How to Privatize the Roads: The Mechanisms and Benefits of Road Privatization
by G. Stolyarov II

In “The Necessity of Road Privatization,” I argued that private ownership of the roads would lead to far greater economic efficiency, customer convenience, and road durability than control of the roads by governments, which often have perverse incentives to specifically commission poor-quality roads in need of constant repair, as a means of favoring select constituencies among politically-connected road construction firms.  

            Now the question arises: “Given that road privatization is desirable, how could it be done, and how would private roads work?” This essay offers constructive suggestions as to how the transition from government or “public” ownership of the roads to a private, competitive, free-market system can be made. Furthermore, it presents ways in which private road entrepreneurs could innovatively manage their property so as to maximize both profit and customer convenience.

            Creating a vast, efficient private network of roads quickly is easier in the status quo than it would have been in a state of nature. The advantage of the present situation is the presence of an immense number of roads currently owned by local, state, or federal governments.  Converted to private hands, these roads could almost immediately be managed with far superior results than the current state of things brings about. Even if no new roads are built, privatizing the existing ones would greatly increase the quality of transportation and dramatically reduce the amount of road maintenance and traffic delays, which at presently grievously hinder the economic life in virtually all developed countries.

            Of course, new roads will be built under a private system, and at far faster rates than under government control. The moment any private entrepreneur thinks an additional thoroughfare is necessary and profitable, he will begin building one; he will require no extensive political lobbying, no seeking of special-interest favors, no lengthy and tedious committee discussions that paralyze efficiency. Instead of several hundred governments, each faced with tremendous institutional obstacles, there will be at least several thousand private road owners and builders, each with the strongest incentive to better his own condition by acting quickly and decisively.

The Road Auction

            In order to dramatically improve existing roads and create numerous new ones, what is the first step? Government at any level can contribute to this by agreeing to privatize its existing roads. Say, City X has agreed to transfer all of its “public” thoroughfares to private ownership. The city need not suffer financial losses as a result of this. In fact, it can turn a substantial profit by establishing an auction to sell the roads to the highest bidder. In order to ensure a competitive outcome, the city will need to divide its roads into appropriate units for sale so that each unit is not prohibitively expensive and can be purchased by a sufficiently determined entrepreneur with moderate means.

            Perhaps each road could be split into segments bounded by major intersections on each side; we can call these Inter-Intersection Segments, or IIS for convenience. Nothing will prohibit a sufficiently large road entrepreneur from purchasing multiple IIS, and the maximization of efficiency will incline bidders to seek to acquire contiguous stretches of roads. However, selling roads in fairly small units will also enable the residents or store owners on any given block to pool together their resources, purchase the road adjoining their homes or businesses, and become responsible for its upkeep and profitability. The people who live and work near a road and whose economic livelihood might depend on the road’s usability for customers will have a strong incentive to maintain the road in good order and charge reasonable fees for its use. Some successful businesses might even render the roads complimentary to their customers, just as shopping malls today allow visitors to use parking lots, drinking fountains, and restrooms free of charge. The road might more than pay for itself in increased sales revenue for the business.

Oversight of the Roads

            After privatization, jurisdiction over the roads will transfer from the government to their respective private owners. This implies that the “rules of the road” would no longer be determined by “public” agencies. Rather, the speed limits, drunk driving policies, restrictions on certain kinds of vehicles, safety standards, and even policies regarding changing lanes, passing, and turning will be left at the discretion of the private road owners. The users of the road would be bound by an implicit contractual agreement to obey the rules of the road as established by the owners -- or else to face penalties for each violation, explicitly specified beforehand.

            Private oversight of the roads would lead to greatly increased customer convenience in that penalties for violations are likely to be reasonable and proportionate to the offense. If a road entrepreneur charges a customer exorbitantly for a minor violation, the customer will not likely use his road again; the entrepreneur will lose business. On the other hand, the road entrepreneur will have great incentives to prevent the likelihood of violations and infractions by establishing fair policies that his customers will generally adhere to and by creating an infrastructure to discourage the rules’ violation in the first place.  The road owner will try to maximize both safety and consumer satisfaction by creating practical, commonsense rules which it is not a hassle to obey.

            Violators of the road rules will treated respectfully even as they are penalized. They will not be handcuffed and pushed to the ground; rather, they will calmly be asked to pay their fine. Private road owners will experiment with creative ways of ensuring that rules are adhered to but that rule violators could remain customers after they paid the consequences of their behavior. Nobody -- unless he deliberately or recklessly endangers human lives -- will be put in prison, but some road users might be asked to attend private training courses or to equip their vehicles with particular safety features deemed essential by the road owner. Furthermore, violations of the policies of one road will not necessarily deny the road user access to other roads, unless the several road entrepreneurs share “black lists” of particularly violent and reckless drivers. In this way, if a customer deems a certain road owner’s policy unreasonable, he can choose to use roads to which this policy does not apply -- just as at present a customer who does not wish to use a certain bank or credit card can with no penalty shift to a different bank or credit card.

            Road entrepreneurs will be responsible for taking care of accidents and assisting drivers in need on their territory. Indeed, quality customer service will encourage road users to favor the entrepreneur who delivers it over others. The road entrepreneur might organize towing services for cars that have malfunctioned; he might also own trucks which refuel cars that have run out of gas. Customers’ waiting times for service will not be as long under a private system as it is in the status quo -- because every immobilized car is a great inconvenience to road users and a possible hindrance to traffic. To improve both customer satisfaction and efficiency of traffic flow, the road owner will have every incentive to address the problem as soon as possible. 

Payments for Use of Private Roads

            Privatizing the roads will give thousands of entrepreneurs the ability to develop innovative payment structures that will please consumers, ensure swift collection and processing, and impede traffic flow minimally, if at all. Those who question the merits of road privatization because they do not want toll booths on every corner need not fear this outcome at all. The road entrepreneurs would not want toll booths on every corner, either! This structure, currently used on many government toll roads, arises from governments’ lack of incentive to regard consumer satisfaction as well as their soft budget constraints that discourage profit maximization. Private road owners would do things differently.

            Electronic tolling -- which even some state governments today have implemented -- is an efficient, time-saving alternative to manual payment of tolls at booths. Road users might register their vehicles with the private road in advance and in exchange receive an electronic device that they might put on their cars. Whenever the car enters a given stretch of road, the electronic toll booth will communicate with the device to subtract the amount of the toll from the user’s account. Other roads might offer yearly or otherwise periodic membership plans, with payment made in advance. Then, the checkpoint on the road will only verify electronically that the customer has purchased the membership. Of course, neither the electronic tolling nor the verification of membership will require customers to stop or even slow down; they will just need to pass through the appropriate checkpoint. This can already be done now, and private road entrepreneurs -- faced with hard budget constraints and driven by an intense profit motive -- will figure out ways to do it even more conveniently and effectively. They will encourage the development of technology that will further reduce transaction costs of assessing charges to road users.

            Not all private roads will even require users to pay. As already discussed, some road entrepreneurs might also be business owners who offer their roads as a complimentary service to customers in the hope of thereby increasing their sales revenue. Other road entrepreneurs might generate their income primarily through advertising -- just as numerous television stations, radio stations, and Internet sites do today. The advertisers will pay for the maintenance of the road, the salaries of the road workers, and the profits of the entrepreneur; in turn, they will be allowed to feature prominent billboards alongside the road or otherwise creatively promote their products within the road entrepreneur’s territory. The private advertisers, too, will be given incentives to innovate in their techniques under this system. The road entrepreneur might create electronic billboards that multiple advertisers could use during different seasons or times of day. Some advertisers might invite customers to sample their products at roadside gas stations or convenience stores. The advertisers might even encourage individual car owners to place stickers with certain names of products on their vehicles -- in exchange for product discounts or free use of affiliated private roads.

            Different road entrepreneurs will affiliate with different kinds of advertisers  -- depending on the tastes and preferences of the customers using the roads. High-minded customers who do not wish to see advertisements for “adult stores” or films with gratuitous gore and sexuality can choose to patronize roads that affiliate with advertisers of more respectable products. On the other hand, customers who do not mind these kinds of advertisements can use roads paid for by the companies that release them. The conflict of interest that prevails on today’s government roads need not at all occur. With “public” ownership of roads, some parties will inevitably be displeased regarding the kinds of advertising that does or does not appear alongside the roads. Some might object to a questionable billboard that the government has decided to approve, while others might be frustrated that more such advertisements had not been permitted.  Road privatization solves this problem by giving customers the choice to use private roads with advertisement policies that suit them. Under this system, no one is forced to see an ad he dislikes or be barred from seeing one he wants. 

The Benefits of Competition and Cooperation

            A twofold objection to this plan might arise. First, could not a single purchaser of a few IIS render a vast network of roads unattractive to customers by charging unreasonably high tolls? Second, would not the vast number of different road owners in the same vicinity tend to lead to numerous and confusing different standards of road quality, rules of the road, payment systems, degree of enforcement, and other aspects which would be under the control of each private entrepreneur?

            The first objection can be rendered null through market competition. A road entrepreneur who charges tolls significantly above those of his competitors will, other things equal, lose business to other road entrepreneurs. It is easy to build roads in parallel so that multiple thoroughfares -- all in the hands of different owners -- lead to the same destination. The vast network of private railroads in 19th-century America accomplished just this and prevented railroad companies -- where they were truly private and unsubsidized by government --  from charging monopoly rates for their services. In fact, persistent competition among private railroad companies often drove railroad rates extremely far down, sometimes even to below cost. Once government began to regulate the railroads through the Interstate Commerce Commission and misguided anti-trust policies, however, railroad rates skyrocketed and quality of service plummeted.

            Roads for automobiles are easier to build and more profitable than railroads. They can carry much higher traffic volumes per unit of time, and many more of them can exist in the same geographic area compared to railroads. If necessary, parallel roads could be built, spaced several hundred meters apart, enabling competition for any given traffic route to flourish, driving down consumer prices and ensuring that no road entrepreneur could for long maintain tolls significantly above those of his competitors unless his road is superior in quality and in other ways more attractive to his customers. Of course, owners of cleaner, more durable roads that provide higher quality of service will be able to charge higher rates and remain in business -- but this will be a result of simple product differentiation. Just as customers today are willing to pay more for larger, safer, more comfortable cars, so they will be willing to pay more for more attractive roads.

            The second objection can be resolved by collaboration among road entrepreneurs in standardizing certain payment features and rules of the road -- just like private railroad companies in the late 19th century collaborated, of their own free will, to establish standard rail widths and agree on certain basic rules of railway traffic control. A fairly uniform code of maritime etiquette and procedure has also developed over the centuries, despite no governmental control over most large bodies of water. Where it is convenient for them and for customers, different road companies in an area might render the same electronic tolling devices compatible with the use of each road; the several road entrepreneurs might also agree on basic rules of the road, such as the shape of road signs and rules for signaling, merging, and passing. This standardization will not, however, be a one-size-fits-all top-down imposition. It will evolve spontaneously from the collaboration of self-interested market actors who pursue profit maximization and the satisfaction of their consumers. Unlike the virtually uniform rules of the road under government ownership, some significant product differentiation will remain -- exactly as much as suits actual differences in customer preferences. This differentiation will especially be marked in such areas as advertising, stringency of rule enforcement, and esthetic elements of the road. Some entrepreneurs will want to provide their customers with spectacular roadside views, including gardens, trees, murals, and elaborate designs on the pavement. Others will pride themselves on building cost-efficient roads which can be built at minimal expense without requiring extensive regular repairs.

Examples of Successful Private Roads

            Not only can private roads succeed; they have succeeded in numerous instances around the world. The Walt Disney Company controls freeways six lanes wide in the vicinity of Walt Disney World in Orlando, Florida. This complex of roads, called the Reedy Creek Improvement District, services millions of tourists to Disney’s theme parks.

            Since 1995, the private Toll Road Investors Partnership II (TRIP II) has owned and operated the Dulles Greenway -- a toll road between the Dulles International Airport in Washington, D. C., and Leesburg, Virginia. The Greenway is a scenic, spacious six-lane road separated by a strip of well-kept grass. It accommodates traffic at a maximum speed limit of 65 mph. The toll is a uniform $3.00, independent of the driver’s entry and exit point on the road; payments are assessed electronically, and the road uses no traffic lights to minimize delays. TRIP II is continually developing ways to enhance road quality, and is at present attempting to widen the road and create an additional access ramp for travelers to the Dulles Airport.

            Not only single roads, but entire cities have experienced the benefits of road privatization. Since 1993, the Seattle, Washington, metropolitan area has been implementing gradual privatization of all its roads; the transition has been smooth, and all 135 miles (about 217 kilometers) of Seattle’s roads are well on their way to full private ownership.

            In India, the highest-quality roads are a privately owned network of expressways, owned by road companies like the GVK Group. These private roads coexist with a government network of highways -- which tend to be of inferior quality and do not facilitate speeds as high as those possible on the private expressways. The M6 Tollway in Britain -- a stretch of 27-miles (43 kilometers) is privately owned and operated; about 56% of Italy’s toll roads are privately operated by the Autostrade Construction Company. Autostrade has been at the forefront of road management innovation; it instituted electronic tolling on its highways as early as 1988. The economic life of Toronto in Canada is greatly benefited by Highway 407 ETR, which assesses all tolls electronically -- even for cars that do not have the electronic tolling device or transponder on them. The highway’s owners use devices that recognize the car users’ number plates to later send bills for highway usage to their addresses.

            These numerous examples of efficient, innovative, and lasting private ownership of roads throughout the contemporary world  -- along with theoretical analysis of how such private ownership could be facilitated any why it would lead to greater benefits than government ownership of roads  -- suffice to demonstrate the possibility, desirability, and opportunity of road privatization. This development has already begun throughout the world, and its evident advantages should bring about its substantial acceleration. We can only hope for the speediest possible transition of as many roads as possible onto the free market.

Works Cited

“Private Highway.” 2007. Wikipedia. http://en.wikipedia.org/wiki/Private_highway

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