Surface Transportation Innovations # 53

Topics include: the other national commission's interim report; the other shoe drops in Texas; strange truck lanes assessment in Georgia; busways as HOT lanes?; update on Indiana Toll Road; and other news.

In this issue:


Report from the Other National Commission

For reasons best known to itself, Congress (in SAFETEA-LU) created two national commissions to look into the future federal role in surface transportation. Last month I commented on the final report of the first one. Shortly after the Policy and Revenue Commission report came out in January, the National Surface Transportation Infrastructure Financing Commission released its interim report. It's well worth reading. (http://financecommission.dot.gov)

Rather than making recommendations at this stage, the interim report outlines the dimensions of our current transportation funding (and performance) crisis and then outlines how the commissioners propose to analyze and assess possible reforms. This is an eminently reasonable and transparent approach, which I can't recall seeing any previous federal commission use. The commissioners invite comments on their interim report, and they should be sent (by May 31) to its staff director, who is DOT's chief economist, Jack Wells (jack.wells@dot.gov).

The report does an excellent and succinct job of documenting the extent to which highway use has grown far more than highway capacity over the past two decades, leading to ever-worsening congestion, affecting both personal mobility and goods-movement. They quantify the extent of the funding gap needed to maintain current (poor) performance levels, and the larger gap if we are to improve system performance.

But then they take a serious look at how the current resources are being spent, noting that "How resources are invested affects how much funding is needed," and that "prioritizing those [national transportation] goals and focusing resources on the most important needs and highest-return investments is crucial." I couldn't agree more.

Next the commissioners set forth 15 potential evaluation criteria for judging future funding options. And they list 19 possible funding mechanisms which they plan to assess against these (or a refined set of) criteria. And they invite comments on all of this.

The 2009 reauthorization debate will be one of the most consequential of my transportation career. The Policy & Revenue Commission has set forth one possible approach—of a much larger and more centralized federal role. We don't yet know what the Finance Commission will recommend, starting from the same set of facts. But I'm impressed with how they are going about the task.

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The Other Shoe Drops in Texas

A focal point of the epic battle over toll concession projects in Texas last year was the SH 121 toll road project near Dallas. What started out as a straightforward competitive process among private-sector teams ended up as a de-facto competition between the experienced local toll agency, North Texas Tollway Authority (NTTA) and the winning private-sector bidder, Cintra. NTTA took a far more aggressive posture than is typical of public toll road agencies, in effect mortgaging its entire system so as to match or exceed the up-front payment that had been offered by Cintra. That ultimately led to a decision to award the project to NTTA—but the end result of the competition was the inclusion in the toll-concession moratorium law, SB 792, of a provision for handling such situations in the future.

If either the Texas DOT or a local toll agency is interested in doing a new toll project, TxDOT and the toll agency must cooperate on a market valuation (MV) study. In this process, they are supposed to agree on terms and assumptions used to model the toll project and determine its MV—the amount of up-front payment it could generate (essentially an estimate of the net present value of the "surplus" toll revenue it will generate) from the private sector if the project was done as a toll concession.

Well, it's now early 2008, and three important events have transpired. NTTA has funded the SH 121 project, and the bond rating agencies have reacted. Second, Cintra has funded its first toll concession project in Texas, SH 130 (Segments 5 and 6). And TxDOT and NTTA have struggled with the MV process for another Dallas-area toll project, SH 161. What can we learn from these three events?

Before answering, let me step back and suggest that last year's debate over toll concessions in Texas departed somewhat from reality. SH 121 was a very atypical case, as new toll roads go. It had relatively modest construction costs (since a portion of it had already been constructed), it serves an affluent area, and it appears likely to have very high traffic and revenues. Those factors together created a situation in which it was possible to have either a cash-rich public toll agency or a profit-minded toll road company offer more than $2 billion up-front for the privilege of building and operating SH 121 for 50 years. And that, in turn, created the presumption that any new toll road in which the private sector would be interested would have a similarly large MV, which could be captured and spent on numerous other local transportation projects.

But SH 121 is hardly typical of new "greenfield" toll roads. Far more typical is the proposed SH 161 in Dallas and the recently financed SH 130 (Segments 5 and 6) near Austin. In the former, the MV process has dragged on since last July—and is still not completed. But instead of several billions in potential up-front payments, the numbers being debated are in the range of a few hundred million. SH 161 is an urban toll road. For the rural intercity SH 130 segments, the picture is even less robust. After TxDOT's financial advisors Goldman Sachs and RBC concluded that conventional tax-exempt revenue bonds could cover only $600 million of the project's expected $1.3 billion cost, the agency accepted a proposal from Cintra/Zachry to fund the entire project at no cost to the state (i.e., entirely financed based on toll revenues). Moreover, the deal includes a modest $25 millio n up-front payment plus the prospect of revenue-sharing over the life of the 50-year deal, if toll revenues live up to the company's projections.

We know the SH 130 numbers are real, because the deal has just reached financial close. And we also know NTTA's SH 121 numbers are real, because that deal was financed last fall. But (as some of us predicted last spring), the bond rating agencies have responded to NTTA's altered financial position. Last month, about the time of NTTA's ground-breaking for SH 121, both Standard & Poor's and Moody's lowered their ratings on NTTA toll revenue bonds by one notch, though both S&P's A- and the Moody's A2 are still investment grade. A harsher verdict was issued by Fitch Ratings, which downgraded from A- to BBB+, and announced that it will no longer provide rating coverage of NTTA.

In explaining its downgrade, Fitch said that "The financing for SH 121 represented a significant departure from NTTA's approach to project financing and delivery," noting that the agency's debt burden will triple, from $2.5 billion to $7.5 billion, within the next few years. While acknowledging the existing toll road system's financial strength and strong record of operating performance, Fitch also called attention to the "considerable risks from this new investment," and that "On a stand-alone basis, the SH 121 project's financial profile . . . would have non-investment-grade credit characteristics." Ominously for Dallas area motorists, Fitch noted that NTTA's "ability to meet its covenants and support new investment may necessitate toll rate increases above already approved levels, which may be challenging to implement now that increases have already been programmed wa y into the future."

None of which is to say that NTTA cannot handle SH 121 and some other planned projects. But the idea that the SH 121 deal was the prototype for numerous other deals that would channel billions of dollars in up-front payments into local transportation projects is now being revealed as a pipedream. Future Texas toll roads are going to look a lot more like SH 130 and SH 161—modestly profitable at best. And if the private sector can generally raise more money from a given corridor than typical public-agency financing (as the SH 130 experience suggests), then there should be plenty of scope for toll concession projects in Texas, along with more projects for experienced public agencies like NTTA and its Houston counterpart, HCTRA.

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Strange Truck Lane Assessments in Georgia

Two and a half years ago I reported in Issue No. 25 on a path-breaking study of possible truck-only toll (TOT) lanes on the metro Atlanta freeway system, commissioned by the State Road & Tollway Authority (SRTA). As an add-on to a study of building out planned HOV lanes as HOT lanes instead, Parsons Brinckerhoff did a separate analysis of the feasibility of adding such truck lanes either in addition to planned HOV lanes or instead of the HOV lanes. The primary measure used was the estimated reduction in total congestion in the freeway corridors in question. And the conclusion of this admittedly 50,000-foot level study was that the TOT lane scenarios yielded more congestion reduction than HOV lanes.

That, of course, was not a very tough test. And that initial study did not directly compare the capital costs of the TOT lanes with their potential toll revenue. So, as its authors realized, there was scope for more-detailed follow-up studies. Moreover, since that 2005 study, transportation planners in metro Atlanta have decided that instead of building a network of HOV lanes, they will build HOT lanes instead. Doing better than HOT lanes (in reducing congestion) is a much tougher test than beating HOV lanes.

But now we have two such follow-on studies. Neither recommends going forward with TOT lanes, but in my view, their reasoning is wrong. Let's first look at the "Statewide Truck Lane Needs Identification Study," completed this winter by GDOT. All we have available at this juncture is a summary Powerpoint presentation, as the final report is still being edited. But these results were presented to the State Transportation Board on February 21st, so they are essentially final.

This study looked at projected truck traffic statewide through 2035, and identified six corridors that met an initial set of screening criteria, based on high truck traffic, congestion at levels of service (LOS) E or F, major through traffic movements, major truck traffic generators, and known freight bottlenecks. For each major corridor segment, 30-year benefits and costs were estimated, in 2007 dollars. These segments were combined into four possible truck-lane systems in the metro Atlanta area. The four systems were subjected to further analysis, including their impacts on general-purpose lane peak-period speeds and traffic volumes in 2035. All four systems had strongly positive benefit/cost ratios, with the highest being 2.5.

Yet, bizarrely, the conclusion was to not go forward with truck-only lanes. Why? "Truck-only lanes would not eliminate congestion in the General Purpose Lanes." Well, duh! And since the study amazingly ignored the possibility that truckers would pay for being able to breeze through congested Atlanta at 40-45 mph at rush hour instead of plodding along at 18-20 mph, the multi-billion-dollar cost of even System 1 was seen as an insuperable obstacle. Somebody needs to go back to their textbooks and recall that System 1's benefit/cost ratio of 2.5 means the value of its benefits is two and a half times as high as its costs. People—including truckers and shippers—are willing to pay for such benefits.

A somewhat more promising study has been done by SRTA, looking at various configurations of managed lanes (HOT lanes and TOT lanes) on the most promising truck corridor, I-75 South. The SRTA study analyzed eight alternatives: three HOT-lane alternative that would add one such lane in each direction restricted to autos only; a TOT-only case adding one TOT lane in each direction; three two-lane-each-direction variants, in which one TOT and one HOT lane would be added each way; and finally a one-lane-per-direction case in which the priced lanes would be used by both cars and trucks. These eight were compared to a no-build case and a case in which two general-purpose lanes were added to the corridor. The modeling estimated 2030 vehicle volumes, person volume, travel speed in each type of lane, total delay hours, and cumulative gross toll revenue over a 30-year period.

By my assessment (also based only on a Powerpoint summary), the C-3 alternative (adding one HOT and one TOT lane each direction) produced the second-highest toll revenue, significant reductions in delay in all lanes, and the best combination of speed improvements in both GP and priced lanes. Yet the study recommended the A-3 (HOT only) alternative on grounds that it provided the most efficient use of public funds. Until the full study is published, it will be hard to understand the basis for this conclusion, and I will remain skeptical at least until then. It seems to me that there is still an over-emphasis on reducing congestion in the GP lanes, giving too little attention to the enormous costs of impeded goods-movement, not only to the national economy but also to metro Atlanta's trucking-hub economy.

I hope the new GDOT regime and the State Transportation Board take a much harder look at the trade-offs involved.

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Busways as HOT Lanes?

Several years ago, while researching what became the Reason Foundation policy study "Virtual Exclusive Busways," I noted in passing that very few U.S. metro areas have built exclusive busways—even though that was the original concept that morphed over time into HOV lanes. Currently there are several such busways in Pittsburgh, one in northern New Jersey (the Lincoln Tunnel Exclusive Bus Lane--XBL), one in the San Fernando Valley part of Los Angeles, and one south of downtown Miami that was recently extended to its originally planned 20-mile length. Most transportation planners have shied away from exclusive busways, because except on the XBL, bus demand is so low that bus operations use only a tiny fraction of the expensive lane capacity.

In the VEB study (www.reason.org/ps337.pdf), co-author Ted Balaker and I made the case that priced (managed) lanes offer transit agencies the virtual equivalent of an exclusive busway—since they can be guaranteed to operate routinely at uncongested Level of Service C even at rush hour. Priced lanes are therefore a two-for-one deal: you get not only a congestion-relief alternative for motorists but also a fixed guideway for high-speed, reliable express bus service. I thought, but did not include in that study: why not propose conversion of existing exclusive busways to virtual exclusive busways (also known as HOT/BRT lanes)?

To my pleasant surprise, the Miami-Dade County Commission and the Miami-Dade Expressway Authority (MDX) are now studying this possibility for the South Miami-Dade Busway. The concept would include several costly changes, including widening the Busway from two lanes to four, elevating the busway over major intersections, adding noise walls and landscaping, and preserving existing bike path and pedestrian access to and along the Busway. The grade separation at intersections is a key point. This busway, like the one in Los Angeles, was built all at-grade to hold down costs, which means that although the buses don't have to compete with other vehicles on the busway itself, they have to stop at every traffic signal, along with the parallel traffic on U.S. 1. It's hard to imagine commuters paying to use the HOT/BRTway if they can't drive nonstop at the promised 50 mph.

The Feb. 11th story in the Miami Herald also notes the ongoing project that is converting the HOV lanes on I-95 to HOT lanes and suggests that after that and the Busway conversion, similar priced lanes are at least a possibility for other key expressways in the region. And once the area's toll roads go to all-electronic nonstop toll collection (as planned within the next decade), greater Miami will have the makings of a regionwide network of value-priced lanes—which could provide the uncongested guideway network for regionwide express bus service.

In reading the BRT literature, I notice that a number of other metro areas are looking into exclusive busways. I urge their transportation planners to take a closer look at the potential of priced lanes as virtual exclusive busways.

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Indiana Toll Road Lease Two Years On

Here's the popular take on Gov. Mitch Daniels' lease of the Indiana Toll Road (ITR) for $3.8 billion early in 2006. Though it raised a lot of money, the deal was a political loser, costing the GOP control of one house of the legislature and making Daniels a likely one-term governor. Those perceptions weighed heavily in New Jersey Gov. Jon Corzine's rejection of privatization, in favor of a state-agency "monetization" of that state's toll roads (which is also proving very unpopular).

But the politics of the ITR privatization are not what they seem. To begin with, the initial 2006 election-day fallout was limited to three seats changing hands, which did lead to the Democrats gaining a slim 51-49 edge in the House. But that was then. Today, as the invested proceeds from the ITR lease have jump-started $6.5 billion of major new construction between 2005 and 2015, many labor unions seem to be having a love-fest with the Republican governor. Several union leaders are on Daniels' re-election campaign steering committee, and last December a bevy of others formally endorsed him for re-election—including the Teamsters, the Operating Engineers, Carpenters, Sheet Metal Workers, etc. And pundits think the GOP has a decent shot at winning back the lost House seats this November.

Besides welcoming all the new highway construction, the labor movement also appreciates that no ITR employees were made worse off by the privatization. All 550 employees were offered jobs with no reduction in pay and benefits either with the toll road company or with the state. According to a recent GAO report, about 85% transitioned to the toll road company, and 115 were offered jobs with the state. All those that left state employment got paid for accrued vacation time, and their pension plan contributions and vested benefits were preserved.

Operationally, the concession company is well along on widening 10 miles of the ITR on the western end, where it is used heavily by commuters into the Chicago metro area, at a cost of $250 million—part of about $700 million in near-term improvements the company committed to as part of the deal. It is also equipping the entire ITR with electronic toll collection (which it never had before)—and has joined the interagency group for interoperable electronic tolling throughout the Northeast and Midwest: the E-ZPass system. The western portion is already in operation, and the eastern section's electronic tolling will be completed by April.

All of this was enough to provoke Governing magazine into a long and mostly positive profile of Daniels and his first term (see www.governing.com/articles/1daniels.htm). Obviously, leasing existing toll roads carries political risks. But when done carefully, the benefits can outweigh the costs.

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News Notes

Trust Fund Shortfall Shrinks. Traffic World reported in its Feb. 11th issue that the projected $4.3 billion shortfall in the Highway Trust Fund by 2009 won't be anywhere near as much. The Congressional Budget Office now pegs the number at just $1.3 billion. Why the big change? CBO attributes the change to its making technical improvements and factoring in a slowdown in highway spending as state budgets come under stress.

Letting Legislators Set Tolls?. One of the chronic problems for many state-run toll roads is political resistance to and interference with needed toll increases. (The Indiana Toll Road, when it was leased, had not had a toll rate increase in 19 years!) So what have Virginia legislators gone and done? Last month its Senate passed a bill revoking VDOT's authority to permit tolling to help pay for rebuilding I-81. No tolls could be imposed without a specific vote of the legislature. That's a stark change from the generally favorable climate for tolling and public-private partnerships that has made Virginia one of the leading-edge states in this area.

The Shrinking Problem of Air Quality. Two friends and colleagues—Joel Schwartz and Steven Hayward—have just published a very useful book whose title and subtitle convey its contents: Air Quality in America: A Dose of Reality on Air Pollution Levels, Trends, and Health Risks (American Enterprise Institute, January 2008). I've read a lot of Joel's work in this area over the past decade, and he is very good with the numbers. It's especially important for those of us in transportation to be fully aware of how much progress has been made in reducing tailpipe emissions—and how small the problem will be during the time period when transportation projects now in the planning stages open for business and operate for the many decades of their useful lives.

Increased CO2 Via Biofuels?. Yes I know, the new worry is CO2 emissions, even as conventional emissions become a non-problem. But we need to be very careful deciding what measures to embrace. Let me direct your attention to the Feb. 29th issue of Science, the journal of the American Association for the Advancement of Science (www.sciencemag.org). Two peer-reviewed papers on biofuels are especially worthy of note. "Use of U.S. Croplands for Biofuels Increases Greenhouse Gases Through Emissions from Land-Use Change," by Timothy Searchinger, et al, finds that "corn-based ethanol, instead of producing a 20% savings, nearly doubles greenhouse gas emissions over 30 years and increases greenhouse gases for 167 years." The other paper, "Land Clearing and the Biofuel Carbon Debt," by Joseph Fargione, et al, argues that "whether biofuels offer carbon savings depends on how they are produced," and makes the case that "converting rainforests, peatlands, savannas, or grasslands to produce food crop-based biofuels creates a "biofuel carbon debt" by "releasing 17 to 420 times more CO2 than the annual greenhouse gas reductions that these biofuels would provide by displacing fossil fuels." The carbon-reducing alternative is biofuels made from waste biomass or biomass grown on degraded or abandoned agricultural lands.

Backwards Congestion Pricing in South Korea. Tollroadsnews.com reports (Feb. 9th) that the new government in South Korea is fulfilling an election promise by cutting tolls by 50% during AM and PM peak periods. The previous government had put in place peak-period discounts of only 20% and for more-limited hours. It will be interesting to see how much peak-period congestion increases, thanks to this insane policy.

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Quotable Quotes

"I carefully read the National [Policy & Revenue] Commission report and had the same reactions as you. Basically, the Majority report calls for more of the same, except bigger: more centralized decision-making, more of the decisions being Washington-centric, and, in effect, completely ignoring the reality that a mature highway market needs a different fix than an emerging market in the Eisenhower era. We need better investment decisions with market exigencies leading the placement of monies, and if we wish to address congestion—a major concern and characteristic of a mature roadway market—it means we need to develop pricing mechanisms. I also am concerned about the divorce of tolling from its user fee nature—a most serious policy error."
--Rob Martinez, former Virginia Secretary of Transportation (via email, Feb. 8, 2008)

"Congestion is slowly strangling our economy—and we've simply got to find ways to defeat it. It's a key front in the economic battle to maintain and increase our standard of living."
--Steve Fitzroy, Economic Development Research Group (www.edrgroup.com/congestion.html)

"We are spending almost twice as much in transportation as we did 10 years ago. Yet traffic congestion has increase 300% since 1982. There is no greater symptom of failure than the fact that Americans simply don't support putting more money into this broken system. Poll after poll shows strong opposition to traditional fuel taxes. The public ranks gas taxes as among the least fair taxes at the federal, state, and local levels. And they are rightly suspicious that higher taxes will translate into more efficient transportation systems. There is a better way . . . a way that allows you and your states to take charge of your own destiny and provide better service to your constituents . . . a way that avoids the zero-sum result of donor-donee. There's upwards of $400 billion available in the private sector right now for infrastructure investment. All we need is the p olitical courage to embrace a new paradigm in transportation financing and construction."
--Secretary of Transportation Mary Peters, address to the National Governors' Association White House Meeting, Feb. 25, 2008

"If you believe in the larger issue of federalism, then the Administration's approach makes a lot of sense. That which Washington doesn't have to do, Washington shouldn't do. I have zero faith that if we send another big tranche of money to Washington, things are going to happen differently."
--South Carolina Gov. Mark Sanford, at National Governors Association meeting, Traffic World, March 3, 2008

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




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