private toll roads ????
talk about some quick gubmint cash
try leasing the toll collection rights
to your state and local road systems
for an up front lump some payment
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hey with todays broadcast gizmos
this can have nearly universal application
one road after another
sold off
while cutting
income and property taxes
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on this point
here's a recent
ham fisted blog flog
Privatization of Roads
Should the allocation of transportation services - driving on roads - be allocated by the price system? If we continue on the road to privatization, will we be satisfied that it is equitable for the haves to be able to drive on roads closed by resource constraints to the have nots?:
Indiana Sells Road for Billions; Prepare for Deluge, by Joe Mysak, Bloomberg: On Monday, Governor Mitch Daniels said a Spanish-Australian consortium had bid $3.85 billion to run the Indiana Toll Road, a 157-mile highway across northern Indiana that runs from the Illinois to Ohio, for 75 years. The legislature still has to approve the proposal...
A Merrill Lynch & Co. report published last July on the subject of U.S. toll road privatization asked whether sales like the Skyway were one-offs, "or do they represent the beginning of a sweeping trend that will spread to other tolled bridges, tunnels, expressways and long-distance toll roads?'' Let's bet on the sweeping trend. The money is just too big to resist...
Merrill Lynch estimates that at least 18 states from California to Massachusetts have state-, county-, or city-owned toll roads that might lend themselves to privatization. ... What you need is an established road, and the flexibility to increase tolls. ... 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... That would cure a lot of Governor Jon Corzine's headaches. 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! ...
The sticky matter for Governor Daniels is selling the state's lawmakers, and everyone else in Indiana, for that matter, on the idea. But we've come a long way from the days where people felt bad about selling assets like landmark buildings and other property to foreign investors. ... The money is just too big.
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 redued 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.
Comments
Ugh! Privatization done bass ackwards, again. We should realize that the virtue of privatization in any given industry is so that the power of the competitive marketplace will allocate resources more efficiently than the government can. In this case, the highways are already built. The capital investment is already spent. For something like highways, which is pretty much a monopoly good for people who have to use it, the way for private business to get maximum profit is not by providing the most product, but to extract the most tolls for the least maintainance.
Not that I am against privatization of roads per se. I really think this country would have been better off in the long run if the government didn't get into the road business at all. If all the roads we had had came into existance as profit-making ventures, and abandoned when any profitable route ceases to become profitable, we would not have the same sparse, sprawling development pattern that we see in the U.S., at least not to this extent. Other modes of transportation like rail would become much more competitive if the true cost of roads were borne by each consumer (drivers and homeowners) rather than subsidized through taxes. We might be facing the coming carbon crisis with something like equanimity.
Posted by: battlepanda | Jan 25, 2006 8:07:44 AM
battlepanda: I believe there is a fallacy in your reasoning, namely that what a single entity like a corporation or consortium, or collectively an industry, perceives as profitable is not necessarily desirable or beneficial to society at large. This is fine as long as it comes to "discretionary" stuff like toys and widgets that will or will not be successful in the marketplace, but not in the case of essential infrastructure.
Which is why the whole idea of representative democracy came about to begin with -- broad input into rulership instead of special interests, who are often enough not even competent enough or in a position to cater to their own long-terms interests, not knowing what they are, beyond easy things like money, riches, and the ability to mess with everybody at will.
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cm: "broad input" usually translates into rule by special interests anyway, and nowhere more than in the present case. Lots of people, certainly in my neck of the woods, experienced the highway initiatives of the 20 century as coalitions of special interests flattening the communities that happened to get in their way. If governments had stayed out of the scrap these coalitions would have had much less power.
Plus battlepanda is clearly right about the specific issues he raises. It goes without saying that we would be nowhere near as automobile dependent if government had not underwritten the fabulous expansion of highways during the last century. It is not just corporations that have trouble decoding their long-term interests.
Posted by: Fred Hapgood | Jan 25, 2006 9:26:20 AM
The Indiana Turnpike is a road used heavily by interstate truck traffic and interstate autos, so the tolls have been a means of sucking money out of people from other states, while providing a road for Indiana traffic as needed.
This is a one-time quick fix of an "asset" that was largely a breakeven venture anyway.
No improvement in service, just a big nothing.
One possible side effect, if tolls are raised too high truck traffic will get off and use regular state highways, causing an increase in maintenance and accident deaths (I know this becuase Ohio raised tolls for a number of years for no good reason and that is exactly what happened).
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"if the true cost of roads were borne by each consumer (drivers and homeowners) rather than subsidized through taxes. "
Most state and federal highway construction is financed through gasoline taxes, one of the few taxes really connected to a specific process (except for the portion of the gasoline taxes stolen in DC for other projects, never trust a federal "trust fund").
At the county/township level most road maintenance is financed by property levies, with sales taxes picking up the reat. Cities usually ahve a combo of income and property taxes.
Posted by: save_the_rustbelt | Jan 25, 2006 9:34:33 AM
The classical economists, two hundred or more years ago, managed to work out that the sunk cost investment involved in building a road cannot necessarily be efficiently recovered by tolls on those using a road. Once the road is built, a toll, which covers more than the cost of road maintenance, only contributes to allocative efficiency, if it reduces costly congestion. Assuming that there actually is costly congestion, one has to wonder why a more capacious road was not constructed to begin with. The classical brethren also recognized that most of the value of having a road would be realized, ultimately, by landowners with land adjacent to, and served by the road.
The U.S. already has a very efficient system for financing roads and highways, in a combination of property taxes and gas taxes. It is a very sensible regime.
A toll, which exceeds the cost of maintenance by enough to finance the cost of construction, depends upon there being significant congestion on the route. It is congestion that makes the toll efficient. This makes a multitude of sense on a bridge to Manhatten. On a "private" toll road, it entails a lot of nonsense. One aspect of the California Orange County experience with toll roads, which does not get much attention, is that the State had to agree NOT to take measures to relieve congestion adjacent to the toll roads. Eventually, the State had to buy at least one of the toll roads, at a profit to the builders, of course, because the situation was so obnoxious.
The Indiana Toll Road is kind of a peculiar case. In some ways, it is like a bridge from Ohio to Illinois. In some stretches, it is only about a mile from Michigan and is used more by people travelling from Michigan than people travelling around Indiana.
Posted by: Bruce Wilder | Jan 25, 2006 9:39:57 AM
I live in northwest Indiana (and used to live in Chicago--which has just sold a toll road, the Chicago Skyway). I find myself wondering how the purchasers expect to make any money. According to Project Management Magazine, the Indiana Toll Road took in $96 million in revenue in 2005. The state's plans call for toll increases that will lead to about $77 million per year over the next 10 years. That's about $173 mmillion per year. The bid for the road is $3.85 BILLION for a 75 year lease--and, according to Toll Road News (http://www.tollroadsnews.com/cgi-bin/a.cgi/qkcOBoxLEdqcEIJ61nsxIA), that's "a lump sum payment of $3.85 billion."
A 5% return on that is over $190 million a year, or $17 million per year more than the revenue the road would generate for the state. Added to that are the operating costs and any investment the purchasing consortium will need to make, and I think their total (opportunity) costs will have to run nearly $300 million per year.
So we're looking at a doubling of the tolls from their planned 2006 levels--at least.
Posted by: Donald A. Coffin | Jan 25, 2006 9:41:23 AM
I say toll roads up the wazoo. I can't afford a car, I don't see anybody worrying about equity for me. i consider myself to be a second class citizen. What about equity for me?
Equity is not an issue here.
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I'm curious about how these "sales" of roads work. It seems kind of short-sighted to me -- So Indiana gets just under $4 billion upfront, but where does the toll money go over the next 75 years? Have they traded cash flow for a lump sum, or will the state still get a cut of the tolls? Why does it make sense for some of the toll money to go to a private company, when it could all go to the cash-strapped state, instead? When the article mentions 'the flexibility to increase tolls,' is it somehow easier for a private company to increase tolls than for the state? Goodness knows there's enough screeching in my neck of the woods every time they try to increase tolls on any road or bridge. And once you've "sold" the road, who is accountable for it?
Sorry for all the questions, but I have to wonder, am I missing something here?
Posted by: Holly W. | Jan 25, 2006 9:44:54 AM
STR said:Most state and federal highway construction is financed through gasoline taxes, one of the few taxes really connected to a specific process
Yep. That is true. But in a way irrelevent -- the tax is tied to "roadbuilding" but the allocation of those funds is decided not in a market but a political process. Very many roads get built that does not have enough traffic on it to be "sustainable".
This is a one-time quick fix of an "asset" that was largely a breakeven venture anyway.
No improvement in service, just a big nothing.
Exactly. It just doesn't make any sense for the state gov to sell at a price businessmen would buy unless the businessmen have ways of extracting more money out of that stretch of road (i.e. bilking the users) or, like the desperate souls lining up at the payday lenders, they need that money NOW regardless of the terms.
Fred said:Plus battlepanda is clearly right about the specific issues he raises.
Fred, I know it's hard to tell with us pandas, but this one is a girl :-)
CM: I believe there is a fallacy in your reasoning, namely that what a single entity like a corporation or consortium, or collectively an industry, perceives as profitable is not necessarily desirable or beneficial to society at large.
I think we can agree that there are advantages and disadvantages to both private and public systems. The worse is the kind of privatization that is described in this post, where formally public systems are auctioned off, sometimes at bargain prices, to private interests. You get all the rent-seeking of the private sector, but since all the capital allocation was done by the government, the inefficiency of state sponsored ventures too.
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great sport for us econ cons eh?
some pretty nasty tax farming days
oughta get invoked here
but hey we survived the great railroad hustles
right ????
love to see one of these dang leases
and of course the silent..brokerage fees
to answer one question
a privatized road
can
do two things
a public one can't
know its mission clearly
stockholders profit max
and
put the chosen toll rate
out of the reach of the electorate
and
under the protection of the courts
vide other private utility rates
imagine if this blows up
which it must
into a toll payers revolt
and some ballot box insurection like
prop 13
forces the state to buy back
the rights
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Donald A Coffin said I find myself wondering how the purchasers expect to make any money.
Don't you worry about that.
Macquarie, the Australian partner in the consortium, is known locally as "the millionaires factory" for the vast sums it pays its senior executives. Macquarie Bank, the head of the octopus, made a return on equity of 30% in 2005.
If the past is any guide to the future, readers might like to research the recent history of Toronto's Highway 407 in which Macquarie/Cintra have a major shareholding.
Holly W said When the article mentions 'the flexibility to increase tolls,' is it somehow easier for a private company to increase tolls than for the state? Goodness knows there's enough screeching in my neck of the woods every time they try to increase tolls on any road or bridge.
Yes, it is easier for a private owner to increase tolls. A private owner doesn't have to face up to angry voters for re-election. Instead, the private owner increases tolls, the government, claiming to be the voters' friend, takes the owner to court, battles valiantly, but reluctantly loses, and blames whoever the officials were who negotiated the contract.
It's playing out now in Ontario as I write.
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Maybe Indiana will have the last laugh by demanding that the private road operator pays to sub-contract the Indiana State Police to patrol their roads? On the other hand perhaps the MacQuarie syndicate will have the last laugh by internalizing speed limit enforcement on "their" road (immediate payment by cash,, credit card, or EZPass) which will bump up the RoR on their purchase by a few pecentage points?
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Interesting, Mike M. Thanks for responding to my question. Not that your answer is exactly comforting!
Posted by pinky at January 27, 2006 02:18 PM