Public-Private Infrastructure Partnerships

Part of the Administration promise to invest trillions of dollars in infrastructure projects is based on the ability to find private investors to help with the investment. Texas tried this 10 years ago with mixed success: some expressways are working while one notable exception is failing (Hwy 130 between Austin and San Antonio).

Highway 130 venture is 41 miles long and acts as an 85-mph expressway. Its approximate cost is $200 million excluding construction of tolls. Wikipedia references the cost at $1.5 billion However, the private consortium that was responsible for constructing and maintaining that stretch of road declared bankruptcy owing $1.6 billion. While it was projected that the road would provide $245 million to the state with its share of the toll revenue, it has only provided $3 million in the past 10 years.

Let's do some quick calculations. Assume it cost a minimal average $1.2 million per mile (for milling and resurfacing). Concrete roads have an expected life of 30-60 years. The road would need to collect $40,000 per year for replacement in 30 years. If the toll is $1/vehicle, only 150 or so vehicles per work day need to travel on it. Bump the price tag to the higher reality of $37 million per mile!! To break even you need to have 5,600 vehicles/workday travel the road.

On a similar, but non-toll, stretch of road in a less populous state, the average vehicle number per day is well above 30,000.

The profit would happen if more than 6,000 vehicles per day travel on it. In spite of that, assume the payback period needs to be five years. At $1/vehicle, you need 36,000 vehicles to travel that stretch of road. It's been reported that the toll has been $3/passenger car for the whole stretch (and much more for trucks).

Perhaps looking at the time value of that stretch would make it worth the $3/vehicle. If the consortium can't make it work, and the state isn't seeing its share of toll revenue, my guess is that drivers aren't seeing the time value of Hwy 130 as a viable alternate to the 'free' I-35.

If you apply supply and demand principles (which one shouldn't do on a straight-forward basis), perhaps Texas and the consortium should consider dropping the tolls to boost traffic volume and have a chance for the road to pay for itself in 5 years. Set a longer payback period and the economics seem to make more sense.

Will the Administration's plan for public-private partnership work for other infrastructure projects? Will we tolerate more tolls on roads or other fee boosts (such as an increase in airfare ticket/airport taxes)? Perhaps if rationality prevails (and if you've read Daniel Kahnemann's Thinking, Fast and Slow or Michael Lewis' related The Undoing Project you know that doesn't always happen.), it might work.