nearby roads that would compete with the private highway.

13:09So clearly, you know, the public may gain from perhaps a better maintained highway, but then they lose from roads that might be expanded nearby. Secondly, piecemeal privatization results in traffic being diverted to adjacent secondary roads when a private entity takes over highway and charges tolls. Well, that means that since there are plenty of nearby roads that are free, that means, particularly if tolls are higher than they were in the past, that means traffic is going to be diverted, and that's often going to lead to too many trucks and other kinds of problems on those adjacent roads. And the third problem with private highways is that because anything that's been attempted has been piecemeal, people object to paying twice. That is, government proposes, for example, in the state of Pennsylvania there was a proposal to put tolls on Interstate 80, which again would make it sort of like a private highway, but you know, why just this highway? Why do we have to pay tolls and everybody else in the state doesn't? And we pay the same gas

14:21taxes that everybody else pays, so why do we have to pay for our highway when everybody Well, just a couple of ways that I would suggest that this opposition might be overcome. Again, I think one of the big reasons for the opposition is piecemeal privatization. If an entire road and highway network could be privatized, then you have a different situation. You have the possibility of substituting Tolls for gas taxes, so people could actually realize, you know, okay, you have to pay tolls, but you no longer have to pay gas taxes. Secondly, it seems to me, and you know, this is, this is arguable, but the fact that there are some public-private partnerships, and they have accomplished some things in terms of getting highways built more quickly than the government typically gets things done, might in fact provide a positive example for people to see, hey, private firms do things in some ways better, in many ways better than the government does and that might help change people's attitudes.

15:40Well, the last thing I want to talk about is what I see as some important trends and some institutional changes that I would hope might be considered that would actually facilitate privatization. The first trend, again, is the one that I emphasized at the beginning, the fact that we have this at the level of the state and federal governments, at least in many states, clearly financial crises, states that have commitments that they've made, that it's hard to imagine how they can possibly raise the tax revenue to meet those commitments, and yet one way, and just think in terms of pension obligations, even if states were to cut some of their other discretionary spending, they've got these obligations that they can't really get around, and the political reality that it's hard The Federal Government Bureau of Economic Analysis estimated that all the roads and highways in the U.S. have a market value of $2.4 trillion.

16:41But selling assets like roads and highways could actually play a significant role in helping states eliminate, or at least reduce, short-term budget shortfalls. The Federal Government Bureau of Economic Analysis estimated that all the roads and highways in the U.S. have a market value of $2.4 trillion. You could debate how accurate that number is, but I would argue that it's not a very high number. But I wouldn't doubt, I don't doubt that infrastructure is highly valuable. In fact, most of that, 2.3 trillion, is estimated to be for state and locally owned or operated roads and highways. So that's a tremendous amount of revenue that government could potentially gain from selling its roads to private firms.

17:29programs. Secondly, to the extent there is a financial crisis and I think you see clearly at the Federal level that when budget cutting starts or when inflation kicks in or some combination of those that the political reality is that they are going to be across the board cuts and those across the board cuts are going to mean that as long as roads and highways is continued to be funded by the state and federal government that they're going to not get enough funding for maintenance, not enough funding for construction, and as people see the road and highway system deteriorating, they're going to perhaps, I would like to think become more open to other alternatives such as private provision.

18:16The third trend that I think makes privatization promising, and this really has more to do with local streets, is the growing number of community associations that already pay the cost of constructing and maintaining streets. And some of you probably already live in neighborhoods like that where, in fact, the streets are are already paid for and provided basically by the community association. Now sometimes they do that even though you pay local taxes for the streets that are provided by the county or the city, but if you live in that association, your association pays. So from those trends From those trends, I want to talk about some things that I would suggest need to happen or at least if they happen would make the process easier.

19:16One is rules that would make it easier for existing neighborhoods and groups of neighborhoods to form associations. It's one thing for a new housing development to have a community association and build its own streets. It's much more difficult for an existing neighborhood in a town or city to form an association that pays for its roads and streets. And I'm not sure that it's theoretically possible, but practically, because I think it would require unanimity for that to happen, I'm not sure that that sort of thing has happened anywhere. Although there probably have been associations that have been formed to Fund to Other Things, so maybe it could happen that way too. So rules that would make it easier for neighborhoods and groups of neighborhoods to form associations would facilitate residents sharing the cost of maintaining streets in their communities. And I think it's important to recognize that tolls probably won't work very well for local streets, but contractually A third point that I think is important to recognize is that selling highways to the

20:37highest bidder, though you might think it would result in high tolls, need not do so if property owners likely to benefit from the highway are able to participate in the bidding, to form associations, because property owners who would benefit from the highway Lastly, harkening back to the U.S. situation in the 19th century, strengthening of community ties might be critical to making something like this work. Businessmen often invested invested in turnpikes in the 19th century not because they expected a decent financial return from the investment, but because they knew that it would benefit their community and they also knew that their contribution would benefit their reputation. So that kept them from free riding on the contributions of other people. So strong community ties is I think another factor which would be a determining factor in whether privatization is going to work. Thank you.