Thursday, October 16, 2014

Could it affect schools, too?...

 Over the next couple of decades, I think the much-needed infrastructure upgrades in the US will increasingly be financed by private-public partnerships (PPP). I've seen this in action on the Indiana Tollway (I-90), but more about that in a moment.

The theory is interesting. There are trillions of Euros, yen, and yuan with nowhere to invest, especially as the global economy slows. We have thousands of miles of road s and bridges to build and maintain. Americans will not raise taxes for anything. There is an unsubstantiated belief that private construction and operation of public capital improvements will be more efficient.

And we have incredibly efficient new toll-extracting technology.  This last point is the big one. I thought about it when we added E-Z Pass Transponders to our cars because of my work and family in the Chicago area.

I am ambivalent on say, Brazilians owning I-74 and the French building bridges in Kentucky.
Tall said U.S. states are becoming more comfortable with private investment, in part because there are more examples of successful projects and fewer alternatives to pay for mounting infrastructure needs.The U.S. has used mostly fuel taxes and public financing for such projects. And the federal gasoline tax hasn’t been raised since President Bill Clinton was in office. A divided Congress only managed a short-term measure in July to prevent the Highway Trust Fund from becoming insolvent.California passed the first legislation allowing public-private partnerships for transportation projects in 1989. Today, 33 states and Puerto Rico have such authority, according to the National Conference of State Legislatures.After years of debating the Ohio River bridges, Daniels and Beshear got on the phone late in 2011 and agreed to split the work, paying for each share separately.Kentucky’s portion includes a new six-lane downtown bridge for northbound Interstate 65 from Louisville and a reconfigured “Spaghetti Junction” where I-65 and two other interstates meet. Indiana is building a new bridge eight miles (13 kilometers) upstream connecting Louisville’s east end with southern Indiana while also expanding highways and building twin tunnels under historically protected property to connect to the new span.Indiana’s history of tapping private industry for transportation work includes the $3.8 billion, 75-year lease of the Indiana Toll Road that Daniels sought in 2006 to pay for roads and bridges. The toll road’s private operator sought bankruptcy protection last month when traffic didn’t match projections.The state’s piece of the Ohio River Bridges uses a different public-private financing model that could require taxpayers to cover any shortfall in tolls. The Indiana Finance Authority issued $677 million in tax-exempt, private-activity bonds in March 2013 on behalf of WVB East End Partners. The authority is also making $392 million in “milestone” payments during construction and annual “availability” payments for 35 years -- assuming the operator maintains the bridge -- using toll revenue on the new spans that the states are splitting. [More]

Note the mention of the I-90 bankruptcy. Here is one flaw that should be addressed, at least.
Even though earnings “increased every year between 2008 and 2013, they were lower than projected,” forcing the company to devote an ever-greater share of operating income to debt service, Redondo said.Open since 1956, the road spans 157 miles (252 kilometers) across northern Indiana, connecting Chicago to major East Coast traffic arteries, according to its website. It took more than 6,200 engineers and laborers 786 days to complete the project.ITR Concession Co. acquired the rights to operate the road in 2006 from the Indiana Finance Authority, according to a company statement.The Indiana company said it put together a reorganization plan that has the support of more than 87 percent of its senior secured debt-holders and unanimous acceptance from its equity owners.Under the proposal, the company would either be sold through a competitive process or restructured with $2.75 billion in new debt with almost all the equity going to the secured creditors, according to the disclosure statement describing the plan.Since it already has the necessary support from stakeholders, the company asked the court to approve the reorganization plan within 30 days. The sale process or restructuring could run until next August, after the company exits court protection.In either scenario the ITR Concession’s unsecured creditors owed about $8 million, its only other listed debt, will be paid in full.Traffic volume has plunged by about 42 percent on the Indiana highway since ITR took over operations eight years ago, according to data on the website of Macquarie Atlas, the unit that owns ITR.First-half revenue increased about 5.2 percent from last year, including a 7.2 percent jump in the quarter ended in June, according to a Macquarie Atlas statement. Traffic gained only a third of 1 percent over last year’s first-half figures, with a 3.2 percent drop in the first quarter due to bad weather.Toll rates for passenger cars paying cash increased 30 cents to $10 for a full 157-mile trip on July 1, according to an ITR statement. Rates for a typical semi-trailer truck rose $1 to $39.70.Travelers using an electronic toll-collection system pay only $4.65 for a full trip, the same rate since 1985. Electronic collection accounts for more than 70 percent of toll receipts, according to the Macquarie Atlas documents. [More]
This is the Pigovian outcome I find intriguing. As formerly free public infrastructure become toll-paying, how will users respond? With little or no growth in wages (see above), more and more could be priced out of these improvements and forced onto secondary routes. Another response could be greater concentration as commuting from the suburbs becomes more expensive that paying for costly urban housing and riding public transport. (Of course, there is no reason "public" transport would not shift to PPP operation as well.)

My point is I think this is already happening. Americans are driving less, taking fewer vacations, moving less, and becoming more immobile, so to speak. Adding tolls to more miles of roads certainly won't reverse this trend. I'm not sure this is all bad, either, but it is another consumption pattern that will confound our predictions for the future economic performance.

The "blend wall" could keep falling on corn growers, for example. Fewer cars will be needed. Less oil. Shipping costs - by truck anyway - will escalate. There are doubtless other consequences that will only become evident when they manifest to counteract these new economic frictions. 

Supposing this proves successful on the whole.  Could other public services be supplied by PPP's? Schools? Police? Regulators like meat inspection? It sounds far-fetched, but once we shift from a public-goods to user-pays mentality, I think all bets are off. It seems to shrink government, which right now is wildly popular. 

And how many transponders will we need?


Anonymous said...


Couple of thoughts by someone who used to use the toll road. First, if someone is to buy something and make say 6% return, why can't a state do it and save the 6% for the taxpayers? Second, we in Northern Indiana essentially get to pay for roads down state we seldom use. I don't think people using 465 around Indy would like to be taxed to pay for bridges over the Ohio. The people who are taxed should receive the benefits.

Anonymous said...

Maybe I don't understand this, but it would seem to me that the state could take your land through eminent domain, and then sell it to someone else so they can profit from it. Can that be right?

Anonymous said...

Nov.7 and you have not posted for awhile? Is the harvest not yet complete?