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Reason Foundation

Surface Transportation Innovations #63

Topics include: the stimulus bill and PPPs; transit investment; Texas commission charting course for PPPs; getting rid of cash tolling; fixing America's bridges; and other news.

Robert Poole
January 1, 2009

In this issue:


Can the Stimulus Bill Help PPP Projects?

Besides the long list of conventional “ready to go” highway projects developed by state DOTs and compiled by AASHTO, there are $19 billion worth of road, rail, and port projects where private developers have been selected or are about to be selected (Public Works Financing, November 2008). These projects are at risk of being delayed due to the ongoing credit market crisis.

Two factors are especially relevant. First, despite infrastructure investment being a relatively attractive asset class (as evidenced by over $100 billion having been raised by infrastructure equity funds in the last several years), debt is less available than it was a year ago. Hence, proposed financings will require larger amounts of equity—i.e., they will be less leveraged. Second, the debt that is available will be more expensive, in part because the bond insurance industry has just about collapsed.

The federal government has two existing programs that have already been tapped for such PPP infrastructure deals: private activity bonds (PABs) and the Transportation Infrastructure Finance & Innovation Act (TIFIA) program. The former allows for tax-exempt revenue bonds for projects developed under long-term concession agreements by the private sector, while the latter provides loans, loan guarantees, and/or letters of credit to projects of national and regional significance.

In contrast to the model to be used in the stimulus bill—handing out cash to fund 90 to 100% of projects—the PPP model provides a powerful filter, singling out larger projects whose benefits exceed their costs, and for which users are willing to pay. Federal credit support puts a much smaller amount of federal funds into a project, so the federal dollars not only go much farther, but they also support the kinds of projects that make the economy more productive.

The PAB program would be more attractive to bond buyers if such bonds were exempted from the Alternative Minimum Tax (AMT), as the Senate Finance Committee currently plans to do (in the stimulus bill) for PABs for airport, water, and housing projects—but not so far for highway projects. That omission should be rectified. Longer-term, the existing $15 billion cap on highway PABs needs to be raised or eliminated (since projects now in the pipeline are likely to use it up in 2009), but this can be done via the six-year reauthorization bill, to be taken up later this year.

Changes to TIFIA via the stimulus bill could leverage federal funding by jump-starting the $19 billion worth of PPP projects now in the pipeline (and potentially some of the $67 billion worth of such projects at earlier stages of procurement). TIFIA to date has provided credit assistance of about $4.8 billion for projects involving $18.6 billion total investment. Possible reforms include the following:

I commend to you a more detailed commentary on TIFIA by Bryan Grote of Mercator Advisors, “Expanding Use of an Existing Tool for Infrastructure Investment,” in the December 2008 issue of Public Works Financing (www.pwfinance.net).

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More Transit Investment…than What?

All sorts of reports have been issued over the past year in anticipation of the 2009 reauthorization of the federal surface transportation program. A great many of them are calling for more investment in urban mass transit. This was also the question posed by National Journal’s new transportation experts blog one week in December (http://transportation.nationaljournal.com/2008/12/has-mass-transit-arrived.php). Nearly everyone else called for increased transit spending. But I begged to differ, as follows.

“Let me respond to this question with another one: Compared to what? According to a recent report for the Urban Land Institute by Prof. David Hartgen, the long-range transportation plans of America’s large and very large metro areas already plan major increases in transit funding over the next 25 years. For the 22 MPOs whose long-range plans were reviewed, transit spending averages 41% of the total, while transit’s projected mode share is just 5.5%. Something is wrong with this picture.

“Nearly all metro areas forecast continued growth in population and driving over the next 25 years. In most of them the major part of that growth will take place in the outer suburbs, and suburb-to-suburb commuting will continue to be the largest category. That sort of commuting pattern is hard to serve effectively via mass transit (especially rail transit), which works best serving large concentrations of jobs in traditional urban cores.

“Nearly all the MPOs’ long-range plans implicitly acknowledge the problem, in two ways. First, they project only modest increases in transit’s mode share by 2030, despite devoting more than 40% (on average) of all transportation dollars to transit. Second, they project that traffic congestion in 2030 will be significantly worse than it is today. There is a direct connection between under-funding the highway infrastructure that buses, car-pools, and individual motorists depend on and continued increases in congestion.

“Rather than pouring billions more into rail transit lines that will serve only a small fraction of urban trips, it would make better sense to add highway infrastructure that does double-duty by providing motorists with a congestion-relief alternative and transit agencies with high-performance guideways for region-wide express bus (Bus Rapid Transit) service. A network of Express Toll Lanes added to the freeway system would do just that.”

I commend Prof. Hartgen’s report to you. It’s loaded with useful data, much of which I’ve never seen compiled in one place before. It is a summary and assessment of long range transportation plans from 22 large U.S. urban areas, going well beyond the issue that I raised in this commentary. “Are They Ready? Mega-Region Growth and Transportation Investment” by David T. Hartgen, M. Gregory Fields, and Claire G. Chadwick can be downloaded from: www.hartgengroup.net/Projects/ULI_Final_Report_2008-03-07.pdf.

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Committee Charts Future for PPP Toll Roads in Texas

I refrained from writing about toll roads in Texas all last year, because I was serving as a member, appointed by Gov. Rick Perry, of the Legislative Study Committee on Private Participation in Toll Projects. This body was authorized by SB 792, the 2007 legislation that put a two-year moratorium on long-term toll concession projects (called CDAs in Texas). In effect, our committee was asked to recommend what role, if any, such projects should have in Texas after the moratorium expires in 2009.

The other eight members were all either current or former Texas legislators, which put me in a rather odd position. In hindsight, perhaps my most important contribution to the project was my recommendation at the initial meeting last February that at the three planned public hearings, we hear not only from interested Texas parties (MPOs, toll agencies, TxDOT, road builders, anti-toll activists) but from people with experience with toll concession projects in other states and other countries. That way, Texas could learn from experiences elsewhere, where nearly all of the issues that had been fought over in Texas in 2007 had also been dealt with.

Fortunately, that suggestion was adopted, and we heard from a wide array of people from other state DOTs (e.g., Virginia and Florida), the Federal Highway Administration, toll road companies, financial firms, consultants, etc. This raised the knowledge level of our discussions and provided a broader context for discussing the issues. We also had outstanding staff support from academics provided by the University of Texas at Dallas. They made available large amounts of data to help the committee get a better handle on the dimensions of the Texas highway funding problem, and of experiences with PPP toll roads in other states and countries.

The result is a report I'm proud to have had a part in creating. It provides a sound factual basis showing that realistic conventional measures can help, but will not resolve the massive funding shortfall. But it also provides some important doses of realism in what had become a very distorted picture of what toll concessions would mean for Texas. For those afraid that nearly all new highways would be PPP toll roads, we explain that "a relatively small number of projects (located primarily in congested urban areas) are 100% toll-viable; toll roads and PPPs will not take over the state." We also provide data showing that start-up ("green-field") toll roads are generally high-risk propositions, rather than being (like the controversial SH 121 in Dallas) large-scale pots of gold that can be used to fund billions of dollars worth of other projects.

The report then goes on to focus on how best to protect the public interest in those cases where a toll concession makes sense to use. Two very important recommendations concern the controversial issues of termination for convenience and up-front payments. On the former, the report suggests that a pre-defined buyout formula in effect says to the private sector that if the toll road does much better than forecast, the state will grab the upside, but if it does much worse, the private sector eats it. If the aim is to avoid windfall profits, the better approach is revenue-sharing over the life of the agreement (which aligns the interests of both parties for the success of the project). And that dovetails with our recommendation on up-front payments: don't go there. Again, revenue-sharing is a wiser approach and a better fit for the majority of projects which will not pe ncil out as "pots of gold."

The toughest issue we faced was "local primacy"-the idea that local toll agencies should always be preferred for developing new toll roads, with the private sector option available only if the agency is unable or unwilling to do the project. While that policy might not have large negative consequences for the two metro areas with large and well-run toll agencies (Dallas and Houston), it could lead to many difficulties for the brand-new Regional Mobility Authorities in the smaller metro areas, attempting their first stand-alone, start-up toll projects (read: high risk). Rather than trying to redefine local primacy to fit all circumstances, we recommended a method to quantify the relative benefits of public-sector and private-sector approaches to doing specific toll projects: the Public Sector Comparator. The PSC is routinely used in Australia, Britain, and Canada. In many cases, the entity doing these analyses is a specialized one such as Partnerships BC in British Columbia and Partnerships Victoria in Australia. So we recommended the creation of a similar entity in Texas, staffed with legal and financial professionals hired from the private sector.

As you will see when you download and read the Committee's report, six of the nine members appended letters, in several cases taking issue with one or more of the points summarized here (and in my case, noting that one advantage of PPP toll roads was not sufficiently explained in the report). So it's not clear what will happen when the Legislature convenes this month to take up the PPP toll roads issue. (The report is online at: www.senate.state.tx.us/75r/senate/commit/c820/SB792Report.pdf).

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Mary Peters: Time to Scrap Cash Tolling

For some years, in this newsletter and elsewhere, I have called for a national date-certain for getting rid of all toll booths, to be replaced by nonstop, highway-speed electronic toll collection. So I was delighted that DOT Secretary Mary Peters issued that call last month. Addressing IBTTA's annual transportation finance summit in Washington, DC, Peters called for the organization to work toward eliminating all U.S. toll booths by 2014. The last ones "should be sent to the Smithsonian," she quipped. The 2014 date is when the upcoming 2009 federal reauthorization would run out.

Congress could help, Peters said, by removing current restrictions on tolling the Interstates and giving states greater flexibility to implement variable electronic tolling. To compete in the 21st century global economy, she said, America needs world-class transportation infrastructure, which cashless tolling would facilitate.

How realistic is this, technically speaking? To begin with, specialized toll roads and toll lanes are already cashless, beginning with the 91 Express Lanes in Orange County, California, and all existing and planned HOT lanes. The Westpark Tollway in Houston has been cashless since it opened in 2004, and the SH 183 toll road in Austin went cashless the first of this month. The E470 toll road in Denver plans to end cash tolling in July 2009, while both the North Texas Tollway Authority (Dallas) and the Miami-Dade Expressway Authority have set 2012 as their deadlines. In each case, "camera tolling" (i.e., video recording of license plate numbers, with bills sent to registered plate-holders) will supplement transponder tolling (as has been the case for more than a decade on Highway 407ETR in Toronto).

One complication is rental cars, where the usual camera tolling may not be rapid enough to link a particular customer with accumulated tolls by the time the car is turned in. To fill this niche, a rental car tolling industry has emerged. The largest camera-based operator is American Traffic Solutions (Scottsdale, AZ), operating under the PlatePass brand. In September, ATS announced an agreement with four major rental car operators (Advantage, Avis, Budget, and Hertz) for interoperable camera tolling in Colorado, Florida, and Texas, three major markets with considerable toll road operations. The company operates a data hub in Texas, which compiles a daily update of rental car data from the four companies and sends it to participating toll road operators.

In the Northeast, where the E-ZPass consortium provides interoperable tolling, camera tolling does not exist, so Platepass and competitor Highway Toll Administration (HTA) maintain transponders in rental cars. In December, HTA announced an agreement with transponder maker TransCore under which HTA hopes to provide the company's new eZGo Anywhere transponder. TransCore is working to make that transponder compatible with all existing toll system protocols. The third company is Rent a Toll, Ltd (Plano, TX), which offers pre-paid tolling under the Pass24 brand name in Colorado, Florida, and Texas thus far.

While we are still some years away from true nationwide electronic tolling inter-operability, the technical problems in eliminating cash tolling, via some combination of transponders and camera tolling, seem to have been solved. All that's needed to meet Peters' challenge is the political and bureaucratic will to proceed.

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Fixing Our Ailing Bridges

One of the likely uses of stimulus bill money will be to work down the backlog of deficient bridges. While our national bridge problem is real, popular perception of it is exaggerated, and the federal approach to fixing these bridges has been far from optimal.

First, while the latest federal figures show that over 24% of U.S. bridges are deficient, that total is made up of two components. The one most people worry about is "structurally deficient" bridges (like the one on I-35 that collapsed in Minneapolis in 2007). The good news is that the numbers in this category have been trending steadily downward over the past decade, and as of 2007, the Congressional Research Service (CRS) estimates that only 12% of bridges are now structurally deficient. The other half of the problem bridges are "functionally obsolete"-typically because they don't have enough capacity for current and projected traffic. While that is a real problem, too, it's not what most people have in mind when they hear that 24% of all our bridges are "deficient."

A second point is that significant sums are being diverted from the federal Highway Bridge Replacement and Rehabilitation Program (HBP). Congress in SAFETEA-LU created a $100 million annual set-aside from HBP for earmarked new-bridge projects. HBP money is supposed to go for rehabilitation and replacement, not new bridges (but OK, over the six years of the reauthorization, that's "only" $600 million diverted from bridge repair). More diversion goes on at the state level, as some states transfer funds from HBP to the Surface Transportation Program (STP), which can be used for all kinds of things, including transit. A recent report by Ron Utt, using data from CRS and the Government Accountability Office, found that from FY 2002 to FY 2007, the difference between what Congress apportioned to HBP and what was actually committed to bridge projects by state DOTs t otaled $9.3 billion. According to Utt's analysis, $2.1 billion of this amount was transferred from HBP to other programs, usually STP. The leading states that used less than 60% of their HBP monies were Arizona, Minnesota, and Pennsylvania. (see www.heritage.org/Research/SmartGrowth/wm2104.cfm)

And a third dismaying point is that the numbers we rely on to define the scope of the bridge problem are themselves suspect. A study published in FHWA's Public Roads magazine, "Reliability of Visual Bridge Inspection," found that the standard visual inspection used under the federally supported bridge inspection program is subjective, highly variable, and not sufficiently reliable. (www.tfhrc.gov/pubrds/marapr01/bridge.html) If we had a more reliable way to determine which bridges need replacement, which need repair to extend their lives, and which are actually being mis-identified (visually) as structurally deficient, whatever dollars are available for rehabilitation or replacement could be far more wisely spent.

A white paper from LifeSpan Technologies, released in October 2008, suggests that the current visual inspection protocol overstates the number of structurally deficient bridges that need replacement, creating a backlog that we realistically cannot fully cope with. And it maintains that commercial technology (presumably some of it made by LifeSpan) can more definitively determine which bridges can be safely rehabilitated and which ones must be replaced. It runs some provocative numbers, suggesting that the federal program might save something on the order of 30% if such condition-assessment technology were used systematically to assess bridges visually judged to be structurally deficient, and state DOTs would save about 50%. The paper suggests increasing the federal share to 90% (from 80%) for those bridges that can be rehabilitated, based on technology-based assessme nt, as an incentive for DOTs to employ such a process. (www.lifespantechnologies.com)

I'm not making any judgments about Lifespan's technology (and I presume they have competitors). I'm simply urging that we be more systematic about assessing bridge conditions and make the available bridge dollars go as far as possible. A new flood of federal money, no questions asked, will not to lead to these kinds of much-needed changes.

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Upcoming Conferences

I don't have space to list all possible transportation conferences of interest; those listed here are only ones that a Reason colleague or I will be speaking at.

Transportation Research Board Annual Meeting, Washington, DC, Jan. 11-14, 2009, three hotels. Details at www.trb.org/meeting/2009/default.asp.

Institutional Investor's 3rd Annual Infrastructure Investment Forum, New York City, Feb. 2, 2009, Union League Club. Details at www.iiconferences.com.

3rd Annual National Conference on Toll Roads, Washington, DC, Feb. 26-27, 2009, Washington Marriott. Details at www.worldrg.com/tollroads.

5th Annual Public Private Partnerships USA Summit, Washington, DC, March 11-13, 2009, Ronald Reagan Building/International Trade Center. Details at: www.cityandfinancial.com/pfiam5.

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News Notes

Bay Area HOT Network Report. The ambitious plan for a region-wide HOT Network for the San Francisco Bay area, approved by the Metropolitan Transportation Commission last summer, is now available on the MTC’s website. Go to: www.mtc.ca.gov/planninga/hov/index.htm.

HOT Lanes for Scotland?. Transport Scotland in December published its Strategic Transport Projects Review, which calls for upgrading the hard shoulders on five motorways to enable them to be used as congestion-relief lanes during peak periods. The report calls for “active management” ITS techniques to be used to manage traffic flow, but it’s not clear whether value pricing will be employed, as well.

Clear Thinking on Climate Policy. Noted regulatory policy expert Robert Hahn provides sobering advice on coping with climate change, in this new working paper from American Enterprise Institute. “Climate Policy: Separating Fact from Fantasy,” argues that the range of effective options is quite limited in the foreseeable future, primarily because of lack of political will of most national leaders. Hence, we should focus policy on what is likely to make sense and actually be do-able. (http://ssrn.com/abstract=1301145)

Energy Boondoggles: We’ve Done This Before. The Forbes magazine special issue on “Energy & Genius” (Nov. 24, 2008) included a gem of an article, “A Brief History of Energy Boondoggles,” by Daniel Fisher. Over the past 30 years, the U.S. Department of Energy has spend over $57 billion in R&D on clean energy. Yet the nation’s energy use pattern is very little changed from 30 years ago. Definitely worth a read.

HOT Lanes, Tolling in Transportation Research Record. Volume #2065 of the Transportation Research Board’s Transportation Research Record appeared in late November. This issue focuses mostly on tolling and managed lanes, including such topics as a new active management approach for metro-area freeways, HOT lanes and transit, and an overview of automated vehicle occupancy verification systems and their policy and legal implications. You can purchase the entire issue or individual papers. Go to www.trb.org.

Lessons Learned from Value Pricing Projects. A new report from the Federal Highway Administration provides a detailed overview of projects funded by the federal Value Pricing Pilot Program from 1991 through 2006 and provides lessons learned from a sample with the richest and most relevant experience. I served on the expert panel that reviewed this effort. “Value Pricing Pilot Program: Lessons Learned,” is report # FHWA-HOP-08-023, August 2008, and can be downloaded from www.fhwa.dot.gov.

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Quotable Quotes

“ . . . [I]nfrastructure finance has shown itself to be more resilient to the credit crunch than many other markets, boasting a good track record of well-structured deals supported by stable assets. Fundamentally, the appetite for infrastructure finance therefore remains strong, especially for core, stable operating infrastructure.”
--Richard Adabie and Daniel Earl, Price Waterhouse Coopers, “When the Dust Settles,” PPP Bulletin, Autumn 2008.

“The traditional [toll road] bond financing approach has layers of conservatism built into valuing the asset, and that conservatism tends to under-value the asset. In addition, bond covenants require a debt coverage ratio, i.e., that the revenues of the asset exceed debt payments by a defined percentage. This debt coverage ratio provides a cushion for investors, but it prevents that cushion from being used to help finance the asset. By contrast, a [private-sector] debt-equity model is able to use the equity investment as the cushion or assurance that those holding the debt will be repaid. As a result, the debt-equity financiers are able to free up more capital than those using traditional bond financing, producing a greater payment to the owner of the asset.”
--D. J. Gribbin, Macquarie Holdings (USA), Inc., testimony before the House Transportation & Infrastructure Committee, May 24, 2006.

“Japan offers a cautionary tale on the risks of infrastructure-based stimulus. A spree of public-works projects designed to spur growth left construction equal to an unwieldy 20% of GDP, compared with 10% in America, and drove the national debt to one of the highest levels relative to GDP in the OECD. America’s construction industry is not as politically powerful, inefficient, and corrupt as it historically has been in Japan, and Japan worsened its slump by increasing the sales tax to deal with the debt. Still, Mr. Obama should take note if he wants to get his stimulus right.”
--“Days of Open Wallet,” The Economist, Dec. 13, 2008.

“I would like to issue a challenge to the toll road operators here today. You hold the key to speeding the transition to open-road tolling, the key to attracting more investment, and the key to unlocking gridlock through dynamic pricing. Open-road tolling equipment can be installed quickly and easily, and I am asking you to commit to making tollbooths obsolete in the United States of America by the time the next surface transportation authorization expires. Let’s send these relics the way of the horse and buggy.”
--Mary Peters, Secretary of Transportation, addressing the International Bridge, Tunnel & Turnpike Association transportation finance summit, Washington, DC, Dec. 9, 2008 (www.Tollroadsnews.com/node/3879)

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


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