Privatizing Toll Roads

Yesterday's Wall Street Journal's front page featured an article on the imminent privatization of the Pennsylvania Turnpike. Generalized to other state highways, as well, the piece catalogued the reasons why this trend has become more pronounced.

While the article noted the obvious reason of quick, present-valued money for cash-strapped states, and the predictable cries by labor of the loss of high-paying patronage jobs, it was silent on two important issues attached to this topic.

The first is one of competence and long run cost curves.

Does anyone with a brain actually believe there are sufficient numbers of competent highway system mangers in each state with their own, e.g., Pennsylvania, New Jersey, Indiana, to run these transportation systems well and profitably?

It seems to me that the trend of investment funds buying these formerly publicly-owned and -managed roadways is a very good thing. They clearly can leverage expertise and scale of management of these operating assets across many highway systems.

But what struck me as odd was the issue missing from the Journal article. Nowhere did the piece mention what is really going on with these sudden privatizations.

Any way you cut it, states are turning to private enterprise to lease their toll roads because they simply can't raise revenues. Thus, they are literally mortgaging a capital asset and consuming the asset value as ordinary operating funds.

As I read a webpage discussing the history of New Jersey's Garden State Parkway, I noted the periodic mention of 'self-liquidating' and 'self-funding' toll road. The intent was clear- the highway was to pay for itself with tolls collected from drivers on the road.

If that were true, and a third party bid on a lease for the road, how could they make a profit if the highway were truly self-funding?

Either an unrealized capital value existed in the road, which is now being consumed without telling voters/residents, or the lessee plans to extract income from the road in excess of current tolls, in order to generate their profit.

My guess is the former is the case. These states are silently extracting capital value from the roadways and consuming it to run their states.

In the case of my current state of residence, New Jersey, its spending has long-ago outstripped the viable, continuing tax base for the state. It is living beyond its means.

Thus, while the operating effects of these highway leases are probably ultimately beneficial to taxpayers and drivers, the net effect of the asset value transfer and consumption is to silently tax and spend public money without notifying voters.

This is the phenomenon which is, I think, the most telling in this story. In an era when US transportation infrastructure is becoming suspect, and probably in need of serious investment to maintain commercial viability for our economic growth and welfare, several states are silently going the other way. They are surreptitiously draining capital from their transportation systems, i.e., toll roads, and spending this capital for normal operating purposes. In a matter of months, or, at most, a few years, that capital will be gone.