Surface Transportation Innovations #20

Topics include: DOT's recent report on public-private partnerships in transportation; getting the Feds out of transportation funding; second thoughts on shadow tolling; fixing California
In this issue:

New DOT Report Boosts Public-Private Partnerships

Many of us have been waiting for a long-promised report from the U.S. Department of Transportation on the use of public-private partnerships (PPPs) in surface transportation. Secretary Norm Mineta previewed the report in his address at the annual Public-Private Ventures conference of the American Road & Transportation Builders Association (ARTBA) last month. And shortly before the holidays, the report was released. You can find it at www.fhwa.dot.gov/reports/pppdec2004.

I�m pleased to say the wait was worth it. This massive report (117 pages plus appendixes) is the most comprehensive overview yet of how the private sector can work with governments to deliver better results in transportation. And because it carries the imprimatur of the U.S. DOT, state legislators and DOTs may take it more seriously than if it were just another academic or think tank report.

It provides a good overview of the different types of PPPs available in surface transportation, from outsourced highway maintenance up to and including long-term build-operate-transfer franchise and concession agreements, and it discusses a whole array of innovative financing tools. Next it provides an up-to-date review of what studies have shown on the value of PPPs, including cost savings, the ability to do large projects many years sooner, and better and quicker project delivery. There is also a long discussion of impediments, both state and federal, and an array of suggestions from state DOTs and private firms on policy changes that would facilitate greater use of PPPs. The report does not endorse all of these, but does recap the proposals DOT set forth in its reauthorization proposal (SAFETEA) that are relevant to PPPs.

And a nice feature of the appendices is short profiles of 21 PPP projects from around the country � a much wider array than the very limited number analyzed in the GAO report that I critiqued last spring in Issue No. 16. I hope this new report will help to counteract the impression left by the GAO report that the scope for PPPs in surface transportation is very limited.


Will This Year's Reauthorization Bill Be the Last One?

"It is time to seriously look at the possibility that we need to devolve all surface transportation funding out of Washington." That was the startling conclusion of the 2004 Turner Lecture, presented Oct. 22 at the American Society of Civil Engineering annual conference in Baltimore . (The lecture honors Frances Turner, the Federal Highway Administrator considered the founder of the Interstate highway system.) What makes this conclusion especially noteworthy is who presented it: Tom Downs.

During the reauthorization battle that produced TEA-21, then-Sen. Connie Mack and then-Rep. John Kasich sponsored legislation that would have largely devolved the federal program to the states. Their effort was backed by some of the donor states and generally supported by anti-big-government conservatives. That�s not Tom Downs! On the contrary, Downs is Director of the National Center for Smart Growth at the University of Maryland , and president and CEO of the Eno Transportation Foundation. Over the course of a long and distinguished career, he's held just about every key job one can imagine in transportation: Associate Administrator of FHWA, Executive Director of FTA, Director of the DC Dept. of Transportation, President of the Triboro Bridge and Tunnel Authority, and chairman and CEO of Amtrak, among others. It's hard to think of anyone with broader and stronger transportation credentials than Tom Downs.

His argument (which I'm attaching to this newsletter) is very carefully structured. He notes (as have many others) that the federal highway program has lost much of its rationale and has become a national public works/pork program that isn't focusing on the most viable transportation investments and is woefully short of funds. Moreover, the traditional user-fee basis of transportation is gradually declining, and the public is increasingly skeptical that it's being given value for its money. He then looks at possible ways to fix the federal program and finds them lacking, after which he briefly discusses the pros and cons of fully devolving surface transportation responsibility to the 50 states. And on that basis, his preliminary conclusion is that we should begin the debate on doing so as soon as the pending reauthorization bill is (finally) enacted.

This is strong stuff. But I agree it's a debate we really need to have. We should all be grateful to Tom Downs for issuing this call.


Second Thoughts on Shadow Tolling

One of the hotter ideas in public-private partnership circles over the past decade has been shadow tolling. The idea is that instead of facing down the usual public opposition to paying tolls, a new highway or bridge can still take advantage of the benefits of PPPs by having the government pay the company a "toll" for each vehicle that uses the road. Unlike traditional state pay-as-you-go financing, this process would provide the funding up-front, as the private partner used its long-term PPP agreement to raise the financing to build the project, to be repaid over the concession period (e.g., 30 years). Portugal , Spain , and the U.K. have been big users of shadow toll funding, and in enacting its sweeping transportation reforms in 2003 (HB 3588), Texas legislators gave TxDOT its own version, called pass-through tolling. The hope is to be able to use it for those projects where tolling doesn't look very feasible, but where the project is still needed sooner than traditional pay-as-you-go funding would permit.

I�ve never been very keen on shadow tolling. Yes, it does help bring the private sector into the roads business in a larger and longer-term way, but there are two major down-sides. First, shadow tolling does not add any funding to overall highway investment, as real toll funding does. It simply enables some investment to take place now, at the expense of committing large chunks of future gas-tax monies to debt service on those early-funded projects. (In this regard, it is very similar to GARVEE bonds.) Second, since the driver is blissfully unaware of how the road was financed and is not faced with a toll, the powerful tool of congestion management via variable tolling is lost when a project is financed with shadow, as opposed to real, tolls. Since most of the highway projects we will build over the next few decades will be to relieve congestion, it seems irresponsible not to manage their traffic via market-priced tolls.

Given this assessment, I was pleased to see that Portugal last fall decided to abandon shadow tolling. Public Works Minister Antonio Mexia told a news conference that free motorways "are no longer financially viable" for Portugal (whose budget deficit is pushing the 3% of GDP limit set by the European Union). About two-thirds of the country's motorways have been developed as (real) tollways, with the other 590 miles as shadow toll projects. Without the introduction of tolls on the latter, the government would have to pay $600 million in shadow toll payments in 2005 and $900 million by 2007, according to Standard & Poor's.

So now the government will be converting all six shadow toll PPP agreements to regular toll concessions. First to be converted will be the motorways already in operation, after which will come those still under construction. The government plans a one-time conversion cost of $1.5 billion, half to convert these motorways to tolling and the other half to compensate investors for reduced traffic flows and credit rating downgrades. It�s a costly lesson, one that should motivate Texas (and other) officials to think carefully before opting for shadow tolling rather than the real thing.


Fixing California's Transportation Funding Shortfall

California's transportation system is practically broke. In response to several years of severe budge crises, the Davis and Schwarzenegger administrations have borrowed some $5 billion in transportation funds to use for other purposes, leaving the coffers for new highway projects essentially empty. And although voters in several urban counties last fall approved the continuation of several half-cent transportation sales taxes, those funds were already included in spending plans and don't represent new money.

For the past year, a Reason team has been developing a white paper on how California can get out of this quagmire. The state is projected to add 16 million people by 2030, two-thirds of whom will be in the three major metro areas of greater Los Angeles , the San Francisco Bay Area, and greater San Diego . So our forthcoming report (to be released January 20th) focuses on those three metro areas. And because the greatest need is to expand highway capacity (note: by 2030, according to the three MPOs' long-range plans, 90% or more of their residents will still get to work by car), we focus on that, as well.

As a reader of this newsletter, you will not be surprised that our white paper makes the case for tolling and public-private partnerships. California, despite having pioneered HOT lanes and private toll roads, no longer has any enabling legislation to do either. So after we make a detailed case for what large-scale toll-funded projects could do for the three big metro areas, we recommend that California enact a state-of-the-art tolling and PPP law so they can get moving.

That's as much as I'm going to reveal at this point. But be sure to check Reason's web-site on January 20th. I predict that our report will be received as the right idea at the right time.


How Green Is Rail Travel?

Those urging increased subsidies for Amtrak or the building of new high-speed rail lines in California and Florida seem to think that global warming is their new trump card. If we can reduce the extent to which people drive or fly, getting them to ride the rails instead, why it's obvious that we can move more people per gallon of fuel consumed, thereby reducing emissions of conventional pollutants as well as the hated CO2. But what if that conventional wisdom is wrong?

That's what Prof. Roger Kemp of the UK's Lancaster University looked into last year, and his results were surprising to most people. Some previous comparisons of road vs. rail compared full trains (100% load factor) with a single-occupant vehicle (20-25% load factor). But that's leaning on the scales. Prof. Kemp and his engineering colleagues did a more careful analysis, comparing state-of-the art trains, planes, and cars on a specific medium-haul route (in this analysis, London to Edinburgh, a distance of 600 km., i.e., 373 mi.). The car was a VW Passat diesel, the plane an Airbus A-321, and the two trains were an InterCity train that tops out at 225 kph (140 mph) and the latest French TGV (218 mph).

Kemp's graphs show the fuel consumption per passenger (liters/seat) for each mode at 25%, 50%, and 100% load factors. What's striking is that for the lower-speed train and the car, the graphs are just about identical. Likewise, the fuel consumption per passenger is just about the same for the plane and the high-speed train. Since cars are the alternative to trains for shorter trips and planes are the alternative to trains for longer ones, it is thus far from clear that switching to rail would reduce emissions, especially CO2 (which is directly proportional to fuel consumed). You can find one of Kemp's presentations on this here.

One criticism leveled at these results is that Kemp chose an especially fuel-efficient car rather than a cross-section of today's auto fleet. But my response is that if we are looking at a rail-investment decision that, if "yes," would mean high-speed rail service beginning 15 or more years from now, today's auto fleet is irrelevant. By 2020 or later, the fleet is going to have much lower emissions than today's fleet.

Kemp attributes his results, in part, to the tendency of trains to have gotten heavier and more powerful in recent years. The former is due in part to social policy and safety requirements, while the latter stems from the quest for speed, which is very energy-intensive. In any event, these points are worth keeping in mind as debates over high-speed rail take place.


Speaking Engagements

Next week I will be chairing a panel at the Transportation Research Board annual meeting in Washington, DC . It's on Tuesday evening, 7:30 to 9:30, at the Washington Hilton. The topic is "Mega-Projects and Pricing."

During the week of January 17, Reason will be launching our new white paper on California infrastructure finance. We're doing a series of invitation-only policy briefings and newspaper editorial board sessions. The details are still being finalized, but thhe general schedule is:

Oakland — January 18

Sacramento — January 19

Los Angeles — January 20

San Diego — January 21

If you get an invitation to one of these, I will look forward to seeing you there.


News Notes

Hydrogen Economy and CO2 Reduction

My Reason colleagues last month released a new policy study that analyzes the prospect of significantly reducing CO2 emissions by shifting cars to hydrogen propulsion. It used California as a case in point, in part because Gov. Schwarzenegger has made such a shift one of his long-term goals. Unlike some other studies, this one traced the total impact on CO2 emissions of an automotive hydrogen fueling system: producing the hydrogen and getting it to points of sale, as well as using it to propel vehicles. It turns out that the overall impact on CO2 would be negligible (though very costly). You can read the whole study on Reason's web-site, at www.reason.org/ps322.pdf.

HOT Networks the All-Time Winner

Reason publishes dozens of policy studies each year, and they are all available at no charge for people to download from our web-site. Naturally, our people keep track of downloads, and last month they told me that our 2003 HOT Networks study remains the "stunning outlier" in terms of downloads. Specifically, in the 23 months it's been posted, it's been downloaded 219,954 times. That's almost 10 times as many as the number two study (at 45,950). No wonder so many journalists are writing about the idea, and so many MPOs are doing serious planning studies of such networks.

Correction

Last issue I gave an incorrect URL for the FHWA study on longer combination vehicles (LCVs) in the western states. The correct URL is: www.fhwa.dot.gov/policy/otps/truck/wusr/wusrindex.htm.

Quotable Quote

"Highways in the U.S. are traditionally government planned, government funded, and government maintained. . . . But that is changing. The time has come for us to acknowledge that building a highway network is not substantially different than building a telecommunications network or a network for the delivery of electricity. . . . The time has come for us to allow — unleash — the private sector to participate in all elements of infrastructure improvements. It is time to let the free market deliver the innovation, the cost savings, and the quality it has delivered in other industries. And, it is time to allow the states to expand the pricing of their highway networks. We know PPPs work. The time is right to move them into the mainstream of transportation finance."

—Mary Peters, Federal Highway Administrator, speaking at ARTBA Public-Private Ventures conference, Dec. 9, 2004.

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





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