As federal spending on infrastructure has waned over the past decades, states and local governments have increasingly turned to the private sector to plug the gap needed to maintain crumbling roads and highways. Ideally, these public-private partnerships (P3s) allow taxpayers and business to share the risk inherent in large-scale projects, delivering a critical service while reducing the burden on already strained local budgets. While the approach holds promise, the results thus far have been uneven. A new approach to pricing could change that.
Through these partnerships, private companies construct new roads — or additional lanes on existing roads — often in exchange for the right to collect tolls for a defined period, known as a toll concession. Growth in the sector has exploded since the 1990s. The Federal Highway Administration’s website lists 17 operational P3 concessions in the US, with another 12 presently under construction.
Despite their mounting popularity, P3 implementation has been anything but smooth. In September 2014, the Indiana Toll Road Concession Company, responsible for managing the 157-mile stretch of interstates 80/90 in northern Indiana, filed for chapter 11 bankruptcy. It was followed last month by the SH 130 Concession Company, which collected tolls from Texas State Highway 130, running between San Antonio and Austin. In both cases, traffic and revenue fell far short of projections — and when these projects fail, it’s often taxpayers who are left to foot the bill.
According to a new study by Robert Phillips, Garrett van Ryzin, and their PhD student, Caner Goçmen, improved pricing strategy on these toll roads could help P3s stay afloat, reducing the financial risk to local governments and attracting new investors to the projects.
Most modern toll lanes rely on transponders rather than toll booths to record traffic, billing drivers monthly for total usage. Newer lanes further allow for prices to shift based on time of day and prevailing traffic, a technique known as dynamic pricing. In these lanes, tolls can change as often as every five minutes. On publicly owned roads, tolls are usually set to maintain a minimum speed across both sets of lanes, maximizing the flow of traffic by, for example, reducing toll costs when free lanes are jammed during peak traffic times. But for private toll collectors, setting a higher price in anticipation of peak traffic time — rather than waiting for traffic to peak — is likely to be a better strategy, according to Phillips and his colleagues.
Phillips and his colleagues examined roads in which new private toll lanes have been constructed next to older, free public lanes, offering drivers a choice — a relatively new approach being piloted in congested commuter zones. When tolls are raised before peak traffic times — like rush hour — they act as a deterrent to drivers, who opt to remain in the free lanes. But as the free lanes become congested, drivers will switch to the toll lanes in spite of the high price to avoid being caught up in the jam. According to calculations by Phillips and his colleagues, this approach can raise revenue by as much as 50 percent on roads that experience lengthy peak traffic times.
Phillips and his colleagues believe their revenue-maximizing model has the potential to improve investor’s returns, attracting new capital and spurring construction at a time when getting anything built has become difficult. Much of America’s road infrastructure is a holdover from the postwar period and is in dire need of repair. At the same time, according to estimates from the Congressional Budget Office, inflation-adjusted investment in infrastructure has declined by 9 percent since 2003. The Economist further estimated that public expenditures on infrastructure in the United States is roughly half of the level seen in Europe — where a smaller percentage of the population relies on cars for transportation. In this environment, additional return has the potential to make similar toll-lane projects more attractive to investors, leading, ideally, to more new lanes being built around the country.
“There’s no question that public-private partnerships will become increasingly important in expanding infrastructure capacity,” Phillips said in a phone interview. “There are strained infrastructure budgets. From the perspective of transportation departments, these partnerships allow them to put their name on widened freeways and the creation of new lanes, appeasing voters without busting their budgets. Until budgets get filled up again by Congress and the states — which I don’t see happening anytime soon — how else are you going to build roads?”
By focusing on revenue maximization, Phillips and his colleagues may have found a way to help public-private partnerships attract more investment while minimizing the risk to taxpayers. Phillips acknowledges that raising toll prices in anticipation of peak traffic times risks triggering a backlash. But for Phillips, simply building more places to drive in a country that does not seem to find any other way to build new infrastructure should help allay public concerns.
“It is important to stress that these new lanes are incremental capacity – they make everybody better off. If a boutique grocery store opens up on your block and starts selling expensive food,” he said, “it doesn’t necessarily make your life worse. In fact, it may make it better because the lines at your normal grocery store will be shorter.”
About the researcher
Garrett van Ryzin
Garrett van Ryzin is the Paul M. Montrone Professor Emeritus of Decision, Risk, and Operations at the Columbia University Graduate School of Business. In...Read more.