Tolling Policy

Highway PPPs are paid for either with direct user fees (such as tolls), government payments (generally from taxes or other general revenues), or both. Most government entities in the United States are struggling with the ability to keep the cost of developing, operating, and maintaining highway infrastructure under control, and also find it difficult to raise either general purpose taxes or motor fuel taxes. Recent surveys have found that there is higher support for the "user pays" concept of tolling than for taxes (Zmud and Arce 2008). Overall, more than two-thirds of our DOT survey respondents considered the toll setting policies related to PPPs to be a "very important" concern; however, a significant share of the respondents (18%; i.e., six states and three Canadian provinces) still indicated that it is "not important."

The PPP debate, specifically related to long-term concessions paid through tolls, is caught in the middle of a debate about tolling policy. In the past, most toll authorities acted on a toll policy (not necessarily explicit) of keeping tolls as low as possible to meet debt obligations on a toll facility or system of facilities. Toll increases were typically done as a last resort, and only after much agonizing public debate-similar to debates on transit rate increases. Unlocking the value of a transportation asset actually means allowing toll rates to be set at market levels and/or permitting them to increase in accordance with inflation, and leveraging that future revenue stream into up-front cash. When tolling as a revenue source and PPPs as a project delivery mechanism are pursued at the same time, toll rate setting control appears to move from the public sector, where elected officials are accountable, to private companies that are motivated by rates of return. Both the Chicago Skyway and Indiana Toll Road long-term concessions were done with the explicit purpose of increasing the asset value of the project through taking rate setting control away from politically motivated officials. The contract terms for both of these agreements allows for toll increases well above increases that have generally been seen in the United States, and elected officials no longer have the ability to intervene in toll increases that are within the caps specified in the contracts.

Indeed, the concept of "unlocking the trapped asset value" of transportation assets has been used as a key argument in favor of PPPs (Gribbin 2006; Replogle and Funderburg 2006). By moving to PPPs, elected officials are removed from the mix on individual toll rate setting decisions in legally binding contracts (although they do approve the over-all structure allowing for future increases). This added value can then be used for a variety of public projects, in addition to providing a profit for the private concessionaire.

Allowing toll rates to escalate does increase the value of the transportation asset, but this is a public policy decision that arguably should be separate from the decision to pursue PPPs (Buxbaum and Ortiz 2007). However, this is not clear because the public sector has historically been unwilling or unable to raise tolls, derailed by political debate or popular disquiet (European Commission 2003; Gilroy 2007). The Florida Legislature has attempted to reverse this trend by passing a provision that requires annual toll rate indexing by Consumer Price Index (CPI) no less than once every five years (Buxbaum and Ortiz 2007).

Responsibility for setting tolls depends on the nature of the partnership. Long-term lease agreements, otherwise known as concession agreements, have received a great deal of attention because they allow the concessionaire to set the tolls. Public control of toll setting policies is established within the contract and typically includes toll growth caps that cannot be exceeded by the private concessionaire. PPP-enabling legislation could include toll setting policy that has been agreed on by decision makers, and with public input (Buxbaum and Ortiz 2007).

Some suggest that the private sector cannot be trusted to raise tolls because it will do so inordinately to maximize profits. The private sector will set tolls based on market factors, which will be highly correlated to the level of competition from alternative facilities or modes (GAO 2000b); therefore, if competition is limited, the private sector may set toll rates within the allowable maximum rates by contract, and yet realize revenues that exceed the cost of the road and a reasonable rate of return. The concern is that besides gouging users, the private sector may be taking money that could be going to the public agency. Some suggest that it is not always in the best interests of private partners to raise tolls by the maximum allowable amount if it drives some users to alternative routes, thus eroding profits (Samuel 2007).

Careful contract negotiations can constrain maximum toll increases. The recent National Surface Transportation Policy and Revenue Commission report recommended capping toll rate increases at the level of the CPI, adjusted by productivity. Tolls on the Indiana Toll Road are scheduled by the Indiana legislature through June 2010. Thereafter, maximum annual increases for all vehicles are capped at the greater of 2%, CPI, or per capita nominal growth in gross domestic product (GDP). Tolls on the Chicago Skyway are scheduled in the lease agreement until 2017, with maximum annual increases capped at the greater of 2%, CPI, or per capita nominal GDP growth beyond 2017. Tolls on the Pocahontas Parkway in Richmond, Virginia, are specified until 2016, and annual increases are capped at the greater of 2.8%, CPI, or per capita real GDP growth thereafter (Subcommittee on Highways and Transit 2007a). Real GDP growth over the last 10 years has ranged between 0.8% and 4.5%, whereas CPI has fluctuated between 1.5% and 3.4%. The recent economic forecast from the Congressional Budget Office (2008) estimated long-term CPI growth at 2.2% and real GDP growth at 2.3%. However, Replogle (2007) cautioned Congress against setting toll rate caps that may limit or impede the application of value pricing to maintain free flow operations, which is in line with environmental objectives.

In the case of the 407 ETR in Ontario, Canada, the long-term concession agreement specifies toll rate increasing at inflation plus 2% over the first 15 years of the concession, and then increasing at the rate of inflation only thereafter. In reality, toll rate increases in the 407 ETR have exceeded the growth rates established by contract. For instance, in 2008, the rate for off-peak travel went from 16.8 cents/kilometer to 18 cents/kilometer, a 7.1% increase. By December 2007, the rate of inflation in Canada, according to statistics from the government of Canada was 2.4%. Therefore, the actual growth rate over the last year was significantly higher than the growth rate allowed by contract (e.g., 2.4% inflation + 2% = 4.4%), following a trend of excessive increases (compared with contract specifications) for several years.