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Private Solutions for Reducing Road Congestion, Fuel Costs, Travel Time, and Waste
September 28, 2006

Session 1

Session 2

Alexander Tabarrok
Research Director, The Independent Institute

We publish many books every year, a quarterly journal, The Independent Review. Our books and our journal cover everything on economics, history, politics, law and other areas. We host many forums such as this one, both here in Washington, D.C. as well as in our California offices in Oakland, California.

Our latest publication is Street Smart: Competition, Entrepreneurship and the Future of Roads. This is a wide-ranging examination of the problem and solutions to road congestion, maintenance, road maintenance, construction and safety. Street Smart draws not only on the U.S. experience, but also on innovation on the management of roads, which is now occurring on a worldwide scale in London, Singapore, Philippines, Sweden and elsewhere.

Here in the United States, we are, frankly, lagging behind. The typical peak traveler in the U.S. wastes 47 hours a year in congested traffic. That’s 3.7 billion hours of time wasted that, with better management, Americans could be spending with their families. Instead, as they sit metaphorically literally fuming in congested traffic, 2.3 billion gallons of fuel are wasted.

Now, I don’t really need to give you these figures, however. If you live in Washington, you already know how severe the problem is. The 66 and 495 are congested every day from 7:00 to 10:00 a.m. and again from 3:00 to 8:00 p.m. Attempts at solutions have been worse than useless. 66, for example, is HOV-only during rush hour. Perhaps the only road in America with that status, HOV-only. Why not make it HOT, a high-occupancy or toll lane?

Now, tolls have traditionally been frowned upon, both because of delays due to traffic toll collection and also to negative public opinion, but technology has solved the first problem, and the public is changing their mind on the second as they come to realize the tolls are just user fees, and user fees are not only efficient, they are fair. In a January 2005 poll, for example, Washingtonians, by a factor of two to one, said that tolls were better than taxes to pay for highway expansion or new highways.

Unfortunately, politicians have not yet gotten the message. Just yesterday the Republicans refused to endorse new taxes for new roads, and the governor’s spokesman responded that the alternative is “borrowing and diverting money from public schools, colleges, public safety and public health.”

Well, there is another alternative. That’s nonsense. User fees are an efficient, fair and technologically sensible approach to financing the building and the maintenance of new roads.

A lot more can be done, however, not just user fees. We’ve assembled two expert panels for you today to enlighten us on the past, present and future of road pricing and road privatization.

Our first speaker is Gabriel Roth. Gabriel has worked in transport issues on five continents for many years, 20 of them with the World Bank. He’s a pioneer in the application of market principles to the provision of roads. He’s also a research fellow at the Independent Institute and the editor of Street Smart.

Gabriel Roth
Research Fellow, The Independent Institute

Talking about the book Street Smart, I would like to pay tribute to the Independent Institute and its president, David Theroux, who commissioned this book and saw it through to publication after a five-year period. I’d also like to pay tribute to Alex Tabarrok, who is director of research for the Independent Institute and who really co-edited this book. He reviewed all the drafts. He found some of the authors. And he helped in numerous ways. And I’d like to say thank you, Alex.

Now, I suppose that the best way to start the discussion on this book is to quote a famous American philosopher, Will Rogers, who is supposed to have said, “To end traffic jams, have government provide the cars and private industry the roads.” Now, I think the having government provide the cars is a topic that should be left to another meeting, but what we want to look at today are the possibility of private industry providing the roads.

The Case for Reforming Road Transportation

Now, why should the present system be changed? I can think of three reasons. First, it is not responsive to consumer needs. We all know the statistic that in 10 years, the traffic has grown 38 percent, lane miles have grown only 5 percent. Why the political system does not respond to road users is something that I’m not clear about. After all, road users do vote. But the fact is that the process does not provide for the consumers who are road users. It does not give them the facilities that they are prepared to pay for.

The second reason is that the present system utterly fails to deal with congestion. Now, congestion is an old phenomenon, and it’s been around at least since the times of Julius Caesar who decreed that goods wagons should not be allowed into Rome because—in the daytime—because of traffic congestion. It is also known as a disease of civilization.

Of course, only economists realize that congestion is really a response to under pricing and educated economists realize that it is a response to the lack of property right in roads, which is something we’re going to get to. As long ago as 1924, the economist Frank Knight pointed out that if urban roads were privately owned, and if the owners could charge prices for them, there would not be excessive congestion.

Now, the third reason why the present system does not work is because it restricts the freedom of mobility. People like to move around. As they get better off as income rises, they have more and more places they want to go to, more and more people they want to meet, and the restriction on motorized mobility seems to me to be a restriction on freedom that should not be tolerated in a free society.

Well, what then should be done? The change that is needed is to apply to roads the allocation and investment principles we use in the market economy. We use them for water, electricity, telecom. Why not for roads? These principles lead to attributes. Consumers pay for what they get and they get what they are prepared to pay for. So why not apply this to roads?

Well, it might be said, what has this got to do with the private sector? Why not get the government to act commercially? Now, the last thing I want to do—especially as a foreigner—is to suggest that the government here is less than perfect or to suggest that people working in government are not as clever, or as hardworking, as people working outside.

But that’s not the issue. Government has to consider many, many things and there are certain things it cannot do. For example, it is very hard for it to raise prices, as we all know when we look at transit prices. Governments are often led by whims and fashions of leaders.

In Britain, the ruling new Labor Party happens to believe that railroads are the best way for transport in modern times and that people should leave their cars and switch to railroads, which was a mode of transport which has very important uses, but it was, in fact, developed to help horses pull wagons in coal mines some 200 years ago. We do not want our transport systems determined by whims of this kind. We want them determined by what people are prepared to pay for.

And it is very interesting that when the railways became strong, the need for toll roads in the 19th century collapsed, and with it, many of the companies that provided it. When the private sector is involved, if there’s no demand, there’s no provision. The private sector does not provide roads to nowhere.

And finally, the government cannot be trusted to spend funds in the interest of those who pay. For example, in this area, the Dulles rail extension is to be partly funded out of tolls on the Dulles Toll Road, which was built specifically for users who do not use Dulles Airport. In London, people pay congestion charges, and that has increased traffic speeds and reduced volumes, but the revenues are not used to improve the road system.

The Role for the Private Sector

Well, what can the private sector do to deal with these matters? Let me give a few examples that are discussed in the book.

First of all, it can test and license road users, drivers and vehicles. If insurance companies were to do that—by insurance companies, I mean the insurance company that insure—that test and certify those that they insure—there would be enormous financial incentives to avoid accidents and to increase road safety. There’s a whole chapter on this in the book.

Second, it can maintain and manage roads to government standards. The government or the road owner can say what standard the road should be at, what standard of roughness for example, and then private sector firms can find the best way to do this. And in that way, you have development of new methods to maintain roads. This works very well in Virginia and in the District of Columbia.

And, of course, the private sector can provide new roads. Dan Klein is going to tell us a wonderful story about how this was done in the 18th and 19th Centuries. Just about 100 years ago, the first motorway was privately provided by William Vanderbilt, the Long Island Motor Parkway. Eleven years ago, the express toll lanes were opened in California. They allow travelers to avoid congestion and the instrument to produce this are tolls electronically collected, which are changed to ensure that there’s no congestion at any time. These express toll lanes, by the way, are being planned for this area to widen the Beltway and to be done by the private sector. There’s a whole chapter on that in the book.

And then we know the Dulles Greenway, a road which was conceived by the late Ralph Stanley, had starting troubles, but is now playing a very useful role despite competition from free government provided roads.

So what could be done next? Certainly the private management and maintenance of roads can be expanded. Some existing roads could be commercialized. HOV lanes, high occupancy vehicle lanes, were mentioned earlier. As Alex said, they could be turned into revenue-earning HOT lanes, that is, high occupancy or toll lanes. And, in fact, this could be done on a large scale to allow the private provision of express toll lane networks in whole cities as discussed in chapter 19 of the book.

What is the main obstacle to reform? Some people think there’s a conspiracy among government officials to keep roads in the public sector. I do not believe this for a moment. I think the main obstacle to reform is public ignorance. The purpose of this book, and of this meeting, is to help overcome it, and I’m very happy to present it to you. Thank you.

Alexander Tabarrok
Research Director, The Independent Institute

Greg is the President and CEO of the American Highway Users Alliance, which is a nonprofit association dedicated to advancing congestion relief, but also to improving the safety of our highways, a critically important task. Greg previously served as professional staff to the House Transportation and Infrastructure Committee, and, prior to that, he was a project engineer at the Maryland State Highway Administration. He is also a fellow of the Eno Transportation Foundation. Greg.

Greg Cohen
President, American Highway Users Alliance

I have a feeling everyone sat on one side who’s speaking and I sat on the other because I have a little bit of a skepticism or a skeptical history regarding privatization, but I think it’s balanced, and what I’d like to talk about today is the promises and the pitfalls that could come with privatization.

First, I’ll just explain where I’m coming from. I’m with the American Highway Users Alliance. I’m not an economist. I’m an engineer. But my group represents the interests of the motoring public to the best of our abilities. That’s our charge from our board. Our members include AAA clubs, and trucking associations, and bus companies, and wide, wide variety of business interests that would like to see roads congestion free and safer.

Let’s talk a little bit about the problems that exist today, and Gabriel talked about them to some extent already. Obviously, congestion is a terrible problem. It’s getting worse. The plans for dealing with congestion are modest to say the least. We have a terrible amount of regulation and bureaucracy that prevent projects from getting started. Sometimes up to two decades just to get through planning studies.

As you all have heard, I’m sure, we have a problem of political pork and waste in the program. We have a lack of accountability where state governments basically regulate themselves to deal with the problems. And we have a revenue problem, at least at the federal level, where we have a per-gallon tax on gasoline that doesn’t adjust to inflation or new fuel efficiencies, so in real terms, the amount of revenue into the Highway Trust Fund keeps declining.

Some solutions to all of these problems. One is prioritizing congestion relief. A lot of times, the problem with congestion isn’t that it can’t be solved, it’s just that there is very little in state and local plans to do so. There’s already some innovation in this area where the state of Texas and the state of Georgia have promoted new congestion relief plans that actually prioritize congestion relief significantly over other competing factors in the plans.

Another solution to bureaucracy in regulation is some of the streamlining provisions that were started in SAFETEA-LU. Very modest streamlining provisions, but for both highways and transit and old Title 23 and Title 49 transportation programs, would see a little bit faster movements of projects through the environmental process.

Another solution is that the media and the public have really woken up to the waste and pork that are in the program, and I think that there is going to be additional pressure over the coming years from the public and from the media to crack down on it.

And fourth, new proposals, and this will really, I think, help deal with the pork and the waste, is the promotion by some of results-based incentives for congestion relief, safety improvements and other efforts where the federal government or the state governments can basically be rewarded or incentivized for dealing with these problems.

And another solution that is possible is a user fee increase to deal with revenue shortages.

Private investor contributions to the solution. And one is certainly building new roads, and I think the private investors and public-private partnerships have proven to be capable of building new roads faster and expanding existing roads faster than the government has been, either by building new toll roads or having a shadow toll program where it’s a free road built by a private entity. And also by taking over failing roads, where instead of the state being self-regulating and accountable only to the voters to deal with the problems, the state can be regulating the private entity to ensure that they follow through on their promises in dealing with congestion relief and maximizing throughput on the roads.

Problems with Privatization

I’d like to talk a little bit about what I think are, in some cases, theoretical pitfalls, and these are things that, in my mind, is a warning to the proponents of privatization. It doesn’t have to be like this, but this is a potential that could harm the public support for these deals in the future.

One is any perception among highway users or among the public that privatization deals are backroom deals or rushed without enough time for the public to digest it, will hurt the deal and will hurt the political support for those who engage in these deals.

Second is the diversion of revenue gained by cities or states for lease deals. In our view, if a city or a state gains revenue for the lease of a project, that money should be reinvested back into highways, and if the money is diverted to us, over time, it will send a very negative message to the highway users that are expected to support these deals.

And I think a case in point, the difference between the Chicago and Indiana deal is instructive. The Chicago deal to lease the Skyway, the money is planned to be used—or is being used—for non-highway purposes. And no one really knew that this was going to happen. It was one of these deals that no one knew about until it was done. At least that’s my opinion. Here in town, people were quite surprised about it. The Indiana deal is considerably better, at least in that highways will be funded. But our worry is that more deals might look like Chicago than like Indiana, and that’s something to watch out for.

Private lessees and owners. This is perhaps maybe more of a conspiracy theory, but I think it’s just something to watch out for, and that is, some of the deals do require that the public entity not improve nearby facilities that add capacity, because it would be viewed as unfair competition to the private entity. And there is some fear that private owners of roads might seek to oppose other road improvements in the area in order to increase their market share.

Fourth, with tight road supplies—and everyone knows that road supplies are tight—if the market forces are unregulated on price—which I think a lot of economists would like to see an unregulated market scheme—it could lead to the same problem that shippers are finding with the railroads where they’re over capacity and they’re being subjected to what they call being a hostage shipper, where the market forces create prices that are much higher than reasonable.

Severe congestion problems can only be resolved with new capacity or with reduced demand, but the macroeconomic growth favors more capacity, and a market-based system might favor reduced demand, and I think the public would balk at a privately run program to reduce demand by restricting people’s movement. In other words, privately controlled congestion pricing where some corporation adjusts the price to a high level to reduce demand. I think the public would have serious problems with that and it would hurt the future of these kinds of projects.

Also, is privatization a solution for national problems? In our opinion, a national network of roads is needed and private investment can only deal with pieces. It doesn’t mean that private investment shouldn’t be there to deal with pieces, but it’s also important to note that private investment is not sufficient to deal with a national network of roads in areas where the market forces are not sufficient to encourage privatization.

So it doesn’t obviate the need for the federal program, and I think that’s the big difference. I think private—between my view and some other views—I don’t see privatization as a panacea for replacing the federal program. I see a strong federal program as necessary, and privatization and public-private partnerships as being an extra tool that is useful in certain areas.

Then to conclude. Again, as I said, private roads and public-private partnerships can be a tool for solutions, but they’re not a panacea. We need a strong public roads program. Opponents of private investment should consider the advantages of privatization, performance-based reviews of congestion and safety facilities, reduced bureaucracy and reduced the process delays and project delays, and the value of the use of the release revenue from a lease deal or a sale for new capacity and new roads.

But supporters of privatization should also be aware that there are many pitfalls that could harm public support and turn back the progress and growing experience of folks to be willing to try privatization. And I would encourage those who support privatization to watch for these pitfalls and try to avoid them to the best that they can.

That’s it. Thank you very much. I appreciate Gabriel inviting me, and it’s a pleasure to be here at the Independent Institute. And I look forward to taking any questions.

Alexander Tabarrok
Research Director, The Independent Institute

So, Pat Jones, the one without the PowerPoint, is the executive director of the International Bridge, Tunnel and Turnpike Association. That’s the worldwide alliance of toll operators and associated industries. The association has more than 280 members in 24 countries around the world, and Pat has more than 25 years of experience in transportation and in association management issues. Pat.

Patrick Jones
Executive Director, International Bridge, Tunnel and Turnpike Association

Well, thank you Alex Tabarrok for the kind introduction, and thank you, Gabriel, for inviting me to be here today. Congratulations on your book, and I wish you much success.

This is my first time here to the Independent Institute, so I was doing a little research. I decided to go to the Web site to see what these people are all about. And I was delighted and a little surprised to see that my colleagues on the panel all submitted their high school graduation photographs to be included in the program. So it’s nice to be around people who feel so youthful at this stage of their life.

And while I was there, while I was on the Web, I thought, well, let’s see how Gabriel’s book is doing. And so I went to Amazon.com. And, you know, if you go to Amazon, and you can look up a book, and you can see where is it in the rankings of the most highly read books—the biggest sales.

And of course, you go to the top 25 and you see number one is another sort of economic book there, Gabe. It’s Busting Loose From the Money Game: Mindblowing Strategies for Changing the Rules of a Game You Can’t Win, by Robert Scheinfeld. That’s number one on Amazon.com.

And then it goes from there. Number two is Saving Graces: Finding Solace and Strength from Friends and Strangers. This was written by Elizabeth Edwards, the spouse of John Edwards, the vice presidential candidate for the Democrats last time around. Down the list a little bit, number seven, Culture Warrior by Bill O’Reilly, and then down a little further, Lemony Snicket has the latest installment called The End: A Series of Unfortunate Events, Book 13, coincidentally also at place number 13. So—well, then –

Gabriel Roth
Research Fellow, The Independent Institute

That’s a long way if you keep going down the list.

Patrick Jones
Executive Director, International Bridge, Tunnel and Turnpike Association

So then you go a little bit further down the list, you find in the Amazon.com rank, number 966,923 is Gabriel Roth, Street Smart. Okay? Now, we’re not disturbed by that because we know all those other books that are high in the rankings, nobody reads those. You know? All people do is they quote from them or they read the reviews from those books. But by golly, we know that 966,923 people are going to read this book, Gabriel, all right? So we congratulate you for that.

Well, I asked Gabriel before I came if I could bring a little bit of literature to promote IBTTA, and I would just do a little bit of show and tell. We’re having a Transportation Finance Summit in December of this year, December 3 through 5, right here in Washington DC, some outstanding presenters looking at different ways to finance transportation. This is the fourth summit we’ve done. It’ll be at the Capital Hilton, and I would encourage you to come. There are copies of this at the table downstairs. I also brought some to this room.

And I heard mention of the Independent Institute’s quarterly publication. We have a—I don’t know what you’d call a three-times-a-year, but it’s not quarterly. It’s something else. And this is our journal Tollways, and I brought a few of these. And I brought a few other things that I won’t go into.

The Magnitude of Current the Problem

I really support and agree with what Gabriel has said, and to a certain extent, with Greg’s remarks. I think what I would like to do is really sort of emphasize the issue of scale, emphasize sort of the magnitude of the problem that Gabriel is describing.

Let’s think about a number, a billion. Let’s imagine if we gave to a person who lived at the beginning of the Common Era, somebody in 1 AD. Let’s imagine we gave that person a billion dollars. You know, Caesar’s there in Rome and Pontius Pilate is hanging out in Judea. You get the idea. 1 AD.

And we tell this person, DJ, we want you to spend this billion dollars at the rate of a thousand dollars a day. And we’re talking about five to 10 times the federal per diem, Okay? Spend it at the rate of a thousand dollars a day. Well, if we did that with our billion dollars, and if that person lived long enough, today, they’d still be spending that money, and they’d have 700 years left to go! All right? That’s one billion.

Now, if you listen to studies that come out of the Hudson Institute, and the U.S. Chamber of Commerce and the American Association of State Highway, and Transportation Officials, and the Federal Highway Administration, they tell us that we have a trillion dollar gap between the revenues that we have and the revenues we need just to maintain our highway system in its current dilapidated condition. All right? So we’re talking about a thousand billion dollars over the next 20 years.

And that’s why the work that Gabriel and his colleagues is so important, because they demonstrate to us alternative ways to get the funding to do the work that we need to do just to stay where we are.

Now, Gabriel said in his final slide that one of the big obstacles—or the biggest obstacle to reform—is ignorance. And I agree with that. I would say a big obstacle to reform is ignorance, but I would add to that fear.

Last night, I happened to be at Washington National Cathedral listening to a lecture by former Senator John Danforth, and he was hawking his book Faith and Politics: How the Moral Values Debate Divides America and How to Move Forward Together. Where am I going with this?

Well, Gabriel’s talking about ignorance, and I agree that there is ignorance about the transportation disinvestment we have in this country, but there’s also fear. I’m not trying to proselytize anybody here with Senator Danforth and his book in the Cathedral. All right? I’m just sharing with you an observation that he made.

And his book essentially says that the religious right in this country has polarized America. He said, 30 years ago when I first got into politics—or 40 years ago—you had 30 percent of Americans were Republicans and 30 percent identified themselves as Democrats, and then everybody else in between was sort of undecided, and that was the battleground for your elections. You went for the people in the middle. But we’ve gotten to a place now where we’re very polarized, and as a consequence of this, I think a lot of very important issues get left on the table and unresolved.

And one of these issues, because of the fear that we’re going to be cast as on the outskirts of this political debate, one of these issues is transportation. So, I would suggest that, yes, we need more education, and yes, we need a public and political discourse in this country that isn’t rooted in fear.

One of the results of this heightened sense of fear is people come up with questions like, hey, what’s going on with this Australian company that’s coming to this country and they’re buying our highways? You know? What happens if they go belly up and what happens to us? How do we get to work? You know? What happens when the private sector is controlling the very public service-oriented roads that we’re driving on?

And I would suggest to you that this really is a false fear. That the companies and the industries and the people who are investing in our highways intend to be here for a very long time. And we see examples of this happening all over the world: in Europe, especially in southern Europe, France and Spain and Italy and Portugal and Greece. All of those countries use the concession model as sort of the way to build and maintain and operate what we would consider their interstate highways.

So I think we have an opportunity here, with Gabriel, and some other smart panelists, and all of you here in this room. Congress created this commission, this National Surface Transportation Policy and Revenue Study Commission, a group of a dozen smart people from many different sectors of the economy and government, to look at what is the future of highway transportation in America, surface transportation in America, looking out 30 years and beyond. What is our vision for how we’re going to fund our transportation system, and what policies will we use to implement this system?

IBTTA, in concert with the American Public Transportation Association and the Intelligent Transportation Society of America, ITS America, and the Texas Department of Transportation—we co-hosted last week in Dallas, Texas the first field hearing of this Section 1909 commission to bring to them some alternative views to help dispel the ignorance, to help dispel the fear, so to speak, about new ways of funding transportation in this county.

They’re going to have a series of other field hearings around the country in the coming months, in November, in February, in April. They’ll be in New York, and Memphis, and Chicago, and Los Angeles, and maybe Orlando and other parts of the country. And I would encourage you to take a look at that, and be present for those hearings, and to express your views to help eradicate the ignorance that lives in our transportation system. And the fear. And the fear. And get this political discourse back on track where we’re trying to solve problems and we’re not trying to alienate one another.

So I would just conclude there. I thank you for the opportunity, Gabriel, to be here. I look forward to the question and answer session, and have a great conference. Thank you.

Alexander Tabarrok
Research Director, The Independent Institute

Thank you very much, Pat. I’d point out that when we started writing this book, it was some time ago, and we asked Mary Peters to write the forward for the book and she gratefully agreed that she would do so. And then, just about a week after the book was released, Mary Peters was tapped to be the secretary of transportation. So you see, Pat, it’s not how many readers you have, it’s who those readers are.

All right. Our next speaker is my colleague, a professor of economics at George Mason University, Dan Klein. Dan has done more than anyone else to shed light on the amazing history of private roads in the United States, a history that is far more extensive than just about anyone realized before Dan’s important work in this area. Dan has also done important work on HOT lanes, on improving urban transit, franchising highways and many other areas. Dan Klein.

Daniel Klein
Professor of Economics, George Mason University

Good afternoon, everybody. It’s great to be here. It’s great to be part of this whole project. Thanks to Alex. Thanks to Gabriel. Thanks to the Independent Institute. Thank you to you for coming out and listening and participating.

When we get out of bed in the morning and go forth in our day with confidence and faith, so much of that faith and confidence comes from our experience, from what we’ve seen, what we’re accustomed to. Sometimes we read about things we haven’t actually seen, and we believe them, but we maybe have talked to the actual people who have seen them and touched them.

People, culture, humanity is really very much experience-oriented. I see it when I believe it. And so it’s sometimes hard to get out of the system that you know. That’s one reason that travel can be so valuable, because you step into a different system, different experience, and you see maybe highway facilities that are run differently than you recognize them.

History is another way of doing that, but it’s a much harder thing to step into. History is really going to be scholarship and imagination, and there’s no way other to do it. But history can also be a great teacher of other ways of doing things and really expand our mind about how whole cultures can be oriented very differently than we are.

Private Toll Roads in American History

So I want to just briefly tell you about what we can learn from the 19th-century American history of private toll road companies. There was an extensive movement throughout the century. We’re talking about a hundred years experience, from the East Coast to the West Coast, which was a lesson in if you want good highways, turn to private enterprise. And that’s what Americans understood very clearly and plainly in the 19th century.

This picture here tries to tally roughly all of the roads, all of the miles that were built. It is rough. This is a very spotty kind of research. Most of it’s in historical societies, local historical societies and things like that. It’s all very bottom-up. But looking at, in particular, three episodes of the 100-year history, it breaks things down and then has an other column, all amounting to something like 3,000 private roads that were successfully built and operated, and something like 40,000 miles of private toll roads.

This experience—and I’m going to generalize about the 100 years as a whole, although each episode had its distinctiveness—but as a whole, it was generally remarked that private roads were the best roads around. It was often remarked that private ownership was really necessary to make the best go of it. And historians about the period remarked that it was really private enterprise that principally provided the good highways of 19th-century America.

Now, what were some of the advantages of the toll road? It unified ownership and responsibility for the entire route, and this was something different from the public management at the time. As private owners, they had a sort of decisive authority over the resources and the operation. And they had what economists call residual claimancy.

Now, this is a fancy word for something you understand very well in managing your own pocketbook and your own resources in your own home. Residual claimancy is nothing more than a fancy word for the idea that you claim the residuals at the end of the period. The residual is, as it were, the money that’s left over. And when that money is positive, we call it profit. When that money is negative, you call it loss. Either way, you have to claim it when you’re an owner and a residual claimant.

And private toll roads were owned by people who understood residual claimancy. They tasted profit and loss, and this meant they had every incentive to make a profit rather than loss, and to make a larger profit rather than small profit, although as we’ll see, it wasn’t generally very profitable.

The regulatory environment was not laissez faire. There were controls by the government on, first of all, creating a company. There were controls on the toll rates, and there were important controls on toll collection. It seems that toll evasion at the time was a very significant problem. Evading tolls was sometimes called shun-piking.

Mostly these roads were entirely private and voluntary. There was very little government participation in the financing. In a couple of states, the government had a policy of buying some of the stock, but not generally. The companies did enjoy eminent domain privileges. It’s not clear just how important those were.

And something I didn’t put on this slide but perhaps should have is that very often the company was granted an existing roadbed that was public property, so that probably should be added to that slide.

But generally, the roads were not profitable. Generally, those residuals were small, if they were even positive. Okay? And yet, these roads went forward nonetheless, because the owners themselves were interested not only in the residuals, the monetary residuals that came from operating a road, but also from the improvement in land values, the improvement in transportation that the facility brought, the increase in population. Indeed, even the pride that such a facility and project brought to the community as a kind of monument to the community.

And so very often—I would even say typically—these projects were undertaken with a strong spirit of community enterprise and community pride, and in general, the profits were lacking, and that they were expected, actually, to be meager.

So why did people build all these roads? Alexis de Tocqueville in his famous book Democracy in America, put it probably as well as anybody. And he just said that there’s an overwhelming public pride, a civic pride and participation in Americans, which I think is normal to humanity, perfectly normal. He could be quoted at length, but he says that they constantly form associations to build roads, libraries, hospitals, schools, and so on to overcome their community’s needs. And so people participated partly out of esteem and interest and altruism, if you will.

So buying stock in one of these toll road companies was a lot like contributing to a local charity or a community project. It really shouldn’t be seen as a narrow sort of monetary investment the way you might buy something through your Schwab account. However, the companies did still taste profit and loss. This was way before law separated profit from not-for-profit corporation, and there were still residuals officially, and I think that’s an important thing for internal organization of the company.

Now, today, with modern toll collection, investors can better capture their share of the value created by the road. Okay? There’s not going to be shun-piking today on a modern road facility, for example. There perhaps won’t be extensive toll exemptions, so investors can expect that the value they create is better translated into those positive residuals, and perhaps we should expect it to be more commercially motivated.

But we should not neglect the civic impulse that can and does still play a role in modern toll facilities. I was teaching out in Southern California when some of the California toll roads were built, and landowners donated land, and were very cooperative in helping to get those projects off the ground, because they wanted better transportation. They wanted higher land values. They maybe also wanted the esteem and good will of the community.

In terms of investment magnitudes, my colleague John Majewski and I did a kind of rough estimate, and we came up with the investment in New England from 1800 to 1830 being about 6.15 percent of the 1830 GDP for those 10 states. I should say the Middle Atlantic states in New England. And that’s over a 31-year period. And this exceeds the percentage of 1995 GDP for the interstate highway system. So through voluntary means, private initiative mustered a larger per capital investment than the interstate highway system did over a 40-year period.

Another lesson that comes out of the history—and this speaks to something that Greg mentioned, and runs contrary to what Greg suggested—is that private ownership and that kind of decentralized control does not mean a lack of coordination. It does not mean a lack of network integration.

This is a map—which I understand you can’t make sense of—but many of these roads are called the Great Western, the first Great Western, the second Great Western, the third Great Western, and they link up to various other private turnpike companies making a system, a well-known system. This is essentially traveling the Mohawk Valley region that was traveled by the Erie Canal through central New York.

And if you look at the construction of these roads, you see that these owners naturally talked to each other. Lo and behold. They said, look, we’re thinking of building this road. If you guys in your region build a road and we connect the two pieces together, we’re going to be able to make it to the valley at the end of the Appalachian Mountains and so on. And this is exactly what they did. This is the way you build an integrated system.

It’s really not that different when the government takes responsibility for the entire thing. They have someone focusing on this portion and some other portion, and they get together in a room, and they talk, and they say, let’s make sure someone can go the whole way.

And what we have here just as an illustration is a letter from one fellow writing trying to start a company in one part of that route you just saw, writing to one of the leaders of another piece of that route saying, “We’re thinking about doing this. It’ll be greatly beneficial to your community, and your road, and the whole region, and the public at large,” as he says, “and I hope you will support it.” And so they naturally coordinated and integrated.

This is really not different than what happens in the market economy in general. If you think about all the activities that flowed, say, into providing one of those cookies you may have helped yourself to today, and you start thinking about all the different activities of who brought it here, who packed it, who made the flour, who grew the wheat, and so on, you have this remarkable chain of activities we can hardly even begin to imagine that got coordinated to bring a cookie to us, and it’s really not that different in coordinating a road system or a transportation system. We don’t need the government to do that, particularly.

Five Lessons for Today

Let me bring this down to five lessons for today. One, private toll roads bought quantity, quality and efficiency. The virtues of private ownership still recommend private enterprise over government as the way of matching highway supply to demand, I would suggest.

Lesson two. Overregulation hampered the old toll roads. Regulatory demands for better service and user concessions back then often resulted in worse road conditions or no road at all. Policymakers today must understand the deleterious long-run consequences of restrictions on road companies. That’s not to say there shouldn’t be any restrictions, but they should be mindful of the deleterious consequences of such restrictions.

Three. Until the end of the century, the toll road companies were confident in the rules of the game under which they operated. In modern times, the rules are prone to change harshly and without much warning. To give private investors the confidence, the government must ensure the integrity of the rules by which private enterprise would go forth.

Four. Modern highways are often plagued by traffic jams, something which wasn’t an issue so much in the 19th century. Road officials today can increase flow by setting higher charges. Such charges not only reduce congestion, they help investors identify profitable ways to provide new roads.

And finally, the old toll roads assembled their routes swiftly and easily. Today, the process of environmental clearance involves tremendous delays, outlays and uncertainties. The clearance and entitlement process must somehow be simplified.

So I hope that we don’t forget that Americans had a long, rich, successful history with private road provision, and the lessons there have not really changed, because I don’t think humanity and society has fundamentally changed. Thank you for your attention.

Audience Member

Do the reasons for the end of the private toll-road era have any bearing on what we might expect in the future if we go this route?

Daniel Klein
Professor of Economics, George Mason University

What brought about the end at the end of the 19th Century? It wasn’t particularly the railroads. It wasn’t particularly any substitute or technology. The coming of the railroads, more in the mid-century, did profoundly affect, as Gabriel alluded to, the private toll roads, killing some, but spurring others, connectors, spur roads, at the time.

Your question is part of a much, much broader question about what the heck happened at the end of the 19th century, because in many, many areas of society, we had big shifts in public policy leading into the 20th century when government, at all levels, became much more involved in society, services became more tax financed, regulations proliferated and so on.

And I think basically that the answer to your question is the same answer to that much broader question about what happened in the Progressive Era and afterward. I think it’s broadly sociological and ideological. I don’t have any better answer for that.

Alexander Tabarrok
Research Director, The Independent Institute

Let me take the opportunity to ask the panel the question, and that is how they see the introduction of new technology as affecting road privatization and road pricing, particularly, say, GPS monitoring from space how people are driving and where they’re driving.

Patrick Jones
Executive Director, International Bridge, Tunnel and Turnpike Association

Well, certainly the introduction of electronic toll collection in the last 20 years has made tolling a heck of a lot easier than it’s ever been in the past, and it eliminates one of the historical obstacles to tolling, which is the need for the user of the road to stop and wait to pay the toll. Now, we have the opportunity to toll people as they move at highway speeds.

And this is the movement of tolling around the world. In fact, perhaps one of the best examples of sophisticated use of technology today is in Santiago, Chile, where they have five urban, free-flow, open-road tolling highways. A completely cashless system. They have something like two million cars in the country, and more than a million of them are outfitted with transponders to use on these open-road tolling facilities in Santiago. And this really is the wave of the future.

Audience Member

What about the National Road? Now was that a government road? The National Road that ran through Cumberland and it went through Maryland and on. Because we’ve traveled out there and got interested in the history of that.

Daniel Klein
Professor of Economics, George Mason University

Yes, the National Road, much glorified in history books and otherwise. It was a governmentally funded road, one of the major and unusual federal efforts of that kind at that period. We have looked into that, John Majewski and I, and that road was deficient and malfunctioning most of the time, and its cost per mile was exorbitant. It essentially was the first great federal boondoggle, the National Road, and what they’re teaching kids in third grade is, for the most part, misleading.

If you compare—and we do—the National Road to the Pittsburgh Pike, which was an alternative route through the Appalachian Mountains and it was private, and again, a network, an integrated network of different private companies, it did much better on traffic. It did much better on cost per mile. So it’s a national road.

Audience Member

I have a general question for the panel. A couple of you have referred to tolls for demand management. For example, Gabriel talked about congestion pricing in London. Others have talked about the express lanes in California. And one of the things that—when, for example, the express lanes in SR91 in California was under private ownership, you basically could let the tolls go as high as—whatever the market would bear. And I heard Greg express some concerns about, again, the extras tolls the users would have to pay. And then there is a presumption, I think, in Dan’s work that the extra revenue would somehow be plowed back into new services for highway users.

And I’m just wondering, the situation like that, you’re talking about allowing the private sector to make the system more efficient if we say higher tolls will make the system more efficient by impeding traffic flow. And we want that to happen. How do we address the public concern about these outrageous profits that might be going to the private sector, and how do we ensure or address user concerns that they may not be put back, plowed back, and the private sector can do whatever they want. They can invest it in cookies, cookie manufacturing if they like. They don’t have to put it back into the road system. So I’d appreciate your response there.

Greg Cohen
President, American Highway Users Alliance

I can start. I think SR91 is an interesting case study, because if you look at SR91, the reason that the government had to renege on its deal, and actually—someone might correct me on this, but I believe they bought back or they changed the terms of the lease with private company—was that there was a non-compete agreement, so there was no incentive for—first of all, the government could not improve parallel roads, so if traffic got terrible and demand increased, the private sector basically could hold hostage the users of that road if alternative routes were also congested. Correct me if I’m wrong on this, because this is how I understand it, but I’m not an expert on SR91

My concern is, particularly if there is a reason for the private entity to oppose parallel road construction and an unregulated, purely market-driven system where the owner of the road could raise the price as high as demand creates, there would therefore be no incentive for the owner to widen the road. And this is what hostage shippers are experiencing from railroad companies.

I mean, it’s interesting. Railroad companies are always asking public policymakers to encourage investment and create tax credits for more railroad capacity, even though it’s a private entity, and then they say, we could take so many trucks off the road if you would just allow it to go on rail. But their dirty little secret is that they’re not investing in railroad capacity except where it’s most profitable to them, so if you happen to want to use the rail in an area like—say you’re moving coal. Railroad is the only real way to move coal, and without some control over that, and without some incentive for more capacity, the railroad company can charge the coal company an exorbitant rate.

So this is what I’m trying to get at. I’m not anti-privatization. I’m just trying to look at the pitfalls here and to encourage those who are for privatization to watch for these kinds of things and make sure that the users of the system aren’t held hostage by a bad plan sometime in the future.

Gabriel Roth
Research Fellow, The Independent Institute

May I comment on this? There are really two issues here. One is the broad issue of what should be done with the revenues from congestion pricing, and there is a chapter on this subject in the book.

Now, clearly, to say that it should be plowed back into roads is a bit naïve. After all, when a phone company—Verizon—they make profits, they do not plow all the profits back into telecom. They might, as you mentioned, might want to invest it in a cookie factory. And why not?

The important issue is that in a normal market economy, these excessive profits would attract other money into expanding road capacity in that area.

Now, when it comes to the practical question of what to require a city to do if there is congestion pricing, one has to look at the politics, and it seems to me that from a political point of view, it makes sense to say that the money would be invested in roads, or the surplus would be reinvested, because, after all, the people who pay are the road users and they have to be the ones who have to be persuaded.

And it’s interesting that recently you read in connection with Stockholm, when they were deciding whether to continue the congestion pricing that they started, that they’ve now come up with what the leader of a political party calls a compromise, which is, they would have the congestion pricing, but the surpluses would be spent on road improvement, I think. It might have been road or transit improvement. But you can look it up in Google. It happened within the last week.

On the State Route 91, which is the narrow point made, I think one should make the point that the company was required to raise the fares to avoid excessive congestion, but that the increased revenues resulting from that did not go to the company. It went to the state, in fact. The company was paid a—was allowed a rate of return on its investment, and this rate of return depended on things like safety, if there were fewer accidents, they got more money, but the company that ran the service did not make any excess profits by raising the congestion charge.

Now, Greg raised the question of the condition, the non-compete condition. Now, this is a difficult problem. On the one hand, if one arranges to give a concession to a private company to provide a road, the company wants some assurance that the government would not open a free road next to it. This is like asking Giant Food to open a supermarket next to a government shop providing free food. So there have to be some kinds of limitation.

Now, this happens because we are operating in a system which is half priced and half free. If all the roads were tolled, and if there was free entry for everybody to start a toll road, this problem would not arise. And my only comment on providing the roads half free and half tolled is that this raises difficult issues and I’m not able to give instant answers.

Audience Member

Greg, you mentioned two deals, the Skyway and the Indiana toll road. What do you like or dislike about the Pocahontas Parkway transaction, and to reach the deal?

Greg Cohen
President, American Highway Users Alliance

I’m less familiar with the Pocahontas Parkway. What I do like is that it’s an opportunity for VDOT to actually save what was a losing investment for them and to find a private investor that was willing to take it on and hopefully make a profit on it.

What concerns me about the Chicago Skyway deal is that in order to get this lease, the group—I think it’s Macquarie—they paid $2 billion up front to Chicago for the rights. Chicago—and this is not Macquarie’s fault, this is Chicago’s fault—then took that money and spent it on healthcare and debt relief in the city and not on highways. Now, the tolls that had been collected on that highway for 70 years, or however long that thing was built, were paid by highway users. And the equity in that road was created by highway users investing in that road, and then the money which was taken up front in return for future tolls, was then spent on something that really wasn’t for highway users.

I don’t know if that’s the case for Pocahontas Parkway. It’s definitely not raised alarm bells within my membership, but I would note that the Indiana toll road, where the money was spent for roads—$3.85 billion—has received a lot more support within my organization than the Chicago deal, because, at least, the users felt like to some extent, the money is going to be used for them. And they invested in it and they think that’s a little bit fairer. I’ve got folks who are opposed to it in my membership, too, but I’ve got more folks who are for that.

And my worry is that if you’re a mayor or a governor, and you’re approached on some future toll road deal, to lease your toll road. And someone waves in front of you $3.85 billion. And you’re in for four years or eight years in office, and then you get to leave, and you’re signing a deal for 75 or 99 years. Your incentive of taking that money and making yourself a hero by solving all sorts of social problems within your town or within your state with that money up front, that that is so attractive, that the willingness to really make sure the deal is the best deal for the highway users who pay for that investment could be lost in the shuffle. And I just think there should be some care and oversight from folks to make sure that that doesn’t happen, because I think that’s a sweet deal

If I was the governor and someone offered me $5 billion, I would take that money, and as the—I would like to do what Mitch Daniels did and invest it in roads. But I think a lot of other folks will find other uses for that money, and I’m concerned more deals will be like Chicago than Indiana. I don’t know about Pocahontas Parkway, though.

Patrick Jones
Executive Director, International Bridge, Tunnel and Turnpike Association

I’d like to address that question as well. What I would like to suggest is that the significance of the Chicago Skyway deal and the Indiana toll road deal, I think, is often misinterpreted or neglected. I would say the significance of those deals is that states are recognizing that they had a severe and growing shortfall in funding for their transportation system. For everything.

So the real significance is, the wakeup call that we recognize that the economy, the economic system of this country, rests on our transportation system. There’s a lack of funds, there’s deteriorating infrastructure and growing congestion, and states are looking for ways to solve those problems. What these asset leases represent is a way forward to move beyond some of these problems.

One other point I would add about this. You, Patrick, with your question, you really pull on the spaghetti when you—you can’t move one piece of spaghetti without disturbing all of the other pieces. And these deals that we’ve seen, these initial deals that we’ve seen, I would compare them to, say, the difference between a child who’s 11- or 12-months-old taking his first steps and somebody who’s 30 years old walking. There’s a very big difference to how those two people walk.

And we’re just in the very early stages of implementing and exercising these asset lease deals in the United States, and five years from now, they probably will look completely different. And we learn along the way. And cities like Chicago and states like Indiana and others will learn how not only to create a public service that provides a road and provides mobility, but also a way to protect the investment that they get from the lease of that facility.

So I would just suggest we’re in the early stages and we have a lot to learn and more experience to gain.

Alexander Tabarrok
Research Director, The Independent Institute

We have time for one more question before our break. Go ahead. After our break, Greg, I noticed we have D. J. Gribbin who’s director of Macquarie Holdings, so we’ll hear a lot more, I’m sure, about these recent deals.

Audience Member

I have one question for the panel in general, and that is, when I look at the (inaudible) that Mr. Roth talked about in his talk about, he mentioned the Dulles rail system as being wasteful. My question really is, is the pricing mechanism you talk about in your book and also in general for building more lanes or additional highways, is that contrary to the Smart Growth movement? Because the Smart Growth movement appears to emphasize—in fact, has emphasized—location of people, condominiums, housing, workplace environment near a Metro station.

So, it seems that this is going in opposition to that and if so, I have another question related to that, and that is if you look at—I think it’s called the Transaction 30 Plan, put out by the (inaudible) council of governance, and they have in that plan many rail projects, one of which is the Purple Line as has been discussed (inaudible) Maryland between Bethesda and New Carrolton. Now would something like a private turnpike be appropriate? I think, Mr. Klein, get a little to talked about the issue that—I’m sorry, it was Mr. Cohen. You talked about the issue that private roads are only appropriate for certain (inaudible). So if you can address that. So those are my two things.

Greg Cohen
President, American Highway Users Alliance

The thing about Smart Growth is it really depends on who’s defining it, and I think there are some folks who believe that Smart Growth—I mean, the idea of Smart Growth, of course, is investing in already-populated areas and trying to direct your new facilities, and your expansions and capacity, and your growth in housing, and your growth in transit in areas that are basically dense areas with high populations and to encourage densification and high populations.

Now, to some extent, there are folks within the Smart Growth movement who would say that new highway capacity within those areas is appropriate because you’re putting a lot more people into a denser area. There are also, of course, groups—probably more and more so—among the Smart Growth folks that say put everything but roads into a Smart Growth area in order to change people’s behavior.

I don’t think that these policies in general—what we’ve been talking about today—really have anything to do with it in that we’re mostly talking about roads that exist over in rural or—the congested areas, but typically routes that are in and out of cities, and not necessarily what could be the next stage, which would be congestion pricing à la London style where you’re basically pricing everybody on city streets. I think we’re mostly here talking about highways, so I don’t think it relates exactly directly.

As for whether or not it would be appropriate to invest private toll road revenue into a Purple Line or a Dulles rail, I would oppose that because this is revenue collected from highway users and should be spent to benefit highway users, and that’s where some of the folks who are opposed to the Dulles rail project have great objections to raising Dulles toll road tolls to pay for a system used by other people to use the rail, and generally, a very small minority of the people that would be using it. So, to me, I would oppose the reuse of revenue from toll roads for non-road purposes.

Gabriel Roth
Research Fellow, The Independent Institute

May I just comment on this? I’m not smart enough to discuss Smart Growth, but as far as the Purple Line is concerned, if one had an express toll way on which one could have high frequency buses running, one could get an excellent public transport system at virtually—with the toll payers paying for it, so at very little cost to public funds.

And the same with the Dulles extension. I don’t think anybody in this panel is against public transport. The argument is that well-appointed buses, running at high frequency, being able to go non-stop from one place to another, would provide superior public transport. The fact that it costs much less is something we don’t talk about because we know that if a project costs less, it is considered to be less attractive, certainly by government.

Alexander Tabarrok
Research Director, The Independent Institute

Let me very briefly, just to add to that. Comparing the Metro lines I think is an interesting comparison because the whole schema there has been to create a hub and spoke system, assuming that everybody is going to want to come out from the suburbs into DC. Well, in fact what has happened is you have suburb-to-suburb commuting. People want to go not from Maryland to Washington. They want to go from Maryland to Virginia, and what they’re having to do now is to come in all the way on one highway, come into DC, and then go right back out again.

And so, a big problem is that the investment which has been made in the Metro is not conducive to the way that people actually want to travel, while with a more profit-oriented private system, people have a greater incentive to build a commuting network which people actually want to go from A to B. Build it between those two points.

Okay, that will conclude our first panel. Please help yourself to some food and we’ll begin our second panel with D. J. Gribbin from Macquarie in just a few minutes. Thanks.


Session 2

Gabriel Roth
Research Fellow, The Independent Institute

Well, the first speaker in the second half of this conference is D. J. Gribbin, division director of Macquarie Holdings, who are, I think, the main people now involved in the private financing of our toll ways. I’ve known D. J. for a couple of years since the time that he was chief counsel in federal highways, and always admired the clarity in which he put his points. And he will explain to us what are the advantages of the private financing of highways and how is it that the private sector can get more value from roads than a state highway department. So please join me in welcoming D. J.

D. J. Gribbin
Division Director, Macquarie Holdings

Good afternoon, everyone. Thank you for having me. Thank you, Gabriel for inviting me to this great gathering. This is very, very timely. Right now, there are a whole series of projects that governors and legislators are considering across America, and one of the public policy issues that’s being bandied about is should we involve a private sector participant in this or not.

And so what I’m going to do is really focus on—I’ve heard a little bit about private-public partnerships. Some of the value they add. The great need that’s out there. The importance of connectivity. And what I’m going to do is focus really particularly on concession agreements and the value that concession agreements add.

There’s a fair amount of opportunity out there. These are articles that were written. I know we’ve talked a little bit from a financing standpoint that Greg talked about in the last panel of Indiana and Chicago deals. There’s actually also a broad gap, not only in how those dollars were invested, but in the politics around those deals.

Chicago, a $1.8 billion deal, is down here. Probably the very best deal ever in Chicago’s history. From the Chicago Sun Times. Mayor Daley was a hero of the people. He had solved all these societal problems by essentially unloading a failing asset onto the private sector.

Indiana was a little bit different. Beth and I were talking. Her family’s from Indiana. Not overwhelmingly popular in the state of Indiana. Driven primarily by the public’s—we were talking about public ignorance before—the public’s lack of understanding of the property rights the concessionaire has in the facility and the fact that it’s owned by foreigners. Interestingly, it was the number one concern Indianans—Hoosiers—had about this transaction. Macquarie is an Australian company. Partner Cinta is a Spanish company, so you have this Spanish-Australian.

There were literally letters to the editor worried that once these foreigners took over the road, we would harbor terrorists that would then blow up the bridges, which would be interesting, because at that point, they would be our bridges that were being blown up. My point to Beth was actually if we were harboring terrorists, they’d blow up competing bridges, not our own. Is this like being taped? (laughter) Now I ask myself, is this on the record?

Let’s go to the next slide.

Public-private partnerships. When I started doing this about 10 years, I worked for Koch Industries. If I did a map of the U.S. and states that were pursuing public-private partnerships, there would be two states, really, Virginia and California, and now you can see that’s filled in. The purple are the states that I speculate next year, and their state legislative sessions will pass legislation allowing for these. There is a one-to-one correspondence between those states and states with existing toll facilities that are very valuable.

We can go to the next one. Opportunities for revenue are relatively limited.

Go the next slide. Let me talk a little bit about how concessions work, because in Indiana, there was a lot of concern about somebody not the public owning these facilities. I think, first and foremost, concession agreements are long-term leases, so Macquarie does not own the Indiana Turnpike. We have a long-term lease. That lease is subject to a concession agreement. A concession agreement is a 200-page document that dictates everything from what tolls we can raise all the way down to the number of hours we have to clear snow off of the main lane, which is four, the number of hours we have to clear snow off the shoulders, which is eight.

So it’s very prescriptive, very detailed, but it is performance-oriented, so we’re not told how we have to clear snow. We’re just told that snow has to be off of the main lane within four hours of it falling.

So the public sector’s role is really kind of setting the agenda. What does the public sector want? What do they want the toll rates to be? How long do they want the concession term to be? What are the maintenance requirements? What conditions that the facility has to be returned back to the public? All of that’s determined by the public sector. Our job as a bank is really to help the public sector understand the value of those different decisions.

So, Indiana, for example, was thinking about doing a 50-year concession. We pointed out the tax depreciation rules may or may not apply at 50, but certainly would at 75. They opted to sort of capture the value of the private sector being able to depreciate the asset and made the concession term 75 years.

In addition, the concession term for—when saying the concession term, you want it to be long enough that the private sector views the asset as an owner and not as a renter, so that we’re incentivized to treat that the same way that the public sector would.

So what are some of the key things concession—we’ve talked about tolling schedule. There are a number of inflators that can be used to increase tolls to keep track with inflation. The state of Indiana actually has—it’s either 2 percent CPI or GDP per capita, whichever is greater, and that’s how we value that asset.

Now, Greg touched earlier on non-compete clauses, and these are relatively controversial. There was a project down in California, SR91, one of the very first public-private partnerships in America on a highway in the modern era. And basically, that agreement said that we the private sector are going to invest in new lanes, but you the public sector can’t build free lanes right next to our investment.

Unfortunately—or fortunately, depending on how you look at it—that road runs through a valley and there really, literally, is nowhere like within 40 miles either direction to build another facility. So that was a pretty aggressive non-compete clause.

What you see now is non-compete clauses that essentially say if the public sector builds a competing facility, they can do that. They just need to reimburse the concessionaire if it wasn’t foreseen in the original concession agreement. So, for example, in Indiana, the public sector can—if the public sector builds within 10 miles of the Indiana toll road a facility that’s interstate quality, that’s more than 20 miles long, then they need to compensate the concessionaire.

In essence, what that is, is that we’re going to cut a deal that’s based upon our guess of what the state’s going to build over the life of the concession, in this case 75 years in Indiana. If the terms of that deal are fundamentally restructured, then we ought to be compensated for that. But in that case, no one in Indiana in their wildest fantasies ever envisioned building something that would be a competing facility, so they’re not really giving up anything.

Other things are revenue sharing. The Pocahontas Parkway was mentioned earlier. That facility has a revenue-sharing component because a lot of people, when they look at these deals—and I think Greg, to your point, pointed this out—there’s a little bit of a misalignment of incentives if you have an executive that’s in office four, maybe eight, years, and a business deal that lasts 75, 99, so the public’s a little bit uncomfortable with that, understandably, so some of these transactions will have revenue sharing. So if there is a massive upside in out years, the concessionaire would share that with the public sector.

What to do with existing employees is a big one. In both Indiana and Chicago, all turnpike employees were guaranteed employment afterwards by either the state or the city, and in maintenance requirements.

There is a concern that I think is ill-founded, that the private sector owns this, will maximize profitability by letting the conditions of the road run down. That doesn’t make sense from a business standpoint or a customer service standpoint, but these maintenance requirements give us a legal obligation to keep them in good shape.

Now, the big question is—and Congress had a hearing on this several months ago at which I testified, and literally, every member was, “Well, why can’t the government just do what you guys do?” I mean, I’m not making that up. They really asked that question. Why can’t the government operate these facilities as efficiently as the private sector?

And this slide is sort of designed to demonstrate the additional value. Both the Chicago Skyway and the Indiana toll road, the city and the state did the right thing, which is they went out and they valued that asset, and they said, okay, what could we borrow against this asset? In both cases, it was roughly half of the payment they ultimately received, so in other words, that asset was twice the value—or close to twice the value—of what they thought it was.

Where does all that additional money come from? There’s an economist Hernando De Soto, who some of you may be familiar with, that wrote a book called The Mystery of Capital, and I think this sort of situation is somewhat analogous to that, in that—and he’s talking about poverty in the Third World—and he points out that there’s a ton of investment that impoverished people have, but they invest in their homes. They have no clear title to that home, and so therefore, it’s not liquid, they can’t borrow against it, it’s hard to sell it. And so that capital essentially is—he calls it dead capital, or it’s captive capital.

Similarly to a toll road where the public sector and toll payers have a large investment in these facilities, the facility that so far has been demonstrated to be vastly more valuable than what they’re getting out of it, and by just having someone else value that, you’re able to release that captive capital. I mean, right now, the only people valuing the facility is the state.

I tell my friends who are heads of state DOTs, I mean, if you had a project and you bid it out and you get one bid, would you accept it? Well, no. You want multiple bids. Why? Because if you get one person just valuing that, you’re not going to get a very good deal. What concessions, in essence, allow is for multiple parties to value this asset, and not surprisingly, the asset comes out to be more valuable.

So, I’m not going to run through all these different layers. Let me just go to the next slide, because what I really want to focus on is kind of the financing of it and how a concessionaire, from a financial engineering standpoint, is able to squeeze more value out of these assets.

If you look at—this is sort of a traditional tax-exempt bond (inaudible), very simple chart. In essence, you’ve got that revenue line, which is the top line. You have the amount of money you can borrow, which is the blue box, and on top of that, you have your debt coverage. So the municipal bond community is not going to allow you to borrow all the way up against your revenue line, because revenues may go down, so they want a layer of insurance that things are going to go the way that you say they’re going to go, and so you have this debt coverage ratio on top of that.

One thing I want you to note, the toll here, I assumed like a toll $2. We’re going to raise about a hundred million under standard debt financing. Now we’re going to go to—you can go to the next one, Ike.

This, in essence, we did on Chicago Skyway and Indiana toll road. Several things happened. First of all, we replaced the debt, which was tax-exempt bond debt with bank debt. These lenders are a little bit more aggressive in their lending, and so you’re able to get more borrowing from them.

We replaced the debt coverage ratio with equity. Now this does a couple of things. So this is Macquarie, in this case. Money went into this road and it helps the banks lend more to the facility. Why? Because if that revenue line dips below where we say it’s going to be, who gets hurt first? We do. So they’re much more comfortable lending in this scenario.

And then not insignificantly, that dotted line is, we’ll take a slightly different point of view of where revenue growth is going to go over time. And so what you have is instead of the hundred million, where it says raises in the top right-hand corner, instead of a hundred million, you raise 160, because you’re capturing all of the greenish-gray area that says equity, and we’re capturing that gray part above there.

Now, this model has been used twice for existing facilities. It’s also been used—we’re currently in the process of building a new facility out in San Diego. This model can also be used to lower tolls, so some of the criticism of our concession models is we’ve got these inflators and tolls are going up. Is that fair to users? So we can go to the next one.

Here, similar to the first model, we need to raise $100 million. Let’s assume the government needs to raise $100 million. Instead of doing a traditional tax-exempt muni-bond financing, we’re going to use a concession model, and instead of our toll being $2, we can now have a toll of $1.40. And in essence, what this does is, using the concession approach, we can take projects that are not financially viable and build them. We can raise the money that’s needed to actually open the project.

So we’re in the process—not surprisingly—of talking to a number of states about how they can take what they thought were non-viable projects and get them built using the concession model.

So finally, (inaudible) some of the concerns that there are with concession agreements. I did a kind of David Letterman countdown. So we’ll start with number six, concessionaire will go bankrupt.

OK? This is actually the best of all worlds for a government entity. We invest a ton of money. They get all the money. We go bankrupt. They reconcession the road. This, for that reason, would never happen. Lenders would step in. They would take over. The lenders are not about to allow a revenue-generating facility to go into the state’s hands when it could be repaying back the debt.

So although, I think, from a kind of instinctual standpoint, it makes sense to worry about the financial solvency of the concessionaire, in practice, it’s not really—should be a worry.

Number five. We’ll sell to a sleazy operator. Okay. We like the guys from Australia. They do all the shrimp on the barbie thing. We like their beer. All good. But what if they were to sell to somebody who really is an unsavory character that we don’t trust?

And there, all these concession agreements, the government entity has to approve any transaction that involves shifting the property rights of this to somebody else.

State will lose toll revenue needed for maintenance and repairs. This came up in Indiana, actually. People were quite worried about it. Okay, we’ve got the Indiana toll road. If we give all the toll road money to the concessionaire, what will we use to repair the facility? Completely missing the point that the concessionaire is responsible for maintaining the facility, to the point of not only maintaining it, but we have to expand it over the course of time. If there’s congestion, we have to make a whole series of improvements. In effect, in the next four years, we’ll spend about $300 million under the concession, and over the course of the concession, spend close to $3 billion improving the facility.

We will fail to repair the facility. I kind of touched on this before. Again, the concession agreement doesn’t allow us to do that. Now, any agreement is only as good as its enforcement, right? So, okay, we’ve got this great contract, but what happens if we don’t obey it? Essentially, we have a period to cure, and then after that, we lose our $3.8 billion payment, so that’s a pretty good incentive to keep us in line.

And then, we’ll raise tolls through the roof. Legitimate concern. Concession agreement governs how we can raise tolls, and, so again, the public sector decides that.

The final number one concern, government will squander the concession payment. I think Greg touched on that. Not really much we can do about that, but I think it’s a legitimate concern.

So with that, I’ll wrap up, and pass on to my panelists. But thank you again, Gabriel, for having me.

Gabriel Roth
Research Fellow, The Independent Institute

I mentioned before that D. J. was chief counsel to the Federal Highway Administration before he moved to the private sector. He was succeeded at HWA by James Ray, who will now give us the government’s view of these sort of concessions. Jim is a member of the North Carolina Bar Association. He received his law degree from Georgetown University, and he earned his Bachelor of Arts degree with a major in history from the University of North Carolina at Chapel Hill. Join me in welcoming Jim Ray.

James Ray
Chief Counsel, FHWA, U.S. Department of Transportation

Gabriel, thank you very much. It’s funny. I find myself following D. J. at a number of these things, so I follow him not only professionally but also at these types of things. I haven’t met most of you. I look forward to doing so. It’s always exciting to come to events like this and find people that are interested in the same things that I am.

This is an exciting time to be at the Department of Transportation. We’re preparing for new leadership, and in a lot of ways, we’re preparing for a new purpose. Before retiring this past summer, the longest serving secretary of transportation, Secretary Mineta, identified congestion as the single largest threat to our economy and announced a new initiative to fight it. I think Gabriel actually outlined some of the highlights of it in the flyer for this. Secretary Mineta recognized that congestion in our ports, in our skies, on our rails and on our roads is a problem that we can’t afford to ignore any longer.

As we celebrate the 50th anniversary of the interstate system, it pays to reflect on how we arrived at this point and to consider where we need to go in the future. We should applaud our predecessors, because the interstate has provided us with the means to develop the world’s strongest economy and to provide our citizens with an unparalleled quality of life.

In 1919—this is probably going back a little further than you all expected—a young Army officer by the name of Dwight Eisenhower took part in a transcontinental convoy. Looking at these pictures, I can sympathize—I hope you all can—with the frustrations that he probably felt. At the time, our roads were barely passable and the country was largely disconnected.

As president, Eisenhower pressed for a plan to create the interstate highway system. At that time, connecting America’s cities and towns was the big issue, and the interstate system did that better than anyone could have imagined.

But over the last 20 or so years, congestion and capacity problems have increased dramatically, resulting in an interstate system with the equivalent of a bad cholesterol problem. If not addressed, the problem will lead to a transportation heart attack.

Consider this. Since 1980, our GDP has more than doubled. During this time, vehicle miles traveled and truck freight miles have increased about 90 percent. Unfortunately, road miles built has increased a mere 3 percent. Capacity has not kept pace with demand and the system is under incredible strain.

Just sitting in gridlock, Americans lose 3.7 billion hours and 2.3 billion gallons of fuel annually. When you look at the economy as a whole, congestion costs us about $200 billion a year. Worse, congestion is affecting our quality of life by robbing us of time that could be spent with family and friends.

And the problem is spreading faster than we realize. National trends show that congestion in medium-sized urban areas trails cities by about 10 years. What this means is that citizens in Birmingham, Alabama, could expect their congestion in 2013 to be as bad or worse than a city like St. Louis. Drivers in St. Louis lose about 38 hours a year to congestion.

And take a look at Washington, D.C. According to the Texas Transportation Institute, Washington ranks second among the 13 largest urban areas for hours lost to congestion, with an annual delay of about 72 hours per traveler each year.

Next slide. Congestion harbors a hidden tax that hits us all in our wallets. The fuel and time we waste—and this is us in DC—sitting in congestion costs us more than $1,000 each year, and when you consider that this figure was calculated using 2003 data, when the retail gasoline has doubled since then, almost, the actual number is probably much worse.

Next slide. That’s why during National Transportation Week, Secretary Mineta announced the department’s six-point plan to reduce congestion. The national strategy to reduce congestion suggests that congestion’s not an inevitable byproduct of economic prosperity, and targets the department’s resources, funding, staff, and technology to reduce congestion across all modes.

While we don’t have all the answers at the department, our plan does contain some of the tools we think will be helpful. In a nutshell, the plan attacks congestion by focusing attention on our urban centers—David Horner is here. He is a co-team lead and heads up that effort—encouraging greater use of public-private partnerships to meet our transportation challenges, promoting operational and technological improvements, establishing a Corridors of the Future competition to accelerate development of nationally significant transportation corridors—it’s the element that I had up. I hope you’ve all read our Federal Register news—targeting freight bottlenecks and investing rail policy in Southern California, and speeding up aviation capacity projects, and identify future funding.

But the real hurdle to fighting congestion is recognizing that the way we finance and manage projects is going to have to change. State budgets are stretched thin and gas taxes are becoming increasingly unsustainable. In fact, when we estimate that the Highway Trust Fund will become insolvent by 2009—I’m sorry. In fact, we estimate that it’ll become insolvent by 2009. CBO has a slightly more rosy outlook on life. They think it’ll be 2011.

The solutions to these problems are not going to be found in raising the gas tax, but rather in harnessing the private sector investment innovation that has completely changed other industries and other networks. I’m convinced that we can do this in a way that promotes efficiency, but protects the public interest.

A growing number of states are recognizing PPPs as the best vehicle to invite private equity and know-how to the table for better system management and cost containment.

The benefits of PPPs go beyond faster delivery and greater cost containment, though. P3s can free up state dollars for competing priorities including critical but unfunded transportation products. Private dollars are drawn to the portions of the transportation network where unmet needs are the greatest, and when planned carefully, PPPs can utilize pricing to improve operational efficiency of existing capacity by maximizing vehicle through-put.

Although we’ve been experiencing with P3s for years, we’re seeing an increased interest in development of new and innovative ideas. Today’s P3s are falling into one of three categories, long-term leases, reconstruction and operation of existing facilities, and construction and operation of new facilities.

Two of the better known P3s—my colleague here, D. J., has already mentioned—are the Chicago Skyway and the Indiana toll road. Both of these leases were leases to operate existing facilities. Under this type of P3, states and cities are able to convert infrastructure liabilities into assets.

A common concern about these deals is that Indiana and Chicago may have leased away their most profitable assets and thereby foolishly given up future revenues. I couldn’t disagree with these types of concerns more.

Under public control, toll roads go years without toll increases due to a variety of constraints. Under private stewardship, tolls will be increased incrementally year-to-year. I think these increases are a good thing because market-based tolling will manage system performance and healthy toll revenues will ensure that the facility is properly maintained. I think the citizens of Chicago and Indiana are going to grow to appreciate their new operators.

Another closely-watched P3 is the Trans-Texas Corridor 35. Here Cintra-Zachry will invest $6 billion to build the toll road between Dallas and San Antonio and pay the state $1.2 billion for the privilege.

However, TTC 35 is part of a larger trend that we’re seeing across the country. In fact, if you look at current highway projects worth $500 million or more—so-called mega-projects—you’ll see that nearly 80 percent of the projects involve tolling and 60 percent involved P3s.

P3s are developing into a great tool for states to deliver their most critical transportation infrastructure, and while a lot of states have laws allowing P3s, only a handful have truly comprehensive laws on the books. D. J.’s map was a little nicer than mine.

Those states with the most comprehensive authority, Florida, Indiana, Texas, Utah and Virginia, have had the most success attracting private partners. Unfortunately, the overwhelming majority of state statutes are either silent on the issue or significantly restrict the scope.

Secretary Mineta dedicated us to reducing congestion and finding a new approach to the way we manage highways. So what I’m here to tell you is that we at the department believe PPPs can and will play a major role in reducing congestion in America, and we intend to promote their consideration and use at every turn.

The congestion initiative includes the specific effort to remove barriers to private sector investment, and private equity markets have responded. Major financial institutions and their clients are expressing increasing willingness to invest billions of dollars in public roads.

To meet the interest in PPPs, FHWA has created a public-partnership office to assist people who want to explore new and creative ideas about ways to design, develop and deliver highway projects. You can download the manual for using public-private partnerships as well as the PPP report to Congress from our website. But the site also contains studies, a resource library, links to state statutes enabling P3s, and summaries of public-private partnership agreements.

If you believe that congestion is similar to cholesterol and the country’s on it’s way to having a transportation heart attack, then I hope you’ll agree that doing nothing would be the equivalent of having a Krispy Kreme policy to fighting heart disease.

We have to change the way we approach transportation planning and work to create a lean network where people, goods and services can effectively move. After all, clogged highways and gridlocked traffic was not the vision of President Eisenhower, and it certainly wasn’t the secret to us becoming one of the world’s strongest economies.

The good news is that SAFETEA-LU created some new opportunities for us, increasing flexibility for tolling, expanding eligibility for TIFIA loans, and giving us $15 billion in private activity bond authority. These Innovative financing tools can attract private sector investment, and the department’s pursuing an ambitious schedule to implement them.

Next slide. We also issued a notice earlier this year summarizing this year summarizing information on non-grant tolling and pricing opportunities in SAFETEA-LU. These include the Interstate System Construction Toll Pilot Program, the Express Lanes Demonstration Program, an authority for states to convert HOV lanes to high-occupancy toll lanes, as well as the reauthorization of the Interstate System Reconstruction and Rehabilitation Pilot Program and the Value Pricing Pilot Program.

Additionally, some of SAFETEA-LU’s changes to the environmental processes will improve cooperation between state and federal agencies and offer a degree of certainty that didn’t exist before.

Next slide. President Eisenhower’s vision was for a free-flowing system of roads connecting America, but we as a department and we as a country have to stay vigilant and innovative to keep that vision alive. President Eisenhower said when he introduced the interstate system half a century ago that the interstate system was a journey and not a destination. I think congestion’s presented us with a bump in the road and we’ll have to work to continue that journey towards a free-flow system. Thank you.

Thomas Downs
President, Eno Foundation

The first thing I wanted to say was that I’m a supporter of privatization. I’m also a believer in value pricing and tolls pricing, having served as the president and CEO of the largest toll authority in the world, the Tri-borough Bridge and Tunnel Authority, which produces about $1.2 billion a year worth of toll revenue in the New York City area.

There are some things about this system—I used to have a saying for some of my staff that facts won’t set you free, but they sometimes help. And part of understanding this issue of both privatization and revenue flow, it’s important to understand a couple of key characteristics of the nation’s highway system.

One of the ways that we measure highways is the center lane mile, not the number of lane miles, but the center lane miles of highway in the United States. Anybody want to take a quick guess at the total number of highway miles in the United States?

Audience Members

Three million?

Thomas Downs
President, Eno Foundation

Four million centered lane miles.

Anybody want to take a guess at the split between urban and rural? Three million, one hundred thousand rural miles of highway.

That leaves 888,000 urban miles, and urban in this definition from the Federal Highway Administration, its census, is a town of above 5,000 population, according to census, or a region with a population of more than—a collective urban region of more than 50,000 population. So that’s every place in America that we think of as a city or a town.

Of the total miles in the United States, 44,000 of those miles are interstate, and of those interstate miles, about 20,000 could have, by one factor or another, are totally rural. Another 10,000 miles have some serviceability between urban areas or in urban areas in the United States.

If you think about then, how miles of travel are broken up within the highway system—vehicle miles of travel, which is all travel, automobiles, buses, trucks, everything that moves on a highway—there are 2.7 trillion vehicle miles of travel. This is, again, FHWA, and this is 2001 data, which is the most current that I could find about total travel. Two trillion, seven-hundred-ninety-nine billion vehicle miles of travel in the United States in 2001. 1.1 trillion of that was rural travel. 1.6 trillion of vehicle miles of travel was on urban roads, so that it’s roughly—40 percent of travel is rural in America and 60 percent is urban.

If you think about where the money comes from for roads in America, anybody want to guess what percent of road revenues comes from gasoline taxes, total state and national? 34.8 percent. This is again, 2001 highway data. That includes all revenues, and the total amount spent on highways in the United States by governments—federal, state, city, county, township—is 132,874,000,000 a year in 2001.

Tolls of that revenue is less than $6 billion of the $132 billion, and a billion of that six was from the Tri-borough Bridge and Tunnel Authority in New York.

The remainder of the funds for supporting highways in America comes from property taxes, 4.8 percent, other taxes and fees, 5.6 percent, investment income and other receipts, 5.8 percent, bond issue proceeds, 9.5 percent, and general fund appropriations, 15.5 percent of the total amount, or some $25 billion a year.

Thinking about road pricing means having to grapple with some issues that we’re not being very crisp about. Crispness is taking a look at what is going to be displaced and how you actually price roads about their total cost, not just substituting for the gas tax revenues around certain corridors. So it’s important to keep in mind that fact that just over 55 percent of the road financing in America comes from gas taxes, and the rest of it comes from other general fund taxes, and that’s a choice that we made over the last century for a variety of reasons.

One of the things that struck me about the issue around toll roads, and the last century, and why they died out, if you think about maybe 25,000 miles total over all time in the United States about toll roads, and then having four million miles of road in the United States, the opening of the American frontier, the expansion during the Industrial Revolution, the need to have farm-to-market movement of goods, the struggle for America to become competitive in a global marketplace through the Industrial Revolution meant that we invested a lot of public funding in roads at all levels because it was just an absolute necessity to have the plant and infrastructure to be the industrial dominant country that we became, and we did that with mixed funding.

Tolling and pricing fits within that mixed funding, but it is not a panacea, and the order of magnitude of need in this environment is so overwhelming that it is easy to get lost about this being a quick and easy solution.

Roughly speaking, if there is $132 billion going into road funding, most folks say that that is underfunded by about $50 billion a year, roughly, if you’re going to account for depreciation, population growth and economic growth in the United States.

So, we already have $132 billion. We need $182 billion. Let’s look at an assumption that over the next 15 years, we could double the contribution that tolling and road pricing makes to highway funding. It would be 8 percent of the total amount, and we could probably get to $10 to $12 billion a year worth of road pricing for filling this void that we are creating by not funding road networks.

Current funding is becoming much more difficult because the gas tax proceeds, according to CBO, if you just look at gasoline tax and not the excise tax proceeds, are stagnant to slightly declining right now. That means that our capacity to even fund the existing highway program at the national level is running out of gas.

If you look at the largest change in state and local revenue going into financing highways—anybody want to guess which category of funding is the fastest-growing over the last five years?

Audience Member

(inaudible)

Thomas Downs
President, Eno Foundation

Nope. Dept. A 93 percent increase in debt at the state and local level over the last five years, which means that nobody’s actually biting the bullet about funding this gargantuan asset, this physical plant asset that we’ve got.

We’re mixing a bit, apples and oranges here. We’re talking about road pricing and public-private partnerships without being crisp about what the purpose is—the public purpose. We’re not being crisp about how limited at times that can be about the going forward over our generation about funding this asset, although it is important, and in some markets, it may be critically important. And we’re also being a little fuzzy about another issue that was touched on a couple of times, and that is the ability to have congestion pricing be a realistic solution to congestion,

The London experience about road pricing for congestion management purposes showed that you can get about a 25 percent—in some cases, up to 30 percent—increase in flow of vehicles and goods through London as a result of the pricing. Anybody want to take a guess about how many urban areas it would take to add up to 80 percent of the congestion currently experienced in America? Fifteen? Fifteen urban areas in the United States account for just about 80 percent of the congestion in the United States, and that’s people and goods. And it’s a drag on the American economy, it’s a drag on air quality, it’s a drag on energy consumption.

We’re not properly pricing that access. We’re reluctant to tackle this because it’s only 15 areas, and, my God, you’ve got to spread this stuff around if you’re going to have a politically viable agenda in the House and the Senate. We’re not there yet about being really focused about one of the most powerful tools about dealing with congestion, and that is road pricing.

The other is that there is an internal set of subsidies that have been going on about the road program for all of our lifetime, and it’s a legitimate set of subsidies, but hardly anybody talks about it except in terms of donor and donee contributions to the Highway Trust Fund.

All of our investments, from the very beginning of our expansion westward, have been about national needs. After all, this is supposed to be the United States of America. Those investments were supposed to be about expanding the financial and business and mobility capacities of the United States.

We recognize that urban areas often subsidize through revenue the access in rural areas. We often recognize that gas taxes created in urban areas go to rural areas for a whole variety of reasons that make a lot of economic sense, farm-to-market, movement of goods, movement of people, access to resources, timber, coal, everything we need in America has to travel someplace, and we have always been able to rationalize those.

Road pricing without some recognition of the internal subsidies will be a limited marketplace unless we recognize those internal subsidies about urban and rural as legitimate, and that is, as well, urban states versus rural states as being legitimate, and that capturing within a corridor all of the economic value of that corridor potentially means, in places like downstate Indiana, at times, the concern about, hey! We’re still down here! What about us? And the fear of being left behind.

Those are government functions and it means that this set of decisions is always going to be legitimately embedded in the political process.

There’s a wag who made the comment in the Chicago Tribune that it wasn’t exactly a profile in courage for the city of Chicago to sell the Skyway when 80 percent of the users are citizens of the state of Indiana. It wasn’t that difficult for the state of Indiana to sell the Indiana Toll Road when 60 percent of the revenue came from out-of-staters. And those potential targets are very low-hanging fruit.

This whole issue needs a better set of rationalization. It needs a better structure for internal equity. It needs a better rationalization if you’re going to price for congestion and road pricing, what the alternative investments are that do not force people out of the system or don’t leave you defending a regressive pricing structure that has no alternatives, because it will become very politically difficult to implement.

One of the things that they learned in London was they had to create alternatives for the 20 percent of the people in London who abandoned going into central London by car every day. If you couldn’t go by car, you had to go some way. They had to link that with transit access in order to have congestion pricing actually work.

They could do that because they had a specific purpose beyond simply pricing. They had congestion reduction, or in some cases, economic survivability of certain districts about the ability to receive commercial goods. The entire retail sector couldn’t actually get access to downtown London during the course of an 18-hour day.

The purpose part of this and its economic internal subsidies and social equity are critical parts of having a well-thought-out approach to road pricing, and I don’t see it yet. But then, it’s early in this game. The next generation of political decisions, though, will depend on exactly that more nuanced framework. Thanks.

Gabriel Roth
Research Fellow, The Independent Institute

Ike is the principle economic adviser for Senator Arlen Hatch. Prior to that, he was chief economist for the Joint Economic Committee of Congress where he worked on congestion pricing and road financing. He has also been an economist for the Office of Management and Budget, and associate professor of economics at the University of Wisconsin, Oshkosh, and Indiana University. He graduated from Augustana College and Indiana University. Ike, come and tell us the worst.

Ike Brannon
Principal Economic Advisor, Office of Senator Orrin Hatch

Thank you very much, Gabriel, for that introduction.

First of all, I have a couple of small-town comments for Tom and D. J. I actually went to graduate school, as I said, for an exceedingly long period of time in Bloomington, Indiana, and there was another issue almost 20 years ago about foreigners coming in and taking over. It didn’t have to do with roads. It had to do with the lottery.

And what happened in about 1990 or 1991, the word went out that a group of foreign investors were buying up as many lottery tickets as they possibly could in order to corner the market on lotteries. And this became, believe it or not, a front-page headline of the Bloomington Herald-Telephone every day for period of weeks. And I’m convinced what made it a big-time headline were two words that went together, foreign syndicate.

I mean, syndicate just has—it just has this terribly negative connotation, and whenever—you know, I still look at the Bloomington paper and the Chicago Tribune, of course. I’m a Midwestern person. And whenever I read about your deal on the Skyway and the Indiana toll roads, the two words that I always saw were foreign syndicate. So what we need to do is ban the word syndicate from the English language, and I think you guys would be much better off.

And my one thought listening to Tom talk—and other people brought this up about the lack of kind of downstate support in Illinois and Indiana for these tolling projects, as they see it only having possibly any impact or benefit to people in big cities. Actually, the reverse happened in Wisconsin. When I was living in Wisconsin, of course, there was the planning for the rebuild of the Market Interchange, which is where Interstate 94 hits Interstate 43. That goes all the way up to Green Bay. And our good friends Kevin and Susie came up with a plan to totally privatize this thing. And of course, the predictable opposition came to them. How dare you do this? How can you take this? And, of course, it became—it first it was in Milwaukee, and initially you saw the Madison paper write about how terrible a thing this is. And then quickly, of course, all the small towns like Oshkosh, Wisconsin and Appleton and Green Bay figured out, look, if this thing is privatized, there’s so much more money that’s going to be made available for all these other projects that are outside of Milwaukee, and if they don’t do that—the Milwaukee interchange is so massive, the cost that they were projecting was going to suck up every single excess dollar of transportation funds.

So what you saw very quickly, the downstate, non-big city rest of the state dynamic was totally reversed from what you saw in Chicago. It was the people in small towns who were adamant that this thing needed to be privatized.

But the gist of my message is that I think the political exigencies of the time are going to require that we look much, much harder at that, and I say that, not because I’m spending a lot of time studying transportation these days in the Senate Finance Committee. I’m not. But I’m studying other issues that I think are going to tie the hands of policymakers in wanting to spend more money on transportation.

Next slide please. I think the biggest problem we have facing us in terms of economics, in terms of fiscal policy, is this gigantic structural deficit that we have in the United States. And by structural deficit, I mean the promised benefits we have made in terms of Social Security, Medicare and government pension obligations compared to the taxes that we have dedicated to those benefits that are going to be coming in from today on into infinity.

The GAO estimates that that deficit is—the present value of that deficit is a staggering $61 trillion, and other economists believe that that’s actually substantially understating it, that it might be more closer to $70 trillion. And what’s more, every single year, as we have more and more people enter the ranks of the retired and people live a little bit longer, that deficit, that structural deficit, increases by $2 or $3 trillion a year.

Next, please. And again, keep in mind these are my own opinions. Don’t pin me down as representing anyone on the Senate Finance Committee. But our ability or inclination to deal with this, at least for the next two or three years, is really going to be suspect. Right? The Republicans and Democrats for not just political reasons, but I think for closely held sincere beliefs, have come to an impasse, and I think it’s going to take two or three more years before we really start thinking about long and hard how we’re going to deal with this deficit. But I think people in both parties realize something has to be done in the near future.

I think we know at least one step of what the Democrats would do, and at least one small step, and that is to repeal the Bush tax cuts when they come due in 2011, when they expire, if not before then. But if you look at people who have done the fiscal analysis, that’s not nearly going to be enough to close the gap.

And other sensible proposals—or not so sensible proposals, I suppose, depending on where you’re at—such as removing the cap on the Social Security tax or maybe means testing, to some degree, Social Security benefits, ideas certainly not endorsed by anyone, but have been things that have been talked about. None of those get us remotely close to closing that fiscal gap.

In fact, Jagadeesh Gokhale, a former colleague of mine and a current professor—fellow at the Cato Institute, has done a number of studies, and he estimates that there is actually no tax rate alone that will close our fiscal deficit. If you think about people’s incentives and how they change, no matter how—even if you’re only a moderate supply-sider, and you feel that increase in tax rates only triggers a very small response, still, the amount of tax increase that we would need to see would simply stifle so much effort, and also encourage a lot more evasion, that he believes it simply cannot be done by taxes alone. It’s just literally impossible.

So, given that the squeeze is on, and given that it might be very, very difficult to deal with this in its totality, what are going to be the implications in terms of building roads?

Well, I think one thing is that we’re going to see spending on non-entitlement programs being dramatically reduced. I think the forecast that I’ve seen is that in the next—right now, federal spending is about 20 percent of GDP, maybe just a little bit above that, maybe closer to 21 percent. If we just go on the current trends, and you just project what will happen to Social Security and Medicare based on demographics—and we can project 20 years out for senior citizen programs with some great degree of reliability—that will go from 20 percent to 30 percent.

Our federal government size would grow 50 percent larger and that’s going to create a significant constraint on all non-entitlement programs. And I suspect that roads would be fairly close to the top of the list. I say that, of course, fully realizing the political benefits of building roads. It’s something that’s very tangible. It’s something that politicians are very happy to be able to hand over to their constituents.

And what I’m suggesting is that—well, there’s definitely a political cost to less federal spending on roads, and maybe turning it more over to the private sector. I suspect that in the cost-benefit analysis that this political calculus will change. And I think it’s going to change when people are told that if we don’t go to some kind of tolling, at least for some significant portion of our roads, taxes are going to have to go up considerably.

Also, in terms of political developments, I think attitudes are changing on both sides of the aisle. When I first got to the Joint Economic Committee, very early on, I fell into cahoots with Beth Pinkston who recently retired from the Congressional Budget Office. And one of the things that Beth was really good about helping us out was educating senators and their staff on what congestion pricing is and what tolling can do.

And we would go to—most of the time, we would go to Republican offices, but we went to people on both sides of the aisle. And kind of the calculus that we would often get told by all kinds of people, well, look, we can’t support this being good Republicans, because tolls equals money going to government equals taxes equals bad. You’re a bad Republican for suggesting this. And you’d be amazed at the number of people who just kind of threw this out there.

And in fact, there were Republican activists who took this as their position. And at one point, if you wanted to sign the Grover Norquist pledge, you had to pledge against tolls. To Grover’s credit, once people like Gary Blank, who’s now chief of staff of the Council of Economic Advisors, kind of explained to him and let him know—understand that this really isn’t a toll, Grover and all kinds of people who consider themselves very fiscally conservative started to embrace tolling as a way out of this mess.

And I think the new calculus, political calculus, that some, but certainly not everybody are making on the right, is just as I have that there. Congestion is now an issue that really impacts the family, and that a market for roads, at least from the Republican perspective, is something that should be welcome regardless of who collects the money.

It would be better if you’re a pure free-market Libertarian that that money was collected by a private entity rather than the government, but half a loaf is better than none at all.

And then, I don’t want to denigrate anyone on the left side of the aisle, because I think there have been a lot of people who have done some great work on this issue and have really done a lot to spread it. And Michael Replogle of Environmental Defense I think has been very valuable on the Hill. He communicates very well and has written quite well on this.

But I think one of my frustrations with the battle—with liberals—is that I don’t think they really fully appreciate the environmental benefits of going to something like privatization, and congestion pricing, and something that would dramatically eliminate the congestion out there. Right? Most of our emissions that come from cars come from congestion and something that dramatically reduces congestion would just have all kinds of benefits.

We can talk about it in the context of family because we have more time with our family. We can shorten commute times. But if you talk about environmental, it seems like this ought to be something that the people on the far-right and the people on the far-left can join together, and Lord knows, we don’t have enough of those things.

And I talked about how foreign syndicate, just these two little words can really make something 20 years later kind of blow up on you and make life a lot more difficult. I think Lexus lanes is another example of that. That has just stuck in the lexicon of so many people when they think about this, and if you talk to people like my parents who think about this once or twice a year, that’s the only thing they really know about congestion pricing. And that’s really something we need to overcome.

And it’s interesting that there’s this—the competition about how to present congestion pricing. The poster. I don’t know if many of you have received this. I think that’s a great idea. If—$1,000 is going to be a bargain if there’s some graduate student out there who comes up with a great way to express the advantages of this. We need more of that. I think it was $1,000 well spent.

What else is needed to kind of spread this out there? And, you know, what I point out is that we really more success stories about privatized roads and congestion pricing. And as someone who’s, not only from the Midwest, but he’s from the most Midwestern town in the world, Peoria, Illinois, Europe or California don’t count as the rest of the world. California might as well be somewhere on Mars, and something that works in California has absolutely no relevance in people’s lives in Peoria.

My sister just moved back to Peoria from doing eight years or nine years of her medical training, the last year of which was spent with her husband in LA. And I tell my people just how ecstatic my sister is to finally have left the hell of Southern California and returned back to Peoria, Illinois. And it just astounds people. People are really like that.

And I think one other thing we need besides kind of one great success story that everyone can get their hands on, is we need kind of a fervent advocate of these ideas in Congress. I think one person who was really in a great position to do that, and was doing a great job, was Congressman Mark Kennedy. You know, a smart, energetic guy. And I’m really hoping that things work out, and he might be the person in the Senate. But if not, I hope there’s somebody who’s willing to pick that up, because sometimes it really just takes that one person who’s willing to fight for this.

But in 2009, which is when our next reauthorization bill comes up in the U.S. Senate, I think that there are going to be all kinds of constraints on people, even to spend the amount of money that we’re spending on roads right now.

And to think that we can just increase spending by increasing the gasoline tax, that might just be overly simplistic. It might be a situation where we’re in such a crunch for revenue, and people realize the long-term ramifications of not dealing with our structural deficit, that we need to take some of that money from the gas tax and actually apply it to general revenue. Lord knows, we’ve done that before.

So, anyway, thank you very much for listening.

Audience Member

Well, my question earlier in the previous session was, you can take this position that you can never take the money downtown (inaudible) roads. Suppose you were just in a small city and you applied that position that the price of congestion, got to build further roads in the city. And (inaudible). I’m just questioning the logic. I mean, how far you can carry the logic (inaudible)? You know. Not using road funds for other purposes.

Gabriel Roth
Research Fellow, The Independent Institute

This is the point whether revenues from road pricing should be, could be used for things other than roads. I think Tom also raised the question of movements between urban and rural areas, which I think brings back the point that I try to make that it’s awfully hard to run the system half tolled and half free. If all the roads were tolls, then the question is not so serious, but with a mixture, it is very difficult.

Thomas Downs
President, Eno Foundation

But it’s also obvious that even if all the roads were tolled, the internal subsidy questions would still be there because rural roads simply, even if you priced them fully, could not generate income enough to sustain those systems, so that that’s a serious set of issues. I don’t have a solution for it. All I’m saying is that in a political economy, you have to have at least a rational approach to the limits that that set of issues brings to this potential solution.

It’s almost intractable in some places. I’m originally from Kansas, and—by the way, in Kansas, a foreigner is somebody from Texas. It’s all relative.

In Kansas still, the largest struggles are between relatively vibrant urban areas and dying rural areas. And the imbalance of resources there is in part about road resources. And if you take those areas that are most able to pay because they have inherent business and personal and family wealth and have them pay, the relationship to that wealth out in rural areas is a set of discussions that the political process will demand an answer for.

Alexander Tabarrok
Research Director, The Independent Institute

Let me just give some general answers to this issue of where the funds should go to. Look, in a market economy, okay, it is not the case that all profits should be resent back into the same industry. Take the cigarette industry. It’s still making profits today, but everyone sees the writing on the wall, and they’re not putting the money back in, and rightfully so.

Or you take any growing industry, like the Internet industry. There’s no profits there, right? At the beginning, there’s no profits at all. So how does an industry, which has no revenues, no profits, how do they grow? Well, they have to grow by taking profits from elsewhere in the economy, so it’s just simply not the case that every industry should grow based upon its own profits. You need for the money to be reallocated from one industry to another industry.

Now, when you come and government is involved, then there are those issues come of fairness, things like this.

Now, I have a somewhat different position on these subsidies than Tom does. These subsidies, I think, are a political reality, but that doesn’t mean we should simply accept them and say, okay, we have to live with them. We should point out that these subsidies, in many cases, are ridiculous. These subsidies are unjust. It’s not the case that everybody should have access to subsidies, or that it’s right that urban areas have huge amounts of congestion, they don’t have enough roads, in order to subsidize grand highways in rural areas where people don’t need the roads.

So these subsidies are not something simply to be accepted. They’re something to be questioned, and I think actually turning to user fees will help people to realize, hey, there have been all these subsidize which have been hidden. They’ve been hidden from us for many years. Now that they’ve been brought to the light of day, it’s time to re-examine them and say whether they’re actually justified by any real considerations or whether it’s just political power.

Audience Member

I’d like to make a couple comments. My name’s Mike Joyce. I represent the Owner-Operator Independent Drivers Association. I represent 145,000 long-haul, small-business truck drivers that contribute to the Highway Trust Fund, contribute up to 34 percent every year into that Highway Trust Fund. That’s made up of fuel tax—they pay more than automobiles—excise tax, heavy vehicle use tax, tire taxes, etc.

Tolling is an issue that concerns them. I think in Indiana—I’m here to make just a few comments before I have to move my car, because I’m parked in the (laughter). I’m here to make a few comments—real pricing.

Number one. I think Indiana, we’ll find out in November how Indiana turns out. And I think everybody can agree with that. It’s a political hot potato right now.

Number two. Tight for you, Congressman Kennedy—and we’re supporters of him—does support, and I believe he will agree that tolls are taxes. He supports increasing additional capacity on the highway as long as it goes away, as long as it provides choice, the toll goes away once it’s paid for, which we know will never be the case. Provides choice to drivers including truck drivers, and the option—and again, creates additional capacity.

I think Tom Downs started down the right path here today. It was good to hear him talk about a reasoned approach, a crisp look at highway funding. I’m concerned, though, Tom, that the train’s already left the station. And the commission has been set up by the highway bill. It’s something that concerns us. We’re not sure it’s taken a broad look at all these different options out there as evidenced by the presentation by Federal Highways today. I think we’d like to see Federal Highways take a broader approach to things.

I represent small business truck drivers that pay a lot into the trust fund. The last thing they want me to say is we might look at increasing the fuel tax. But that’s something that needs to be laid on the table, and I think it’s something the Federal Highways should talk about. And I’m concerned that that train has already left the station.

We’d like to take a look at that. We’d like to take a look at some other things versus tolling, public-private partnerships, and moving away from something that Eisenhower, I think, deemed as a defense highway, a highway to move somebody from whatever economic background they come from. They can get in the car—hopefully—in Florida and drive to Washington state if they want to and make their life better for themselves. Our truckers try to do the same thing.

So just some comments. I look forward to working with all of you, hopefully, in the next couple years. Thanks.

Audience Member

St. Gregon (sp?) describes the creation in Germany of (inaudible). Do you agree with that?

D. J. Gribbin
Division Director, Macquarie Holdings

I’m sorry. (inaudible) on trucking

Audience Member

In Germany.

D. J. Gribbin
Division Director, Macquarie Holdings

In Germany? I believe Germany has just instituted a truck toll system where they’re collecting tolls. But instead of focusing on Germany, I think the point as someone who sort of now has a long-term lease on a highway, obviously, trucks are an important part of our constituency, and so what we’re going to want to do pretty aggressively is make sure that we do things like electronic tolling, we talk about possibly increases in the speed limit, we look at greater weight and size limits to the extent that federal and state law allow.

But we’re now incentivized because the trucking community has somebody who views them as a customer, to do what we can to help them be more profitable. And I think that’s when you add toll road perspective.

But then you look at congestion pricing in particular. I don’t want to speak for your members, but I can’t imagine that those of your members who need to move through an urban area during rush hour wouldn’t like to have a quicker route even though it may cost more, because in some cases, the wait is worth the wait. In other cases, there’s actually real money to be made if they can move quicker.

Audience Member

Yeah, I think in response, D. J., I think that they expected Congress to look at taking a hard look at how their 24.3 cents is spent in the Highway Trust Fund. They expect Congress, instead of having 10 percent of funding, in other words, earmarks, and highway projects, and beautification projects, and enhancement projects (inaudible) past them. I’m (inaudible) for myself. But that money (inaudible) and transit projects that never get off the ground. I can tell you countless number of Congressional earmarks and transit projects that never go anywhere because the need is not there. There’s desire on the part of political, but it never happens.

D. J. Gribbin
Division Director, Macquarie Holdings

While I agree with all of that, I mean, I think it all makes sense. Again, going back to the presentations earlier, I think the gap is so great, even if you fixed all those problems, you still have significant issues. And I know that there are components to the trucking industry who support gas taxes and other things, and the only problem again with the gas taxes, is you could raise the gas tax as high as you want, but it doesn’t help you with urban congestion.

Really, the only real solution kind of in our lifetimes of urban congestion is going to be some form of congestion pricing.

Audience Member

I am Jerry Brach. I’m with the Science and Technology Policy Institute that works for the Science and Technology Policy for the White House. I have a question for Mr. Ray. The estimate given by Secretary Mineta, a $200 billion cost estimate, differs very substantially from that of the Texas Transportation Transporters by about $75 million. The plan was based on 3.8 billion wasted hours times $13, plus the cost of gas. And the (inaudible) I thought something about, we’re (inaudible) so much larger (inaudible) Secretary Mineta’s (inaudible) (inaudible) several million.

So it seems that these new estimates are based on the market value, let’s say, of the hours that are being wasted by the (inaudible) business bill out twice our compensation (inaudible). That, in fact, is our market value. But are those people that are sitting in traffic being charged the market value or at their own private (inaudible)? Would you address that or (inaudible) that came from?

James Ray
Chief Counsel, FHWA, U.S. Department of Transportation

Well, I—actually, Patrick may do a better job than me. I can certainly get you the data on that. I know one of the factors that we actually looked at, though, was that the Texas data that we have either dates to 2003 or dates to 2001, so there’s an adjustment upward that needs to be made just in fuel costs alone.

Audience Member

That’s not the fuel cost. Fuel costs are (inaudible).

James Ray
Chief Counsel, FHWA, U.S. Department of Transportation

And time. You’re right. And then there’s also the time. And Patrick, do you have more insight on that figure? I mean, I can get you the data, but Patrick may have it off the top of his head.

Audience Member

Well, I think I mentioned Jack Wells, our chief economist, the one who produced that information, and my understanding—I’m not an economist myself, but I mentioned this. It really depends—I mean, extra value is really in productivity, second-order benefits. When you reduce congestion, you actually have, for example—businesses have less proper stock. Just-in-time manufacturing becomes possible. City A’s costs go down so they can do more trade with City B. The whole GNP goes up. You know, I’m an economist, but that’s my understanding of how the extra value is created.

I guess my general question is, this is a big deal if the estimates (inaudible) 65 to $175 million. (inaudible) understand.

James Ray
Chief Counsel, FHWA, U.S. Department of Transportation

Sure. I’ll tell you what, if you give me your information afterwards, I’ll be happy to take it up, aside, and get whatever data I can for you.

Alexander Tabarrok
Research Director, The Independent Institute

Just a couple more questions. Go ahead.

Daniel Klein
Professor of Economics, George Mason University

These discussions of the public acceptability are very enlightening, and Ike mentioned the possibility of a poster, what makes an effective poster, and I wanted to make an actual suggestion. If somebody’s going to make a poster, or put an ad in a magazine, let’s have a kind of squib image, one of a bumper-to-bumper highway scene and the other of folks lined up waiting in line to buy bread, for example, at a Soviet grocery store. Maybe an image could be taken from the old Robin Williams movie Moscow on the Hudson, which in fact has such a scene it, and you have these two images, and you have a slogan, “What happens when access to a resource is underpriced?”

Gabriel Roth
Research Fellow, The Independent Institute

Another question in the back.

Audience Member

I think (inaudible). It’s hard to get.

Audience Member

Take the (inaudible).

Audience Member

Oh, sorry. Yes. The private sector—I think we have to look at the model. The private sectors are going to work on a very logical point, and that’s going to be to seek as much use of a facility that they’re managing for automobile use. Now, that’s logical. I’m not arguing with that. I’m saying, is that the model that’s going to work best for the community?

I think part of the model has to also say we don’t just give you choices in our overall transportation system. And how is the model going to—let me ask first, is that the way the model will work, or the product operators will logically seek to maximize the number of auto users to the facility to mange it. That’s question One.

Question two. Is that the right model?

Thomas Downs
President, Eno Foundation

It speaks to the confusion of purpose. If the purpose is the privatization of the Indiana toll road to make it more efficient and better maintained, then some of the incentive is about increasing traffic. If the purpose is congestion pricing, the answer is, you price to reduce congestion. They’re two entirely different purposes with different strategies. So we talk too loosely about pricing purpose.

Gabriel Roth
Research Fellow, The Independent Institute

Just to answer this point. It seems to me that if people under competition had a choice of what price to charge, they would charge to maximize their revenues, but this would not be the same as the price to maximize traffic, in the same way that when you have a theater, you don’t charge to pack it as full as possible with people. You charge it to sell the kind of seats in different parts of the theater.

Audience Member

I just wanted to—more than ask a question, to offer some observations and make a comment. I’m concerned a bit that maybe we’re missing the forest for the trees in some of the discussion. It seems to me that there are three fundamental givens in a situation that we’re working with.

One is that we have a fundamental, serious financial problem in transportation pricing, and there are problems at the federal level, the state level, and the local level. No one is exempt from it.

It seems to me the second fundamental point is that we have a fundamental performance problem, also at the state and local network transportation level.

And the third one that I think that we forget about sometimes is that in this country, our transportation network is fragmented in its ownership, and it’s owned by a jillion different entities.

My concern is, is that if we lose sight of the fact—and I think that what we’re dealing with is trying to do performance of the network, so we need to understand how congestion pricing is an important and essential tool, but we don’t fully understand how it contributes to the bigger goal of performance within a financial problem and an organizational difficult situation.

What I think I would like to see—because I think a number of forums like this, I think they’re very good. We need to talk a lot more about this and I am personally a supporter of pricing. I think it’s a tool that we need to have available to us. Because sometimes I feel like I’ve just come from a pep rally, and I feel like we need to have maybe another book, Mr. Roth, or a workshop where we look at the serious issue of having a priced and non-priced facilities working in the same network. I mean, we both end up at the Times. That’s not trivial.

We need to look at that and the implications of that and implications of the financing, implications of how we do this, and whose problem we’re solving when we have ownership broken up in so many different entities. We could help one and not give anything at all to help the other, and we did not really address the performance on the network level.

D. J. Gribbin
Division Director, Macquarie Holdings

Actually, I’d like to comment briefly on that because Macquarie owns the Greenway. And one—I actually live in Leesburg, so I commute to it. I like to think that helped me get this job, but I’m sure it’s the case.

But one of the problems we’re experiencing is obviously we own a segment of highway, and we don’t own the adjoining segments, and so what you find is you get on the Greenway and you whiz along until you hit the publicly owned facility, which then backs up onto ours.

But I think from just sort of a market perspective, diverse ownership is not a bad thing. Probably pretty helpful. Especially if you get diverse private-sector ownership, and ideally, at some point where we’re competing against each other.

Ideally, in the DC area, you’d have a private owner of GW Parkway, a private owner of 66, a private owner of 395, a private owner of segments of the Beltway, and they’d all be competing against each other to try to encourage best service for customers.

But on the performance point, I’m actually not sure that performance is spread along sort of state and local. I think performance is mainly failing at the urban level, the 15 cities that were mentioned earlier.

The financing, again, kind of tends to be universal across the states and counties. Everyone seems to be short of money. The performance seems to be more of a local problem than it is a national one.

Alexander Tabarrok
Research Director, The Independent Institute

Okay. Well, I think we—all right. One more. One more. Last question.

Audience Member

I’m a (inaudible) Washington Standard. And when he brought up Virginia, I suppose, that seems to be a very good example of how this congestion pricing has not yet been really brought out. The Greenway, for attempting to raise tolls tremendously in light of these great (inaudible) paved Dulles toll road, they’re used to build Dulles Rail, and those tolls are going to go up, and you basically have a bunch of users who are stuck out there paying taxes on facilities that they don’t get any benefit from them.

Plus, the legislature, which is comprised mainly of downstate people who want to preserve their rural subsidies and not give Northern Virginia the money that it needs for the roads. So how do you fix that problem is the question. Pricing without leaving the individual commuter paying a huge amount almost just to get on roads somebody paid for (inaudible)?

D. J. Gribbin
Division Director, Macquarie Holdings

Yes, this kind of goes back to I think where we started, and it’s a very, very helpful question, which is the biggest obstacle to this is public education. The public didn’t pay for the Greenway, actually. That was privately paid for. The facility wouldn’t exist but for private investors having invested in that facility and looking forward to returns of the future.

Similarly, our gas taxes pay for a fair amount of things, but not everything the public thinks they pay for, and I think at the end of the day, it would be very helpful—maybe this is another book, Gabriel—is to sort of explain to people where the gas taxes are coming from, what you’re paying for, and what value you’re getting for that. And then what it’s not covering, and do you want to have the option?

There was a poll that was done recently on SR91 out in California, and people were asked what changes would you like to see? What do you value the most? And they had the choice between lower tolls or maintain a congestion-free alternative. The congestion-free alternative won overwhelmingly. I mean, that’s what they value. Would they like a congestion-free alternative at a lower price? Absolutely. But they’re not willing, in the case of that facility, to trade off a lower price for being stuck in traffic again. And I think that’s sort of a small microcosm of people understanding what they’re paying for and what they’re getting.

I mean, back to the point that was made earlier about clear, crisp thinking. There’s not much crisp thinking as far as what we’re paying in terms of tax dollars and what we’re getting back for it and what gap is left.

Thomas Downs
President, Eno Foundation

I think it’s also a perfect example of why it’s important to think about what role of government is responsible for what kind of step. The idea that the national government could actually be in the road pricing business is ridiculous on its face. Imagine the Congress trying to set the road price access for the New York metropolitan region. Congress setting that. Or Congress setting the road price access prices for the Washington metropolitan area with Maryland, Virginia and the District. The Congress doing that.

Alexander Tabarrok
Research Director, The Independent Institute

I (inaudible) but other people can come up and ask questions (inaudible). We’re done. The book is Street Smart: Competition, Entrepreneurship, and the Future of Roads and it is by Gabriel Roth. We thank our panel.

Audience Members

(applause)

END OF EVENT



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