Private Provision of Highways: Economic Issues
Privately financed and operated highways are an idea whose time has come, ended, and returned. The idea returns, however, as part of an infinitely more complicated system than that of America’s 19th-century turnpike era. Throughout the 20th century, public expenditures were successfully used to finance, design, and implement the transportation infrastructure that helped to open the United States for its great economic expansion — most famously, the Interstate Highway System.
Several factors have brought the private sector back into transportation infrastructure, although this involvement is more limited in the United States than in the rest of the world. One significant factor is the changing economic pressures on government funding. Fuel-efficient vehicles and high gasoline prices have decreased gas tax revenues. Higher taxes in other sectors have made it more difficult for officials to increase taxes or issue bonds to fund further infrastructure needs. Maintenance requirements alone require a significant percentage of current revenues. These reasons and others have led to an increased consideration of private funding for highway construction and maintenance.
Along with the enormous potential that private financing represents, several issues and questions need to be addressed. For example, it is not enough to say that tax-exempt public bonds automatically save money over private funds. A detailed analysis must consider the taxes that the government will collect from private funding, taxes lost to government from asset depreciation, and any deadweight losses.
In addition, there are significant tradeoffs between various public goals and resulting costs, which can be addressed in the design of franchise contracts. Environmental and safety concerns, financial stability, and limits on future toll increases can be achieved, but at a cost in lower up-front value as reflected in bids. Some monopoly power is inherent in private road projects, and deciding how much to allow will also impact the return received by the public sector. The economic analysis of these issues, and others like them, is the focus of this study.