Twenty years ago, when some of us began seriously promoting long-term toll concessions as a better way to finance and manage limited-access U.S. highways, we had no idea how difficult the struggle would be. The early wave of enabling legislation-in Arizona, California, Minnesota, Virginia, and Washington State-led to only a handful of projects in what we can look back on as the false dawn of this new paradigm in the early 1990s.
But the second wave that began with the long-term lease of the Chicago Skyway and the 50-year concession deal for the first Trans-Texas Corridor is much larger and more promising. Despite a populist reaction in Texas last year, and some hostile rhetoric from House transportation committee members last spring, states like Florida, Texas, and Virginia have moved forward with billion-dollar-scale greenfield toll projects-and the capital markets are crying for more.
But as I wrote last month, the split on the National Surface Transportation Policy and Revenue Commission exposed the extent of the chasm that must be bridged if the toll concession paradigm is going to be accepted as more than a possibly helpful side-show in 21st-century highways.
Before I go further, let's be sure we're all on the same page regarding paradigms and paradigm shifts. The term stems from Thomas Kuhn's insightful 1962 book, The Structure of Scientific Revolutions. Kuhn explains that one model of how things work in a particular area of science prevails because it best explains the available data; it is the reigning paradigm. But as evidence accumulates over the decades that it doesn't fully explain things, competing scientists seek to develop a better model that does account for all the old and new data. When support for the new model reaches a critical mass, it displaces the old model-and we have a paradigm shift.
Kuhn never liked extensions of this idea beyond the sciences, but the term is now widely used to describe mental models and established ways of doing things in all sorts of fields. As applied to highways, the 20th-century paradigm for limited-access highways was what Peter Samuel has called the tax-and-grant model. Levy fuel taxes on highway users, amass the money in a central fund, and use some kind of politicized central planning to parcel it out among numerous contending projects. It's basically the same model at the state level and at the federal level.
The toll concession model is profoundly different. It says limited-access highways are businesses, which can and should be developed and run by investor-owned companies. Those companies charge users directly, in proportion to their use. And they make decisions on the size, nature, and location of highways based on return on investment. But because highways, like electricity and natural gas, have elements of monopoly and are also vested with various public interests, they are generally subjected to some form of public oversight (in this case, via enforcement of public-interest provisions included in the concession agreements). Thus, under the toll concession model, highways are an investor-owned network utility, like other network utilities.
Transportation Secretary Mary Peters largely accepts the toll concession paradigm as what we should be shifting to for 21st-century highways. That-and not slavish adherence to an ideological "no new taxes" mantra-accounts for the thoughtful dissent she and two other national commission members authored. And it's also the underlying reason she's been getting beaten up in the media and in Congress in recent weeks.
When she appeared before the House Transportation & Infrastructure Committee February 13th, Chairman James Oberstar (D, MN) expressed incredulity that she could hold such views, saying that her statement (that the real problem is not so much how much we spend but how we spend it) "is fragmented and does not rise to the level of a policy"-- whatever that means. Even more telling was her exchange with Rep. Joe Knollenberg (R, MI) of the House Appropriations subcommittee. That subcommittee has ordered GAO to review DOT's Urban Partnership competition, under which several dozen large urban areas competed to win discretionary funds to implement some form of road pricing to reduce congestion. Knollenberg complained that Detroit hadn't even made the semi-finals: "I'm wondering if there wasn't some people that were overlooked, and frankly I don't know that the decision was one that was best for the country." His favored city "couldn't even get heard." What a perfect expression of the old tax-and-grant paradigm-I'm entitled to my share, regardless of merit.
We're going to be hearing a lot more of this as Congress gears up to reauthorize the federal surface transportation program next year. Oberstar and DeFazio fired their second round (following their threatening letter to all 50 governors last spring, warning them about PPPs) by asking the GAO to research PPPs, including whether the public interest was being protected and what the federal role in this might be. The very good report appeared in February (GAO-08-44), and should be required reading for subscribers to this newsletter. For the most part, it tells a very positive story, providing the context in which long-term toll concessions are being used, including some good case studies, and laying out in some detail the potential benefits. The "possible costs and trade-offs" are pretty innocuous and easily answered by PPP proponents. So instead of the indictment of PPP toll roads that the requesters may have been hoping for, they got instead a generally objective and positive report.
Nevertheless, GAO did point out a couple of areas where the Federal Highway Administration might have acted: to define clearly what the words in recent federal highway bills mean by "reasonable return on investment" and "excess toll revenues," in projects where tolling is allowed on federal-aid highways. That's an opening wedge that proponents of federal regulation of PPP highway projects can use to advance their aims.
But GAO also repeated its long-standing call for all federal programs to be re-thought, given the federal government's "imprudent and unsustainable fiscal path," noting that the federal highway program is "particularly ripe for reexamination." That's an engraved invitation to proponents of the toll concession paradigm to play a significant role in a national debate over what the federal role in highways should be-and how large a role toll concessions should play.