Infrastructure Privatization Leading To Inefficient Pricing In Hampton Roads

The Elizabeth River

Elizabeth River Crossings photo.

As I wrote at the beginning of the month, putting infrastructure into private hands leads to inefficiently high monopoly pricing. A great example of this fell into my lap today in the form of a press release from Swedish engineering firm Skanska bragging about their participation in the Elizabeth River Crossings project between Norfolk and Portsmouth in Virginia. There are a lot of ins and outs to this, but the basic shape of things as detailed on the project’s Frequently Asked Questions page is that a private company is going to refurbish an existing tunnel and build a replacement for another tunnel and in exchange will collect tolls on the roads for 58 years.

Now the problem here, as I said in my previous post, is that while America would do well to engage in more tolling of congested roads it’s very socially inefficient to be tolling on non-congested roads. As Josh Barro pointed out in response this is a special case of the general problem with monopolies and there are two reasonable solutions. One would be competition and the other would be regulation. In this case since we’re talking about two different parallel tunnels across the same river there’s room for at least a limited amount of competition. Or there would be, had the state not elected to parcel this out as a single contract. That leaves us with regulation. But of course the same Virginia Department of Transportation that failed to create competition has also failed to create a sound regulatory scheme. The rates will “for cars using either the Downtown or Midtown tunnels will be $1.59 (off peak) and $1.84 (peak)” and then starting in 2016 “will escalate by a factor equal to the greater of changes to Consumer Price Index or 3.5 percent.”*  Virginia is creating a predatory monopoly that will prey on the wallets of off-hour shift workers for no good reason.

I note that this is a substantial regression in policy design. It was standard 18th Century practice for governments to provide public services through limited monopoly grants. Corporations required special legislative charters and were usually banks or turnpike operating companies. For a government with constrained ability to collect taxes or keep records, these monopoly grants are probably a good idea since inefficient infrastructure provision is better than no infrastructure at all. But the 21st Century United States is only constrained in its revenue collection ability by dysfunctional politics that prefers a roundabout method of making Virginia’s citizens pay for a bridge to the more efficient alternative of direct public financing.

* Correction: I initially thought the terms of the contract would make higher inflation be in Skanska’s interests but that’s mistaken so I excised the line