Reason Fdn. Report "Building For the Future" Calls For New Toll Roads & Private Partnerships

The full report is available online at www.rppi.org.

Putting Global Capital to Work on California's Highway Problems

California is projected to add 16 million people between 2000 and 2030, 10 million of them in our three largest urban areas. Vehicle miles traveled by individuals will increase by 30 to 50 percent, with truck traffic growing even faster. Congestion on our urban freeway systems is projected to be even worse than today's intolerable levels by 2030.

Even before the current transportation funding crisis, available funding sources were hard-pressed just to maintain the existing highway infrastructure, let alone add to its capacity. California must find a better way to finance and deliver highway projects.

Why Business as Usual Will Not Suffice

Of the nearly $400 billion in transportation funds the Los Angeles, San Francisco, and San Diego regions plan to spend by 2030, only a small fraction will go to expand the capacity of the highway system. The majority will operate and maintain the existing systems, and to invest in expanding mass transit. Yet transit is projected to handle no more than 7 to 10% of all trips by 2030. No wonder congestion will still be a major problem then, even if these three long-range plans can be fully implemented.

And this is the best-case projection by the MPOs, assuming that transportation finance in California quickly returns to business-as-usual, from its current dire crisis state. Any number of factors could make the outcome significantly worse. Hence, business-as-usual should not be accepted as sufficient.

Learning from Abroad: Lessons from World-Class Cities

Cities like Paris, Toronto, Sydney and Melbourne have coped with similar pressures of growth versus limited public finances by turning to tolls. Global capital markets have invested billions of dollars into highway transportation projects in these cities over the past decade, producing much-needed expansions of their highway systems – e.g., new urban expressways and ambitious toll tunnels A steadily growing stream of toll revenues makes it possible to sell billion-dollar bond issues to amass the capital to build such projects.

What if we had such a mechanism to use here in California? In a new report issued in January, my Reason Foundation colleagues and I analyze four case studies of potential toll-funded urban mega-projects. Each would cost well over $1 billion, each would address a major transportation problem, and each could be funded largely or entirely by tolls.

The first project is a $3 billion tunnel linking Palmdale with Glendale, beneath the Angeles National Forest. With value-priced tolls to keep traffic free-flowing at rush hours, it would cut 45 minutes to an hour off the time between north county and downtown Los Angeles, thereby relieving congestion on SR 14 and I-5. The tunnel would make it far more practical to develop serious airline service at the Palmdale International Airport site, our last best hope for meeting the region's need for more airport capacity.

The second case study is an alternative approach to San Diego's current plan to add $2.4 billion worth of value-priced managed lanes to several major freeways. Our plan would build a more ambitious $10 billion interconnected network of managed lanes. This would give every commuter a form of "congestion insurance" on most of the freeway system, while providing the equivalent of an exclusive, uncongested busway for express bus service.

The third and fourth case studies are of toll truckway systems for greater Los Angeles and the East Bay region of greater San Francisco, respectively. Our Los Angeles proposal would extend a truckway system from the twin ports of Los Angeles and Long Beach through San Bernardino and up I-15 to the California-Nevada line. This $10 billion truckway system would be self-supporting from toll revenues. In the Bay Area, our proposed truckway would link both the Port of Oakland and Silicon Valley with I-5, via I-580. At a cost of $9 billion, it could also be self-supporting from toll revenues.

For all four studies, we modeled the projects as being funded by 40-year, tax-exempt toll revenue bonds (though more complex toll financing is also possible).

Dealing with the Risks of Mega-projects

Transportation mega-projects have a well-documented tendency toward cost over-runs and traffic shortfalls. Why? Because contractors benefit from decisions to go forward, and can generally get compensated for factors leading to higher costs. And when the project is finished, they can walk away, leaving the government to worry about revenue shortfalls and high maintenance costs.

But the incentives change dramatically when the project is structured as a long-term partnership. Risks – from cost overruns to inadequate traffic and revenues – shift from the taxpayers to the developer/operator. The developer/operator pays far greater attention to controlling costs and to conducting rigorous traffic and revenue studies prior to financing the project. And because the developer/operator also operates and maintains the project, it does not pay to use cheap construction techniques, for they simply lead to steeper maintenance costs.

Best Practices from Elsewhere

The recent trend in Europe, Australia, and Latin America is to make use of long-term public-private partnership agreements for large toll projects. Typically, the government goes out to bid for a company or consortium to finance, build, operate, and maintain the tolled project for a long enough period to recover its investment (typically 35 to 50 years). The public sector partner often defines the project and does preliminary design, permitting, environmental clearance, and land acquisition. The private sector partner, selected by a competitive process, then finances the project, develops it using the design-build method, and operates it during the agreed-upon franchise term (typically called a "concession" overseas).

California experimented with this model with a 1989 pilot project law, AB 680, now repealed. During the past 15 years, nearly two dozen other states have passed enabling legislation for public-private partnerships in transportation infrastructure. These policies have allowed fast-growing states like Texas and Virginia to invest billions of dollars into highways.

California's experiment with private toll roads was flawed. The 1989 AB 680 private toll road law required 100 percent private financing, rather than permitting a mix of public and private support that gives both parties a stake in successful outcomes. It applied only to Caltrans, despite the subsequent devolution of significant transportation authority to regional/local levels of government. And it permitted extremely restrictive non-compete clauses in franchise agreements. Second-generation public-private partnership laws, like those in Texas and Virginia, are far more flexible.

What California needs is a second-generation tolling and public-private partnership law. It would authorize both Caltrans and local/regional levels of government to initiate toll-funded transportation infrastructure projects, and permit them to partner with the private sector to carry out such projects, using both RFPs and procedures for dealing with unsolicited proposals. This would enable California to enter the global capital markets, and allow the state to tap world-class expertise to modernize its vitally important highway system.

Last year, USC's Keston Institute for Infrastructure and the governor's California Performance Review recommended this course. Possible legislative vehicles include:

• Modernizing the now-repealed AB 680 law.
• Amending AB 2660, a 1996 infrastructure public-private partnership law.
• Permitting the creation of new regional transportation authorities that can initiate tolled projects.

The funding and the expertise are out there, and are being used in other countries and other states. The key question is whether California will turn its back on billions of dollars of private capital, or create the legal framework to take advantage of such investments.