Defining Toll Road Privatization

In this report, we focus on evaluating proposals for toll road privatization to determine whether privatization of toll roads makes sense according to the criteria described above.

Private toll road deals can involve lesser or greater degrees of privatization. On the lesser side of the spectrum are small changes such as the hiring of private contractors to mow grass or operate toll-collection systems. On the other side of the spectrum is the construction of wholly privately owned and operated highways.

Toll road privatization: When an existing roadway is leased to a private company for a concession fee, or when a private entity finances new road construction in exchange for the right to operate and collect rising tolls on that road.

"Availability Payments" Versus Toll Concessions

By retaining the public's right to set and collect tolls while more narrowly pre-scribing the private role, contracts that pay "availability payments" to private operators have a number of advantages over private toll concessions. The public retains greater control over transportation policy and will not be subject to non- compete clauses. Nor is the public liable to be sued for compensation when policies reduce toll traffic. Incentive clauses create a direct economic incentive to keep lanes available and in good repair.

Availability payment deals still have many potential problems. Higher private borrowing costs mean that deals will still tend to lose the public money over the long term; and contract incentives still cannot anticipate future public needs. The public interest protections listed in this report would also apply to deals that involve availability payments. Moreover, the payments should not be overly generous com- pared to what it would cost the public to make these lanes available themselves.

This paper focuses on two types of arrangements: when an existing roadway is leased to a private company for a concession fee; and when a private entity finances new road construction in exchange for the right to operate that route over a specified period of time. These arrangements share two characteristics. First, the government transfers rights tantamount to ownership to a private entity. Second, the private entity receives access to toll revenues and the right to raise tolls.

There are many types of arrangements that fall just outside of this definition of toll road privatization. For example, governments have signed contracts with private entities to perform virtually all of the services a government would perform in building and operating a highway - ranging from design to financing to ongoing maintenance - but without granting the private entities direct access to toll revenues. In these cases, government still maintains ownership of the road as well as a direct ability to withhold public funds from the private operator if the terms of the contract are not upheld.

One example of such a deal is an agreement reached between the state of Florida and the Spanish company, ACS, for the construction and operation of express toll lanes alongside I-595. Under the arrangement, Florida will make annual "availability payments" to ACS over a 35-year span to compensate the company for the cost of building and operating the highway. The payments to ACS are incentive-based, but the state of Florida retains the power to set toll rates and collect the revenue.5 The Florida deal, while clearly a "public-private partnership" with a strong private-sector component, does not ft strictly within the definition of toll road privatization used in this report.

Another complicating factor in defining privatization projects is the use of non-profit intermediaries to secure preferential treatment for privatization arrangements under the U.S. tax code, IRS Revenue Ruling 63-20. Local governments have traditionally issued tax-exempt debt in order to build schools, court houses or hospitals. Today, however, private companies establish these so-called "63-20" non-profits so that privatized projects can achieve the same favorable credit terms as public agencies. In order to establish a 63-20, the local government must approve its charter and the issue of its debt, giving the government title to its assets after the debt is repaid. However, a loophole in the law allows an arrangement in which the government can then effectively disown the non-profit, which limits the government's ability to be involved in the operations of the company. By law, 63-20s cannot make a profit, but private companies can circumvent this restriction by receiving their compensation through development fees that are charged for consulting services. Though obviously an indirect way of earning a return on investment, this contrivance has nonetheless become a common way for private companies to seek publicly subsidized capital, and projects financed by 63-20s can ft into the definition of "privatization" used in this report.6

Describing proposed toll road privatization projects with exactitude is difficult because the precise relationship between a government and a private entity in operating a road may not be determined until a contract is finalized. As a result, while we have attempted in this paper to use a relatively narrow definition of privatization for completed projects, our list of proposed projects includes a much broader range of potential arrangements. While some of these roads may end up as fully privatized highways, others will not. Including the broad range of potential projects is valuable despite this problem because it conveys the variety of potential privatization projects across the country and the potential stakes involved for the public.