Building New Roads

Carlos Salinas, the former President of Mexico, rushed through an accelerated programme of highway construction. He wanted to be prepared for the expected boom in trade with the US and Canada, which would increase the need for high speed roadways. There was also the hope that with the privatisation of the banking system, the increased supply of car finance would boost the demand for cars.

This haste proved to be disastrous. In several cases, government engineers drew up specifications for roads without studying the sites carefully. This meant that unexpected snags cropped up after the construction of particular roads had already started. In at least one case, this went to almost ridiculous extents with the builders having to build an unplanned half mile long bridge! The obvious outcome of all this was that the actual cost of construction was significantly higher than expected, sometimes being as high as twice the original estimates.

 

The government was also guilty of overestimating the density of traffic on several roads. This induced the government into making the mistake of granting very short concessions to private constructors, who were given only 15 years in which to build and operate the highways before handing them over to the government. The private operators were expected to recover costs within that period.

The inflated cost of construction, together with the short time span in which they had to recoup their money, forced operators to levy very high toll charges. For example, the toll charge for a 115 mile stretch to Acapulco is approximately $15, which is about 5 times the daily minimum wage. The outrageously high toll charges proved to be self-defeating, since users preferred to use the old freeways to the new highways. To add to the misery of the builders, the soaring inflation pushed up interest rates on their loans from 20 to 100 per cent, since these were adjustable rate loans. Finally, the Mexican government has had to come to the rescue of the private builders. There concession has been extended from 15 to 30 years. The government has also agreed to bear part of the enhanced interest costs. These measures have enabled the private operators to reduce the toll charges. The lower toll charges have resulted in an increase in the density of traffic, although it is still below the original estimates. There is now hope that at least some of the private operators will be able to recoup costs.

What lessons should we pick up from the Mexican experience? Clearly, a mere increase in the surface transport ministry's highway plan allocation or an increase in the capital base of the National Highway Authority will not be enough. The private sector must be involved, simply because the government does not have sufficient financial resources to construct the required miles of new highways. Of course, private entrepreneurs will not agree to any BOT scheme, unless they are assured of adequate returns on their capital.

The crucial question is how to ensure private builders an adequate rate of return without providing them with subsidies - surely no one wants to burden the state exchequer with a new source of subsidy. Clearly, if traffic densities are low relative to the cost of construction, then the Mexican experience has shown that the freedom to levy any level of toll charges is not sufficient by itself. The length of the concession is perhaps a more important parameter, as far as the private operators are concerned. One can argue that no limit should be set on the period during which operators can charge and collect tariffs, provided certain standards are satisfied (no more than one pothole per 100 miles?).

The relevant authorities must also make strenuous efforts to help the BOT operators to develop generate substantial non-toll revenues from services related to the highways. For example, hotels and restaurants along the highway are an important source of revenue, which can help defray part of the cost of construction of the highway. All this will typically require new administrative and legal arrangements. But, unless the government is willing to take these steps, we are probably better off with our existing antediluvian road system!