This week President Bush signed the new highway act, legislation that provides $15 billion in funding for public-private roads as demonstration projects. The ultimate goal is to demonstrate the superiority of the private sector over government. The theory is that competition forces businesses to provide the best services at the lowest price. Government is supposed to be monopolistic, corrupt, and grossly inefficient. When it taxes us, we can be certain it is misusing our money.

That is the theory in a nutshell, one that is widely accepted these days.

Some even go so far as to believe we can tax-cut our way to prosperity.

Unbossed has spent the week reporting on how an existing public-private partnership - E-470 - actually behaves. In other words, we have collected data that can be used to test these theories.

Even though we have covered a lot of ground, we end this week with more questions than we have answered. These and more are questions that we, as citizens of this great country must discuss.

To begin that discussion, here are what I regard as important open questions.

The posts here have exposed the terms of noncompete agreements to the light of day. I think that most Coloradans would regard the terms of those noncompetes - lowering speed limits, installing unnecessary stop lights, and failing to do road improvements - as a betrayal of trust. The public officials they elected to represent the citizens’ interests were so concerned about forcing people to use the toll road they were willing to go to these extreme lengths.

When you think about it, the very idea of a “competing” road is odd. But that is the way the parties to the noncompete agreements saw the world. I am certain that most people - and certainly the people of Colorado - do not see roads as competitors with one another. Rather, they see them as an integrated system through which traffic flows. Individuals may choose to flow one way or another depending on their needs at a given time.

Compare this with going into a drug store to buy vitamins. You would compare price and strength, and if enough people make the same choice as you do, the competing vitamins will go out of business and no longer be available and you have fewer choices.

But if people choose one road over another the less popular road does not go out of business. It is still there as part of the system of roads, and less traffic on it may actually make it a more popular choice.

In addition, the value to you of various vitamins does not depend on any system in the way that the value of roads does. The best built, most attractive road is of no value if it is not integrated into a system of roads.

But the parties to the noncompete agreement failed to see the roads as a system and saw them only as competitors. This limited vision means that they also to take into account the range of interests of those they were elected to represent. They began to see them not as citizens but only as customers to be lured into paying to ride the toll road. They came up with schemes to this by market speed. Colorado’s Denver area toll road E470 uses slogans such as "70 mph optimism," "Road Nirvana," "Home Swift Home," and “Arrive Fashionably Early.” The E-470 Board meetings had time to discuss producing commercials for television and other marketing and public relations activities:

Mr. Kristick briefed the Board on marketing activities, including the refer a friend program and the 150,000th customer recognition. He reported on the home swift home and arrive fashionably early marketing campaigns launched in September and noted that September saw the highest new account growth.

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There was no discussion of the public interest.

The more I’ve thought about it, the more it seems to me that this public-private partnership led the cities and counties to create a sort of secret government. The residents of those cities and counties thought they had elected representatives who could be trusted to do what was right for the citizens as a whole. The reality was that these representatives paid their allegiance to the needs of the toll roads. They came to believe that those needs were the needs of the people they were elected to represent. E-470 needed to have lots of toll payers, so they tried to shoo as many people as possible onto E-470 by any means necessary.

Why did they do this?

As it turns out, to a great extent, the E-470 Toll Road Authority and the governments of the communities with which it contracted are one and the same. This means that when the Authority contracted with the governments of those communities, it was actually contracting with itself. It also means that no one sat in on those negotiations to represent the citizens. To say the least, this arrangement created a dangerous conflict of interest.

To put this another way, the structure of this partnership has corrupted these public servants. The structure of the organizations that operate E-470 are mostly public with some private involvement. It seems likely that with greater private sector involvement and private investor money directly at risk, there will be even more pressures to focus on generating revenue. So while those who promote privatization see government as inherently monopolistic, corrupt, and grossly inefficient, one question these events raise is: Can the private sector also be monopolistic, corrupt, and grossly inefficient? These events give us no reason to think that the answer will be no.

Being Honest about Privatization

The theory of privatization is that market competition forces businesses to be efficient and to deliver the highest quality goods and services at the lowest prices. Proponents claim that the market is so superior that they can provide cheaper and better services and goods than government can. That is the theory.

The story we have revealed this week on unbossed tests that theory against reality. The structure of the toll road has pushed the players here to respond to market forces. Rather than focusing on making E-470 better, the Toll Road Authority worked to ensure there was no competition. They knew they would lose drivers to Tower Road unless they made it worse. Put another way, the goal was to make money, despite the market.

Yet even this has not been enough to keep E-470 revenues from falling far short of projections. Given the investments the communities surrounding E-470 have made, in E-470 their concerns for recouping those costs, drives many of the actions we have seen. In economic terms, these may be sunk costs, costs that cannot be fully recovered, that are influencing decisionmaking. For more on this, you can read about the sunk cost fallacy here.

What is the true cost of toll roads?

They also did a bait and switch. It seemed as if the cost of the toll road was just the tolls. But the true cost of the toll road was real but hidden. The true cost includes unpleasant drives on Tower Road and on city and county budgets that are lower because of the money committed to E-470 - which may never be repaid. The true cost is borne by everyone who uses a product or service that uses E-470 - the cost will be part of the price and paid even by those who never set tire on E-470. It will also be borne by non-users of E-470 because business uses will be able to deduct their tolls, worsening the tax shortfall. If “competing” roads are left not just unimproved but inadequately maintained, the cost will be borne by those whose cars need repairs caused by a bad road.

But all these costs are nothing compared to the loss of faith citizens will feel toward their government as this story comes out. That loss of faith in public officials will only reinforce the anti-government movement that led to this problem in the first place.

It would be a blessing if knowing the true cost of E-470 pushed all of us to face up to the reality that you have to pay for what you need and use or do without. There is no magic in the market.

Questions about Design-Build

E-470 is held up as an model, in part, because of its use of the design-build process. The traditional way to build a road is to have one party design it. Someone else then builds it. Under design-build, one party does both. The benefits of design-build are that it can save time, because the contractor knows what needs to be done, because the contractor designed the system.

In the case of E-470, its design-build contract went even farther. It entered into a contract with Morrison Knudsen to design and build segments 2 and 3 of E-470 and to secure millions financing and to guide the E-470 authority through the thicket of political, legal, and environmental issues.

But there is a downside to efficiency, and that is loss of accountability. For all the millennia that people have built houses and roads, they still can fail. Roads are inherently complicated building projects. With all the cost in time and money, it is most important that the work be done right. And when that is what is potentially lost with the design-build structure. It may slow work down, but it may, in the end, be helpful to have the contractor go over and challenge what has been designed.

Accountability is the weak spot in outsourcing, something has been observed repeatedly - in government studies, by academics such as Elliott Sclar and Ellen Dannin, and even by Deloitte Consulting, an outsourcing consultant.

How do toll roads change the picture?

Trying to predict the future is always tough, but here are four trends I think are developing.

First, the push for public-private partnerships seems to be a dry run for full-on privatization. The problem for privatized roads is that they have not made money, so it is hard to find investors in new projects. In Highways and Transit: Private Sector Sponsorship of and Investment in Major Projects Has Been Limited, GAO-04-419, March 25, 2004, the GAO found that the “private sector encounters many challenges to becoming more actively involved in highway and transit projects because of limited opportunities and barriers to financial success.” In plain English, the problem is that it is hard to make money in private roads . . . if you rely on the “magic” of the market.

Public-private partnerships, especially those supported by federal funds, provide a safe testing ground to develop ways to make a profit. One is noncompete agreements. Selling advertising and concessions at toll plazas, something the E-470 Authority is interested in, may generate revenue. Another may be acquiring more land than is needed for the project and then selling off excess land when its value rises as a result of development. We can expect to see efforts made to squeeze profits wherever possible.

Second, a major goal is changing the nature of government to make it more privatization friendly. This includes both getting people accustomed to the idea that you pay to use a road and that it is natural to operate roads to make a profit. The Colorado government has been active in efforts to get citizens and government to make the change.

In addition, it means creating the conditions to make governments desperate to embrace privatization through cutting tax revenues, a topic that has been discussed here and here.

Third, to make toll roads succeed it is critical to find economical ways to collect tolls. Reason Public Policy Institute recognized as long ago as 1992 that this issue was important as well as its complexity. The reality is that collecting tolls is expensive. As a result, there is a great burst of creativity to find ways to ensure investors get paid. These have been discussed here.

Fourth, developing new technologies to collect tolls is about more than making certain investors get paid as much as possible.

We are seeing the development of a whole new industry, one that is growing and international. It’s about more than just EZ-Pass or Omni-Air. A quick search for “toll collection” brings up the SunPass, FasTrak, and on and on.

This is an industry whose purpose is to collect tolls. It lives or dies as toll roads live or die. In other words, we now have a new lobby group in support of toll roads.

The second aspect of these new technologies is that they promote use. A driver who has money on an electronic pass is not going to want to waste that money, so she will be more likely to choose the toll road. It’s more or less the sunk costs issue.

So get out your crystal balls, and help me think about for whom the roads are tolled.

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