Privatization That Protects Taxpayer Interests

The Mass. Turnpike Authority is broke, and state taxpayers are partially on the hook if it can’t pay the bills. Bridges are in woeful condition; the Commonwealth just agreed to borrow $3 billion to fix the nearly 600 of them categorized as “structurally deficient.”

Nationally, the Highway Trust Fund, which provides money for road and bridge projects, is tapped out. One recent proposal to keep it afloat would transfer billions from the deficit-ridden federal treasury.

Clearly, the days of funding highway projects with proceeds from state and federal gas taxes have come and gone. Higher-mileage vehicles, increasing use of alternative fuels, and reluctance to periodically raise gas taxes to keep up with inflation have produced an unsustainable system.

And if the nation is serious about renewable energy, independence from foreign oil, and reducing emissions, does it really want a funding system based on fossil fuels?

Governments have long looked to the private sector to fill funding gaps. Highway privatization can replace public debt with private capital, accelerate construction, and find innovative ways to reduce costs.

The most recent wave of privatization involves the long-term lease of a toll road to a private entity in return for a large up-front payment. The idea behind these so-called concessions is to give the private sector ‘skin in the game’ by creating an incentive to perform the maintenance on which government often skimps. Maximizing toll revenue, and recouping the initial payment, requires a well-maintained roadway.

When properly structured, concession deals can work for taxpayers. Indiana is investing all of the $3.85 billion it received for a 75-year lease of its 157-mile toll road in transportation infrastructure projects that will promote long-term growth, not using it to plug holes and go on a short-term spending spree. Privatization has been floated as an option to address the Turnpike’s financial woes. But there may be an even better way than the concession deals that are currently the rage.

A smaller up-front payment could be combined with annual payments to state or local government. Unless they get permission from their government partner, concessionaires would be prohibited from selling their equity in the transaction the way a financial institution might sell a mortgage. By giving taxpayers a seat at the table when decisions are being made, these changes would require the private sector to keep skin in the game for the length of the lease and discourage self-dealing and artificially inflated short-term profits.

This joint ownership model can be taken even further. Government is interested in providing maximum service for minimal cost; that gets people re-elected.

Business owes a fiduciary duty to its investors to maximize profits by collecting as much toll revenue as possible. Spending on maintenance and improvements, such as installing electronic tolling to cut travel times, is cost-effective only to the degree that it increases revenue.

If government wants service on the cheap and business wants profit, introducing a third class of road owners whose interest is in quality transportation — such as trucking and logistics companies and motorists — could balance the competing interests of government and private investors.

By themselves, new ownership models won’t solve our highway funding problems. We must create a system of user fees that relies on technology to collect revenue and manage demand.

Clearly, a system funded by gas taxes is neither sustainable nor desirable in the 21st century. Throughout the nation’s history, the private sector has played a critical role in the construction and maintenance of transportation assets. The time has come to forge new partnerships that serve a changing public interest.

Joseph M. Giglio is a professor of Strategic Management at Northeastern University’s College of Business Adminis-tration. Charles Chieppo is the principal of Chieppo Strategies, a public-policy writing and advocacy firm.

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