Private Provision of Highways: Economic Issues

This paper reviews issues raised by the use of private firms to finance, build, and/or operate highways — issues including cost of capital, level and structure of tolls, and adaptability to unforeseen changes. The public sector’s apparent advantage in cost of capital is at least partly illusory due to differences in tax liability and to constraints on the supply of public capital. The evidence for lower costs of construction or operation by private firms is slim. Private firms are likely to promote more efficient pricing. Effective private road provision depends on well-structured franchise agreements that allow pricing flexibility, restrain market power, enforce a sound debt structure, promote transparency, and foster other social goals.