Problems Compounded By Excessively Long Contracts

The loss of control and lost value from privatization are greatly compounded by the fact that privatization contracts often extend so far into the future. The Chicago and Indiana lease deals will stretch for generations: 99 years and 75 years, respectively. Private investors prefer deals at least 50 years long, because that length allows them to qualify for large tax subsidies.

To appreciate how profound future changes will be over these time frames, consider these transportation-related mile-stones: Henry Ford introduced the Model T in 1908, 101 years ago and Congress created the interstate highway system in 1956, 53 years ago. Similarly, population changes during these time periods can be dramatic.

Metropolitan areas have doubled their populations in the course of a few decades, creating huge changes in transportation needs. Massive, unforeseeable changes will likely take place for transportation technology, networks, demographics, and the distribution of population over time frames like those in the Chicago and Indiana deals. In the face of such uncertainties, governments cannot predict their transportation needs, nor the revenue potential of their toll roads, well enough to negotiate a deal that fairly allocates risks, dictates policy, or sets a fair price.

No contract can be crafted well enough to solve these problems. Even the most public-minded elected officials with the best lawyers and consultants cannot draw up a lease or concession contract that will predict the public's needs and contingencies in the distant future. Ambiguities in the future interpretation of a contract under unforeseen circumstances may have huge stakes and may need to be litigated.

Professor José Gómez-Ibáñez at Harvard, who has written numerous books on infrastructure privatization, describes this problem as "the overuse of long-term con-cession contracts as the method of regulation." He explains that, "the concession contract attempts to describe completely the obligations of the private firm to the government and vice versa, and it can not be changed unilaterally by either party. …The main risk with concession contracts is that an unforeseen event will make the contract unworkable for one or both parties. In such cases, the parties face a difficult choice of whether to renegotiate the contract or try to live with its unsatisfactory terms until the concession expires."95

A study for the Organization for Economic Cooperation and Development (OECD) and the European Commission of Ministries of Transport similarly concluded that toll road contracts beyond 30 and 35 years are "sub-optimal for taxpayers" and refers to the long-term losses of longer deals as "mortgaging the future."96 A Federal Highway Administration study of European experiences recommends against deals longer than 30-35 years. England and France, according to this study, will require private road contracts to be renegotiated at the end of each 7.5 years.97

Beyond the uncertainties inherent in a multi-generational time frame, an additional issue of good government arises: disenfranchisement of future generations of voters. Private investors in toll roads specifically seek out essential thorough-fares that lack attractive alternative routes. These highways are vital infrastructure, integral to the daily lives of residents. So long as the state, directly or through a turnpike authority, retains control over its toll roads, voters have the ability to hold decision-makers accountable. Turning over control of the roads to private investors eliminates that accountability and binds future voters to present-day decisions. Doing so for several generations of voters is simply anti-democratic.