Transportation Economics/Ownership

Ownership

CosaNostra Pizza #3569 is on Vista Road just down from Kings park Mall. Vista Road used to belong to the State of California and now is called Fairlanes, Inc. Rte. CSV-5. Its main competition used to be a U.S. Highway and is now called Cruiseways, Inc. Rte. Cal-12. Farther up the Valley, the two competing highways actually cross. Once there had been bitter disputes, the intersection closed by sporadic sniper fire. Finally, a big developer bought the entire intersection and turned it into a drive-through mall. Now the roads feed into a parking system - not a lot, not a ramp, but a system – and lose their identity. Getting through the intersection involves tracing paths through the parking system, many braided filaments of direction like the Ho Chi Minh trail. CSV-5 has better throughput, but Cal-12 has better pavement. That is typical – Fairlanes roads emphasize getting you there, for Type A drivers, and Cruiseways emphasize the enjoyment, for Type B drivers. (Stephenson 1992)

The Ownership of Transportation Networks: A Rationale

To explain the patterns of public and private ownership of transportation networks in the United States and elsewhere, one would need to take a longer view of the development of transportation systems. While such explanations are beyond the scope of the current text, they may be found elsewhere. We will focus instead on some of the common economic themes that lead to observed outcomes.

Market Failure

Public ownership of transportation networks has been more prevalent in certain locations and at certain times during history. A common rationale in more modern times given in support of the public ownership of transportation facilities has been that of market failure. Though the formal concept of market failure is a relatively recent phenomenon, dating to developments in welfare economics during the early 20th century, earlier forms of it were used to justify public ownership of certain transportation facilities in the United States. In the colonial U.S., a system of post roads was maintained by the federal government (as will be discussed later), as these roads were considered vital to communication. Most mail and other types of communication moved by road, and hence it was considered critical to government administrative (and perhaps also judicial) functions that such roads be maintained. A secondary justification was that such roads would facilitate trade and interstate commerce. This is a type of positive externality argument. While it might have been possible for some such roads to be financed and built privately, there was concern that the desired network would not develop quickly enough, with lower-priority roads linking parts of the rural hinterland to established urban centers significantly lagging the completion of other segments, and thus leaving rural areas with poor lines of communication.

Other types of market failure arguments may also apply in the current context. Some road and rail networks may exhibit economies of scale, leading to more efficient provision by fewer firms with high levels of output. In an extreme case, strong economies of scale may indicate the presence of a natural monopoly, where it becomes more efficient for a single provider to produce a good. In addition to monopoly or market power justifications, there are some public good aspects of transportation networks. The next section discusses the nature of roads as different types of goods, with some local roads having the characteristics of public goods (non-rivalry and non-excludability). Private firms might undersupply a public good if there is not sufficient motivation (i.e. profit) for them to do so.

Government Failure

While the existence of market failures may provide a rationale for public ownership of transportation networks under certain circumstances, there is also a countervailing argument that cautions against public ownership as a response to instances of market failure. The public sector analogy to market failure is known as government failure, and refers to situations where government intervention causes a more inefficient allocation of resources than would occur in the absence of the intervention.

There are many types of government failure, but the ones most relevant in the context of transportation policy tend to be legislative in nature. They include issues of logrolling, pork barrel spending and rent-seeking.

Logrolling is a term applied to political allocation processes to describe the act of vote-trading among members of a political body. James Buchanan and Gordon Tullock, in their seminal work on political economy entitled The Calculus of Consent, described a formal model of simple majority voting incorporating as an example the maintenance of local roads by a group of rural farmers. Buchanan and Tullock show how bargaining (vote trading) among the participants allows for agreements that ensure the maintenance of all roads. However, the cost of this bargaining is shown to be an aggregate overinvestment of resources, since each farmer must pay for the maintenance of all other local roads in order to ensure the maintenance of the road that serves his property. There is a direct analogy between this process and the process used to allocate resources for transportation by the U.S. Congress. The rapid growth of federal transportation programs during recent re-authorization cycles, not only in terms of absolute expenditures but also in terms of the number and scope of programs, provides strong evidence of this.

Pork barrel spending has become one of the more ubiquitous forms of government failure in U.S. transportation policy. The term refers to the process of elected officials securing spending on projects or programs for the primary benefit of members of their home district. This practice has become synonymous with the process of earmarking, in which provisions are included in bills or committee reports to direct spending to specific projects, often without any form of evaluation to determine the project's social desirability. The most recent federal transportation bill, authorized in 2005, included more than 6,000 earmarks, totalling more than $24 billion in spending. The project which came to represent the most egregious example of pork barrel spending in transportation was the proposed $398 million Gravina Island Bridge in Alaska, infamously known as the "Bridge to Nowhere". Other prominent examples of pork barrel spending include Boston's Big Dig, the Johnstown Airport and Interstate 99 in Pennsylvania, and the Coconut Road Interchange in Florida. Pork barrel spending has also influenced the design of federal highway and public transit programs, both of which are structured to spread benefits as widely as possible across congressional districts in order to ensure local support.

Rent-seeking involves the manipulation of the economic environment by private individuals or groups in order to extract economic rents. Governments are a primary target of rent-seekers, since they may offer special privileges in the form of budget allocations or regulatory treatment, and are susceptible to interest group lobbying. A classic example in the field transportation is the Davis-Bacon Act, which applies to all federally-funded public works projects in the United States. The Act requires the payment of "locally prevailing" wages to workers employed on such projects. The term "prevailing" is generally understood to refer to local unionized wage rates, including fringe benefits. Originally passed in 1931, the law has survived numerous attempts to repeal it or weaken its provisions, owing largely to political support from unionized construction labor. The Davis-Bacon Act, among other provisions (such as the Buy America Act), is cited as a source of rising construction costs on many federally-funded projects.

In practice, both market failure and government failure have influenced the nature of ownership arrangements in the provision of transportation. In addition to these considerations, the type of good represented by different transportation assets may influence not only the distinction of public versus private ownership, but also which level of government should be responsible for providing transportation infrastructure and services in the case of public ownership. As we will also see, there are a range of possible outcomes in terms of the degree of private involvement in the provision of transportation.

The Nature of Transportation as a Good and Its Ownership

Elements of Vehicle/Highway System

The existing vehicle/highway system can be characterized as having a sort of quasi-private form of ownership. While in many elements are publicly owned:

• Road infrastructure
• Traffic control
• Public transit services

The system does have several elements that are privately supplied including:

• Private vehicles
• Time
• Roadside Services (Gas, Food, Lodging)
• Origins
• Destinations
• Parking

Functional Highway Classification by Type of Good

There are four types of goods that are determined by their technical characteristics concerning excludability and rivalry:

		Excludability
		Yes	No
Rivalry	Yes	Private	“Congesting”
	No	Club	Public

Public goods are non-excludable and non-rivalrous,

Private goods are both excludable and rivalrous.

Club goods (for instance a country club membership) are excludable, but non-rivalrous (in the absence of crowding).

Congesting goods are rivalrous but not excludable, for instance a crowded street. While an individual cannot be excluded from a city street, that person's presence may cost you extra time and his occupation of space does prevent you from occupying the same space at a given time. (Note that limited access highways are potentially excludable, unlike city streets.)

Excludability

Excludability implies that the good's provider can prevent a user from obtaining it without charge

National defense for instance is non-excludable, America's nuclear weapons protect anyone in the country, whether or not they want it. On the other hand, the sale of anything in a store is excludable – the owner can prevent a customer from obtaining a good unless the customer pays (assuming enforceable property rights etc.).

Rivalry

Rivalry implies that one person's consumption of a particular good prevents another individual from consuming it.

National defense again is non-rivalrous – one person's protection does not prevent another's protection. Shoes are rivalrous, only one person can wear a pair at a time.

Roads

Hierarchy of roads delineates which roads serve property access and which roads serve movement

Roads exist largely to serve two purposes: movement and access (specifically, access to property). Different types of roads have characteristics of different types of goods based on their functional classification. In other words, there is a correspondence between the functional classification of a road and the type of good it represents. What types of roads are which type of goods?

Limited access highways (freeways) and some arterials with signalized intersections and few access points, could be considered private goods, since it is possible to identify and exclude users with appropriate toll technologies. These roads are also rivalrous since, in the absence of pricing or other measures to limit demand, an additional user can affect the use of the road by others.

Local roads lie on the other end of the spectrum in terms of functional classification, since they exist primarily to provide property access. Local streets can be excludable if access to them is restricted. Access restrictions may take many forms, ranging from the simple posting of signs indicating that access is restricted to residents to actual physical restrictions, such as gates. The latter type of restriction is typically associated with gated communities or other forms of private residential development. Local streets are also generally non-rivalrous in that their low levels of traffic tend to preclude problems with congestion. This combination of characteristics (excludability and non-rivalry) indicates that some local streets may be considered club goods. The oldest such example in the United States is that of Benton Place in St. Louis, Missouri, where adjoining property owners were required to join a private association which was responsible for road maintenance, with assessments being levied on each association member.

Local streets are typically provided by local governments with no restrictions on access. In the absence of access restrictions local streets may be both non-rivalrous and non-excludable, leading them to take on more of the character of a public good. Note the term "public good" in this case is defined by the economic characteristics of the good, and not simply by the fact that it is supplied by the public sector.

Between limited-access highways and local streets are a middle level of road, collectors, that link local streets with limited-access highways. These “linking collectors” serve both access and mobility functions, since they may also provide access to some adjacent properties. These roads may be considered “congesting” or common goods.

The characterization of roads in terms of functional classification may also inform decisions about which level of government should be responsible for providing a given road (assuming the decision is made to provide the road publicly). Local units of government seem best suited to providing local streets, since they are closest to the problem. Roads that provide for a higher level of movement, such as limited-access highways, ought to be provided by higher-level jurisdictions, such as states. Of course, there are tradeoffs involved in each of these decisions. Smaller jurisdictions may not be able to fully realize scale economies, while larger jurisdictions may encounter problems with span of control. Between these extremes there is some optimal mix of expenditures between different levels of government that minimizes capital and operating costs.

Realms of Public and Private Involvement

Spectrum of transportation infrastructure ownership

One can think of the degree of public and private involvement in the provision of transportation as falling somewhere along a continuum between fully public and fully private ownership. Returning to the example of road provision, the figure outlines the various forms of possible public and private ownership structures, along with the types of functional class roads they might apply to.

Under conventional forms of government ownership and provision, responsibility for road provision is divided between federal, state, and local government. Federal and state governments have primary responsibility for arterial roads (including the Interstate system in the U.S.), with states also operating some more heavily-used collector roads. Local governments provide some combination of collector and local roads. In addition, some local roads may be provided by non-governmental organizations, such as homeowners' associations and individual private landowners (as in the case of apartment complexes).

One could also conceive of roads being provided under a public utility framework, where responsibility for maintenance and operation of the roads was transferred to a quasi-public authority. This might be an acceptable way to provide the network of linking collectors that connect local roads with higher-level arterials (limited-access highways) and serve both access and mobility functions.

Alternately, the private sector can be involved in the provision of roads to varying degrees. Most public works and transportation departments involve the private sector to at least a minimal degree in such activities as planning, design, construction and maintenance.

The more limited forms of private involvement in road provision tend to involve the outsourcing of road design, construction and maintenance activities to private consulting and construction firms. Private contractors may enter into service contracts with government agencies to provide certain specified operations and maintenance activities. These contracts may apply to all classes of publicly-owned roads. Outsourcing may also apply to more comprehensive management contracts, in which the contractor may be responsible for the design and construction of a road (often under so-called design-build project delivery systems), sometimes coupled with provisions for operations and major maintenance activities. These types of contracts often are applied to the construction of new arterial roads in cases where a public authority is unwilling to give up full control of a project.

Greater private sector involvement in terms of project financing and risk assumption are possible through agreements between public authorities and private contractors for the franchising of road projects. Franchise agreements often leave the ownership of the road in the hands of the public sector, while leasing it out to private operators who agree to operate and maintain the road for over a given period specified in the contract. This method is often adopted for projects involving the construction of new arterial roads, where the contractor is responsible for some combination of design, construction, finance, operation and maintenance activities. Many contracts are structured such that the management and operation of the road asset will revert to the public authority after the expiration of the contract. Franchise arrangements for highways also typically involve contracts that contain rather detailed provisions regarding pricing, operations, and maintenance requirements.

The greatest amount of private participation in road provision is made possible via the divestiture of existing roads by the public sector. Divestiture involves the outright sale of an existing road to a private firm, who is then free to operate the road and collect charges from users to financing its operation. Examples of full divestiture of roads are rare in the United States though, as will be discussed later, there has been some renewed interest in the franchising of existing highways in recent years.

Public Role in Private Provision of Infrastructure

The public sector has generally had three different types of roles that interact with private sector in the provision of transportation infrastructure.

• The public sector may be the recipient of privately provided infrastructure. Traditionally the public sector owns, operates, and maintains street and road infrastructure. However developers may build local roads and streets and dedicate them to the public sector as part of their role in making land suitable for occupancy. These private in-kind contributions are the most common type of private provision of infrastructure.
• The public sector may play a role as facilitator in the provision of infrastructure. Government agencies may provide planning and coordination activities in anticipation of the development of an infrastructure project, possibly including the assembly of land for right-of-way (which in some cases may require the use of eminent domain powers). Some public entities will also offer financial inducements to facilitate the provision of infrastructure. In addition to some of the tax advantages offered to private investors in the financing of infrastructure projects (which will be discussed in the next section), public entities may sometimes provide matching grants to encourage private investment. A more traditional role of the public sector in facilitating private investment has been for the state to act as a broker for infrastructure projects, combining its traditional coordination activities with the discretion to select a private developer for an infrastructure project from among multiple competing proposals.
• The third type of role that the public sector might play is to serve as an investor in infrastructure projects. Governments may serve as stockholders in some private projects, though this practice has been limited in the US (see the preceding section on the history of state involvement in US road provision for the early precedents to this policy). In some cases, the public sector may form a transportation corridor development corporation to guide the development of an infrastructure project. Lastly, the public sector may play a more traditional role as developer in an infrastructure project.

Private Role in Public Sector

There are also many situations in which the private sector plays a role in the public sector's provision of transportation. Consider the case of highways. The private sector is often intimately involved in several aspects of the development of highways. Private consultants are often hired to provide expertise in the planning and design functions on specific roadway projects. Private construction contractors are hired to manage the actual construction of transportation projects once the design work has been completed. Sometimes these functions are more closely integrated into what are termed "design-build" contracts.

The private sector may also be invited to participate in the operation of public facilities. In some cases, existing assets such as toll roads will be put out to bid for the right to operate them for a limited period of time. Recent examples of this include the Indiana Toll Road and the Chicago Skyway. Sometimes a public entity will sell an asset to a private investor, then lease it from the investor and continue to operate it, an arrangement referred to as a leaseback scheme. Under such a scheme, the public entity benefits by being able to raise cash through the sale of the asset, while the investor is able to claim the tax benefits from the depreciation of the asset.

The private sector may also be encouraged to take on a greater role in the provision of new infrastructure. Beyond the traditional planning, design and construction functions, public entities may award contracts that require private firms to take on responsibility for the financing and ongoing operation of a road. These contracts are referred to as Design-Build-Operate-Maintain (DBOM) or Build-Operate-Transfer (BOT) contracts, with the latter containing provisions for the transfer of the asset back to public ownership after a given concessionary period.

Differences in Transportation Ownership by Country

There is a great deal of diversity reflected in the international experience with the ownership and development of transportation networks. Here we will provide a brief survey of the experiences in a few of the more developed, industrialized countries of the world.

United States

Article 1, Section 8 of the United States Constitution states that:

The Congress shall have power to lay and collect taxes, duties, imposts and excises, to pay the debts and provide for the common defense and general welfare of the United States; but all duties, imposts and excises shall be uniform throughout the United States; … To establish post offices and post roads; …

Amendment IX adds:

The enumeration in the Constitution, of certain rights, shall not be construed to deny or disparage others retained by the people.

Also, Amendment X provides that:

The powers not delegated to the United States by the Constitution, nor prohibited by it to the states, are reserved to the states respectively, or to the people.

It is not entirely clear what the above provisions prescribe in terms of ownership and operation of transportation infrastructure. On one hand, Article 1, Section 8 provides for the establishment of post roads, which initially were meant to imply major routes connecting cities, essentially the equivalent of modern highways. However, as the population grew and mail service became more widespread the designation of post roads became less clear. Also, a law passed in 1838 extended the designation to all railroads. The addition of Amendment X indicates that transportation activities not under the purview of the federal government (for example, those identified in Article 1), should be left the states or to private individuals. States, in turn, could devolve some powers to local units of government.

Early federal road bills were vetoed by Presidents James Madison, James Monroe and Andrew Jackson, primarily on the grounds that they overstepped the bounds of federal authority granted by the Constitution.

One might interpret the above provisions as prescribing a rather limited federal role for transportation, especially considering the declining importance of having a set of federally-designated post roads and the development of rather robust roadway networks. In contrast, the federal role in transportation has grown considerably, particularly during the latter half of the 20th century. While states have taken on increasing roles in constructing and maintaining transportation networks, the federal government still has a large presence in terms of regulatory policy and financing. These two activities are the primary instruments through which the United States implements its transportation policies.

Currently, governments provide the majority of the system of roads and highways in the U.S. In turn, they recover part of the cost through the imposition of fuel taxes, vehicle license fees, sales taxes on motor vehicles, weight-distance charge from trucks, and various other fees and penalties (fines). The federal portion of the motor fuels tax, currently at 18.4 cents per gallon, is directed to the federal Highway Trust Fund. Most of the federal Trust Fund revenues are distributed to the states as aid for highway and bridge construction. The remaining share is distributed for mass transit grants to cities and for environmental remediation projects related to leaky underground fuel storage tanks. States add their own motor fuel taxes, which raises the US national average motor fuel tax to 47 cents per gallon. Some state and local governments also operate toll facilities, mostly roads and bridges, which account for a little over 5 percent of all transportation-related revenues. Most of the toll facilities in the U.S. are located in older, northeastern states and many of them predate the initiation of the Interstate Highway System. More recently, faster-growing Sunbelt states like California, Florida and Texas have accounted for most of the growth in the mileage of toll roads in the U.S.

The Interstate Highway System (also known as the Dwight D. Eisenhower National System of Interstate and Defense Highways) is a unique feature of the U.S. transportation system. It is comprised of a national network of over 46,000 miles of grade-separate, limited-access highways. The network was initially planned during the 1940s, while the U.S. was involved in World War II, and was presented to the public primarily as a critical component of national defense. The stated goal was to provide the ability to move large amounts of troops and equipment across the country quickly. A second important goal was to facilitate interstate commerce, coinciding with the growth of commercial truck traffic, though this goal was not as prominently promoted. Construction on the Interstate system began in 1956, under the Eisenhower administration. Today, states retain much of the responsibility for maintaining the Interstate system, with the federal government providing grants funded the federal fuel tax. The Interstate system remains publicly owned, largely on the grounds that national defense is too important to place in private hands.

Most airports in the United States are owned and operated by municipal governments or local authorities. This remains the case despite a recent attempt to privatize Chicago's Midway Airport. The privatization proposal, initiated in 2008, would have taken the form of a long-term (99-year) lease from the City of Chicago in exchange for a $2.5 billion up-front payment. The lease arrangement fell through when the consortium that would have operated the airport was unable to put together a full financing package.

The Federal Aviation Administration (FAA) imposes taxes on aviation fuels, passenger tickets and several other aviation-related items in order to fund the Airport and Airway Trust Fund (AATF). The Trust Fund, authorized in 1970 under the Airport and Airway Development Act, finances air traffic control and grants to local authorities for airport improvements. These funds are supplemented by revenues raised by local airport authorities from sources such as landing fees (based on the maximum landing weight of aircraft), passenger facility charges (PFCs), parking charges, and concessions for retail activities at major airports. Each airport has its own user charge schedules. Airport expansion costs are usually raised by airport bonds secured by signatory (major) carriers. This gives the signatory airlines power to veto any major changes to landing fee structures or airport slot allocation systems. This veto power has proven to carry weight, for example, when LaGuardia Airport's incumbent airlines blocked a recent proposal to auction off airport slots during peak traffic periods.

Airport congestion has become a recurrent problem in many locations throughout the U.S., often affecting the on-time performance of carriers. Only a handful of airports, such as those in the New York City area and Boston's Logan Airport, use landing fees during peak periods in order to mitigate congestion. The fees are typically designed to get smaller aircraft to move their flights to off-peak periods or to other nearby, less congested airports. Airport gate and Landing slots are a similar type of mechanism for allocating peak capacity. Some landing slots are transferable among carriers. However, the method used by most airports to allocate slots to carriers tends to confer windfall gains on existing carriers.

Expanding capacity at U.S. airports has proven difficult in recent years due to political and environmental considerations. When physical expansion is undertaken, it is often in the form of adding a runway to an existing airport rather than building an entirely new one. In the U.S., Denver International Airport has been the only new airport built since 1974.

Canada

Governments provide system of roads and highways;

• recovers a part of the cost through fuel taxes, vehicle license fees, and other fees and penalties;
• limited number of toll roads and bridges.

Transport Canada owns and operate most of the airports in Canada, and provide enroute air traffic control and navigational aid services;

• Toronto, Montreal's Dorval, Vancouver, Edmonton and Calgary airports were transferred to respective local authorities in 1992.
• Some examples of private provision of airport facilities;
  • Toronto airport's terminal 3 ($500 mm)
  • Renovation and reconstruction of terminals 1 and 2 ($750 mm)
• a push towards further defederalization and privatization of airports.
• recovers a part of the costs through air transport tax, landing fees, concession and other rentals, general terminal fees, parking fees, etc.

The development of Canadian policies toward transportation have some importance differences from those in the United States. Like the U.S., Canada has maintained some degree of shared responsibility for transportation between the national government and the country's 10 provinces. However, unlike the U.S., Canada has devolved responsibility to lower levels of government to a much greater degree. With the exception of air transportation and marine navigation, most transportation functions are devolved to provincial and lower levels of government. Canada has also undertaken more extensive measures to privatize certain types of infrastructure and services, particularly in air transportation (e.g. airports and air traffic control).

Canadian transportation policy, especially toward issues of ownership of transportation infrastructure, has gone through significant change since the mid-1980s, when a wave of economic liberalization affected many sectors of the Canadian economy, including transportation. The roots of regulatory reform in Canada's transportation sector can be traced back to the MacPherson Royal Commission on Transportation (1961–62), which was tasked with studying the issues of the railway industry, which came under financial stress during the 1950s when it started losing commercial traffic to competing modes such as intercity trucking and waterways. The Commission recommended broader regulatory liberalization across the transportation sector with a more limited role for government subsidy in guiding transportation policy. Many of the Commission's recommendations toward Canada's railways were adopted with the 1967 National Transportation Act, though the recommendations regarding regulatory liberalization of other modes were not. Liberalization policies toward other modes were picked up again during the 1980s under a more conservative national government.

Railway companies themselves provide their own infrastructure; roadbeds, tracks, yards and stations; Ports Canada, a crown corporation, owns and operates major ports in Canada; each port authority (e.g., Port of Vancouver) enjoys substantial autonomy.

While a department of the Canadian government, Transport Canada, has broad responsibility setting regulations and policies affecting transportation in Canada, decisions about road construction are placed under the jurisdiction of individual Canadian provinces. The Trans-Canada Highway, a transcontinental highway link, was built through a federal-provincial partnership that emphasized connecting and upgrading major inter-regional links within provinces. Apart from this effort, there is little federal involvement in the provision of roads. Roads costs are partially recovered through a combination of fuel taxes, vehicle license fees, and other fees and penalties. Fuel taxes in Canada include a combination of federal and provincial excise and sales taxes, a portion of which are directed to a Gas Tax Fund which is used to finance municipal infrastructure.

Canadian provinces make limited use of toll facilities in the road sector. The primary use of tolls on Canadian roads is to provide a revenue stream to repay bonds issued for road construction. Some highways that were initially tolled have since seen the tolls decommissioned. Most recently, the Coquihalla Highway had its toll facility decommissioned in 2008. Originally completed in 1987 at a cost of $848 million, the highway's tolls were removed after the BC government had collected a roughly equal amount of revenue during the toll road's 20 years of operation.

Private participation in the development of road infrastructure has been limited to a couple of major facilities. Ontario Provincial Highway 407 was built between the late 1980s and late 1990s under a 35-year lease to a private consortium. Under the original agreement, the highway was to be transferred back to the provincial government at the end of the lease. However, in 1999 the Ontario government passed a budget-balancing resolution that included a 99-year lease of the highway to a private consortium. The 407 facility is one of few in the world to use an all-electronic toll collection system. The other major privately developed road infrastructure project in Canada is the Confederation Bridge, an 8-mile toll bridge connecting the mainland province of New Brunswick with the island province of Prince Edward Island, off Canada's eastern coast. The Confederation Bridge was completed in 1997 under a build-operate-transfer agreement between the Canadian government and a private developer, Strait Crossing Development Incorporated. A subsidiary of the developer, Strait Crossing Bridge Limited (SCBL) will operate the bridge for 35 years and collect tolls, with the operation of the bridge reverting to the Canadian government at the end of the lease. SCBL services the debt issued to pay for the bridge's construction with a combination of toll revenue and subsidy payments from the Canadian government for the ferry services it continues to operate at a loss in order to provide transportation for pedestrians, cyclists and other types of vehicles that are prohibited from using the bridge. It is important to note that the original motivation for building the bridge was to provide a fixed link across the Northumberland Strait to better connect Prince Edward Island with mainland Canada, and to partially replace the ferry service that previously carried most traffic to the island.

Transport Canada also retains a large role in Canada's aviation system. Prior to 1996, it had responsibility for both aviation regulation and provision of air traffic services. While it retains most of its regulatory functions, Transport Canada's responsibility for provision air traffic service has been greatly reduced. The adoption of the National Airports Policy in the early 1990s led to the divestiture of many smaller airports, while Transport Canada retained ownership over the larger airports in the National Airports System. The larger airports are leased to local private operating authorities. The National Airports Policy resulted in privatization of other aspects of the aviation system as well. A new private, non-profit company (Nav Canada) owns and operates Canada's air traffic control and air navigation systems.

Japan

Japan's major intercity roads are owned and operated by regionally-based public corporations.

Regionally based public corporations own and operate major intercity roads;

• other roads financed by fuel taxes
• many toll roads make profit after paying back the capital costs of construction and expansion.

Local authorities own major airports such as Narita and Kansai International airports;

• Landing fees and passenger fees are high;
• Government subsidize construction and expansion costs

Europe

European Commission has proposed to establish a rail infrastructure company to own and maintain railroad tracks and stations, and let rail carriers use it for fees to provide competing services.

Privatization

Gomez-Ibanez and Meyer have identified three types of privatization that may apply to transportation systems. Privatization may take the form of the sale of existing state-owned businesses, private infrastructure development, or the outsourcing of conventional public sector functions by contracting with private vendors.

Sale of existing state owned business

The first type of privatization is the sale of former state-owned business (public enterprises). During the 1980s, many governments in Europe and the developing world (South America in particular) initiated the sale of state-owned enterprises. Western European countries, led by France and the United Kingdom, were eager to return to the private sector many industries that were nationalized following World War II. These industries included public utilities, transportation, and some heavy industry (e.g. British Steel in the UK). Similar developments were taking place in the developing world, led by South American countries such as Chile and Argentina. The rationale was largely the same: a belief that the private sector could operate such enterprises more efficiently. Around the same time, the collapse of the Soviet Union and the dissolution of the former Communist Bloc left many Eastern European countries to make the transition toward a market economy. This transition affected the transportation sector in a large number of countries, where governments were eager to promote private sector participation in functions such as the provision of urban and intercity bus services. Reviews of early experiences with such reforms have started to appear for countries such as Poland and Hungary.

Private Infrastructure Development

The second type of privatization involves private participation in infrastructure development. While there has been more experience outside of the United States with private transportation infrastructure development in recent years, there are some limited examples domestically. These include the privately developed SR 91 Express Lanes in California, the Dulles Greenway in the Northern Virginia suburbs of the Washington, D.C. region, and the Las Vegas Monorail, one of the few examples of privately financed passenger rail systems in the U.S. In most cases where the private sector is invited to participate in transportation infrastructure development, the primary motive is raising new money for transportation, something that can be more difficult to accomplish under a system that is reliant on tax financing.

Outsourcing of conventional public sector functions by contracting with private vendors

The third type of privatization is the outsourcing of conventional public sector functions by contracting with private vendors. This type of privatization has gained wider acceptance in the U.S. and has become fairly standard practice for many transportation and public works departments. Functions such as road maintenance and highway management are routinely contracted to private firms.

Many urban public transit agencies in the U.S. also contract with private vendors to provide maintenance services, direct operation of some transit routes, or both. For example, a number of cities in the northeastern U.S. have contracted with Amtrak or one of several private firms to operate commuter rail services. The selection of Amtrak as the operator in some cases was due to the fact that Amtrak owns the rail infrastructure on some lines where it also provides intercity passenger service.

In both cases, the primary motive for outsourcing maintenance, management or operations is financial gain on the part of government. Many governments have been able to realize cost savings in the provision and maintenance of transportation infrastructure through competitive contracting of services. The savings may then be used to either expand or improve the quality of service, to pay down existing debt levels, or to lower the burden of taxation that is borne by citizens.

Disadvantages of Privatization

Privatization of transportation infrastructure and services may also have some disadvantages. These can be categorized in terms of whether they apply to private firms or to society more broadly.

Disadvantages to private firms

• Private firms must pay taxes
• Private firms must borrow funds at market interest rates
• Private firms do not have eminent domain powers

Disadvantage to society

• Type 1 privatization (sale of state-owned businesses) may upset existing property/equity relationships. Winners and losers are created.
• Cost savings may lead to unemployment when firms cut back on unprofitable services. These workers must find employment elsewhere in the economy, something that may not easy to do during periods of recession.
• Environmental sensitivity may not be in a private firm's objective function.

Lessons for Success

Privatization is easier when:

• There is competition in input and output markets
• Possible efficiency gains are large
• Few redistributions or transfers are required
• There are few controversies with the environment or opposition to economic growth
• An activity or service covers its cost BUT profits are not TOO high

Transit Bus Privatization

One industry within the transportation sector where privatization has gained momentum in recent decades has been bus transit, particularly urban (intracity) bus services. The relatively low fixed costs associated with provision of bus services provides the potential for a market with relatively low barriers to entry and intense competition.

Regulation Cycle

Like many modes of transportation, urban bus transit has gone through many stages of growth, maturity, decline and some degree of rationalization. Gomez-Ibanez and Meyer have identified a 10-stage cycle of regulation and privatization that broadly reflects the experience with bus transit in many countries around the world. The 10 stages are listed below.

1. Entrepreneurial
2. Consolidation
3. Regulation of Fares and Franchises
4. Decline in Profits
5. Withdrawal of capital and services
6. Public takeover
7. Public subsidies
8. Declining efficiency
9. Vicious cycle of subsidy cuts, fare increases, service cuts, declining riders
10. Privatization [Go to 1 or 3]

While most cities begin at the first stage (entrepreneurial) of the cycle, some remain in the stages of public ownership and subsidy (stages 6 and 7), while others have moved on to various degrees of privatization (stage 10). Where privatization has taken place, the cycle indicates that cities typically revert to either an entrepreneurial phase or to a phase in which services are privately provided, but certain aspects of provision such as fares and franchises are regulated.

Types of Privatization

Depending on which policy objectives are being pursued, bus transit privatization may either eliminate or supplement public ownership. Where governments are looking to divest themselves of the ownership and operation of buses services and to end or limit the provision of subsidies, they may allow greater entry for private providers and limit regulatory involvement. Partial forms of privatization can also allow governments to continue to pursue certain social objectives (for example, providing service to low-income users), while maintaining ownership of bus service. An example of this is the competitive tendering of bus services, which is a more common form of partial privatization in the U.S., where the public sector retains ownership of bus services but enters into a contract with a private provider to operate the service. Decisions on fares, scheduling and service levels typically remain in the hands of the public organization.

Conditions on Privatization

Fares

• Deregulation of fares (Colombo Sri Lanka, Santiago Chile) [Colombo kept the public company with low fares and overcrowding; Santiago had a proliferation of modes, drivers formed route associations and raised fares, service is better but still crowding]
• Regulation of fares (everywhere else)

Routes

• Deregulation of routes ... direct subsidies to specific routes
• Regulation of routes ... must provide service on unprofitable routes -> cross subsidy

Britain's Buses

The most high-profile experiment with transit bus privatization in recent history has been the privatization and deregulation of local bus services in the UK. Privatization began with the passage of the Transport Act of 1985 which privatized and deregulated bus services throughout the UK, though London did not fully deregulate its services, opting instead for a system of franchised routes. The Transport Act was passed under the conservative Thatcher regime, as part of a series of sweeping economic reforms which privatized several former state-owned enterprises.

The Act requires only that firms register the commencement of, or changes to, a bus service at least 42 days in advance. Under the law, bus operators are only allowed to offer scheduled services, prohibiting jitney-type services. Local governments may refuse to allow a service only in the event of serious safety or traffic congestion problems. They may also supplement privately registered routes by offering unserved routes for competitive tender.

New entrants - low cost by lower wages, lower overhead, flexible work rules, do not usually lower prices, passengers are unlikely to wait.

The privatization and deregulation of bus services in Britain was designed to inject competition into the supply of bus services and thus to exert downward pressure on costs. This goal was largely achieved, as new entrants with with lower costs entered many markets and exerted pressure on incumbent operators. The newer firms tended to achieve lower costs through lower wages, more flexible work rules, and lower overhead costs. Existing firms were forced to respond by cutting their own costs. Since these firms retained many employees from their pre-deregulation days while simultaneously hiring new workers, a two-tiered wage structure began to emerge reflecting the compensation of these different groups. Another source of cost savings was the substitution of smaller vehicles (minibuses), operating more frequently and at higher speeds, for larger buses. Heseltine and Silcock report that just a few years after the initiation of deregulation, former National Bus Company operators claimed to have reduced costs per bus mile by 15 to 20 percent, while former Passenger Transport Executive operators reduced costs by an average of 30 percent.

While significant cost savings were achieved by the deregulated operators, passenger fares increased as broad-based government subsidies were withdrawn. Examining the experience with the first 10 years of deregulation, Mackie et al. reported that throughout the UK, passenger fares increased by an average of about 19 percent, while real subsidies declined by an average of 38 percent. Demand, measured in terms of passenger journeys, declined by an average of 22 percent nationwide, thought the decline was much lower in the London metropolitan region. Higher fares were an important factor in explaining the decline, as was the instability in the newly deregulated bus markets. However, the decline could not be accounted for by diminished service levels, as bus-kilometers of service rose in every region examined.

One of the more interesting developments in the evolution of the deregulated bus industry was the competitive strategy that was employed by the newly-private firms. There were initially many small operators in most of the larger markets, though the industry became much more concentrated within a few years, either through the exit of unprofitable firms or through acquisition of smaller operators by larger competitors. There are essentially no economies of scale in providing local bus services, but large firms have been able to successfully drive out competition by engaging in price wars and using profitable routes to subsidize fares on more competitive routes (cross-subsidization). Maintenance of competitive conditions on routes is made even more difficult by the scheduling practices employed by the deregulated operators. Since operators may set any schedule they like, subject to the provision of publishing the change six weeks in advance, many competing operators have an incentive to engage in "route jockeying" or "headrunning", wherein an operator schedules its service to run immediately ahead of its competitors (and thus take its competitors' customers). This practice works since passengers are often indifferent to which bus they choose to reach a specific destination, provided prices and quality are roughly equal, and is made easier by the fact that operators must publish their schedules. Such a strategy often invites retaliatory behavior by incumbent operators, who have been observed to respond by running service so frequently as to prevent competitors from attracting sufficient patronage to survive, a practice known as "route swamping".

In contrast, transit contracting in United States consists mostly of paratransit services, with only some fixed routes.

Curb Rights

Drawing on the experience of bus deregulation in the UK, as well as previous experience with private provision of transit the United States and around the world, Klein et al. diagnosed the problems associated with private competition in bus transit as an absence of property rights. Specifically, they suggest that fixed-route (though not necessarily fixed-schedule) transit services are able to function where operators have a right to pick up congregations of passengers along a route.

The congregation function in urban transit is considered essential to establishing a market for transit services. Klein et al. note that the establishment of private jitney services (services operating with smaller vehicles on relatively fixed routes, though not on fixed schedules) is common where there are substantial congregations of passengers at points along a route served by a regular, fixed-schedule service. Particularly in "thick" transit markets, the fixed-schedule service acts as an "anchor" around which the private jitney operators target their service. Klein et al. draw on a historical example from the US of jitney operations emerging during the 1910s and picking up passengers along the routes of streetcars, often running ahead of the scheduled streetcar arrivals. However, problems may arise when there are no rights assigned to pick up passengers at particular locations and during particular time periods. In the case of the streetcars, the issue was dealt with by the streetcar operators appealing to local governments to enforce their exclusive franchise rights and drive out the jitneys. While this action may have (temporarily) preserved the streetcars' viability, it also drove out potential market entrants who were willing to provide valued services to customers.

In the case of thick markets, like the streetcar example, the problem of "interloping" (or inter-temporal poaching of passengers) by new market entrants like the jitney operators is not as severe. If demand levels are sufficiently high, a route can sustain several competing operators. However, when markets are "thin" (i.e. when demand levels are lower), the problem of interloping becomes more severe. When a number of competing operators enter a thin market where scheduled service is provided, the anchor of the scheduled service may be "dissolved" by the competing operators. Operators may be hesitant to invest in providing scheduled service if they cannot appropriate the returns from picking up congregations of passengers and are not protected from interloping competitors. If interloping continues to occur in this kind of market, the result may be the destruction of the market altogether. This process has been observed in many of the smaller cities in the UK following deregulation, where intense competition and frequent interloping have become destructive and resulted in a large amount of concentration among a limited number of operators.

One possible solution to this problem that has been used in the past has been for a local government to offer exclusive rights to operate a particular route. However, this type of arrangement creates many of the same problems typically associated with monopolies (higher prices, lack of innovation in service provision). The role envisioned by Klein et al. for government is one of creating and enforcing property rights to serve passengers at particular locations and times ("curb rights"). The term "curb right" is used to denote the fact that the operator would have rights over a particular space along a street (a "curb zone"), including a bus stop area and the adjoining sidewalk, which would serve as a location for passengers to congregate. These curb spaces could then be auctioned to private operators who wished to use them to pick up congregations of passengers. The provision of rights over these congregations of passengers would ensure a minimal market to establish regular, scheduled service and protect this market from interlopers. Klein et al. also suggest the possibility of local governments protecting against monopoly abuse by reserving some curb zones as "commons" areas for jitney services when a single firm seeks to buy up all of the curb zones along a particular route, giving it a de facto monopoly. Where markets are sufficiently thick, the establishment of curb rights can also improve the quality of services by ensuring a market for both scheduled services and unscheduled, jitney operations.

Road Privatization

Unlike buses, roads are not easily contestable. Buses tend to have low fixed costs and higher variable costs, which implies few barriers to entry. The roads most likely to be private (limited-access roads) under the framework discussed previously also tend to be more costly to provide and entail high fixed costs. In this case, market power is a serious consideration. Many limited-access highways function essentially as local monopolies, making the introduction of direct competition difficult.

Issues of competition can also be problematic in urban settings. Where new private toll roads or road capacity are built in urban areas, the toll road must often compete with one or more free alternatives, making it difficult to attract sufficient traffic. In the case of the privately built 91 Express Lanes in Orange County, CA, the local topography made the provision of parallel routes difficult. The primary competitor to the toll lanes was the parallel free lanes on the SR-91 freeway, which tend to become badly congested during the peak period. After several years of operation, the worsening peak-period conditions on the free lanes led to growing public demands for additional capacity. While the significant peak-period congestion ensured a market for the toll road, it also imposed a heavy economic cost on the users of the free lanes in the form of delays. Since the lease agreement with the private operator prohibited the addition of untolled capacity, the Orange County Transportation Authority had no choice but to purchase the toll road and take over its operation.

Other aspects of road networks can also make privatization difficult. For example, on low volume roads, tolls often cannot recover costs. This typically leads to other forms of financing. One possibility is to finance such roads through general revenue sources, essentially treating them as local public goods. Another is to adopt shadow tolls or other forms of availability payments.

Roads are also a long term investment, implying a need for guarantees of stability. Long-term traffic forecasting is difficult and often involves large margins of error. Uncertainty about future traffic demand translates into uncertainty regarding future revenue streams from road tolls. Under private financing arrangements, risks associated with revenue uncertainty often get capitalized into interest rates, leading to higher borrowing costs. Problems of uncertain traffic demand can be particularly acute when a private road is being built in a growing area, where future development is anticipated to form a significant part of the base of demand for the road. An illustration of this problem is provided by the experience of the Dulles Greenway in Loudoun County, Virginia, where the Greenway's original owners defaulted on their loan due to lower-than-projected demand and revenue.

Reluctance

Since the establishment of the publicly-owned National Highway System in the U.S. there has been continued reluctance to build new private roads or privatize existing roads. There have been a handful of exceptions, however. During the 1990s there were two notable projects that involved private ownership and financing: California's SR91 Express Lanes and The Dulles Greenway). More recently, the privately financed and developed South Bay Expressway was completed in 2007 in the eastern suburbs of the San Diego region. In addition, there have been a couple of cases where existing toll roads have been leased to private entities under long-term lease agreements (an example of the "franchise" framework discussed previously). These types of arrangements have been agreed to for operation of the Chicago Skyway and the Indiana Toll Road.

There are several possible explanations for the reluctance to move toward greater privatization of roads in the U.S.:

• The reluctance may reflect apprehension toward privatization in general, due to some high-profile and problematic experiences with privatization and deregulation in other industries such as California's electricity deregulation and Britain's experience with Railtrack.
• Private roads must offer a significant and apparent advantage over public control.
• The burden of proof is on those who want to change the status quo. They must prove why privatization would be beneficial to all interested parties.
• The case for privatization must be compelling, and for most places to try it, it must have been done somewhere else first.
• Not just net gains, but also distributional effects must be considered. Privatization may create winners and losers, and the losers are likely to be the most vocal opponents, complicating matters politically.

Thought Question

The 2000 Libertarian Party Platform asserts "Government interference in transportation is characterized by monopolistic restriction, corruption and gross inefficiency. We therefore call for the dissolution of all government agencies concerned with transportation, … We call for the privatization of …, public roads, and the national highway system. …"

Is Government Ownership Characterized By:

• Monopolistic Restriction
• Corruption
• Gross Inefficiency

Would Private Ownership Be Characterized by:

• Monopolies
• Corruption
• Gross Inefficiency ?

Public Policy Questions

Should the freight railways continue to provide their own infrastructure ? If yes, should they be subsidized to the extent that truckers are being subsidized indirectly ?

What are the advantanges and disadvantages of creating a common rail infrastructure corporation ?

Should the governments (i.e., tax payers) subsidize a part of infrastructure costs ?

Should the extent of subsidy be equalized across all modes of transportation ?

If so, should we subsidize an equal amount per passenger-km or an equal proportion of the total modal costs ?

Exercise

Who should own Metro Transit? How should it be organized? Work in pairs, identify alternative ownership regimes, discuss their merits.