Latest / The Fiscal Policy Podcast with Fexingo: Government Budgets, Stimulus, and Public Spending / The Strange Economics of Tolls and Public Roads
Transcript
- Lucas: So here's a question that's been bugging me: why do some governments sell off their toll roads to private companies, while others keep them public and reinvest the tolls themselves? Luna: And I'm guessing there's a concrete example that makes this more than just a theoretical debate? Lucas: Absolutely. Let's talk about the Indiana Toll Road. In 2006, the state of Indiana leased a 157-mile stretch of the toll road to a private consortium for seventy-five years. The state got a lump sum of 3.8 billion dollars upfront. Luna: Three point eight billion. That's a lot of cash for a state budget. What did they do with it? Lucas: They used it to fund a ten-year transportation improvement plan—roads, bridges, that sort of thing. But the interesting part is what happened to the toll road itself. The consortium, which included Macquarie and Cintra, promised to make improvements and keep toll increases within a certain formula. Luna: And it worked? For a while? Lucas: It worked until it didn't. By 2014, just eight years into the seventy-five-year lease, the consortium filed for bankruptcy. They had borrowed heavily to pay the upfront fee and to fund upgrades, but traffic projections fell far short of their assumptions. Luna: So the private sector overestimated how many people would use the road. That's a pretty classic risk. But weren't the toll increases supposed to ensure profitability? Lucas: Well, the lease agreement allowed for annual increases of either two percent or the rate of inflation, whichever was higher. But even with that, the underlying debt load was too high. When the 2008 recession hit, truck traffic—the main revenue driver—dropped significantly and never fully recovered to projected levels. Luna: So the state got its 3.8 billion, but the private partners took the loss. Is that a win for Indiana? Lucas: It depends on how you count. Indiana shifted the risk of traffic volumes to the private sector, and when that risk materialized, it was the bondholders and equity investors who took the hit. But there's also a long-term cost: the state gave up control over toll rates and road operations for seventy-five years. Luna: And what about the users? Did tolls go up or down after the bankruptcy? Lucas: Tolls continued to rise under the bankruptcy restructuring—the court allowed the new owners to maintain the formula. So drivers paid more, not less. And the state had no say. Luna: That's the fundamental tension, isn't it? The state gets cash upfront, but it trades away the ability to set policy for decades. Lucas: Exactly. Now compare that to Florida's Turnpike. That's a publicly managed toll road system. It generates about 1.2 billion dollars in annual toll revenue, and that money is reinvested directly into maintenance, widening projects, and new interchanges. Luna: So the public keeps the revenue stream instead of selling it for a one-time check. But doesn't the public sector have its own risks—like political pressure to keep tolls artificially low? Lucas: It can, but Florida has a dedicated agency, the Florida Turnpike Enterprise, that operates with some independence. They have a statutory requirement to maintain a certain debt service coverage ratio. So they do raise tolls periodically, but the money stays in the system. Luna: And users can see where their money goes—new lanes, better pavement. That creates a kind of accountability. Lucas: Right. And there's an interesting efficiency angle. Some studies suggest that private operators can build and maintain roads more cheaply, but the evidence is mixed. A 2018 paper by the Congressional Budget Office found that public-private partnerships don't consistently deliver cost savings—they just shift risks. Luna: So when a toll road goes private, the government is essentially paying the private sector to take on risk. But if the risk doesn't materialize, the private sector earns a higher return than the government could have. Lucas: That's the deal. And the Indiana case shows that when the risk does materialize, the private sector can walk away via bankruptcy, while the asset—the road—still stands. The users still pay tolls, and the state still has limited control. Luna: So what's the lesson for other states? Should they be cautious about these long-term leases? Lucas: I think the lesson is to be very careful about traffic projections. A lot of these deals relied on aggressive growth assumptions. The other lesson is to structure the lease so that the state retains some regulatory authority over toll rates and service quality. Luna: Is there a middle ground? Maybe a shorter lease, or a revenue-sharing arrangement? Lucas: Some states have tried that. For example, the Chicago Skyway lease was for 99 years—very long. But in more recent deals, like the I-77 managed lanes in North Carolina, the state retained some oversight. It's a spectrum. Luna: I want to go back to the ideological question. Why are some governments so eager to privatize toll roads in the first place? Lucas: Part of it is the upfront cash. It's a way to raise capital without raising taxes. Politicians get to fund infrastructure projects immediately and push the long-term costs into the future. It's very tempting. Luna: It sounds like a fiscal tool, not necessarily an efficiency tool. Lucas: That's a fair way to put it. And there's a philosophical angle too: some believe private enterprise is inherently more efficient. But the evidence suggests that the efficiency gains are modest and depend heavily on the contract design. Luna: So if a state is considering a toll road lease, what should they ask? Lucas: First: what is the real value of the revenue stream over the long term? Second: what are the contingency plans if the private partner fails? And third: what public benefits—like congestion management or environmental goals—are we trading away? Luna: Those are good questions. And maybe they should also ask: can we do what Florida does and manage it publicly with a dedicated enterprise? Lucas: Exactly. The Florida Turnpike model isn't perfect, but it shows that public management can work if there's a clear mandate and political insulation. Of course, not every state has the scale or the political will to set up something like that. Luna: So we have two very different outcomes from the same basic question: how to fund a road. Indiana went private, got cash, but lost control. Florida kept it public, retained control, but had to be disciplined about reinvestment. Lucas: And both involve user fees. That's the broader theme here: toll roads are a form of user fee, which is a different animal from general taxation. They create a direct link between payment and service, which can be efficient, but they also raise equity concerns—low-income drivers may be disproportionately affected. Luna: So the fiscal policy debate isn't just about how much we spend, but how we pay for it and who bears the risk. And toll roads are a microcosm of that. Lucas: Exactly. And I think that's the key takeaway for today. Whether you're leasing a road or running it publicly, the underlying economics are about valuing a long-term asset and deciding who should own the risk. Luna: It's a reminder that infrastructure isn't just concrete and steel—it's a set of financial contracts that shape our daily lives for decades. Lucas: And those contracts are written by policymakers who may not be around when the consequences hit. That's the real challenge. Luna: Thanks, Lucas. I think I'll look at my next toll booth receipt a little differently. Lucas: Same here. Until next time.