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Reason Foundation

Surface Transportation Newsletter #111

Virginia P3 program at risk? MAP-21's contradiction, Tolls finance bridge projects, Federal transportation policy

Robert Poole
January 10, 2013

In this issue:

Is Virginia's P3 Program at Risk?

The state with the longest track record in public-private partnerships (P3s) for transportation infrastructure is clearly Virginia. It enacted the first workable general enabling legislation for P3s back in 1995 (the Public-Private Transportation Act—PPTA) and despite a few early stumbles, has generated substantial private capital investment for much-needed projects, including the recently opened Express Lanes on the Beltway (I-495), the Midtown/Downtown Tunnel project in Hampton Roads, and the Express Lanes project on I-95, the latter two financed in 2012. Virginia is also the first state to have created a professional privatization unit in state government, inspired by similar units in the major states of Australia and Canada.

This leading role is now under political attack, due to unhappiness among some elected officials in the Hampton Roads area, egged on by a critique of the PPTA program from the Southern Environmental Law Center (SELC). That report, released in November, is essentially a follow-up to a 2004 SELC critique by the same author, James J. Regimbal, Jr. It can be downloaded from SELC's website, www.southernenvironment.org.

In effect, what Regimbal wants is fairly significant politicization of the P3 process in Virginia. He suggests giving the legislature a formal role in the process, wants no P3 activity to occur until completion of the long, drawn-out environmental review process, thinks design-build and public toll agencies could generally do a better job than private investors, and wants to constrain all P3 projects to follow a standard model, despite the fact that projects differ considerably in risks. And if at the end of a competitive procurement process, only one consortium ends up submitting a proposal responsive to the RFP, Regimbal would cancel the procurement.

You have to get well into the details of this critique to see that Regimbal doesn't really understand how toll concessions or global P3 procurements work. He's completely oblivious to the political risk that would be created by a number of his recommendations (e.g., requiring the legislature approve the specific amount of state investment in a P3 project—which means politicizing the negotiation over the specifics of the concession agreement, and requiring formal approval of the terms of the negotiated deal by the Commonwealth Transportation board). These kinds of political approval requirements are features of state P3 enabling measures that have failed to yield any viable P3 projects (or even proposals). He is also sharply critical of the relatively new Office of Transportation Public-Private Partnerships, despite it being exactly the kind of professional P3 unit recommended last year by the Brookings Institution for all states and modeled, as Brookings recommended, after similar bodies such as Partnerships B.C. (Canada) and Partnerships Victoria (Australia).

Regimbal laments the fact that Virginia (like most states) no longer has enough transportation money to build new projects, but his critique of P3s often seems oblivious to this fact. In the one place where does suggest an alternative, he points to a long-established state toll agency (Chesapeake Bay Bridge & Tunnel District), which can, indeed, issue toll revenue bonds for new projects. But this is a single-facility agency which has been unable to finance a needed expansion of its own facility.

He also doesn't appreciate the critically important role transferring risk to the private sector in well-structured P3 concessions. Construction cost overruns, late completion, and over-optimistic projections of traffic and revenue are endemic in transportation mega-projects. P3 toll concessions have not eliminated such risks, but when done right, such concessions transfer all those risks from the public sector to the private sector. The value of such risk transfers is quantified in the value-for-money analysis carried out by P3 units. And because of the P3 provider's willingness to take on such major risks, it is entitled to earn a competitive return on the capital it is willing to risk on the project.

Finally, I'm dismayed that after nearly two decades of P3 projects in Virginia, any critique would repeat the nonsense about the private sector having to pay significantly higher interest rates on debt than government. Nearly all major transportation P3 projects these days use tax-exempt private activity bonds (PABs) plus low-cost subordinated debt in the form of TIFIA loans. Equally silly is the claim that a ceiling on annual toll rate increases "guarantees" that such increases will occur every year. No toll operator with any sense will increase toll rates if doing so will reduce revenues, as might occur during recessions, for example.

In short, while this report makes a few good suggestions for increased transparency, the bulk of its recommendations, if implemented, would increase political risk for P3 projects in Virginia. That would lead some or all potential investors to go elsewhere, depriving Virginia of much-needed transportation investment.

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MAP-21's Contradictions on Managed Lanes

In the SAFETEA-LU legislation of 2005, Congress intended to "mainstream" the conversion of HOV lanes to HOT lanes. And in the 2012 MAP-21 reauthorization, Congress went even further, permitting the conversion of HOV lanes to Express Toll Lanes (ETLs). But in drafting the new legislation, nobody noticed a contradiction between the two sets of provisions. I am indebted to Fred Kessler of the Nossaman law firm for pointing out this problem, both in a managed lanes webinar last fall and in a session at the AASHTO annual meeting in Pittsburgh several weeks later.

SAFETEA-LU dealt with managed lanes in section 166(b) of federal highway law. Prior to this, conversions were only permitted under the Value Pricing Pilot Program (limited to 15 states) and new ETLs could be created under the Express Lanes Demonstration Program (15 projects, program sunsetted Sept. 30, 2012). SAFETEA-LU mainstreamed HOV-to-HOT conversions, meaning all states could do this without needing VPPP approval, but with several specific requirements:

Going even further, MAP-21 authorized conversion of HOV lanes to ETLs without the above requirements. Per new language in section 129(a)(1)(H), such a conversion does not require a federal tolling agreement, or requiring HOVs to be exempt from tolls. Under this provision, states can design and operate managed lanes—whether new construction or conversions of HOV lanes—in the manner they judge best.

But in drafting MAP-21, Congress failed to delete the old language in Sec. 166(b), including the requirement that HOVs in converted lanes be exempt from tolls. This leaves state DOTs and MPOs in a quandary when it comes to planning managed lane networks: must they exempt HOVs from tolls per the older language or go straight to Express Toll Lanes per the new MAP-21 language?

FHWA staff spotted the conflict between the two provisions and issued guidance on Sept. 24, 2012 (www.fhwa.dot.gov/map21/guidance/guidetoll.cfm). According to this document, the new language of Sec. 129 has no specific authority allowing non-HOVs to use HOV lanes; that authority comes only from Sec. 166. Therefore, it says, Sec. 166 governs all HOV-to-HOT conversions. And hence HOVs may not be charged tolls on the converted managed lanes (unless the state gets specific approval to do so under the VPPP).

I am not an attorney, but in my view, this is a rather tortured reading of the intent of Congress. MAP-21 provided for a complete replacement of 23 USC 129(a), the thrust of which was to significantly reduce federal limits on the use of tolling and pricing. Tolling and pricing are now a statutory right of states, without FHWA approval or tolling agreement, as long as there is no net loss of non-HOV lane capacity on highways. That strongly suggests an intent to let state DOTs and MPOs convert HOV lanes to toll lanes, if that makes the most sense to them, especially when developing managed lanes networks. Clarifying this would be appropriate in a technical corrections bill, if there is one. If not, it cries out to be fixed in the next reauthorization, two years from now.

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Toll Finance Key to Major Bridge Projects

While there is still a lot of hand-wringing about less federal highway money available than many had hoped for in MAP-21, state DOTs are going full-speed ahead on major bridge replacements, financing them with tolls and often using some form of public-private partnership (P3) arrangement.

One of the highest-profile projects is the replacement of the aging and obsolete Tappan Zee Bridge, across the Hudson River north of New York City. After years of political battles over whether the bridge should include a hypothetical light rail line, the project is now on a fast track with Gov. Cuomo's support and a winning design-build bidder selected on a bid of just over $3 billion (the other two bids came in around $4 billion). Like the bridge it's replacing, the new Tappan Zee will be largely or entirely toll-financed.

The largest other bridge project is replacement of the non-tolled I-5 bridge across the Columbia River between Oregon and Washington. Oregon insists on it including a light rail line, which has much less support north of the border, and that issue is not yet resolved. What has been resolved is that this $3.5 billion project will be a toll bridge, and it may be procured via some form of P3 arrangement. Washington State is also using toll financing to replace the SR 520 floating bridge in the Seattle area. Tolls will cover about 40% of the new bridge's $2.7 billion cost. The original floating bridge was financed via tolling, but after the initial bonds were paid off, the tolls were removed. With permission from the federal Value Pricing Pilot Program, and hard-won local political support, WSDOT began tolling early last year on the existing bridge, two years before construction on the replacement bridge begins

A $2.6 billion project for two new toll bridges is under way in Louisville, in a joint effort between the Indiana and Kentucky DOTs. Because Kentucky does not have P3 legislation, its bridge is being procured conventionally, while Indiana has selected the winning bidder for a design-build-finance-operate-maintain concession for its bridge, the East End Crossing. Both bridges will be tolled, but the states will be taking the traffic and revenue risk. InDOT will compensate its concessionaire via availability payments.

North Carolina is making use of a toll concession to procure the new $650 million Mid-Currituck Bridge, with the state making an equity investment to buy down the amount to be toll-financed for this seven-mile, low-traffic bridge to the Outer Banks. The value-for-money analysis carried out for the NCDOT's Turnpike Division found that while the capital cost of a concession will be slightly higher than if the state developed the project, there are large offsetting benefits from risk transfer and lower life-cycle costs.

This is just a sampling of the major bridge projects now under development around the country. Others include the $2.4 billion Brent Spence Bridge in Cincinnati, the $2.3 billion Detroit River International Crossing, the $800 million Knik Arm Bridge in Anchorage, and two Port Authority of New York and New Jersey toll bridge projects: the $850 million replacement of the Goethals Bridge (availability-pay concession) and the $1 billion refurbishment of the Bayonne Bridge. Without toll financing, it's doubtful that any of these projects would be under way.

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Rethinking Federal Transportation Policy

Last fall when I began focusing on the impending Jan. 2nd federal sequester (now postponed two months), I concluded that engaging in endless battles over dividing up shrinking federal transportation money is counterproductive. As Congress grapples with impending budget cuts, we need to do a fundamental rethink of how the federal government assists with much-needed transportation infrastructure.

The reality going forward is that there will soon be no such thing as "general revenue" funding for much of anything beyond entitlements, defense, and interest on the national debt. As long as the federal budget remains grossly unbalanced, federal general-fund investments in infrastructure are essentially borrowed from China—an unsustainable situation.

Drawing on everything I think I've learned in more than 25 years in transportation policy, let me suggest three key principles for a sustainable federal role in infrastructure:

  1. Users should pay for the infrastructure they use;
  2. Large capital projects should be financed, via revenue bonds and other mechanisms; and,
  3. The federal role should be narrowed to do only things that are truly interstate in nature, which will mean shifting more responsibility to the states, metro areas, and the private sector.

Reason Foundation's new Policy Brief, "Funding Transportation Infrastructure in a Fiscally Constrained Environment," starts with those principles and seeks to apply them to all the modes of transportation in which the federal government has played an important funding role. You can download it from the Reason website: http://reason.org/news/show/funding-important-transportation-in.

The paper first explains why I think the basic model used for federal transportation programs—user taxes feeding centralized trust funds that make annual grants for cash-based investments, increasingly subsidized by general-fund money—needs replacing:

The report lays out a comprehensive set of organizational, tax policy, and regulatory changes that would implement the above principles, thereby ensuring needed, cost-effective investment in airports, air traffic control, highways and bridges, ports and waterways, transit, and passenger rail. This is especially relevant with the new Congress set to take up both passenger rail and ports/waterways legislation this spring. I will have more to say about both subjects in upcoming issues. Meanwhile, I hope you find this new paper thought-provoking and at least some of its policy ideas worth considering.

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State DOT Concerns Over TIFIA

While every state DOT that has transportation P3 legislation available cheered MAP-21's expansion of the TIFIA credit support program for projects with dedicated revenue streams, there are growing concerns over how FHWA is implementing the revamped program. Texas DOT, for one, has filed critical comments in response to DOT's Notice of Funding Availability issued last July to explain how DOT interprets what Congress enacted.

Public Works Financing's December issue details some of TxDOT's concerns, which I've heard echoed by several other DOTs in recent months. What many of those supporting the revamp (not just expansion) of TIFIA thought they would be getting was a program in which "administrative earmarking" was pretty much eliminated in favor of a check-off-the-boxes approach—if you meet all the criteria and there is funding available, you will get the loan. But TxDOT's comments express concern that, as PWF summarizes, "the NOFA allows USDOT to continue earmarking projects based on poorly defined [non-statutory] policy preferences such as livability and sustainability." And in a direct quote from the TxDOT filing, the agency wrote that "The USDOT should adhere to administration of the TIFIA program as a prudent lender, not as an arbiter of public policy." Instead, projects must now pass an undefined "public benefit" test before Letters of Interest are processed.

I have also seen a list of possible points to be addressed in a proposed oversight hearing on DOT's implementation of TIFIA including the fact that, as of early January, none of the 23 projects submitting Letters of Interest (LOIs) since the program was revamped have been invited to submit a loan application, that the process being used for LOIs circumvents the statutory rolling application process, and FHWA's failure thus far to issue the promised new TIFIA program guide and new regulations per MAP-21.

While I can understand that gearing up to manage a considerably larger program takes time, on the policy questions I think the critics are making some good points. Again, if there is to be a MAP-21 technical corrections bill, it may be that the intent of Congress in revamping TIFIA needs to be more clearly stated.

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Rail Transit Under Fire in Los Angeles and San Jose

In the last several weeks hard-hitting critiques of rail transit projects in California's two largest metro areas have crossed my screen. What I found unusual about them is not so much their content as the identity of their authors. One is Mike Rosemberg, a long-time transportation reporter for the San Jose Mercury News. The other is Robert Garcia, a respected civil rights advocate and head of The City Project in Los Angeles, whose credo is "equal justice, democracy, and livability for all."

Rosenberg's article is a background news story on the 25th anniversary of the light rail system in San Jose. Its headline reads "25 Years Later, VTA Light Rail Among the Nation's Worst." Rather than the typical newspaper puff piece, Rosenberg's article sticks to hard facts about what the VTA light rail system has cost, what it has accomplished, and how it stacks up compared to comparable systems elsewhere. I've read similar critiques by independent researchers, but was surprised to see Silicon Valley's main newspaper tell it like it is about one of the most disappointing U.S. experiences with light rail. (www.mercurynews.com/traffic/ci_22264605/25-years-later-vta-light-rail-among-nations?IADID+Search)

Garcia's piece, which was sent out by The City Project, is titled "Just Transportation: Is Los Angeles Making Progress on Transit for All?" It makes a detailed factual comparison of bus and rail in Los Angeles over the past 30 years. Drawing on expertise from transportation consultants, it finds that the L.A. County MTA "spends almost twice as much on rail to carry about one-fourth as many passengers" as its buses do. (www.cityprojectca.org/blog/archives/17561) The piece is a powerful corrective to several recent national stories, such as "How Los Angeles—Yes, Los Angeles—Is Becoming America's Next Great Mass-Transit City," by Matthew Yglesias, last Sep. 17 at Slate.com. They make quite a contrast.

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Upcoming Conferences

Note: I don't have space to list all the transportation conferences going on; below are those that I am (or a Reason colleague is) participating in.

Transportation Research Board 92nd Annual Meeting, Jan. 13-16, Washington, DC (Adrian Moore and Robert Poole speaking). Details at: www.trb.org/AnnualMeeting2013/annualmeeting 2013.aspx.

Moving Georgia Ahead: What's Coming Down the Pike, Jan. 24, Georgian Club, Atlanta, GA (Robert Poole speaking). Details at: http://weblink.donorperfect.com/LeadershipBreakfastRegistration.

Advancing Transportation Infrastructure through Public Private Partnerships, Jan. 28, Northwestern University, Evanston, IL (Robert Poole speaking). Details at: www.transportation.northwestern.edu/lipinski/index.html.

Private Resources for New York's Future: Public-Private Partnerships, Feb. 12, Hotel Albany, Albany, NY (Shirley Ybarra speaking). Details at: www.ncppp.org/calendars/Albany_1302/NY2013flyer.pdf.

Infrastructure Report Card, ASCE DC Meeting, Feb. 19, Hilton Arlington, Arlington, VA (Shirley Ybarra speaking). Details at: http://asce-ncs.org.

Transportation Finance & Mileage-Based User Fee Symposium, April 14-16, Doubletree Philadelphia City Center, Philadelphia, PA (Cosponsored by Reason Foundation). Details at: www.ibtta.org/events.

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News Notes

Turkey Leases Highways and Bridges. Last month the Turkish government announced the winning bidder for a 25-year concession to operate, maintain, and improve all 1,975 km. of tolled motorways and two toll bridges (the Bosphorus Bridge and the Fatih Sultan Mehmet Bridge). Submitting the winning bid of $5.72 billion was a consortium of Koc, UEM Group, and Gozde Girisim. Five consortia had submitted qualifications and three were invited to submit bids.

Oregon Launches New MBUF Pilot Project. In late November, Oregon DOT launched its second pilot project to test ways of charging drivers per mile driven (mileage-based user fee). Volunteer participants may choose among five different plans to record and pay for miles driven, including three different on-vehicle devices: a dongle that plugs into the diagnostic port, a smartphone app, and a GPS box. Another option is a flat rate annual charge, with no device in the vehicle. Further information is available at www.roadchargeoregon.org.

Beltway Express Lanes as Virtual Exclusive Busways. Fairfax County, VA's Fairfax Connector bus service will begin operating the first of four express routes on the new Express Lanes on the Capital Beltway, I-495 in mid-January. The initial route will go from Burke Center to Tysons Corner at a planned average speed of 55 mph, previously impossible on the congested Beltway during peak periods. The other routes will be introduced this spring.

Abertis Now World's Largest Toll Road Provider. Thanks to two recent acquisitions, Spain-based Abertis has become the world's leading toll road provider, with 7,312 km. (4,541 miles) of toll roads in its portfolio. In December the company acquired 3,226 km. of Brazilian toll roads from another Spanish operator, OHL, and followed that transaction with the purchase of OHL's 343 km. of toll roads in Chile. Abertis's core holdings in Europe are in Spain and France. Its initial U.S. toll operations comprise toll roads and a major toll bridge in Puerto Rico.

Comparing Concessions with Traditional Procurement. A useful and informative paper by Bob Prieto, a senior vice president of Fluor, explains the many differences between traditional public-sector procurement of large transportation projects by design-bid-build (DBB) contracts with the more complex design-build-finance-operate-maintain (DBFOM) method, commonly called long-term concessions (which may or may not involve tolling). Especially useful is a detailed comparison chart comparing who does what, and especially which party bears which risks. "Comparison of Design Bid Build and Design Build Finance Operate Maintain Project Delivery" appears in the PM World Journal, Vol. 1, Issue V, December 2012 (www.pmworldjournal.net).

ICC Speed Limit to Increase. Although it was designed to operate at 60 mph, Maryland's year-old InterCounty Connector (ICC) toll road spent its first year with a 55 mph limit. In December, the results of a year-long engineering study were released, concluding that it makes sense to increase the limit to 60 mph. The speed limits on the nearby Capital Beltway and I-270 are both 55 mph, but those unpriced roads are so congested that such a speed can seldom be achieved. By contrast, the variably priced ICC is thus far congestion-free.

Low-Cost All-Electronic Tolling. Last month's issue summarized the recent Reason Foundation policy study which found that the cost of collecting tolls via all-electronic tolling (AET) should be as low as 5% of the revenue collected—not the 25 to 30% of revenue needed for most 20th-century toll roads. In its major report on alternatives for the Ohio Turnpike, KPMG analyzed the costs of toll collection on that facility. While cash collection consumed 33.5% of the revenue generated, transponder-based E-ZPass tolling cost just 4.9% of the revenue it generates. (www.ohturnpikeanalysis.com)

New Congestion Intensity Data from INRIX. Traffic data company INRIX recently unveiled a new INRIX Gridlock Index (IGI) that provides monthly updates on the intensity of traffic congestion in the country's 10 largest metro areas. The data come from the INRIX Traffic Data Archive, a database that draws on numerous sources including a network of about 100 million vehicles and mobile devices. The 10 metro areas are Atlanta, Boston, Chicago, Dallas, Detroit, Los Angeles, Miami, New York, San Francisco, and Washington, DC. Details are available by emailing info@inrix.com.

Mass Pike Going Cashless. Joining the trend toward all-electronic tolling (AET), the Massachusetts Turnpike and the state's other toll facilities will end cash tolling by 2015, Gov. Deval Patrick announced on Dec. 12th. The state's 410 toll collectors will either retire or find other work, and the state expects to recoup the AET system's estimated $100 million cost within three years.

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Quotable Quotes

"Much of the transportation policy establishment in Washington seems to be on the dinosaur track. The big players are still trying to divide up the spoils rather than thoughtfully triage programs that have outlasted their value. In transportation funding, leverage ought to be the priority rather than politics. Economic development and mobility ought to be the priority rather than administrative earmarks. But we seem to be going the wrong way as the fear of scarcity makes everything political. Transportation politics runs deeper than scarcity. Divisive politics is preventing both sides—highways and transit—from addressing the scarcity problem with anything more than plumber's putty."
—William G. Reinhardt, ". . . And the Politics of Scarcity," Public Works Financing, November 2012.

"As for future legislation, even if Congress finds the time to renew the transportation program by October 2014 when the current law expires, few observers expect the next surface transportation bill to be a massive multi-year measure funded with hundreds of billions of dollars. More likely, the next transportation authorization will take the form of another short-term bill funded at current spending levels. Those levels ($74 billion in FY 2012) are generous enough, a senior state DOT official told us, to allow most states to maintain transportation infrastructure in a state of good repair, but they will leave little money for major new construction. The Highway Trust Fund can no longer provide capital for capacity expansion."
—Ken Orski, "A Post-Election Outlook for Transportation," Innovation NewsBriefs, Dec. 20, 2012

"'Unlocking the value of the [Ohio] Turnpike' is the theme phrase to describe the approach the Governor as adopted. That is political gloss for using optimistic projections of future Turnpike revenues to borrow more to increase the state's stock of 'free' roads that need taxpayer support—or themselves more debt—for upkeep and modernization. Short-term this presents an apparently irresistible temptation to politicians because it appears to produce so many benefits at so little immediate pain or obvious cost now. The damage done by the accumulation of eventually unsustainable state debt will happen on someone else's watch, they hope."
—Peter Samuel, "Comment," Tollroadsnews.com, Node 6317, Dec. 13, 2012

"If the [I-495] Beltway [Express Lanes] had been funded through traditional public financing, its development and construction would have taken decades to procure, acquire right of way, design, and build. It would have possibly been broken into multiple construction segments. And traditional funding would have been pressured by other transportation priorities in Northern Virginia and the Commonwealth. The Commonwealth's having the ability to leverage current public funds with private-sector investment, which included equity funds and private activity bonds, allowed the commuters in Northern Virginia to benefit from the improvements now instead of in decades."
—VDOT Secretary Sean T. Connaughton, "Accelerating Public Benefits," Public Works Financing, December 2012.

"One idea for funding surface transportation gets more traction by the year. Tying user fees directly to miles driven by a vehicle matches a usage pricing model favored by many businesses. Turn on a light, you pay for the electricity you use. Cell phone owners pay for the number of minutes they talk or text. TV aficionados pay extra for select shows. Drivers pay extra for electronic toll transponders that let them skip tollbooth lines. Use as you cruise. It seems a fair model for transportation . . . and more and more often, policymakers favor the concept."
Xerox Corporation, "Mileage Based User Fees: Use as you cruise—alternative funding to the fuel tax," www.xerox.com/transportation, 2012.

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


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