Surface Transportation Innovations # 43

Topics include: the basics of toll road concession deals; financing new roads vs. pay-as-you-go; guaranteed congestion relief?; rethinking Oregon transportation policy; rethinking CAF�

In this issue:


New Primer on Toll Road Concessions Is Much-Needed

Two recent events have suggested that many transportation policy-makers don't really understand what long-term toll road concessions are all about. Early this month, Texas legislators passed and sent to the governor an ill-conceived two-year moratorium on any new concession deals. And on May 10th, the chairs of Congress's Transportation & Infrastructure Committee and its Highways & Transit subcommittee (James Oberstar and Peter DeFazio, respectively) sent an amazing letter to all 50 state governors and other officials warning them not to enter into such agreements that "can undermine the national highway system."

That makes the Reason Foundation's newest policy paper exceedingly well-timed. "The Roll of Tolls in Financing 21st Century Highways," by Peter Samuel, is a primer on highway finance. It lays out the growing limitations of the 20th century fuel tax/trust fund/grants model. Next it explains why it makes sense to finance, rather than pay cash for, long-lived infrastructure such as major highway, bridge, and tunnel projects. Samuel then discusses both the accomplishments and the limitations of the 20th century public-sector toll agency model. With that as background, he then explains how long-term concessions work, contrasting their features with those of public toll authorities. He makes what I consider a very strong case that the private sector, under this model, can raise more money, reduce risks to the public sector, develop outside-the-box solutions to critical highway infrastructure problems, and maintain and expand toll roads more reliably than public sector agencies (thanks to a greater ability to keep toll rates in pace with inflation and growth).

Obviously, as the concerns expressed by Texas legislators and the congressional critics make clear, whether long-term toll concessions are truly in the public interest depends on the governance mechanisms embedded in the concession agreements. Samuel's report provides an introduction to the key issues involved in crafting such provisions, which include performance standards, provisions for early termination, provisions for amendment, limitations on the extent of free-road competition, and caps on either toll rate increases or the company's return on investment. You can download the full report from the Reason Foundation website: www.reason.org/ps359.pdf.

If you are interested in the gory details of the ongoing Texas controversy, there's a whole section of the website devoted to this topic, including my working paper, "Tolling and Public-Private Partnerships in Texas: Separating Myth from Fact," and my commentary "A Tale of Two Texas Toll Roads." This situation is still evolving, so anything that I write today may be obsolete by tomorrow.

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Financing New Roads vs. Pay-As-You-Go

As I noted in the previous item, it's a basic principle of public finance that long-lived assets whose benefits exceed their costs should be financed, rather than being built in dribs and drabs out of ongoing cash flow. That way, the benefits of the new infrastructure will start flowing to people much sooner, and the beneficiaries will pay for it over the many decades during which they use it. It's similar to the case for taking out a mortgage to buy a house, rather than waiting 30 years until you have saved up enough to pay cash (or building it a room at a time, as poor people in developing countries often do).

But many legislators and citizen activists still don't get this basic principle. They note that the interest charges involved in borrowing essentially double the cost of a road or bridge that is financed (e.g., with toll revenue bonds), and that's too high a price to pay. So they argue against toll finance and every other form of borrowing to pay for long-lived infrastructure.

But a dramatic new factor has entered this equation in the last few years: the soaring cost of highway construction. In Virginia's recent competition for a PPP project for the new Rt. 460 project, the estimated cost of the project was $1.5 billion. But by the time it would start construction in 2010, that cost is expected to increase to $1.9 billion. That suggests another reason to finance such projects, when the alternative would be to do them piece-meal, based on however much can be scraped together each year over 20 years or so. Doing it that way might lead to construction costs escalating out of sight.

A recent study prepared for the Governor's Business Council in Texas applied real numbers to this trade-off. It recommended a $66 billion investment in the state's eight largest metro areas, finding that this investment would generate $541 billion in economic benefits. (Even if you take out the $322 billion in "economic impact of construction," the benefit/cost ratio is still a hefty 3.3, based on savings in travel time and fuel, plus improved regional productivity.)

One portion of this study looks specifically at "accelerating" $36 billion worth of projects in congested corridors, via bonding. It finds that doing so would save $1.24 billion in construction costs (thanks to building before costs rise too much) while costing $1.28 billion in interest costs. In other words, in today's high-construction-cost-growth environment, the savings in construction costs from building now just about offset the additional costs of borrowing.

The report is "Shaping the Competitive Advantage of Texas Metropolitan Regions," and is available on the Governor's Business Council website: www.texasgbc.org.

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Guaranteed Congestion Relief?

Thanks to more than a decade's worth of experience with the 91 Express Lanes in Orange County, California, we now know that variable pricing can offer reliable, high-speed trips on express lanes on freeways. In principle, this means reliable, uncongested trips could be offered by a metro area's entire freeway system—if it were likewise priced. But at this point in time, putting pricing on existing "free" general purpose lanes seems politically impossible. Motorists (and therefore elected officials) believe, first, that "We've already paid for these lanes with our gas taxes, so it would be unfair to make us pay again to use them." And most are also skeptical that the pricing would actually work, so they fear ending up with the worst of both worlds: still stuck in traffic but also paying more.

Some hope for getting past this policy gridlock was offered at the January Transportation Research Board annual meeting, in a paper by Karl Wunderlich and colleagues at Mitretek. "Measures of Travel Reliability and the National Strategy to Reduce Congestion" proposes a paradigm shift for freeway systems. Such systems would be incentivized to focus on satisfying their customers' demand for faster and more reliable travel by offering travelers a money-back guarantee. In exchange for paying a variable toll, customers would get a specified quality of service—or their money back. And all revenues from the pricing would be reinvested in the system. Moreover, they suggest that private firms be contracted to operate and maintain the roadways. Due to the money-back guarantee, those companies would have strong incentives to minimize delay-causing incidents, and to clear them up quickly so as not to lose revenues. And to simplify operations, they suggest that all vehicles would pay tolls, with no special deals for carpools, hybrids, or what-have-you.

The paper goes into some detail about what kind of much-improved data system would be needed to measure the highway system's performance precisely enough to deal with the money-back guarantees. This is not a trivial problem, but it appears to be a solvable one. But I especially liked its focus on incentives. "Just as the guarantee of speedy, reliable travel is the insurance policy for the traveler that they receive value for the tolls paid, the compact to reinvest all the toll revenue in corridor-wide operations is the insurance policy that tolls paid are, indeed, user fees and not a form of general taxation."

Since even this new approach will still face tough political sledding at first, it makes sense to implement money-back guarantees of this sort first on specialized toll lanes. That includes toll truck lanes, as well as commuter-oriented HOT lanes. Guaranteed deliveries are an important part of the business model of segments of the freight industry—e.g., UPS and Fedex, but also such major players as YRC Worldwide and Con-way Freight. But the truck freight industry can only make good on such guarantees if the highway system, in turn, permits highly reliable service. We're starting to hear serious concern from shipper groups that the highway system is not delivering the performance they need—and for which they would be willing to pay more.

Note: The Mitretek paper is on the TRB 2007 Annual Meeting CD-ROM. If you don't have access to that, you can probably get a copy from the lead author: kwunderl@mitretek.org.

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Rethinking Transportation Planning in Oregon

I reported last September (Issue No. 35) that the business community in Oregon had begun raising concerns about traffic congestion and its impact on the regional economy of the state's major metro area, Portland. Now, a follow-on study by the same consulting firm, Boston-based EDR Group, has extended the analysis to the statewide level. Using an economic model that links transportation and economic activity (called TREDIS), the new report estimates that without major increases in investment, by 2025, congestion and other inadequacies of the state's transportation system will cost Oregon $1.7 billion per year, and 16,000 jobs per year. The modeling analysis is supplemented by case studies, reporting decisions of specific firms in response to transportation system deficiencies.

Overall, the report classifies the problems into four broad categories:

  1. Congestion due to traffic levels in excess of roadway capacity;
  2. Deficiencies in intermodal connections between roadways and rail, air, and marine terminals;
  3. Road system deficiencies that cause network access limitations; and
  4. Location and shipping requirements that cannot be met due to transportation network limitations.

We can hope that this study, sponsored by the Oregon Business Council and several other firms, will serve as a wake-up call for state legislators and officials of Portland Metro, the regional government of the state's main urban area. The latter received another wake-up call last year, in the form of comments from a Federal Highway Administration review of their new draft Regional Transportation Plan. The feds took Portland planners to task for focusing more on land use than on transportation needs, and for downplaying the abysmal level of service (LOS) performance of major arteries. "The plan should allow for highway expansion as a viable alternative," FHWA said, and "a large and vibrant metropolitan region like Metro should include additional highway capacity options along with maximizing the use of the existing system and land use choices." And the plan "should acknowledge that automobiles are the preferred mode of t ransport by the citizens of Portland . . . they vote with their cars every day." The feds also called for the plan to give more attention to goods movement in their highway planning, consistent with the concerns expressed by the state's business community.

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Why CAFÉ Is the Wrong Approach

Someone asked me recently why I'm opposed to the government's Corporate Average Fuel Economy (CAFÉ) regulations while supporting tailpipe emission standards for cars and trucks. It's a good question, but somewhat complicated, so please bear with me.

Before there were tailpipe emission standards (for NOx, VOCs, and particulates), motor vehicles were a major source of urban air pollution (and in some place, the major source). There are clear harms to human life and health from these emissions, and since it would have been completely unworkable to use the tort system to remedy the harm, this was a case where government regulation—to safeguard life and health—was clearly justified. And it's worked. Since 1968, despite a huge growth in vehicle miles traveled, emissions of these pollutants from light-duty vehicles has plunged, as the fleet has turned over more than once. And the same process is finally under way for heavy diesel trucks; previous and new 2007 standards are projected to cut total national truck emissions of NOx by 90% and PM-10 by 72% by 2020, as the truck fleet turns over (see Appendix B of "Assessing the Effects of Freight Movement on Air Quality at the Nat ional and Regional Level," ICF Consulting, prepared for the Federal Highway Administration, April 2005).

The situation is quite different with fuel efficiency. Two reasons are advanced for the government to mandate increased miles per gallon. One is to reduce dependency on foreign oil; the other is to reduce CO2 emissions (which are directly proportional to the amount of fuel burned). The former goal does not, in my view, rise to the level of necessity that justifies overriding consumer choice with government compulsion. (It's also not likely to work, since forcing people to buy cars that get higher MPG reduces their per-mile cost of driving, and may lead them to drive more, therefore not saving much fuel after all.)

But what about global warming? Assuming that we do need to reduce the carbon-intensity of global energy use to prevent real harm to millions of people, is mandating higher MPG standards for cars sold in the USA a sensible approach? It's not, for the following reason. Motor vehicles account for only 20% of U.S. CO2 emissions. Targeting particular industries or segments of the economy is likely to waste resources (forcing expensive reductions while foregoing less-costly ones), while creating endless scope for companies and politicians to cut deals that favor certain companies, technologies, or processes at the expense of others. Subsidies for ethanol? Why not for hydrogen? Tax breaks for wind power? Why not for next-generation nuclear plants?

The currently trendy alternative to such targeting is "cap and trade" schemes, in which government would permit emitters of CO2 to trade emission allowances across the entire economy. Emission trading has had limited success in narrow areas (like reducing sulfur dioxide emissions linked to acid rain). But applied across the entire economy, it is subject to endless gaming of the system by companies and industries. It also raises basic questions of fairness to those firms that have already invested large sums to reduce their carbon footprints, prior to launch of the trading system.

An economy-wide system that seems to be least subject to such problems, and hence to be least distorting to the economy, is an across-the-board carbon tax—as a substitute for all other carbon-related emission regulations, subsidies, tax credits, etc. It would motivate the search for cost-effective investments in energy efficiency. It would not penalize those who have already made serious investments along these lines. It would make regulations like CAFÉ irrelevant, along with all the other special-interest subsidies, regulations, and tax breaks for various kinds of energy. It would allow the companies and consumers to decide which approaches to energy efficiency are most consistent with a competitive economy that maximizes choice.

We don't know what those choices would end up being. (I predict a lot less use of coal, a lot more nuclear power, and still a wide range of choices of cars, with continued movement toward alternative propulsion systems.) But those who fixate on cars and driving as the problem may well be disappointed. Princeton's Robert Socolow estimates that a $30/ton tax on CO2 emissions (a plausible number) would increase the retail price of gasoline by about 30 cents/gallon—not enough to make a big difference in people's choice of vehicle. But if we can achieve the CO2 end goal at less total cost by changes in how electricity is generated and other non-transportation changes, so what? A serious debate on a carbon tax will separate those concerned about CO2 reduction from those whose real agenda is to demonize the auto/highway system.

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News Notes

Design Build Doesn't Cut State DOT Jobs. The most important hold-out on embracing the efficient design-build process for large transportation projects has been Caltrans, thanks to endless litigation (now ended) by its engineers' union, PECG. Their concern has always been that if D-B were allowed, design work normally done by PECG members would be done instead by engineers on the outside D-B teams. Turns out this zero-sum view of the world is wrong, according to a study published last month by the Keston Institute at USC. "The Impacts of Design-Build on the Public Workforce," by Douglas Gransberg and Keith Molenaar, used a survey of state DOTs to determine that D-B does not shift engineering jobs from government to private firms and does not reduce the use of traditional design-bid-build procurement. (www.usc.edu/schools/sppd/keston/research/index.html)

Major Reports Stress Infrastructure Investments, PPPs. Deloitte, Ernst & Young, and McKinsey have all recently released studies that focus on the need for increased infrastructure investment and the role that private finance and PPPs can play. Space prevents me from summarizing them, but here's how you can find them:

Toll Truck Lanes Journal Article. The journal Public Works Management & Policy (Vol. 11, Issue #4) has published a new paper of mine on "The Case for Truck-Only Toll Lanes." If you or your agency, company, or university library does not subscribe, you can download the article on a pay-per-view basis from http://online.sagepub.com.

Reaching Auto Enthusiasts re Congestion Reduction. I haven't subscribed to Car & Driver since I was in my 20s, but a friend told me to check out the editorials, by Patrick Bedard, in the May and June 2007 issues. They explain to car enthusiasts the case made by Reason Foundation's Mobility Project that congestion is a solvable problem, and one that's not inconceivably expensive. The May issue is probably already gone, but June is on the stands. Look for "Take the Car or Hop a Choo-Choo?" on p. 34.

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Quotable Quote

Mineta on Transportation Infrastructure Investment

"Productivity gains from increased competition since deregulation (are) being undermined by a declining playing field in the form of aging infrastructure that's being stretched beyond its limits. . . . Overseas, I have seen new airports, transit systems, ports, and rail lines—fueled by private sector investment—made possible by fresh and creative approaches to ownership, operation, and regulation of infrastructure." Tapping private resources to build transportation systems through tolls has "already gone mainstream around the world."
--Norman Y. Mineta, speaking at the Transportation Intermediaries Association, Orlando, FL, April 20, 2007, as quoted in Traffic World, May 7, 2007.

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





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