Proceed with Caution: Avoiding Hazards in Toll Road Privatization

On April 12, 2006, Indiana Governor Mitch Daniels leased the 157-mile Indiana Toll Road to ITR Concession Company LLC, a consortium composed of a Spanish and an Australian company. Under the agreement, the private entity paid the State of Indiana $3.8 billion and promised to operate and maintain the road for the next seventy-five years in exchange for various tax breaks and the right to collect toll revenues during that period. As a result of the up-front payment, Indiana has funding sufficient to meet its transportation needs for the next ten years. Nonetheless, the deal came under strong criticism, including from some of the 2008 contenders for Daniels' job, in part because the lease agreement's terms gave the new operators rights to raise tolls, perhaps substantially. Though a state-commissioned financial analysis of the proposal assured the transportation department that the road's $3.8 billion price tag exceeded what the state could have raised through traditional bond financing, a competing report alleged that the allowable toll increases under the new lease actually increased the road's value to $11 billion, suggesting that the state had accepted a price that greatly underestimated the current value of the road's future revenue stream.The Indiana deal is still the largest toll road concession agreement to date in the United States. ITR formally assumed operational responsibility for the toll road on the same day a concession was signed for Virginia's Pocahontas Parkway, and both followed on the heels of a 75-year concession for the eight-mile Chicago Tollway. In November 2007, Colorado followed the trend, leasing a section of toll road northwest of Denver to a Portuguese toll road operator. In 2008, Mississippi and Florida both issued requests for proposals for similar projects. The governors of Pennsylvania and Texas attempted even more ambitious projects. On June 6, 2008, Pennsylvania Governor Ed Rendell accepted a $12.8 billion bid to lease, repair, and operate the Pennsylvania Turnpike for seventy-five years to come; the deal eventually died after a failure to obtain legislative approval. Texas Governor Rick Perry's original vision for the Trans-Texas Corridor, announced in 2002, would have included a $175 billion system of 4,000 miles of corridors, many privately operated, crisscrossing the state. Each corridor was to be one-quarter mile wide, accommodating toll roads, rail, and utility lines.These states' toll road lease plans did not arise in a vacuum. Recent road leases are part of a much larger privatization trend that has expanded from the 1980's through today. Governments now look to the private sector to provide a wide range of goods and services that government itself used to provide. In the face of a widely-recognized need for enormous infrastructure repairs and the fact that toll roads are ready income-producing assets capable of attracting investment, it is natural that states would turn to toll road leasing as one of the next large-scale moves in privatization.Bankers and economists have presented often-conflicting analyses of the economic valuation of the contemporary toll road leases. Governments and citizens are understandably concerned that the up-front payment and the services to be performed by a toll road company accurately reflect the value of the lease, but in addition to valuation questions, the current crop of toll road leases raise two fundamental sets of concerns. First, privatization can raise tensions between conflicting goals within government programs and the potential for conflicts of interest between the goals of the public and private entities involved. These concerns are magnified in the case of toll road privatizations, because the extraordinarily long lease terms lock the parties into agreements that may or may not serve the needs of the state in the distant future. Second, like prior privatization efforts, toll road privatizations run the risk of undermining democratic values, as opportunities for participation and accountability decline. Already, road privatization projects have been criticized for the perceived secrecy under which they came to be.The sheer length of toll road lease terms heightens these concerns and calls for new solutions. Other scholars have proposed that potential problems posed by privatization can be resolved by legislation and the careful drafting of contracts. These tools work well for addressing many aspects of toll road privatization, and should be used. However, no contract can anticipate the transportation needs of a state ninety-nine years into the future. Thus, toll road privatization contracts should be structured to allow for periodic reconsideration and renegotiation of key terms in order to maintain a balance between the needs of the state and the private company.Part I of this Article describes the current toll road phenomenon, and Part II provides background about the wider privatization trend. Part III examines the potential benefits of toll road privatizations, and the potential problems that may arise due to tensions between competing goals of the programs themselves and due to losses in democratic accountability. Part IV advances specific legislative reforms and contracting terms that have the potential for lessening negative impacts of toll road privatizations, and evaluates states' use of these tools to date.