States Solve Their Budget Problems By Selling Roads Recently the State of Indiana leased a portion of its toll road to a Spanish-Australian consortium. This 157-miles of Interstate 80-90 going from the Ohio border to the Illinois border, was leased for 75 years at the cost of $3.8 billion. There are many things that are confusing about this transaction. It was my understanding that theses were federal highways run by states, through federal and state funding. So, how can the state lease the road to a third party? It was interesting to find out that the federal government actually is helping the states lease the roads, and many roads and bridges are already owned by private parties. In July 2005, the Federal Highway Administration (FHWA) created a new office dedicated to the advancing of public-private partnerships in surface transportation. They are promoting this concept and act as a central point for states and investors to meet. The FHWA estimates that about 20 percent of the interstates will be leased within the next 5 years. Most states are under tight budget constraints and can not afford all the road repair, new roads and explanations that are currently needed in their state. Also, the contractors who do this work have had to increase their bids to states to cover the increase in materials and other inputs. The states are feeling the pinch from both sides. The goal of these leasing agreements is to lease a small portion of the states' overall roads and then use the money to fund other needed projects. There are 13 states that already have or are in the process of leasing a portion of their roads or bridges. The reason people and companies invest is to make a profit and increase their net worth. So how can private investment groups make a go of this if the existing systems can not cover the costs? It is true that the government isn’t always the most effective and there are inefficiencies that can be reduced, but is this enough profit for the investors. So for the investors to make money they will need to increase income – through tolls – and decrease expenses – by managing road maintenance costs. Many roads that are already owned have seen a decrease in the amount of people using the road due to the increased tolls which means the investors will have to cut costs further to make a profit. One final thought. This year is the 50th anniversary of President Dwight D. Eisenhower signing the Federal Highway Act, which paved the way for the interstate highway system. Our roads are in fair to poor shape today at the end of the best 50 years of economic growth in world history. What are they going to look like when we get them back in 75 years? The FHWA defines public-private as: The agreements usually involve a government agency contracting with a private company to renovate, construct, operate, maintain, and/or manage a facility or system. While the public sector usually retains ownership in the facility or system, the private party will be given additional decision rights in determining how the project or task will be completed. The term public-private partnership defines an expansive set of relationships from relatively simple contracts (e.g., A+B contracting), to development agreements that can be very complicated and technical (e.g., design-build-finance-operate-maintain). |
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