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Reason Foundation

Surface Transportation Innovations #30

Topics include: new book on future of highways; long-term concessions in Texas; Fitch and S&P on private toll roads; sticker tags making real headway; pricing trucks at ports; gas tax contrarian; and other news.

Robert Poole
April 1, 2006

In this issue:

A System at Risk—and What to Do About It

Harold (Hal) Worrall has had a long career in transportation: assistant secretary for three state DOTs, executive director of an urban toll road authority, and president of the International Bridge, Tunnel, and Turnpike Association. So when he told me, a couple of years ago, that he was working on a book, I expected it would be good. Now that A System at Risk has been published, I'm not disappointed.

Hal's starting point is that the 20th-century model of financing, building, and operating highways is at a turning point. To use a popular catch-phrase, it is not sustainable for the new century we've entered. To help readers figure out what should replace it, he applies a healthy dose of transportation economics. Efficient mobility of people and goods is crucially important for economic growth, he shows. And there is nothing on the horizon that can displace the automobile as the mainstay of personal mobility or the truck as the mainstay of goods movement (though transit and rail freight each have important roles to play). So we need to keep expanding our highway system, to keep pace with growing travel demand.

After laying this basis, Worrall goes on to show the increasing limitations of the fuel tax as the principal highway funding source, especially given the growing need to invest more in the system. Drawing again on economics, he explains the critical role of pricing and suggests that in a revamped highway system, direct pricing of transportation would re-establish a needed link between customer and provider, while providing a more robust source of revenue and balancing demand with supply, as prices do everywhere else in our economy.

The book's final chapters lay out fairly specific prescriptions for urban and rural transportation of individuals and goods (including a positive view of toll truck lanes). Proposed institutional reforms include much greater use of regional mobility authorities (as in Texas) and the long-term concession model, under which private firms would finance, design, build, and manage major portions of the system under long-term franchises granted by either the regional authority (for urban projects) or the state DOT (for intercity projects).

The book suffers from the lack of an index and inadequate proof-reading, but those are minor flaws in what is otherwise a very valuable contribution to our thinking about the future of the highway system. A System at Risk is available from publisher IUniverse (www.iuniverse.com/bookstore/book_detail.asp?isbn=0-595-36643-0).


Texas Wants Long-Term Concessions

I've said before that Texas is far in the lead in defining 21st-century highways�and TxDOT laid down another marker in January. At a half-day workshop attended by over 400 people, senior officials laid out their plans to make use of the Texas version of public-private partnerships, called comprehensive development agreements (CDAs) in Texan. The bottom-line message is that TxDOT is taking a very aggressive approach to using all the tools the legislature gave it in 2003 and 2005. And while all forms of PPP are available (beginning with plain old design-build), TxDOT made clear that its preferred model is the long-term concession. Why? Because it maximizes opportunities for large-scale, self-supporting toll projects and transfers significant risk from taxpayers to investors.

You can get a nicely presented overview of the rationale for the whole program, called the Texas Transportation Challenge, by clicking on: www.txdot.state.tx.us/txdotnews/trans_challenges.pdf. There you will find that while roadway use is projected to grow by 214% over the next 25 years, highway capacity will increase only 6% with a business-as-usual approach. That's because current transportation revenues (mostly state and federal fuel taxes) can do little more than keep pace with the need to maintain and rebuild the existing highways. To achieve an acceptable level of mobility by 2030, Texas must close a funding gap of $86 billion.

And that's what they intend to do via tolling and CDAs. The workshop included a detailed Powerpoint presentation (available on the txdotnews/cda_index.htm portion of the TxDOT site) that explains the overall program, lists current projects being considered for, or already moving forward as, CDAs, and gives highlights of high-profile projects like the first two Trans-Texas Corridor projects, TTC-35 and TTC-69. It also explains how TxDOT will assist private partners in making use of the federal TIFIA and PAB programs. And it emphasizes that TxDOT welcomes unsolicited proposals in addition to planning to issue many RFPs for projects it has identified.

There's no question that states and urban areas are in competition as good places to live and do business. Some, like Texas, are adopting aggressive approaches to reducing congestion and expanding highway infrastructure, while others are taking a different approach. A natural experiment is in the making. We should have some very interesting results in 20 or 25 years.


Fitch and Standard & Poors on Private Toll Roads

With the long-term lease of the Chicago Skyway and Indiana Toll Road now accomplished, and long-term concessions envisioned for toll projects in Texas and Virginia (and probably other states), it's very timely that the agencies that rate toll road bonds weigh in on this subject. Hence, recent reports have been issued by two of the leading rating agencies, Fitch and S&P.

The FitchRatings report, issued March 22, says toll road privatization can be a good deal for governments and motorists, but obviously needs to be done with care. "The key to achieving [the right] balance has been the development of tailored agreements that seek to appropriately share risks and rewards and take a long-term, balanced view of benefit for both the public and the private sectors." Those deals that strike the right balance "should result in the generation of long-term value to governmental entities through accelerated project delivery [in the case of new toll roads] and/or more efficient service delivery [for existing and new projects], and [to] equity investors through predictable and stable rates of return."

In looking at the impact of such deals on government credit ratings, Fitch will look with favor on those whose up-front proceeds "are invested in comparable long-term assets that provide lasting economic benefits." In terms of the rating of the private concessionaire, among the points Fitch will look for is "complete independence in implementing the prescribed tolling regime." Among the potential benefits from privatization, Fitch believes, are the following:

Obviously, these benefits only result from well-structured transactions, and the Fitch report goes on to discuss a variety of issues that must be addressed, including alternative uses of the proceeds of a lease, the type of toll regime selected, risks in asset valuation, restricted flexibility due to long concession terms, etc. The full report is available at www.fitchratings.com under the U.S. Public Finance tab and Special Reports.

The S&P commentary, issued on Feb. 23, 2006, is called "Credit FAQ: Assessing the Credit Quality of Highly Leveraged Deep-Future Toll-Road Concessions" and is available at http://www2.standardandpoors.com. The 10 frequently asked questions are quite technical, addressing many detailed issues that have arisen with the more sophisticated long-term financing structures used for deals such as the Chicago Skyway, Indiana Toll Road, and Toronto's Highway 407. In an interview with Urban Transportation Monitor (March 3, 2006), S&P analyst Robert Bain says that a more detailed commentary, addressing long-term forecasting and other issues, will be published around the middle of this year.

What is clear from both reports is that long-term toll-road concessions are not some kind of "risky scheme" dreamed up by financial gunslingers. They are a serious alternative that can bring both global capital and world-class toll road expertise to the U.S. highway system.


The Next Little Thing: Sticker Tags for ETC

I reported last summer (in Issue No. 24) on the rapid acceptance in Puerto Rico of a new, very low-cost transponder for electronic toll collection. Designed for affordability and user-friendliness to cash customers, the credit-card-size "sticker tags" were an instant success in the Commonwealth. Since that time, they have grown even more popular, both in Puerto Rico and on the U.S. mainland.

Puerto Rico has five toll roads and a major toll bridge. Until the introduction of the eGO sticker tag, only the bridge had electronic toll collection, using a battery-powered European transponder. But given the huge success of the sticker tags (well over 200,000 in service, representing nearly half of all toll transactions), the privately developed Teodoro Moscoso Bridge is shifting to sticker tags as well. Going to electronic toll collection on the toll roads is saving 20 minutes for sticker tag users, with their own lanes at toll plazas, and their removal from the manual lanes is saving 5 to 7 minutes in those lanes.

The TransCore eGO tag needs no battery, and is sold in Puerto Rico for just $10 (compared with typically $30-35 for conventional transponders on the mainland). It is also issued with a mag-stripe card, so that users without bank accounts or credit cards can replenish their accounts with cash at payment machines in gas stations. This cash basis means the accounts are anonymous, preserving user privacy.

These results have impressed other toll agencies, who would like to increase the market share of electronic tolling by making it easier for customers. TxDOT has announced an order for 500,000 eGO tags for the $2 billion Central Texas Turnpike project in Austin. In Atlanta, the State Road & Tollway Authority began offering the tags, at $10 apiece, to its CruiseCard customers last December. And the Florida Turnpike Enterprise plans to begin phasing in an eGO tag replacement for its current battery-operated SunPass tags in 2007. That is a key ingredient in the agency's longer-term plan to phase out toll booths throughout its system, beginning with the Sawgrass Espressway in Broward County, starting in 2008.


Pricing Trucks at Ports

In Issue No. 26, last fall, I reported on the innovative use of peak-period pricing for the trucks serving the ports of Los Angeles and Long Beach. Under a program called PierPass, the terminals at the ports agreed to add four evening shifts and one Saturday shift. And to motivate truckers to use the off-peak shifts, PierPass was authorized to charge an access fee during the regular weekday hours, $40 for a 20-ft. container and $80 for a 40-footer. The hope was that, in addition to reducing congestion at the ports themselves, congestion would be reduced on the truck-heavy Long Beach Freeway, I-710, and other LA-area freeways.

The results thus far have exceeded expectations. On a typical weekday, more than 10,000 trucks use the new off-peak shifts, reducing peak-period truck traffic on I-710 by 24%. Some 30 to 35% of container cargo is now being moved during the off-peak shifts. At the better-managed terminals, drivers are able to make three "turns" per shift, compared with one or two during the day shift, thanks to reduced congestion. Most are paid per delivery rather than by the hour, so more turns means greater income. Some of the harbor truck companies have been able to get their customers to pay a premium for off-peak deliveries, since they are saving the customers the $80/container daytime fee. The revenue from the premium gets passed on to the drivers, according to Traffic World, providing another incentive for drivers to work during the off-peak shifts.

PierPass has been so successful that it is leading to additional changes. In Los Angeles, the terminals are now considering adding a sixth off-peak shift, perhaps on Sundays. And the Port of Oakland is trying out a similar program called NightGate. At one terminal that serves agricultural exporters, a new evening shift is being offered, Monday through Friday, on a pilot program basis.


Second Thoughts on a Big Gas Tax Increase

You can hardly open an op-ed page these days without a noted pundit arguing that what America needs is a $1.00 or $1.50 gasoline tax increase. Not, needless to say, to fund much-needed highway investment. No, that's the farthest thing from the minds of the Paul Krugmans and Thomas Friedmans of the world. No, they just want a big boost to reduce gasoline consumption, so as to reduce what the Iranians and Saudis take in, to reduce global warming, etc. If they say anything about where the revenues would go, it's usually to be an additional source of general federal revenues.

Proposals like this should make advocates of increased highway investment very nervous, because, if implemented, (1) they would make it all but impossible to enact increased gas tax rates for traditional highway purposes, further imperiling an already dire funding situation, and (2) they would represent a further erosion of the fuel-tax-equals-highway-user-fee principle that is already in dicey shape after more than 40 years of growing diversions to non-highway uses.

Therefore, I was pleased to read in the latest Milken Institute Review, a thoughtful article by Ian W. H. Parry of Resources for the Future (www.milkeninstitute.org/publications/review/2005_12/36_45mr28.pdf). Titled "The Uneasy Case for Higher Gasoline Taxes," it takes you step by step through the current arguments for such a gas tax increase, in each case summarizing what economists know about the issue. For example, on oil dependence, Parry cites recent economic analyses putting the external cost of oil dependence between zero and 30 cents/gal., much smaller than most people would think. As for enriching overseas suppliers like Iran or Venezuela, you have to ask how much impact a changed U.S. policy could have. If doubling the U.S. fuel tax reduced domestic demand by 500,000 barrels per day (a realistic estimate), that would have very little impact on global oil prices, given that daily world consumption is 85 million barrels per day. On global warming, Parry cites the careful work of Yale economist William Nordhaus, who estimates the economic costs of potential global warming at about $15 per ton of carbon. An across-the-board carbon tax of that magnitude would have a big impact on coal prices (for example)�but would raise gasoline prices less than 4 cents/gal. "Most of the low-cost options for reducing carbon emission are in sectors other than gasoline," Parry concludes.

There's more, and I hope you will read this thoughtful article, a very useful counterweight to all sorts of pleas for sky-high gas taxes based on . . . well . . . righteous feelings?


Athens Conference

Our friends at the Transportation Research Board, along with the Federal Highway Administration, the International Bridge, Tunnel & Turnpike Association, the TRB Freeway Operations Committee, and several other U.S. and Greek organizations, are sponsoring the 1st International Symposium on Freeway & Tollway Operations June 4-7 in Athens, Greece. One of its focal points will be Managed Lanes, including HOT lanes, express toll lanes, and toll truck lanes. I wish I could attend, but my schedule does not permit me to. You can get more details at: www.citycongress.com/1_ISFO.


Quotable Quote

"The real solution is not reducing traffic to fit capacity. We must expand capacity to handle the growing traffic."

—DOT Secretary Norman Mineta, Feb. 28, 2006.


Robert Poole is Searle Freedom Trust Transportation Fellow and Director of Transportation Policy


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