Safeguarding and Modernizing

America’s Highway
Infrastructure
by
Robert W. Poole, Jr.
Director of Transportation Studies,
Reason Foundation
www.reason.org/transportation
bobp@reason.org
Overview of Presentation

The problems with the status quo:

it’s not just lack of funding
How 21st-century tolling addresses
these problems
How PPPs could fit in—and why
Minnesota applications
Major Funding Shortfall
FHWA Conditions and Performance Report,
every 2 years
Latest one (2006) shows the following:
Annual capital spending:
$70 billion
Investment needed to maintain performance:
$79 billion ($9B/year shortfall)
Investment needed to improve performance:
$132 billion ($62B/year shortfall)
 Why the shortfall:
Decline in real value of the fuel tax ($1997)
5.00

4.00
Cents per mile

3.00

2.00

1.00

0
1950 1960 1970 1980 1990 2000 2010
Average
Second major problem:
Political allocation of highway funding
Federal level
High-growth “donor” states get less, but their
need for new capacity is more.
Record-high level of “earmarks”--funds low-
priority projects at the expense of high-priority
ones.

State level
Pressures to fund projects in every district—so
major “lumpy” projects don’t get funded.
Third major problem:
Maintenance as the neglected stepchild
Cutting ribbons is dramatic; proper
annual maintenance is not.
Lowest-bid construction often leads to
higher life-cycle costs.
But, deferring maintenance is an “easy”
budget cut, compared with many other
state budget needs.
Highways and bridges lack an
“endowment fund” to ensure proper
ongoing maintenance, reconstruction.
It’s an institutional problem
Political incentives lead to spending on
numerous low-priority projects, making
large “lumpy” projects hard to fund.
System is biased toward new
construction vs. adequate maintenance.
Low-bid process leads to higher life-cycle
costs—because cheap construction
requires more maintenance.
But maintenance is all too easy to defer.
Why finance
highway development?
Fairness: those who benefit from the
roadway pay for it as they use it,
over its useful life.
Benefits sooner: needed projects put
into service years or decades
sooner.
Backlog catch-up: excellent way to
catch up with unmet needs—like
deficient bridges.
GAO on toll finance’s advantages:
Provides new revenue source;
Promotes more effective investment
strategies;
Better targets spending for new and
expanded capacity;
Leverages existing revenue sources,
via private-sector investment.
Source: GAO-06-554, June 2006
Maintenance “endowments”
First priority for toll revenues is
operating and maintenance costs.
Toll road must be in top shape to
persuade people it’s worth paying.
Enforced via bond covenants.
Thus, tolling solves the
maintenance problem.
Tolling and life-cycle costs
Financing based on 30-40-year model.
Makes sense to minimize life-cycle costs, not
initial cost.
Electronic toll collection costs a small fraction
of 20th -century toll plazas.
Hence, 21st -century toll roads are a wiser
investment than gas-tax roads.
Common perception:
toll roads are just a side-show.
Only 5,000 route-miles of toll road,
of which 2,800 are on the
Interstate system (FHWA).
Toll revenues are only 5% of total
state highway revenue.
BUT—new data challenge that
perception.
Tolling is an important factor in new
highway capacity.
Since enactment of ISTEA law in 1991:
147 new toll projects in various stages
of development.
Encompass 22 states + Puerto Rico.
If all built, would be 13,800 new lane-
miles.
Estimated cost: $75 billion.
Source: PB Consult report for FHWA Office of Transportation
Policy Studies, April 2006
And tolling is major fraction of new
limited-access capacity
We’re only adding about 150 route-
miles/year of limited-access highway.

Tolling accounts for 30 to 50% of this total,

since ISTEA (50 to 75 rt.-mi./year).

PB finds the rate of tolled, limited-access

projects increasing to nearly 150 rt.-
mi./year.
Electronic tolling makes road
pricing feasible:
HOT lanes as on I-394
Express toll lanes for congestion
relief on major freeways
Priced lane is “Virtual Exclusive
Busway”
Truck-only toll lanes could
accommodate growing freight traffic.
Priced Lane Projects, 2007
What does the private sector
have to offer?
Why not continue with public toll
agencies?
Private concession model offers:
Large pool of new capital
Ability to raise more for a given project
Risk transfer
Multi-state potential
A more commercial approach
Innovation
How toll concessions work:
Company designs, finances, builds,
operates, charges for use of facility
for N years;
Competitive selection process;
Project financed based on credible
toll revenue stream;
Public interest protected via
provisions in the concession
agreement.
New sources of capital:
Taxable debt market
Bank financing
Equity
Corporate/sponsor equity
Public share offerings
Institutional investors (pension funds,
insurance companies, buyout firms)
More funding from a given
traffic projection:
Traditional toll agency finance:
30-year tax-exempt bonds
Stringent coverage ratios
Global toll finance model:
More aggressive growth projections
40+ year financing
Equity providers willing to take traffic
risk
Depreciation benefits
Risk transfer (from taxpayers to
investors)
 
 
Multi-state projects (toll truckways)
Innovation to solve
difficult problems
Value pricing (91 Express Lanes)
Value engineering (Beltway HOT
lanes)
Missing links (A86 tunnel)
Elevated expansion (Tampa)
Noise solutions (CityLink)
91 Express Lanes,
Orange County, California
Value-engineering the Washington,
DC Beltway HOT Lanes
VDOT plan to add 2 lanes each way to
SW portion of Beltway: $3B, opposition
Private concession proposal:
Eliminated a pair of breakdown lanes
Reduced number of access points
Replaced Jersey barriers with pylons
Slashed number of property takes
Bottom line: $1B + community support
Missing Link on Paris A-86 Ring Road:
Toll Tunnels
Double-Deck, Cars-Only Tunnel Slashes Cost
Tampa’s elevated express toll lanes
Elevated Tollway with Sound Tube
(Melbourne)
Concession Agreement Protects the
Public Interest
Length of term
Toll rate caps (formula)
Performance
requirements/penalties
Buyout provisions
Default provisions
Amendment provisions
Possible Minnesota Applications
State already has a PPP law;
review and update, if necessary.
Rebuild major bridges
Twin Cities Express Toll/BRT
network
Possible toll truckways on I-35
and/or I-94
Summary: How tolls & PPPs
address the institutional problems:
Investors seek projects with solid
ROI—large “lumpy” projects.
Same entity designs, finances,
owns and operates—minimizes life-
cycle cost.
Maintenance endowment built in,
along with replacement funding.
Safeguarding and Modernizing
America’s Highway
Infrastructure
by
Robert W. Poole, Jr.
Director of Transportation Studies,
Reason Foundation
www.reason.org/transportation
bobp@reason.org