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Toll Booths a Scam?

Have you ever driven through a toll booth, paid a couple of dollars and wondered what was that for?

Well, you’re not the only one. We here at Crazyfinances have had plenty of experiences with toll booths and we’re here to tell you it’s not always as cut and dry as it seems.

Simply put, the tolls you pay that supposedly are meant to cover the cost of the road and it’s maintenance so the road can always be in good condition for the people that use it. Theoretically, that’s not a bad idea, but there are so many inefficiencies that make toll booth fees seem ridiculous.

Depending on the type of toll, the collection process can take away as much as 30% of the toll fee which means 30% of what you pay is essentially already wasted. Just take a look at the Seattle Times article referring to the exorbitant costs of fee collection on highway 99. Put it this way, how would you feel if every time you were paid, a third party took 30% of your profits as a transaction fee? There’s a reason why credit card fees and other transaction have decreased to sub 3% these days, but toll roads seem to be the exception.

Besides those wasteful operational costs, did you know many of the most popular toll road are leased to private firms? 

That’s right, the money you pay isn’t even funding government activities such as maintaining the road. Instead, what happens in these scenarios is the government takes a one time up front fee in return for a long term lease of which some are 99 years. While the government gets money right away, this is a very poor proposition because the fees generated over the lease greatly outweigh the lump sum payed. If you think about it, the government is basically taking payday loans (which are very predatory and everyone should know to stay away from) and the private firms offering it are reaping in huge fees (like interest). What’s crazier is after some of these tolls get leased, the private firm can do whatever they like with the tolls which usually means no more maintenance (to cut costs/ increase profit margin) and jacking up the toll prices.

A good example of a private equity getting into the toll road game is when the Chicago Skyway toll bridge was sold. Here a link to an article in the Chicago Tribune about the sale. The important thing to take away is that while the state of Illinois made billions dollars which was badly needed (Illinois is a very poorly run state from a financial standpoint), the private firms that now own the toll for the next 100 years are going to still probably come out ahead. The fact that major infrastructure like this is now partially owned by some of Canada’s biggest pension funds is kind of crazy when you think about it. Pension funds aren’t stupid; they have an obligation to their holders to make a return and tolls provide continually cash flows especially when it’s a critical infrastructure piece like the Chicago Skyway.

But, there has been some debate about whether Tolls are really all that profitable. In the case of the Indiana Toll Road lease, the company that bought the original lease actually went bankrupt. But before you go off thinking tolls are great and we should start selling them so private firms can take the debt, this situation was an unfortunate timing of a black swan event in the form of the 2008 recession. The decreased cash flow during that period coincided with a balloon debt payment which forced the PE firm in bankruptcy. But, shortly out of bankruptcy, the firm is now owned as a subsidiary of an Australian PE firm owning the rest of the lease and I’m sure they won’t make the same mistakes.

The key takeaway from all this talk about tolls is to show that they are hugely inefficient. I mean that is to be expected from any government operation (as you probably know 😉 ). The next time you go through a toll, just realize that the money collected is probably not being used the way you expected. There’s a good chance a large percentage is already eaten away through the collection process and a private equity firm may be receiving the profits on the other end. It seems that even with taxes, the average Joe is still getting suckered and now we hope you can see why tolls aren’t all they are cracked up to be.

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