How Free Enterprise Can Fix America’s Failing Highways

highway-congestion

The way we fund and manage U.S. highways is broken and needs serious rethinking, if it’s going to meet the needs of 21st-century America.

The problems are legion, beginning with the huge direct cost of traffic congestion—a whopping $160 billion per year just in wasted time and fuel. And while our highways and bridges are not “crumbling,” there are chronic problems of deferred maintenance, leading to many rough roads and a shameful number of structurally deficient bridges.

Our highway funding system that is based on per-gallon fuel taxes is breaking down, for several reasons. A growing share of the proceeds is no longer spent on highways, so people have come to view gas taxes as just another tax, which politicians are reluctant to increase. Yet as cars keep getting more efficient—using fewer gallons to go a given distance—revenues from per-gallon fuel taxes can’t keep pace with (1) the growth in driving or (2) the cost of building and maintaining highways.

Many decisions on how to spend transportation dollars are political, at both state and federal levels. The billions raised and spent each year are often not spent on projects that would produce the most bang for the buck. Most federal highway and transit money is doled out by formula, and although members of Congress can no longer “earmark” pet projects, the overall process is based far more on politics than on sound economic principles (such as ensuring that benefits exceed costs).

A much better model would be highways operated as utilities, like those providing our electricity, water supply, telecommunications, and natural gas. Most utilities are not run by tax-funded government agencies, with key decisions made by politicians. Instead, the utilities are organized as companies that sell services to customers, under government oversight. Even when run by government, they are still operated as businesses, paid for directly by their customers.

If our roads were provided by highway utility companies, many things would be different:

  • People would pay for highways based on how much they used, just as we pay for water by the gallon and electricity by the kilowatt hour.
  • People would know how much highways cost them, based on their monthly bill, as they do now with cable, cell phones, electricity, water, etc.
  • Per-mile highway charges would be subject to some form of regulatory oversight, based on the extent to which the highways and bridges have competitors or are essentially monopolies.
  • Large-scale highway investments—for new highways and to replace worn-out ones—would be financed up-front in the capital markets, just as individuals do in buying a home and as other utilities do in building new facilities, rather than being paid for piecemeal out of annual budgets, as highways are today.
  • Major highway investments would be business decisions, not political decisions, subject of course to the same kinds of land-use and environmental constraints faced by all other commercial developments.
  • Highway operations would be managed in real time, to provide customers with the quality of services they were willing to pay for.
  • Highway companies would have strong incentives to keep their facilities in excellent condition, to attract and keep customers.

That may sound like a utopian vision, but our highways have reached a point where dramatic changes are necessary. The federal government is on a path toward insolvency, where nearly all federal revenues will be consumed by entitlements, defense, and interest on the national debt. There will be no “general revenue” left over to bail out a Highway Trust Fund. Most state governments are also in trouble, with huge unfunded pension and health-care obligations to retired public employees They are not in a position to take up the slack from a reduced federal role. And per-gallon fuel taxes will have to be replaced by per-mile charging, so that all vehicles pay their way, regardless of how they are powered.

These conditions are the main reasons we need to change to a new highway model. And three other factors will reinforce the case. First is the growing success of revenue-financed public-private projects for highways and other transportation infrastructure. America has hardly scratched the surface of what is possible, compared with Australia, Chile, France, and Spain.

Second is the emergence of infrastructure investment funds, which have raised over $350 billion of equity to invest in revenue-producing infrastructure in the past five years. Most of this is being invested in Europe, Asia-Pacific, and Latin America—but these funds clearly want to invest far more in the United States, if only there were lots of projects to invest in. Our aging, hyper-congested highway system could offer hundreds of projects.

A third development is the increasingly recognized need for public pension funds to diversify their portfolios by investing more in revenue-producing infrastructure. That’s hard to do in U.S. transportation, because nearly all airports, highways, and seaports are owned and operated by governments. But the public-private model opens such infrastructure to serious investment by non-profit pension funds as well as for-profit investment funds.

The transformation of U.S. highways from state-owned enterprises to highway utility companies could not happen overnight. But in my new book, Rethinking America’s Highways (University of Chicago Press, June 2018), I show how a several-decades transition could occur. The book shows that investor-owned toll roads have a long European and U.S. history that was overlooked once motor vehicles arrived on the scene. The concept was rediscovered in post-World War II Europe, and it spread to Australia, China, and Latin America late in the 20th century. It is only in the last 15 years that this approach has gained a toe-hold in the USA.

The White House infrastructure plan released this year offers steps toward starting this transition. It recognizes the need to reduce the funding role of the federal government for infrastructure owned and operated by state and local governments. It provides for expanded financing tools for public-private projects, as well as repealing the federal ban on using toll revenues to finance the reconstruction and modernization of aging Interstate highways. And by not embracing a federal fuel tax increase, it de-facto encourages the needed shift from per-gallon to per-mile charging, led by the states that own the highway infrastructure.

Come hear me explain this vision in my FreedomFest presentation. There will also be a book signing, where you can buy a copy of my new book, Rethinking America’s Highways, and have me autograph it for you. For information on tickets, contact www.freedomfest.com and use code FFREASON100 to receive a $100 discount, or call 1-855-850-3733 ext. 202.

–Bob Poole, Reason Foundation

 

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