In this issue:
- Strong growth in infrastructure finance
- Texas passenger rail and Reason Foundation
- Millennials buying cars, after all
- Oregon’s road charging vs. paranoid rants
- Further information on San Francisco HOT lanes and network
- Upcoming Conferences
- News Notes
- Quotable Quotes
Strong Growth in Infrastructure Finance
The ongoing drama of U.S infrastructure, including highways and bridges, concerns a supposed funding gap. Hence, the endless battles over whether to increase federal and state fuel taxes. Far too little notice is given to the fact that over the last 15 years or so, global infrastructure investment funds have raised something like $300 billion in equity to invest in highways, bridges, airport, seaports, waterways, energy, and water projects. I document this important phenomenon in the “Transportation Finance” chapter of Reason Foundation’s Annual Privatization Report 2015, just released. (https://reason.org/news/show/apr-2015-transportation-finance)
Last year alone these funds raised $48.3 billion, a new annual record. A survey by Probitas Partners found that as of last year 54% of institutional investors (including investment banks, insurance companies, pension funds, and mutual funds) now have a separate allocation for infrastructure. The largest of the infrastructure equity funds, Macquarie Infrastructure and Real Assets, has raised over $27 billion during the past five years.
Given the U.S. and global shortfall in infrastructure investment, what is amazing (and tragic) is that the majority of what all these funds have raised is not yet invested in actual projects. And that is because so much U.S. transportation infrastructure is still government owned and operated (airports, highways, ports, waterways, etc.). Most of these funds have raised money to invest as equity-but you can’t buy part ownership of government infrastructure. The only way such investments can be made is via long-term concession PPPs (P3s), in which the equity is invested in a special-purpose company that wins the right to design, finance, build (or rebuild), operate, and maintain a transportation facility. In other words, for the duration of the agreement (typically 35 to 70 years) it becomes the de-factor owner/operator, subject to the terms and conditions of the concession agreement.
More widespread use of such long-term concessions is inhibited by (1) lack of enabling legislation in many states, (2) inadequate expertise in the state DOT or other relevant agency in procuring and then overseeing mega-project concessions, and (3) ill-informed opposition, either to direct user charges (e.g., highway or waterway tolls) or to concessions themselves (often dubbed “crony capitalism” or bad-mouthed as “foreign takeovers” of vital infrastructure).
In the chapter I respond to this “foreigner” concern with specifics. First, of the top 30 global infrastructure funds, 33% of the capital raised last year came from the United States, and another 13% from Canada. Add in Australia, and the total is 77% from the Anglosphere, with most of the rest coming from Europe. By contrast, of the 39 largest transportation infrastructure developer/operators actually doing long-term concession projects, nearly all are European or Australian. The only U.S. company that makes this list is Fluor. That is because until very recently, privately financed, developed, and operated highways, airports, seaports, etc. were unknown in America-but were increasingly common in Europe and Australia. So that’s where the expertise and track records are. Increasingly, U.S. firms are taking part in joint ventures to bid for U.S. concession projects, so as the market expands, more U.S. firms will become bigger players.
One of the most important U.S. trends is that public employee pension funds are starting to move aggressively into P3 infrastructure. In doing so, they are following a trail blazed by their Australian and Canadian counterparts for well over a decade. Public employee unions themselves, as recently as a couple of years ago, railed against “privatization” of public infrastructure, such as the long-term lease concession of the Indiana Toll Road in 2006. But when the concession was put up for auction this year, the winning bidder was a consortium of public employee pension funds, led by Australia’s giant Industry Funds Management but with serious participation by major public employee pension funds from Arizona, California, Florida, Illinois, and New York City. Their trustees have figured out that existing (“brownfield”) infrastructure is lower-risk than brand new (“greenfield”) infrastructure, and is a good fit for their long-term liabilities.
Incidentally, I wrote a companion chapter that summarizes recent trends in P3 highway and bridge projects, mostly in the United States but with some global trends included for context. Go to: https://reason.org/news/show/apr-2015-surface-transportation.
Texas Passenger Rail and Reason Foundation
In previous issues, I have mentioned, but not written about, the proposed Texas Central Railway (TCR) project to privately finance, build, and operate a high-speed passenger rail line between Houston and Dallas. But since proponents and opponents are now both citing Reason Foundation as an authority on the subject, it’s time for me to weigh in. A group called Texans Against High-Speed Rail extensively cites in its literature and advocacy a May 2013 study by my colleague Baruch Feigenbaum, “High-Speed Rail in Europe and Asia: Lessons for the United States.” (/wp-content/uploads/2013/05/high_speed_rail_lessons.pdf)
Texas Central Railway has several times stated that they agree with the main points in the Reason report-and that their project is fundamentally different. Since I found that to be the case for the All Aboard Florida (AAF) project (planned to link Miami with Orlando, via Fort Lauderdale and West Palm Beach), I decided to get more specifics on what TCR is actually all about. I perused their literature, and spent close to an hour interviewing TCR’s president, Judge Robert Eckels. Here is what I learned.
Like AAF, TCR believes it has identified a specific corridor (out of 97 it had professionally analyzed) that they believe has the right kind of distance (240 miles), two very high-population metro areas on either end, and relatively low cost of construction (due to flat terrain and no major tunnels or massive bridges to construct). They plan to use higher-speed (Japanese Shinkansen) trains than AAF, to offer 90-minute trip times (much faster than driving, competitive with flying) at fares competitive with air fares. They point to projected doubling of the populations of both metro areas and the likelihood that the only major highway between them-I-45-is unlikely to be doubled in capacity (probably true under current highway funding, but not necessarily if Reason’s toll-financed Interstate 2.0 comes about). Besides, worldwide the large majority of HSR passengers come from air travel, not highways, so that is not a crucial assumption.
Much of the opposition to the project comes from farmers and ranchers concerned about having their properties acquired via eminent domain, and its tranquility and usefulness harmed by high-speed trains running through it. TCR has several responses. First, its needed right of way is just 100 feet, about the ROW of two-lane farm-to-market roads in Texas. Second, they plan to use eminent domain (as investor-owned pipelines, electric companies, and others are allowed to do) only as a last resort after making market-value offers for purchases or easements, as the case may be. Third, they plan much of the line to be elevated, permitting highways and animal movements beneath it. Fourth, they say the Shinkansen technology is quieter and has less vibration than other passenger rail systems. All of those points will increase the cost well above just running tracks along flat ground.
The other major argument, as in Florida, is that there will inevitably be taxpayer subsidies, since HSR is almost never self-supporting from its passenger revenues (as the Reason report and many other studies make clear). TCR says flatly that they will neither seek or accept government grants or subsidies of any kind. But they will consider existing federal credit assistance, such as loans available from TIFIA and/or RRIF, for which their project is eligible. TIFIA loans require the project’s financing to have an investment-grade rating and a dedicated source of revenue to repay the loans-and so far, the U.S. DOT’s TIFIA loan portfolio has lost less than 1% due to project defaults. RRIF does require collateral, but thus far lacks the degree of taxpayer protections built into TIFIA. TCR might also seek DOT approval to issue tax-exempt private activity bonds (PABs), which are widely used on highway P3 concession projects. Such bonds are backed solely by the revenues of the project; taxpayers are not on the hook in case the project defaults; only the bond-buyers are.
Thus, my conclusion on Texas Central Railway is about the same as on All Aboard Florida. Both are private sector projects, to be done via project finance that must be paid back from the project’s own revenues. There is little or no risk to taxpayers, federal or state, in either project.
Whether either one can build their project within the budget each has estimated, or attract the ridership and farebox revenue in their financial models, remains to be seen. Thus far, neither has disclosed the details on either the cost or the revenue side. But as a public policy researcher, that is not my concern. It is the legitimate concern of those who choose to invest equity in the project, or to buy its bonds. Both should receive the same legal and regulatory treatment as any other railroad-no more, no less, as long as there are no taxpayer monies involved.
After the sorry track record of politically defined passenger rail systems, I am very interested to see what the private sector can do.
Millennials Buying Cars, After All
Well, forgive me for saying I told you so, but all the media hype about Generation Y not being interested in owning a car turns out to be mistaken. “Gen Y Zooming to Dealerships” was the headline of a Bloomberg News story by Jing Cao that I came across, datelined April 28th.
Cao reports that millennials (Gen. Y) accounted for 27% of U.S. new car sales in 2014, up from just 18% in 2010 when the Great Recession was still under way. Generation Y is now the second-largest group of new-car buyers (after Baby Boomers), surpassing Generation X. As the recovery has taken hold, the employment rate for those 25 to 34 reached 76.8% in March, the highest level since November 2008, Cao reports, based on data from the U.S. Department of Labor.
Cao also quotes the head of global product development at General Motors, Mark Reuss, who tells him that he never bought the idea that Millennials aren’t interested in cars. They weren’t buying cars, he said, because they didn’t have jobs. “Our internal research says that they’ve only been able to afford used cars, if anything at all.”
To be sure, Millennials aren’t buying big Buicks and Lincolns, like their parents and grandparents. As Cao suggests, “Entry-level compacts stuffed with technology are selling particularly well to this cohort.”
Just as the idea that Millennials disdained suburbs and single-family houses has proven false, so has their supposed disaffection from cars and driving.
Oregon’s Per Mile Road Charge vs. Paranoid Rants
As Oregon DOT revs up its second major pilot project to test various means of collecting a mileage-based user fee, I thought it would be worthwhile to compare what ODOT is doing with the kind of rants about the subject that are appearing here and there in the popular media. For this purpose, my comparison texts are a brief presentation last month by Jim Whitty, who manages ODOT’s Road Usage Charge Program, and an op-ed by Tammy Bruce, a radio talk-show host, author, and Fox News contributor. Bruce’s piece. “Americans Should Just Say No to GPS Tracking of Their Cars and Trucks,” appeared in the Washington Times on Dec. 29, 2014.
ODOT’s new pilot project is recruiting 5,000 volunteer drivers who, starting July 1st, will pay 1.5 cents per mile instead of the current state gas tax of 30 cents/gallon. Participants will have a choice of either a basic plan, with their mileage data based on periodic odometer readings by ODOT, or an “advanced” plan in which they can sign up with any one of three vendors offering several different in-vehicle mileage devices (which can include GPS and offer value-added services). In future, ODOT also plans to offer an “all-you-can-drive” option based on a flat annual fee, with no tracking or mileage recording at all.
Bruce is aware of ODOT’s pilot program, but in her very first paragraph claims that the whole idea is that “drivers should pay an additional tax (they’ll call it a fee) based on how many miles you drive”-even though in the third paragraph she matter-of-factly notes that those in the Oregon pilot will pay 1.5 cents/mile instead of the state gas tax. Near the end of the op-ed she repeats the point about the mileage fee being an add-on: “One of the more silly claims is that a mileage fee would replace the gas tax.”
But most of her piece is about privacy-“to coerce you into accepting a complete elimination of your personal privacy and allowing government to know when and where you go at all times.” And she states flatly that “The programs being suggested or tested to track your mileage involve installing a GPS tracking device to determine not just how far you go, but which roads you use, how fast you go, and whether or not you’re a ‘good’ driver.” She quotes from a Los Angeles Times article about plans for California’s upcoming pilot program, noting the alternatives of “odometer readers, smartphone applications, or global positioning technology”-but never notes that this contradicts her GPS-mandate scenario. She ends up in a rhetorical rage, urging readers to “make sure our state and federal representatives know that tracking and taxing us like a government-owned beast of burden is unequivocally unacceptable.”
As a libertarian, I quite agree. But I don’t know any serious state DOT or state legislator that wants to do anything like that. And I commend Oregon DOT for taking the lead in demonstrating a program that is clearly designed as a replacement for per-gallon taxes, enlists private-sector account managers, and gives motorists genuine choices of how to pay for the miles they drive.
Further Information on San Francisco HOT Lanes & Network
Last month’s article on problems encountered as express toll lanes expand in scope towards networks brought several responses, and led to some further research on my part. HOV/HOT lanes guru Chuck Fuhs responded rapidly, generally agreeing with my point about the downsides of retaining HOV-2s going free but pointing out that considerable analysis went into the decision about continuous access. He also noted that federal signage regulations for managed lanes require three or more overhead sign gantries for each access point, a considerable cost item.
At his suggestion, I contacted Randy Pozdena of ECONorthwest who had done modeling and analysis for the Metropolitan Transportation Commission (MTC), the Bay Area’s MPO. He pointed out the many trade-offs involved in continuous versus limited access to managed lanes, and that their modeling showed that in some cases restricted access creates more merge-weave problems than the friction caused by continuous access between general-purpose and managed lanes.
I then heard from Melanie Crotty of MTC, who provided more detail on the policy concerns that led to the decisions on access treatments. To begin with, she clarified that on some corridors or portions of corridors where there are serious weaving problems now, they will use restricted access. She itemized the major principles they used in making decisions based on the analysis by Pozdena and others:
- Keep the costs low without major widening or reconstruction. This will be an almost entirely single-lane per direction network, the large majority of it resulting from converting HOV lanes to HOT.
- Open access benefits more travelers, including express buses.
- Only restrict access where it is operationally necessary due to excessive weaving, etc.
- Pursue comprehensive freeway management (ramp metering, etc.) to help the GP lanes work better.
To some extent, their access decisions reflect the desire to do a minimal, rather than optimal system, which accepts lower performance than a more costly system that would need a lot more lane additions (and would also need a lot more toll revenue).
On the other hand, I was pleased that she expressed agreement with my concerns about retaining the HOV-2 policy. She said they share much of my concern, because with HOV-2s using most of the capacity, not only will they have limited revenue but also-a point I’ve been making for years-very limited pricing power to actually reduce or eliminate congestion in the lanes. She said they are working on developing performance criteria to create a process that might, in effect, let policymakers agree that once conditions seriously exceed a threshold, occupancy would automatically be increased. But a network with some links HOT-2 and some HOT-3 is a negative for motorists and even harder to enforce than one with a uniform occupancy policy.
Upcoming Transportation Conferences
International Conference on Public-Private Partnerships 2015, May 26-29, 2015, University of Texas, Austin, TX. (Robert Poole speaking). Details at: www.icppp2015.org/index.php.
ITS World Congress, June 1-3, 2015, David Lawrence Convention Center, Pittsburgh, PA (Baruch Feigenbaum speaking). Details at: http://itsannualmeeting.org/wp-content/uploads/2015/04/ITSPreliminaryProgram_April.pdf
27th Annual ARTBA PPPs in Transportation Conference, July 15-17, 2015, Hyatt Regency Washington, Washington, DC. Details at: www.artbap3.org
2015 Transportation Summit, Floridians for Better Transportation, July 22-24, 2015, Casa Monica Hotel, St. Augustine, FL. (Robert Poole speaking). Details at: www.bettertransportation.org
Federal Fiscal Outlook: Unsustainable. My Reason colleague Len Gilroy last month posted a summary of the GAO’s latest annual Federal Fiscal Outlook, which continues to find a huge gap between federal spending and revenue. If unaddressed, the result will be ever-increasing debt as a share of GDP. To close the gap, if action were taken immediately, would require either revenue increases of 20-37% or non-interest spending cuts of 17-27% (or some combination of the two) each year for the next 75 years, to keep the debt-to-GDP ratio from increasing. If lawmakers wait a decade before acting, it would take revenue 43% higher or non-interest spending 31% lower every year through 2089. (https://reason.org/news/show/gao-federal-fiscal-outlook)
Texas DOT Seeks Vehicle Occupancy Detection Automation. Recognizing the severe limitations of visual observation of the number of occupants in vehicles using HOV and HOT lanes, TxDOT has posted a solicitation seeking an Automated Vehicle Occupancy Detection Solution. The solicitation number is 601440000001531. It is posted at: http://esbd/cpa.state.tx.us/bid_show.cfm?bidid=117268.
MBTA Reform Legislation Introduced. The troubled Massachusetts Bay Transportation Authority would be restructured under a bill filed late last month by Gov. Charlie Baker. It would create a Fiscal Management and Control Board to oversee MBTA through 2018, charged with creating and overseeing the implementation of one-year and five-year operating budgets, and increasing both productivity and revenues.
AASHTO Tracking State Funding Proposals. The American Association of State Highway & Transportation Officials maintains a database, updated biweekly, tracking proposed state transportation funding measures. It is available at: www.transportation-finance.org/pdf/featured_documents/state%20transportation%20funding%20proposals%202014-11-10.pdf.
Super Express Toll Lanes Proposed by Honda. At the Society of Automotive Engineers 2015 World Congress, Honda offered an alternative to Elon Musk’s proposed Hyperloop for fast intercity transport. In the conference’s closing keynote, Frank Paluch, President for R&D of Honda Americas, suggested dedicated lanes on long-distance Interstates for high-speed automated vehicles using swarm technology to travel safely at speeds up to 180 mph. That could mean Los Angeles to San Francisco in about two hours, door to door via your own vehicle-“no drive to the train station, no constraints on when you can come or when you go.”
Seattle Opts for HOT-3 on I-405 Express Lanes. The Washington State Transportation Commission has approved limiting free passage on the new express toll lanes on I-405 to three persons during peak periods (two persons at other times). The decision follows the recommendation of a panel of local elected officials, and will mean much larger revenue and pricing power/congestion management than if most of the capacity were given away to two-person carpools and fampools.
Colombia Going Big on Tollway Concessions. The competitive procurement process is under way in Colombia for two new toll roads worth $1.26 billion-Autopista Mar 1 and Autopista Mar 2. Both will provide links between Medellin and the Caribbean coast. The two are among 10 concessions that are part of the second round of Colombia’s $25 billion 4G national highway plan.
Ohio Sued Over Toll Revenue Diversion. A class-action lawsuit in federal court seeks to overturn the diversion of $930 million of toll revenue from the Ohio Turnpike to 10 non-Turnpike highway projects in northern Ohio. The measure being challenged is legislation, sponsored by Gov. John Kasich, enacted in 2013. Under it, the Turnpike issued $1 billion in new bonds, backed by toll increases of 2.7% per year through 2023, with more than 90% of the money devoted to the non-Turnpike projects. The suit maintains that the non-Turnpike projects “are not part of an integrated transportation system, and there is no benefit conferred on Turnpike users, as Turnpike users, by the unrelated non-Turnpike projects funded with the increased tolls.”
Wisconsin Gets Interstate 41. On April 9th, the Federal Highway Administration gave official approval to the designation of U.S. 41 in Wisconsin as I-41. The change has been under way for a number of years, as Wisconsin DOT engaged in widening and interchange revamping projects to convert the highway to Interstate specifications. I-41 begins just south of the Illinois/Wisconsin border and extends northward to Green Bay, WI.
Tolled Mega-Project in Manila. Procurement is under way for the $2.8 billion Laguna Lakeshore Expressway in Manila, The Philippines, with three teams having been prequalified to bid. The six-lane expressway will be constructed on a dike along the lake shore, for a length of 29 miles. The concession is to run for 37 years.
Shifting Managed Lanes Risks to Investors. In response to talk among Virginia officials about not using a long-term concession for the planned $2-3 billion I-66 express toll lanes project, I wrote my monthly Public Works Financing column as a discussion of the risks in managed lanes that can be transferred from taxpayers to investors via a long-term toll concession. The column, “Public-Private Partnerships Hedge Managed Toll Lane Risks,” is posted at https://reason.org/news/show/how-risky-are-managed-lane-concessi.
Large Houses on Large Lots Continue in Favor. Americans continue to prefer large houses on large lots, according to new research published last fall. Demographia found that “the vast majority of new occupied housing in the major metropolitan areas of the United States [between 2000 and 2010] was detached and was located in geographical sectors associated with larger lot sizes. Moreover, houses became bigger, as the median number of rooms increased, and the median new detached house size increased.” Details at: www.newgeography.com/content/004560-metropolitan-housing-more-space-large-lots.
Grasping at Straws in Florida. Opponents of privately financed passenger rail project All Aboard Florida (AAF) have filed a lawsuit against the U.S. DOT for having approved the issuance of tax-exempt Private Activity Bonds (which are revenue bonds, backed solely by project revenue, not taxpayers). The grounds? Several archeological excavation areas “each lie in or adjacent to the railroad right-of-way.” Except that right of way has been there for over a hundred years, ever since railroad pioneer Henry Flagler built the Florida East Coast Railway, whose tracks AAF will use. For good measure the lawsuit throws in disturbance to wildlife and “the potential for collisions between passenger and freight trains,” which exists on every freight railroad that has Amtrak service.
“In coming decades, most existing highways will be modernized, resurfaced, or repaired. Innovative highway designs like diverging diamond interchanges, high-speed directional ramps, partial-access arterials and frontage roads will increase traffic capacity and safety. Pop-in uniform bridge designs and task-force construction contracting will allow for rapid replacement. New methods of highway funding and maintenance will be available as well. Tracking systems that show vehicle locations will make it possible to charge for road use by time and location, instead of paying fuel taxes. Privatization and performance-based contracting, meanwhile, in which contractors guarantee road conditions for years hence, may become commonplace. Automated monitoring of road conditions will be widespread and tied directly to repair schedules. Maintenance and repair may be quickly addressed using long-lasting composite materials. Highway departments could become largely contract managers rather than construction and maintenance units.”
-David T. Hartgen, “Keys to the Highway of the Future: Smart Cars, Smarter Networks,” The Wall Street Journal, April 30, 2015
“[C]ritics whining about the [U.S. 36] toll lane called it a ‘Lexus Lane’ that will be used only by the rich. First of all, that is not true. The lanes will be used by buses and carpoolers as well as those willing to pay the tolls, most of whom will not be rich. Transportation officials are right in saying the lanes give motorists choices. Secondly, and maddeningly, the question should be asked-what is the alternative? If the public is not willing to raise taxes to pay for road construction, then tolling is the logical alternative. And thirdly, where were those critics years ago, while the project was in its planning phases? The highway is almost finished. There is no going back.”
-Editorial Board, “U.S. 36 Toll Lane Is Not a ‘Lexus Lane,'” The Denver Post, April 22, 2015
“[A]lthough the price drop has been bad for producers in the North Sea, it has not derailed America’s oil boom. Indeed, America is replacing Saudi Arabia as the world’s swing producer. Frackers have drilled lots of wells and then plugged them, waiting for the price to rise again. If it does, Mr. Cohen expects between 300,000 and 800,000 b/d of production to start up . . . . A new forecast from America’s Energy Information Administration reckons rising production and greater efficiencies mean that the country will stop importing energy between 2020 and 2030, depending on the price.”
-“Oil Prices: Unconventional but Normal,” The Economist, April 19, 2015
“A number of bills in the Texas legislature would go even further by preventing state highway money from being spent on toll projects, and requiring that tolls be removed once a roadway’s construction costs have been paid off. One bill would even require the Texas Department of Transportation to come up with a plan to eliminate all toll roads in the state within 30 years. These proposals are problematic, on many levels. Mileage-based funding allows for the use of important demand-management tools, such as charging higher tolls during rush hour, which can reduce the need for new construction. Today, there is strong support for transportation investment in Texas. But loosening the link between who benefits from transportation assets and who pays for them could lead to reduced funding over time.”
-Charles Chieppo, Kennedy School of Government, Harvard University, “The Temptation to Make Somebody Else Pay for Roads,” Better, Faster, Cheaper blog, www.governing.com/bfc