Sell the Streets
By Benjamin Powell
“Nothing unique about roads causes them to be congested, expensive, and irrationally placed.”
The Problems with Government
One doesn’t have to look far to see problems with government-provided roads. Congestion is the most obvious problem. In Los Angeles, the average commuter spends 72 hours per year in delayed traffic. Although L.A. is the most congested city in the U.S., it is in no way an exception. In the 14 largest urban areas, commuters spend an average of 54 hours per year in delayed traffic, and the congestion is getting worse. Delayed traffic has increased more than 25 percent since 1995 and 157 percent since 1982. Congestion is a problem even in smaller urban areas. In Colorado Springs, for example, commuters spend an average of 27 hours per year in congested traffic.1
Citizens’ frustration with congestion often creates pressure for politicians to “do something.” All too often, politicians adopt largely symbolic, if colossally costly, projects like light rails that do little to relieve congestion.2 Even when they build roads, cost overruns and delays are rampant. Boston’s “big dig” is one particularly egregious example. Although it was initially forecast to cost $3.3 billion, the final tally was nearly $15 billion.
Finally, when the government does spend money on roads, it is often not on projects that best serve drivers. When new roads are built, they often are not the ones most needed, and maintenance of existing roads is often sacrificed for the more public demonstration of building new roads. Politics, rather than economic necessity, drives the selection of construction projects. Only after a public outcry was Congress’s funding of a $398 million “bridge to nowhere” rescinded. The bridge would have connected an island of 50 people to Ketchikan Alaska—hardly the most-needed infrastructure project.
Nothing unique about roads causes them to be congested, expensive, and irrationally placed. All of these failures are a product of government ownership and operation. Congestion, like long lines, is a sign of a shortage at the legal price. The price for using most roads is zero. Drivers all pay the same gas and excise taxes whether they use a busy road or an empty stretch of country road, whether they drive at rush hour or late at night. We have a shortage of road space because people do not have to pay for road use based on the scarcity of road space relative to demand.
When government planners build roads, they have little incentive to control costs. Unlike private firms, they do not make greater profits when they keep costs down. In fact, bureaucracies often benefit by maximizing their budgets. This problem is curtailed somewhat when private firms build the roads for the government, but, even then, government planners often pick contractors based on politics rather than on efficiency.
Finally, roads are irrationally placed because they are outside the realm of profit-and-loss accounting. In private markets, investments are made on the basis of expected profits and losses. In the case of roads, this means that roads constructed should provide the highest benefit to consumers as measured by their willingness to pay for using the roads minus the cost of construction. Absent these price signals, governments are unable to identify which roads are most needed and which are wastes of money. Pork-barrel spending on roads only exacerbates this fundamental problem.
The Advantages of Private Roads
Private ownership and market prices could fix these inefficiencies. Private ownership creates incentives for owners to build, maintain, upgrade, and innovate their roads in order to maximize their profits. Market prices not only enable owners to gather the necessary information to best manage their roads, but also serve another important function: They cause drivers to take account of the scarcity of road space and economize on its use.
How would a system of private roads operate? Private companies would be allowed to construct major highways, bridges, and tunnels or to purchase existing ones from the government. The companies would then charge tolls to pay for the roads’ acquisition and maintenance costs and to make a profit. Because owners would profit by better serving consumers, they would have an incentive to ensure that their roads were safe and fast and that they led to where people wanted to travel most.
Congestion is, perhaps, the biggest problem on government-operated roads. The problem stems from the fact that drivers do not take account of the fact that their use of a road makes it marginally more congested and slows everyone else down. Private highways could use flexible tolls to minimize congestion, charging higher prices when traffic is heavy and lower prices when traffic is light. Companies could raise or lower tolls throughout the day to maintain 55 to 65mph free-flow speeds at all times. Any time congestion started to develop, prices could be raised to encourage drivers to seek alternate routes or delay their own travel. Such flexible pricing causes drivers to account for their contribution to congestion and improves efficiency by allocating scarce road space to those with the highest demand for it.
Such a system would also improve the long-term management of roads. When owners found that high prices were necessary to eliminate congestion, they would have an incentive to add lanes in order to serve more drivers and maximize profits. Highways with consistently low prices and low profits would have little incentive to expand. Thus, a private road system would eliminate the politicized process that currently determines road funding and would ensure that the road network developed in accordance with consumer, rather than political, demands.
Constructing private highways and selling existing government highways is not a libertarian pipe dream. It has already happened in numerous places in the United States and around the globe. SR 91 in Southern California is one interesting example.
SR 91 is a government highway in Orange County.3 The freeway was extremely congested, but no government funds were available for expansion. So the government leased the space in the median to a private consortium to finance and construct private express lanes. The ten-mile, four-lane private highway was opened in 1995. Drivers could choose to remain on the congested, “free,” government highway or to pay a toll to use the private express lanes.
Cofiroute, a member of the private consortium that still operates those lanes today, introduced a number of innovations in the operation of the 91 Express Lanes.4 Tolls vary over the course of the day, from a high of $9.50 on Friday afternoons at 3 p.m. (Eastbound) to a low of only $1.25 overnight. The tolls are periodically updated based on traffic flows in preceding months. Drivers don’t have to deal with traffic-slowing toll booths, as tolls are collected electronically via overhead arches that read a transponder in each vehicle. Drivers simply drive down the road at freeway speeds and their accounts are automatically billed. The 91 Express Lanes also have 35 cameras monitoring the highway. Whenever a car breaks down, the company quickly sends out assistance to help the driver get his car on its way to minimize any traffic delays it could cause.
More recently, other highways in the United States have been semi-privatized. In 2004, the Chicago Skyway was leased to a private company for 99 years for more than $1.8 billion. The company has the right to toll and concession revenue and the responsibility to maintain the road. In 2006, the same company purchased the right to maintain, operate, and collect tolls on the Indiana Toll Road for 75 years for $3.8 billion. Soon after acquiring these roads, the company introduced electronic tolling on them. Could the government have done this? Of course. But government lacks the profit-maximizing incentives that spur businesses to innovate to better serve consumers, so innovation and responsive customer service by government are much less likely.
Private toll roads are operated on a much larger scale outside the United States. Cofiroute, which operates Express 91, also owns and operates a 550-mile toll road network in France.5 There, they have innovated to update drivers on travel time and road conditions via their transponders; integrated toll telepayment using mobile phones and Bluetooth technology; and introduced an inter-vehicle hazard warning system that allows vehicle-to-vehicle communication. Cofiroute recently began constructing a $1.5 billion tunnel project around Paris that is privately financed and will be repaid in toll revenue. Numerous other cities and countries are also experimenting with various privatization and lease schemes and congestion pricing.
How to Handle Local Roads
What about local roads? Traditional toll booths are obviously impractical on most local roads. Some major cities are using congestion charges, a fixed fee that each vehicle entering local roads during certain times of day is subject to. The city of London charges £8 to enter congested zones of the city and uses cameras to monitor license plates. However, the streets are not privately owned in London and, consequently, innovation is lacking. The city allows automatic billing only for commercial-fleet vehicles. Private owners must go out of their way to pay via phone, text message, or web, or in special shops.
Although electronic transponders make tolling more practical, it still may not be beneficial to have local toll roads. If congestion isn’t an issue, alternative methods of finance might be more efficient. In many new housing developments, builders must finance and construct roads. In some cases, they turn over maintenance and operation to homeowners’ associations when the development is complete. The homeowners, who pay association dues, are the main beneficiaries of the road, and if there is little congestion or through traffic there is no need for tolls. Even some existing public roads have been privatized by creating road-owners’ associations that are responsible for maintaining and operating the roads. The main barrier to local-road ownership is the fact that governments typically charge citizens the same property taxes whether or not the government pays to maintain their local roads, thus giving developers and private citizens little incentive to pay twice for their roads.
And, As a Bonus.
Private highways have brought innovations in tolling and services and helped eliminate congestion. Other areas of road governance could also benefit from private innovation. Most “private” roads still operate under government regulations that set and enforce maximum speeds, drunk-driving laws, licensing requirements, and other traffic laws. Accidents between drivers are externalities on government roads. When roads are privatized, though, the externality is internalized to the owners of the road, who will lose profits if their roads are unsafe.6 Although it is difficult to predict what the rules would be, if private owners were free to set their own regulations and enforcement strategies, they would likely innovate new methods to ensure that their roads were safe without imposing unnecessary inconveniences on drivers.
The government’s socialized road network is congested and poorly designed and managed, and it lacks incentives for innovation. These failings do not stem from any unique features of roads, but from the fact that there is not widespread private ownership and market pricing of roads. The sale or lease of some government roads to private companies is an encouraging trend. It has been demonstrated that private roads can more efficiently handle traffic and that owners have a greater ability to discover innovative ways to improve the driving experience. As politicians confront fiscal difficulties resulting from the current economic downturn, hopefully more of them will be willing to “sell the streets.”
See Randal O’Toole, The Vanishing Automobile and Other Urban Myths, for an excellent discussion of how light rails fail to reduce urban congestion.
The 91 Express Lanes were sold to the Orange County Transportation Authority in 2003. The sale was not the result of a “market failure” in the private provision of streets. The sale was mainly motivated by resentment over a “non-compete” clause in the initial agreement that prohibited the government from making any improvements on the regular SR 91 lanes. See Edward Sullivan, “HOT Lanes in Southern California” in Street Smart, Gabriel Roth (Ed.), 2006.
For a discussion of how externalities can be internalized and innovation harnessed with the privatization of roads see Bruce Benson, “Private Policing and Private Roads: A Coasian Approach to Drunk-Driving Policy.” Economic Affairs. Vol. 27, issue 4, pp. 30-38. 2007.