TCH: Turnpike Finance

??????????? Many firms would struggle to invest in enough capital equipment and buildings needed for their business, these large expensive assets, if constrained only to reinvested profits. Similarly, local governments would struggle to invest in public infrastructure if constrained to using their budget surpluses alone. Any significant amount of infrastructure investment must be enabled by borrowing.

???????????One option is to raise a municipal bond to pay for infrastructure. However, for a road, which may run through the jurisdiction of multiple authorities, arranging such a loan can be undesirable. Also, roads between cities may be used by only a subset of citizens and there are many private incomes that are enabled by a road. So, governments may wish to confer a private entity with authority over an entire road and make that road’s users pay for it. This was what the British government decided to do with turnpike roads in the 18th century.

Turnpike Trusts

???????????Turnpike trusts were private entities established to maintain and improve roads in England and Wales. Through a ‘turnpike act’, Parliament would grant to a trust a concession to operate a road for twenty-one years at a time. This concession would usually be renewed, sometimes with modifications like extensions to a turnpike trust’s authority to further length of roads. Some of the earliest trusts were formed prior to 1710; the roads entrusted to them were previously managed by local parish governments.

???????????A typical trust operated only within a confined small geography. The Bath Trust, for example, took control of roads radiating from Bath, most notably a portion of a road connecting Bath to London. The roads assigned to any given trust could be very small; some trusts were responsible for less than ten miles of road. Others were very large, responsible for over one hundred miles. The turnpike trusts were governed by trustees who in some cases provided most of the initial capital.

Tolls

???????????The turnpike trusts did not just transform the management of roads, it was also a new funding structure. The trusts collected tolls on the roads they managed, roads which were previously free to use. Under the turnpike acts, reductions or exemptions to the tolls were often given to local, rather than through, traffic and those carrying certain essential commodities like coal or grain were also given favorable treatment at least on some roads. Roadwork was previously funded by property taxes. Parishes could also requisition the labor of residents who could be demanded to work up to six days per year on roads. The turnpike trusts inherited this right from the parish governments.

???????????The new funding model of turnpike trusts was implemented because road improvements were expensive. Take the following example. Two early 18th century trusts, the Islington and Marylebone Trusts, were in charge of developing what was then New Road, an approximately 2.5-mile stretch of road in London, comprising what is now parts of Marylebone, Euston, and Pentonville Roads. They spent over ￡4,000 on improvements between 1756 and 1759 or nearly ￡1,600 per mile. Note that ￡4,000 went very far in the 1750s. ?At the going wage rates of the south of England, this was equivalent to keeping a crew of sixty-three unskilled laborers employed for six days a week for three years straight. Obviously though, much of the cost went towards materials and more skilled labor as well.

???????????While roads were expensive to build and maintain, some toll roads were very lucrative, particularly those between cities. For example, a road to London from Bath comprised just 10% of the Bath Trust’s road mileage but this one road was responsible for about one-third of the trust’s revenue from the mid-18th century through the 1820s.

???????????Studies have returned mixed verdicts on whether the turnpike trusts actually delivered more investment to roadways. The road network does seem to improve materially in the period when trusts took over management of roads. However, the advent of the turnpike came at a time when local parishes were investing more in roads anyway. Thereafter, it seems the turnpike trusts’ investment in roads came at the expense of the parishes’ investment which fell. Nonetheless, the turnpike trust did clearly transfer the responsibility for funding roadwork from taxpayers to the roads’ users and investors.

Financing

??????????? When it came to raising larger sums of money than a few months’ toll revenues could yield, funds were raised from investors. Turnpike trusts issued bonds backed by toll revenues. This was an early example of a mortgage bond secured by something other than land, though the tollhouses and the turnpike road itself would also be collateral for the bonds. The turnpike trusts did not issue shares of stock so the bonds were their only issuance of a security, though some issued unsecured bonds alongside the secured ones. Since they were not supposed to earn and distribute any profit, surpluses would be set aside for future expenses or improvements to the road.

??????????? The money raised from investors grew. New turnpike trusts were formed and many were enlarged by further acts of Parliament. The Bath Trust, mentioned earlier, grew from a total capital of ￡12,000 in the late 1750s to over ￡45,000 in the early 1830s. In sum, over ￡7 million in secured turnpike debt was outstanding by the mid-1830s. These bonds generally paid 4% to 5.5% per year in the period between 1820 and 1850. This compared to less than 3.5% on perpetual government bonds, called consols.

??????????? Attorneys were hired by the trusts to find buyers for their bonds. Turnpike bonds were usually purchased by local landowners, businessmen, and savers. Charities also invested their endowments in turnpike bonds. Generally, investors came from the community around the road; most invested only in roads in their county and few invested in more than two or three roads. Investors could buy bonds in some trusts in units of ￡50 and the vast majority of investors in the Bath Trust had no more than ￡500 invested. They were not all wealthy though they were generally comfortably well off. Of the ￡12,000 raised by this trust in 1758-59, about half came from gentry and capitalists but the other half from tradesmen and professionals.

??????????? The turnpike bonds traded hands infrequently; most investors bought their bonds directly from the turnpike trust and held them for a long time. In the case of the Bath Trust, between the start of 1776 and the end of 1780, a five-year period which saw particularly elevated trading in the trust’s bonds, ￡7,900 of its securities traded hands as compared to a capitalization of ￡17,000. A more typical rate of trading in a given year would have seen more like ￡1,000 or so change hands. This would imply that the average investor held their bonds for about eight and a half years.

??????????? Further, there is no indication that investors scrutinized the decision to invest in one trust as opposed to another; there was not a culture of picking from a large pool of potential securities. Investors largely simply kept to their local trusts. For most investors, the likely alternative to a local turnpike bond was not another turnpike bond issued by a faraway trust but rather an investment in common government bonds.

??????????? Defaults were fairly common but some trusts caught up on payments. Based on data from the 1830s, about 34% of trusts that had to completely suspend payments for a year were paying at least some interest again by the following year and 40% by the year after that. Despite defaults and suspensions, long run average returns prior to the mid-19th century were close to the bonds’ advertised rates. Typically, if interest was not paid for even six months, the bondholders could foreclose on the toll revenues.

Ubiquity

??????????? There were 175 turnpike trusts in existence in England by the early 1750s. Then, the first of two turnpike booms led to the creation of many new trusts in the 1750s and 1760s; another major round came in the 1820s and 1830s. By the 1830s, there were about one thousand turnpike trusts. They managed twenty thousand miles of road or approximately 20% of the road network in England and Wales. By then, the trusts managed virtually all roads between major towns and every major road leading into London was under a turnpike trust’s management.

??????????? Governments steadily raised the authorized capital of turnpike trusts or even removed those limits altogether. Government support of the turnpikes arrived by other means as well. A state entity, the Public Works Loan Board, began to accumulate turnpike bonds between 1817 and 1832 by investing money into the roads. The agency was responsible for improving infrastructure, partly as a means of providing employment. The concept of the turnpike trust was extended to canals and even rivers which needed maintenance to remain navigable.

Opposition

??????????? Turnpikes were controversial because, while the structure of a turnpike trust allowed money to be raised for road improvements, they relied on collecting tolls. Tolls were levied on roads previously free to access, enforced by gates and tollhouses at the entry to the road. Commoners thought the old free roads were preferable even if carriages for carrying freight or the wealthy could not easily travel along them.

??????????? One of the turnpike trusts, the Bristol Trust, was even plagued by riots which saw its gates destroyed in 1727. Further riots took place in 1731 and 1749. This trust’s tolls were particularly difficult to avoid since it controlled various roads leading into Bristol. The act of Parliament which created the Bristol Trust did grant coal miners carrying coal on horseback a reduced toll charge. This concession was not enough to prevent the riots which were carried out by miners. Eventually, the turnpike’s tollhouses had to be guarded day and night.

End

???????????The turnpike trusts were not brought down by riots though. Instead, new methods of transport brought about change. That said, already by the 1830s, unpaid interest was becoming more common. The ratio of accrued unpaid interest to debt outstanding was rising, reaching 18.4% in 1842. By that same year, trusts were repaying more capital to investors than they were investing in roads.

???????????Railways and steamships competed for freight and passengers after 1850. This meant more substantial deterioration in the financial condition of the turnpike trusts as toll revenues declined. Turnpike trusts largely disappeared within the next thirty years; an average of 52 per year were dissolved between 1865 and 1882.

???????????Many turnpike bonds defaulted. Actual interest paid on turnpike debts fell to below 2% on average. Many investments were written-off, at least partially. Around ￡2 million worth of turnpike bonds seem to have been cancelled. It is estimated that about 39% of the amount due to be repaid after 1850 was lost. Only forty turnpike trusts still existed by 1882; down from around one thousand in the 1830s.

Lesson

??????????? What do private turnpikes add to infrastructure investment? It is not low borrowing costs; the government in 18th and 19th century Britain could generally borrow more cheaply. Whatever the work of local trustees, it was not public buy-in that justified the turnpikes either. The rioters in Bristol, who benefited from a lower toll to start with, suggest public opinion loathed the toll roads.

???????????Though, for all the fairness and efficiency of a publicly administered road network, the old local-government-run system did not seem up to the task of delivering a quality product. A turnpike authority was able to overcome the political disincentives to investment, namely that those who did not use a road were unlikely to approve improvements, even if justified, and a local government was not likely to care for a road that largely handled through-traffic. Eventually, the private model would fade away but, for over a century, the turnpikes did at least match a policy problem to a funding approach that would allow worthwhile investments to be undertaken.

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Further Reading

1.????? Albert, William. “Popular Opposition to Turnpike Trusts in Early Eighteenth-Century England.” The Journal of Transport History, vol. 5, no. 1, Feb. 1979, pp. 1–17.

2.????? Bogart, Dan. “Did Turnpike Trusts Increase Transportation Investment in Eighteenth-Century England?” The Journal of Economic History, vol. 65, no. 02, June 2005.

3.????? Bogart, Dan. “Investing in Early Public Works: Financial Risks and Returns in English and Welsh Turnpikes, 1820–82.” The Economic History Review, vol. 72, no. 3, Mar. 2018, pp. 848–68.

4.????? Buchanan, B. J. “The Evolution of the English Turnpike Trusts: Lessons from a Case Study.” The Economic History Review, vol. 39, no. 2, May 1986, pp. 223–43.