The case for privatizing America's highways

Backups on U.S. highways are a daily source of frustration to tens of millions of Americans. Cars and highways are engineered to transport riders at 50 to 70 miles per hour (mph), yet, during rush hours, average speeds are 15 to 20 mph and declining each year. Superhighways are set up for vehicles to cruise along safely at 50 to 70 mph, yet are becoming parking lots full of stop-and-go traffic for hours each day. Drivers find it hard to relax in jammed traffic because they keep wondering how late they are going to be, whether they should try another route, and whether the congestion ahead suddenly win clear.

Generally, highways are built and managed by state agencies and offered "free" to the public. Instead of paying for road use directly, motorists provide highway funds through license and registration fees, gas and diesel taxes, truck charges, special transportation sales taxes, and development district levies. After that money has gotten through the various bureaucracies, tax agencies, treasuries, and transportation administrations at different levels of government and some has been diverted to transit systems and even general government revenues, what is left for roads is political "pork" - allocated by deal-making between various government actors in Washington, state capitals, and county seats.

Meanwhile, there is no price on rush-hour travel. There is no revenue stream directly from road users to managers to provide incentives either to utilize existing capacity to maximum consumer advantage or to adjust capacity to demand. According to the Transportation Research Board, "In the absence of efficient pricing, motorists who drive on congested facilities are not required to pay for the delays they cause each other, and these delays are substantial. The wasted time and fuel are estimated to cost [at least] $40,000,000,000 annually."

Congestion long has been recognized as an inner-city problem, but, as the Texas Transportation Institute (TTI) notes, it has gotten "into the suburbs, with street systems designed for service to residential areas [now] overburdened with traffic headed to large shopping malls and business parks." Because many internal combustion engines operate most efficiently at a steady 40 to 50 mph, stop-and-go traffic adds considerably to air pollution - emissions of carbon monoxide and volatile organic compounds are worst at low engine speeds.

The congestion is getting steadily worse. In its traffic congestion index (TCI), the TTI expresses congestion as the ratio of daily vehicle-miles traveled to roadway design capacity (i.e., a ratio of 1.0 means that the roadways are carrying the amount of traffic for which they were built). The average TCI for 47 of the 50 cities surveyed has gotten worse every year since 1982; in only three - Phoenix, Houston, and Detroit - did it lessen. In some places, it got spectacularly worse: in San Diego, the index went from 0.78 to 1.22 a 56% increase. The other cities with radically worsening congestion were Salt Lake City, up 3.7%; San Francisco-Oakland, up 33%; Sacramento, up 30%; and Washington, D.C., up 30%. In Los Angeles, congestion worsened by 28%; in Chicago, 25%; and New York, 13%.

The trend to gridlock is not confined to the largest municipalities. Medium-sized cities also are in trouble. Atlanta showed a 28% rise; Seattle-Everett, 27%; Dallas, 26%; San Jose, Calif., 26%; and Portland, Ore., 24% worse. Twenty-five of the 50 largest cities had expressway and arterial traffic at saturated levels (TCI 1.0 and above), compared with 11 of the 50 in 1982.

Mass transit does not seem to help to avert congestion. In the 1970s and 1980s, the Washington and San Francisco-Oakland areas developed and continued to expand passenger rail systems at a cost of billions of dollars, yet those cities are among the gridlock leaders both in absolute terms and congestion growth. New rail systems tend to gain their patrons from other transit systems - buses and vans - not cars, and those systems approximately double trip costs. New York and Chicago have major subway and elevated commuter rail systems as well as huge bus fleets, but suffer serious highway congestion.

The basic pattern with mass transit is that it serves mainly hub-and-spoke journeys between suburbs and downtown. The downtowns, however, generally are declining, as work and shopping move to emerging new urban centers such as Tysons Corner (Washington area), Las Colinas (Dallas), Burlington Mall (Boston, at Route 128), and the 287 corridor (White Plains, N.Y.). In each metropolitan area, there are suburban downtowns of office parks, malls, and concentrated commercial districts five to 20 miles away from the old downtown. The new downtowns are the sites of about 70-75% of current office construction and almost all new stores.

Quite a number of these suburban downtowns are in trouble. Some of the earliest - such as White Plains, Stamford, Conn., Southfield-Detroit; Greenpoint-Houston; Sherman Oaks-Los Angeles, and Tysons Corner - are struggling and may decline or collapse. While some old downtowns, such as that of Boston, are making a comeback because of their historical character and cultural and educational resources, another trend - moving to small rural towns way beyond the edge - is facilitated by the telecommunications and computer revolutions. This creates a need for emphasizing adaptability in any transportation system, which suggests the general superiority of rubber tires on asphalt to steel rail technologies.

In a hydra-headed urban area, single center-oriented mass transit works only for a small proportion of journeys. There really is no alternative to the highway system for most intra-urban journeys.

The automobile best suits multipurpose trips. People in busy households with husband and wife both working like to combine journeys, stopping off after work to go to a supermarket, convenience store, bar or restaurant dry cleaners, liquor store, or video rental place. They may combine shopping and transport of children in one trip, or buy materials for a weekend project during a lunch hour. The car is a goods hauler and storage locker as well as a people mover. Mass transit can not compete. A car goes door to door and leaves when you want to leave, not according to a printed timetable produced by a transit company. It offers a degree of privacy and personal security that mass transit can not match. Moreover, the great bulk of its costs - depreciation, insurance, and service - are fixed, so once you have a vehicle, its trip costs (e.g., gasoline, tire wear) are relatively low.

Anthony Downs of the Brookings Institution sums up the reason people are reluctant to abandon their autos for transit or share them as urged by car pool advocates: "The commuter who drives alone enjoys not only greater privacy and comfort but shorter travel times, more convenient timing, and if parking is free, lower day to day cash outlays."

The average angry and articulate middle-class protester attending a city council meeting to oppose a local developer's application for permits for a new subdivision generally talks as if traffic congestion were the result of increased population. In fact, more people are just one factor. A major cause of increased traffic is the transportation emancipation of the family. By about 1970, the majority of American families had a car, but only a minority had two vehicles. The man of the house did most of the driving. The last two decades, however, have seen women all over America getting jobs and driving cars as regularly as men. Moreover, as the overcrowded parking lots and side streets around any senior high school will confirm, older children are getting their own cars, too.

Congestion is a function not of traffic itself, but of traffic compared with highway capacity. Opponents of roads and cars say that building extra highway capacity is futile. It is true that, under highly congested conditions, some demand for roads will be suppressed and that providing extra roads will cater to latent demand. For instance, if roads during rush hours have been congested, relieving the conditions causing the congestion will encourage some who were driving during off-peak times to avoid tie-ups to drive during peak times. Also, adding capacity to one highway while leaving untouched another one not far away will attract traffic to the enlarged road. However, claiming that increasing supply in and of itself can increase demand displays an ignorance of fundamental economics or indicates a hidden agenda or a fatalistic sense that there is no hope of building out of congested conditions. Doom-sayers hold that road builders would have to pave the entire countryside to provide enough roads. Yet, demand for highway space is not infinite, or there would be no uncongested highways at all.

None of that means that extra capacity may not be warranted. Relief of latent demand may, indeed, be a service worth providing. The TTI data support the contention that building extra capacity can help (though, in deference to current and-road fashion, the institute does not advocate that course). The three cities that saw a reduction in their TCI in the 1980s all added major amounts to their freeway network - Phoenix (TCI down 10%) added 302 new lane-miles, or 88%; Houston (TCI declined 10%) brought in an extra 378 lane-miles, or 23%; and Detroit (TCI down three percent) introduced 171 new lane-miles, or 11%.

San Francisco-Oakland, which is about the size of those three cities put together, brought in just 86 new lane-miles, or four percent, and southern California expanded its highway capacity by less than half what was needed to maintain current congestion levels. The Washington area needed an extra 147 lane-miles to maintain traffic conditions, but added just @l (four percent), so the area now suffers increased stop-and-go traffic. New York managed to keep traffic conditions from deteriorating as fast as they did in many other places through the country's largest expansion of arterial road capacity - 724 miles (10%). Most of the expansion occurred early in the decade, and the increase in congestion in the Big Apple has been associated with that program's winding down.

Critics of the current car and highway regime should be conceded several points: highway users currently are not paying their way; the system of roadway pricing is riddled with inefficiency and unfairness, state highway agencies have gone from being overaggressive advocates of an engineering solution (in the 1950s and 1960s) to being timid bureaucracies so cowed by small organized opposition groups and environmentalists that they have abdicated their responsibility to expand highway capacity to meet demand.

Advocates of free-market solutions have a great opportunity to get into the problem-solving business and win wide political support by advocating and organizing a solution for traffic congestion on freeways. It should consist of progressive privatization of major highway service funded by time-flexible toll pricing and concession rights, combined with the phaseout of gasoline and diesel taxes and the Federal and state highway agencies that live off them. Privatizing highways progressively and creating markets in highway service will make it possible to use resources more efficiently and to build as much highway capacity as people are willing to pay for. Three factors make this so:

* The politics is right. People are distrustful of large state bureaucracies that live off taxation, and they demand lower taxes. The state highway agencies largely have given up on providing new services. * The technology is fight. Tolls no longer have to mean inefficient congestion-creating plazas collecting money. Small, cheap transponder tags attached to a sun visor or wind-shield can hold a prepaid stored value that gets debited by radio signal while the motorist drives by at highway speed. * The economics is right. The costs of congestion are a huge and growing burden not only to the peace of mind of commuters, but on the economy that depends heavily on free-flowing transportation of goods and services. Once the highway system is shown to be paying its way with tolls instead of from the public purse, it will be easier to argue for ending government subsidies for mass transit, the costs of which are strangling big cities.

The alternative to privatization and a market solution is not the status quo, but growing government control in the form of mandated employee trip reduction planning, which forces businesses, under threat of fines, to coerce their employees into riding in car pools, vans, and buses and using high-occupancy vehicle (HOV) lanes. Government officials deliberately engineer highway congestion to force more mass transit use.

The first modern-era private toll road (from Washington, D.C.'s Dulles Airport to Leesburg in Loudon County, Va.) opened in late 1995. The Dulles Greenway toll road is 14 miles of four-lane divided freeway through largely undeveloped countryside on the western fringe of the Washington metropolitan area.

Environmentalists and local officials have supported the project as a central element of a growth strategy for the county, which provides for future development to be concentrated in the Dulles-Leesburg corridor on the theory that it will take development pressure off the western part of the county, which the plan intends should be kept rural. The project was supported by the powerful Piedmont Environmental Council the group that played a large role in running a planned Disney theme park out of northern Virginia in 1994. The developers spent several million dollars satisfying environmentalists, requests, building a specially long-spanned bridge over the Goose Creek reservoir to avoid piers in the water, creating a new wetlands larger than required by the Environmental Protection Agency and the Army Corps of Engineers, and committing themselves to a landscaping plan that will justify die name "Greenway."

The Dulles Greenway business plan projects the operation will be in the red until 2004, when it is realistic to think that the Dulles-Leesburg corridor will be developed fully and the private road will be used heavily. There are not many other roads. Leesburg Pike, the main highway in the area, has 10 traffic lights in less than 10 miles. Moreover, the private tollway was built as an extension of the successful state-operated Dulles Toll Road that is connected to the Capital Beltway (I-495) and to I-66, an expressway connection to downtown Washington. The Dulles Toll Road group has based its financial plan on models of red estate development and traffic in the entire Washington metropolitan area and projects annual toll revenues of $100,000,000 by 2008, $200,000,000 by 2025, and nearly $300,000,000 by 2036 when the 40-year franchise ends.

The state turnpike agencies are major repositories of highway management expertise and, according to Gerald Pfeffer of United Infrastructure Co., Omaha, Neb., several of them are extremely well managed. They have major disadvantages, though. As government-owned entities, their policies are determined politically. They have shown no interest in time-variable pricing - an essential tool for combating peak-hour congestion and for attaining efficient use of highway infrastructure.

Consider what has happened in the New York area, a region perfectly set up geographically for the implementation of congestion pricing policies. The major bridges, tunnels, and traffic arteries are run by state toll agencies - the Port Authority, the Triborough Bridge Authority, the New York Thruway Authority, and the New Jersey Turnpike. None of those agencies ever has proposed a rational profit-maximizing price policy of the kind a private operator would insist upon. Such a policy would can for premium prices in rush hours, because that would benefit the company by maximizing profits and customers by offering free-flow conditions.

New York's various toll and turnpike agencies, however, consistently have followed the perverse policy of offering deep discounts (up to 50% off) to purchasers of multiple tokens and coupons - predominantly rush-hour patrons. New York State agencies' pricing policies in effect provide rush-hour concessions and aggravate congestion. The agencies do that not because their officers are stupid or malicious, but because they take orders from politicians, who usually are responsive to small organized interest groups and demagoguery. Anti-congestion pricing has been discussed and proposed interminably in New York, but no public official has displayed the courage to talk any sense on the issue. In the 1980s, Mayor Abraham Beame claimed that such tolls would "make a ghost town" of New York, and in 1991, when the Triborough Bridge Authority proposed to reduce its commuter discount from 33 to 10%, Gov. Mario Cuomo, pandering to protesters, ordered the price to multiple-coupon purchases rolled back to provide a 50% discount.

Maybe urging bureaucrats and politicians to set economically rational prices is like advocating vegetarianism to wolves. It just is not in their nature. Bureaucrats talk about orderly systems, not maximizing resource use. Politicians talk about fairness, not efficiency. Both kinds of officials tend to defer to those with a large concentrated interest at stake, rather than the larger constituency of people with dispersed interests.

The market offers a better prospect than government for furthering the general public interest. Transport service companies in a competitive environment will be forced by the needs of their owners and creditors to charge pretty much what the market will bear, which happens to be about what will maximize the efficiency of the system. They will not survive if they offer gridlock. They will seek to match supply and demand. When they have an underworked asset, they will strive to drum up some revenue and use it. If they happen to make super profits for a while, that will generate the revenue and attract the capital for an expansion of capacity.

Time-variable pricing is accepted elsewhere. Everyone's long distance telephone service involves high tolls per minute during the business day, medium in the evenings, and low when most people sleep. Customers accept that as a way of encouraging fuller use of the spare capacity available out of business hours. Ski resorts and hotels offer large discounts out of season to attract business, rather than close up completely. Airlines offer discounted trips for travelers who stay over Saturday nights to reduce overloading on Fridays and avoid having idle planes on Sundays. Truckers and railroad companies offer special deals when they have equipment to move that would otherwise go empty. There is no logical reason why variable pricing should not apply to highway tolls, too. Indeed, the case is much stronger precisely because urban highway demand is so heavily peaked and capacity expansion is extremely costly.

A toll bonanza

There is potentially a large amount of money in highway tolls. Kenneth Small of the University of California, Irvine, estimates that there is at least as much in congestion pricing revenues as in congestion costs - around $50,000,000,000 a year, just about enough to offset the $40,000,000,000 raised in Federal and state gasoline and diesel fuel taxes and the $10,000,000,000 in state registration revenues. Small makes the case for deploying congestion tolls in a package that would compensate losers, finance alternative peak-hour transit, and generally smooth the way politically for reform.

John Kain of Harvard University sees the perception of tolls as taxes as the overwhelming obstacle. "This obstacle to congestion pricing ought to be removed by returning all congestion price revenues, net of collection costs, to taxpayers in the form of a highly visible tax rebate." Another way to achieve that result would be for governments progressively to privatize their highways, phase down their gas tax and registration fees, and phase out their highway departments. That could be done by calling for bids, putting sections of highway up for sale, and selling conditional franchises to build and operate.

One objection likely to be raised is that the facilities will be monopolistic. The degree of monopoly will vary with the alternatives available. Part of the process of tolling major highways will be restricting through traffic on untolled local access streets, first so that the business is not lost from the highway and second so that local neighborhoods are not gridlocked with toll evaders.

Regulation is die routine procedure where there is private monopoly power. in California, the four private highways approved so far cope with the monopoly objection with a negotiated ceiling rate of return on capital that is written into their franchise agreements with the state. In Virginia, the Dulles Greenway group applied for the right to build and operate the highway and eventually was granted that night on condition that, as do utilities, it get state approval for toll increases. It may be preferable to establish standardized ground rules and call for competitive bids. The more negotiation there is with an already selected franchise operator, the more room there is for special favors, which will generate public suspicion of the legitimacy of the arrangements.

The emerging private highway industry does not propose anything as bold as general privatization. Entrepreneurs do not want to bite off more than they can chew. They see themselves at the mercy of Federal, state, and local officials, so they do not want to appear to be a threat to government agencies. Most people in the emerging private highway business characterize what they propose as private-public partnership, and some want a mix of government and private funds.

While it might be regarded as dogmatic to suggest that mixing government moneys and investment funds always be ruled out, such proposals need to be regarded with great suspicion. The main objective, after all, is to develop a truly free market in highway service, and that requires that only those projects that are seen by investors as promising a reasonable prospect of making a return on total investment be built. Projects that would not fly without subsidy usually should not fly. The mixing of public and private funds in any area usually looks - and often is - crooked. The Wall Street Journal (Dec. 23, 1994) said of that problem: "The whole universe of public-private development projects and of special agencies, a network that New York's William Stern once called the `insider commercial party,' should trouble any fiscally concerned citizen."

As a general rule, private highway projects should be financed entirely with private money. Perhaps a valid exception might be made for government financing of some of the costs of doing government-required studies and acquiring government permits. In California, some government money is going for environmental impact and other studies that have to be done before the prospective investors know whether they will be able to proceed. The SR-91 express lanes project in Orange County cost more than $7,000,000 in studies, lawyers, and consultants, fees, and staff time in the three years before construction began. Dulles Greenway cost $50,000,000, and took seven years before ground was broken.

As long as there are "free" roads - and the possibility of new and upgraded untolled roads built by state highway agencies - investors will be wary about private toll roads. It is a bit as if the government financed most of the nation's housing out of taxes and charged no rents. It would be hard for private builders and landlords to compete except in small niche markets neglected by the government. As long as the state elephant roamed free, they would be concerned that it might wander past and crush them.

So there is a case for legislating that government will get out of highways and phase down the taxes that currently support them. Henceforth, they will be funded by investors charging tolls and subject to competition. With a real marketplace in highway provision, there will be a test of what users are prepared to pay and a mechanism for persuading commuters and other travelers to adapt their travel patterns to make fuller use of spare off-peak highway space. The threat of creeping gridlock will be averted.

COPYRIGHT 1997 Society for the Advancement of Education
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