How Public-Private Toll Roads are Financed

Robert Poole clarifies a number of misconceptions about how toll roads are financed – particularly in the cases of public private partnerships for new projects. This is not a direct response to, but effectively refutes, a number of claims made in a recent Patriot News guest column:

First, an alphabet soup of huge tax breaks and subsidies drives private investor interest in infrastructure privatization. Second, privatization contracts require the public to guarantee revenues expected by private contractors.

Neither statement is accurate; as Poole writes:

In America’s limited experience with public-private partnership toll roads thus far, there are two kinds of circumstances in which critics could identify something as a “subsidy.” First, they can point out that Congress in 2005 allowed for tax-exempt toll revenue bonds to be issued for use in PPP toll projects. All this did was level the playing field between government and the private sector when it comes to issuing bonds. As long as we’ve had a federal tax code, governments have been able to issue bonds that are exempt from taxation on the interest they pay to bondholders. Prior to 2005, PPP toll roads were at an artificial disadvantage compared with public-sector toll roads, since the latter could issue revenue bonds at (lower) tax-exempt rates, but PPP toll roads could not. Most conservatives and libertarians do not consider exemptions from taxes as subsidies. (Personally, I would like to see all tax-exemptions for bonds abolished, but until that day comes, I’m all for a level playing field.)

The other claim for “subsidies” to public-private partnership toll projects could be made in cases like the Beltway High-Occupancy Toll (HOT) lanes in Virginia and the LBJ HOT lanes in Dallas. In both cases, the government wanted a larger and more costly project than the private sector could finance, based on projected toll revenues. So in both cases, the end result was the government agreeing to pay for certain portions of the project that it required to be included and the PPP company financing the rest. And in both of these cases, the long-term agreement between the state DOT and the PPP company includes revenue-sharing, so that if the project does well in terms of toll revenue, in future years the government will get a share of the revenue as a return on its investment in the project.

In the vast majority of cases, toll roads – whether public-sector or public-private partnerships – are self-supporting. And their only revenue comes from people who choose to drive on them, because the time savings and other attributes of the toll road are worth more to them than the price of the toll.