Privatization: Issues of State and Local Public Infrastructure
Privatizing Highways in the United States
Eduardo Engel, Yale University
Ronald Fischer, University of Chile
Alexander Galetovic, University of Chile
Major increases in congestion over the last two decades, combined with a trend toward smaller government, have made private toll roads increasingly attractive. The standard option for privatizing roads is a Build-Operate-and-Transfer (BOT) contract, where a firm builds and operates the road for a long period of time, and then transfers it back to the government. The main (often only) source of income for the firm is toll revenue. We review the experience of both private toll roads built in the United States in recent years, and argue that the problems they encountered could have been avoided if the length of the franchise contract had adapted to demand realizations. We also argue in favor of adjudicating private toll roads in competitive (Demsetz) auctions. Both advantages are attained if the highway is auctioned to the firm that bids the least present value of toll revenue (PVR), an approach we discuss in detail throughout the paper. We compare the traditional approach used in the United States to finance highways with the BOT approach. We discuss many potential advantages of private toll roads, our main point being that whether these advantages attain or not depends crucially on both how the franchise auction and contract are designed. We provide guidelines for implementing BOT contracts and show that PVR contracts satisfy most of them.