Wednesday, 7 September 2011

Huffington Post's shallow critique of privatising toll roads

The online rag, Huffington Post, has published an article by Dave Jameson that claims to dish out lessons to Ohio regarding the proposed privatization of the Ohio Turnpike. Unfortunately, it offers nothing new besides the old fashioned left wing political clichés that find suspicion in the private sector involvement in the road sector, but offer no credible or rational answers to the problems besetting US land transport policy.

I've written three times (here, here and here) about the Ohio Turnpike privatisation concept, which I believe has merit.

It damns the privatisation of the Indiana Toll Road because the price has gone up. Presumably if it was cheap and congested, and badly maintained, it would criticize that as well. So much of the US highway infrastructure is crumbling and has bottlenecks, you might think there would be some pause for thought about the quality of service on the Indiana Toll Road – which doesn’t come for free.

It engages in mindless xenophobia saying the profits go to “overseas investors”, you know those people who when they are Americans in other countries making money, are heroes and entrepreneurs, but when they come to the US and invest in infrastructure, are horned devils out to rip Americans off. Those Australians and Spanish after all, how dare they? I don’t doubt Jameson would be upset if both countries shut out US exports or companies.

Jameson does point out the state did gain US$3.8 billion, of foreign cash, for the lease on the road, and that there are claims Indiana got paid above the odds for the road. All good, but then he says it is “too early to tell” if it was a good deal. Hopefully Indiana has invested the money wisely then.

Yet he contradicts himself  in his article to suit his obvious opposition to the idea. He claims “No one knows how expensive it might get” which presumes that the owners would want to choke off demand, which is absurd. However, it is easy to tell how expensive it might get because he tells you “The road's leaseholders can now raise the toll annually at one of three rates -- at a flat two percent, at the percentage increase in the consumer price index or at the percentage increase in gross domestic product -- whichever is highest.”  Yet does he know how expensive fuel is going to get, or bread?

So you see in Indiana the state set a limit on how much the tolls can be increased. However the real discipline is the price mechanism, something Jameson doesn’t quite understand.   The incentives on the owner are to maximise revenue, which means balancing price with demand.

He quotes a Professor saying “they are going to regret that”, but then let’s look at the wider picture. There is a crisis in highway funding in the US, as politicians have been unwilling to raise fuel taxes to pay for it on the one hand, have been happy to divert fuel tax revenue onto other projects with the other, and have mismanaged highways to the extent that bridges collapse. He doesn't have a solution to the chronic failure of the current system.

Jameson asserts about privatisations that “they can place a considerable burden on taxpayers two or three generations from now”. How? When they get the road back for free having been well maintained and fully operational the whole time, and able to be privatised again?  If a state foolishly leases out a toll road with no conditions, it could be returned needing much maintenance, but that can be fixed by having conditions on the concession about maintaining minimum service standards.   It is a lease after all, not a sale.

He quotes an Oregon Democrat politician as saying “One of the most basic things government does after public safety and law enforcement is infrastructure”. Does it? In much of the world privately owned roads are the norm, as in France, Italy and Spain. Almost all US railroads are privately owned, and the entire electricity and telecommunications infrastructure are privately owned.

Continuing with the choir he has assembled, he quotes Ohio Congressman Tim Ryan (D) who says “It’s a quality roadway, and I think we really risk an increase in tolls and a decrease in quality if this thing gets privatized.... To me it's another example of pure ideology, where everything that government does needs to be abolished or privatized”.

Hold on. Where has there ever been a decrease in quality seen in privately owned highways? Isn’t it just pure ideology to say that the private sector owning and running a road will mean prices go up and quality down? Besides, who in Ohio is saying sell all of the roads?

Jameson then says “The private sector may or may not manage highways better than state governments”, but does he investigate examples? No. He wouldn’t look overseas of course, given that he thinks foreigners are the devil incarnate, but is the Indiana Toll Road badly maintained? No.

The one useful example he brings is “when fees on the toll road were temporarily waived for safety reasons during a serious flood in 2008, the state ended up reimbursing the toll operators for lost revenue. Had the state not leased the road, the waiver would have cost it nothing.” Sounds concerning yes?  However he is wrong. The state would have been the toll collector so would have foregone tolls it otherwise would have collected, oh and it wouldn’t have had U$3.8 billion in cash from the lease.  It would have been preferable for this to be born by the leaseholder, but that is a lesson in contract negotiation, not a reason to throw out the proverbial baby.

Give Jameson his due, he finally interviews the well known tolling advocate Robert Poole who says of the Ohio Turnpike “I see a road that will need major reconstruction in the next decade or two.... Given that the toll road industry has a very good track record of financing and building, I think [privatization] is an acceptable alternative to look at."

Indeed.  Roads cost money.

Opposition to the temporary privatisation of toll roads is largely ideological. As long as a good price can be gained, and the road is handed back in good condition, the incentives exist for such a road to be well managed, for tolls to be at levels to ensure the road is well maintained, and can even manage congestion.

Dave Jameson’s article engaged largely in an ideologically driven beat up which isn’t bore out by experience. Privatising toll roads is an option, if done well it can deliver major benefits for motorists and the government involved, as well as profiting the new owners. I thought in the USA that people selling good quality services at a profit to willing buyers was what the country was all about?

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