In a Pinch, Turn Partly to Toll Roads, Private Sector

The defeat of Gov. George Deukmejian’s highway bond-issue proposal, Proposition 74, has dismayed those familiar with California’s highway crisis. The voters are leery of granting open-ended taxing authority, even for badly needed additions to our highway/freeway system. Last February the Little Hoover Commission estimated the shortfall in highway revenues between 1988 and 2000 to be $800 million to $1.8 billion per year.

The Southern California Assn. of Governments’ regional mobility plan offers three possible scenarios for coping with incipient freeway gridlock between now and 2010. The least costly of these requires $29 billion more than is available from current revenue sources; the most costly approach requires $96 billion more. On an annual basis, that’s a $1.3- to $4.4-billion shortfall just for Southern California.

It’s time that we considered alternative approaches to raising and spending transportation capital. One very promising approach is to harness the resources of the private sector to finance, build and operate highways and freeways. This approach has been used successfully in Europe for decades and is now spreading around the Pacific Rim.

Since World War II more than 5,000 miles of intercity highways in France, Italy and Spain have been built by private firms in partnership with government. The basic model is called “build-operate-transfer.” Under that approach the state grants a several-decades franchise or concession to a consortium of firms to develop and operate a state-designated route. The firms can use their state-granted franchise as security to issue bonds, to be paid off from toll revenues over the 30-year life of the franchise. About 90% of Italy’s motorway system has been built by this method, as have the majority of French motorways since Charles de Gaulle’s time.

In the past decade the build-operate-transfer model has spread to the Pacific Rim. Privately funded and operated motorways are being developed in Indonesia, Malaysia and South Korea, and a 30-year franchise was recently granted for a 1.4-mile harbor tunnel in Sydney.

The past year has seen the model come to America as well. The Virginia Legislature in March authorized this country’s first modern private toll-road project. Municipal Development Corp. and Parsons Brinckerhoff, Quade & Douglas have formed a joint venture to finance, build and operate a 15-mile extension of the Dulles Toll Road, linking the Dulles area to Leesburg. The franchise agreement provides for the joint venture to operate the highway for 10 years beyond the paying off of the $135 million in bonds, after which title would revert to the state.

Far more ambitious projects are on the drawing boards. The Front Range Toll Co. of Denver has proposed an $800-million, 200-mile tollway from Pueblo to Ft. Collins in Colorado, parallel to a congested interstate. And a group in the Middle West is promoting a $2.2-billion, 400-mile toll-way linking Chicago and Kansas City, by way of Peoria. A preliminary financial analysis by Prudential-Bache Capital Funding has concluded that the project makes sense, based on the time and fuel savings that it would provide, and therefore is privately fundable.

What’s especially interesting about the Chicago-Kansas City project is the proposed funding mechanism. Instead of relying entirely on issuing debt (revenue bonds), Prudential-Bache is proposing a mixture of 70% equity (stock) and only 30% debt (bonds). Thus the tollway would not revert to the state after 30 years, as in the build-operate-transfer model. Rather, it would remain an investor-owned enterprise, like other public utilities.

This model has been applied to the world’s largest public-works project: the Channel Tunnel between England and France. This $10.6-billion project is entirely private, without even government guarantees of its debt. It is funded by a mix of debt and equity. Private investors eagerly bought up $1.36 billion worth of Channel Tunnel shares last November, only weeks after the stock-market crash. No wonder Prudential-Bache has concluded that the Chicago-Kansas City Tollway represents “a forerunner of how we envision large U.S. public-works projects being financed in the future, given the scarcity of federal capital.”

Given the scarcity of state capital, it’s high time that California transportation planners began considering the private sector as a key player in solving our highway crisis. To be sure, Californians have historically shunned toll roads as inconsistent with our freedom of mobility. But that freedom risks grinding to a halt as our highway and freeway networks become hopelessly overloaded.

When the voters rejected Proposition 74, they were voting to uphold California’s traditional user-pays approach to highway financing. Private tollways are entirely consistent with that approach. The private sector can finance, build and operate badly needed new capacity--if we decide to let it.