Commentary

The (Limited) Case for Shadow Tolling

Approach could advance projects difficult to finance through tolls

I’ve long been skeptical about the concept of shadow tolling, in which the state goes out to bid for a concessionaire to design, finance, build, and operate a transportation project but the project does not charge tolls. Instead, its financing is based on a long-term agreement by which the state makes regular payments based on traffic counts (and/or other performance measures) over the long term of the concession agreement.

My concerns have been several. First, since the overwhelming reason why governments are interested in long-term concessions is a lack of funding, shadow tolling is a bust because it adds no funding to the pot. To be sure, it’s a financing technique, but just like GARVEE bonds, it relies on the state committing to use a portion of its future transportation revenues (mostly fuel taxes). As states that have issued a lot of GARVEE bonds are discovering to their dismay, those future revenues will cover a lot less of future operating and maintenance costs, given what needs to be spent first on servicing this debt. Real tolls, by contrast, add large new amounts of funding to the highway system.

Second, shadow tolling necessarily means foregoing the huge advantages of value pricing as a tool for managing traffic flow to optimize the performance (speed, throughput, and reliability) of the priced roadway. Since the majority of what we need to invest in added highway capacity over the next several decades will be for urban congestion relief, it makes no sense to add such capacity without value pricing.

I could see a limited set of cases where, despite these drawbacks, shadow tolling could make sense. For projects intended to divert truck traffic from congested “free” roads (like the planned Miami Port Tunnel), charging a toll would discourage at least some of the intended traffic from using the facility. And there can be other public policy reasons (apart from political fear of tolling) to use shadow tolling instead of real tolling: new roadways needed for hurricane evacuation but lacking sufficient daily traffic flow to fund the bulk of the project, or El Paso’s project to accommodate an expansion of the Fort Bliss military base.

But two recent articles have led me to see a somewhat wider role for a specific form of shadow tolling. Michael Parker’s column in PWF‘s January 2007 issue and Patrick DeCorla-Souza’s paper in Public Works Management & Policy (January 2006) both suggest models that combines value pricing and shadow tolling. As the latter explains it, “Although the private partner would set the real toll rates to manage demand and ensure that traffic is free-flowing, all toll revenue would go to the public sector, and the public agency would reimburse the private partner with a flat fee for each vehicle served at free-flow speeds.” He calls this approach “concurrent real and shadow tolling.”

In what circumstances might this approach be preferable to real-toll concessioning? Parker suggests that some types of HOT or TOT (truck only toll) lanes might be good candidates, in cases where the traffic is difficult to predict and hence the project is difficult to finance. In the TOT lanes arena, for example, we have yet to see any projects financed, partly because the idea is still new but also partly because forecasting truck traffic on such lanes seems to be far more difficult than traditional traffic & revenue forecasting. Financiers tend to want usage of TOT lanes by trucks to be mandatory, but that approach is unacceptable to the trucking industry. And if the TOT lane concept includes the enticement of allowing double- and triple-trailer rigs (currently not allowed on most Interstates, but strongly desired by many truckers and shippers), the uncertainties in traffic forecasting get even more complex-what rate of investment in such new rigs do you assume, and on what basis?

Likewise, colleagues doing traffic & revenue studies of proposed HOT or Express Toll lane projects tell me that these forecasts are far more sensitive to small changes in assumptions than are the forecasts for conventional toll roads. In other words, there’s a significantly higher risk that the forecast will be wrong, especially in the early years. That, too, makes financing difficult.

But if the concurrent real and shadow toll approach were used for such projects, and the concessionaire were paid partly based on availability and partly a negotiated amount per vehicle, it would be able to adjust the real toll rate to be lower if traffic was slower to use the toll lanes than expected (or higher if it was unexpectedly higher than forecast). The pricing mechanism could be focused on optimizing use, rather than meeting debt-service schedules.

But of course, there is no free lunch here. By shifting revenue risk to the state, such agreements could leave the state scrambling to come up with additional sources of funds to meet its payment obligations (though with some prospect of windfalls in the out years).

Shadow tolling and availability payments are still very new ideas in the United States, despite more than a decade’s use in Europe. So we don’t yet know how the financial community will assess the soundness of a state’s commitment to make such payments over 30 or 50 years. The Miami Port Tunnel will be an interesting case to watch.

Robert Poole is director of transportation policy and Searle Freedom Trust Transportation Fellow at Reason Foundation. Poole, an MIT-trained engineer, has advised the Ronald Reagan, the George H.W. Bush, the Clinton, and the George W. Bush administrations.

Surface Transportation

In the field of surface transportation, Poole has advised the Federal Highway Administration, the Federal Transit Administration, the White House Office of Policy Development, National Economic Council, Government Accountability Office, and state DOTs in numerous states.

Poole's 1988 policy paper proposing privately financed toll lanes to relieve congestion directly inspired California's landmark private tollway law (AB 680), which authorized four pilot toll projects including the successful 91 Express Lanes in Orange County. More than 20 other states and the federal government have since enacted similar public-private partnership legislation. In 1993, Poole oversaw a study that coined the term HOT (high-occupancy toll) Lanes, a term which has become widely accepted since.

California Gov. Pete Wilson appointed Poole to the California's Commission on Transportation Investment and he also served on the Caltrans Privatization Advisory Steering Committee, where he helped oversee the implementation of AB 680.

From 2003 to 2005, he was a member of the Transportation Research Board's special committee on the long-term viability of the fuel tax for highway finance. In 2008 he served as a member of the Texas Study Committee on Private Participation in Toll Roads, appointed by Gov. Rick Perry. In 2009, he was a member of an Expert Review Panel for Washington State DOT, advising on a $1.5 billion toll mega-project. In 2010, he was a member of the transportation transition team for Florida's Governor-elect Rick Scott. He is a member of two TRB standing committees: Congestion Pricing and Managed Lanes.

Aviation

Poole is a member of the Government Accountability Office's National Aviation Studies Advisory Panel and he has testified before the House and Senate's aviation subcommittees on numerous occasions. Following the terrorist attacks of Sept. 11, 2001, Poole consulted the White House Domestic Policy Council and the leadership of the House Transportation & Infrastructure Committee.

He has also advised the Federal Aviation Administration, Office of the Secretary of Transportation, White House Office of Policy Development, National Performance Review, National Economic Council, and the National Civil Aviation Review Commission on aviation issues. Poole is a member of the Critical Infrastructure Council of the Los Angeles Economic Development Corporation and of the Air Traffic Control Association.

Poole was among the first to propose the commercialization of the U.S. air traffic control system, and his work in this field has helped shape proposals for a U.S. air traffic control corporation. A version of his corporation concept was implemented in Canada in 1996 and was more recently endorsed by several former top FAA administrators.

Poole's studies also launched a national debate on airport privatization in the United States. He advised both the FAA and local officials during the 1989-90 controversy over the proposed privatization of Albany (NY) Airport. His policy research on this issue helped inspire Congress' 1996 enactment of the Airport Privatization Pilot Program and the privatization of Indianapolis' airport management under Mayor Steve Goldsmith.

General Background

Robert Poole co-founded the Reason Foundation with Manny Klausner and Tibor Machan in 1978, and served as its president and CEO from then until the end of 2000. He was a member of the Bush-Cheney transition team in 2000. Over the years, he has advised the Reagan, George H.W. Bush, Clinton, and George W. Bush administrations on privatization and transportation policy.

Poole is credited as the first person to use the term "privatization" to refer to the contracting-out of public services and is the author of the first-ever book on privatization, Cutting Back City Hall, published by Universe Books in 1980. He is also editor of the books Instead of Regulation: Alternatives to Federal Regulatory Agencies (Lexington Books, 1981), Defending a Free Society (Lexington Books, 1984), and Unnatural Monopolies (Lexington Books, 1985). He also co-edited the book Free Minds & Free Markets: 25 Years of Reason (Pacific Research Institute, 1993).

Poole has written hundreds of articles, papers, and policy studies on privatization and transportation issues. His popular writings have appeared in national newspapers, including The New York Times, The Wall Street Journal, USA Today, Forbes, and numerous other publications. He has also been a guest on network television programs such as Good Morning America, NBC's Nightly News, ABC's World News Tonight, and the CBS Evening News. Poole writes a monthly column on transportation issues for Public Works Financing.

Poole earned his B.S. and M.S. in mechanical engineering at Massachusetts Institute of Technology (MIT) and did graduate work in operations research at New York University.