In this issue:
- Outsized toll increases bring threat of new regulation
- Failure of biofuels policy
- CBO’s new report on highway PPPs
- A closer look at benefit-cost analysis
- The decline in vehicle miles of travel
- Upcoming Conferences
- News Notes
- Quotable Quotes
Shortly after last month’s issue went out, with its lead article on large toll rate increases implemented by the Port Authority of New York and New Jersey to help pay for its World Trade Center project, Sen. Frank Lautenberg (D, NJ) introduced legislation that would allow the Secretary of Transportation to regulate tolls on all Interstate highways. And two weeks after that came news that Pennsylvania’s state auditor has found that the Pennsylvania Turnpike faces default on its debt obligations, thanks to the legislature having converted part of its tolls into a general transportation tax by diverting $450 million a year to non-Turnpike purposes. The common theme in both cases was precisely what I wrote about last month: political bodies converting what is generally a pure user charge (like your electric bill or gas bill or cable bill) into a hybrid of user charge and tax.
The Lautenberg bill–now cosponsored by Rep. Michael Grimm (R, NY)-has been criticized by the International Bridge, Tunnel & Turnpike Association as adding a redundant layer of oversight that would deter needed investment and could damage the credit ratings of toll facility owner-operators. And given the repeated failure of Congress to reauthorize the federal surface transportation program, “Congress should not interfere with the efforts of local and regional toll agencies to advance mobility and provide for their own funding needs.”
While I’m inclined to agree with IBTTA on this, Tollroadsnews.com reported an unidentified source as pointing out that “the tolling industry brings this on itself,” citing the high bridge and tunnel tolls in the New York metro area, a large fraction of which are diverted to transit (and to the World Trade Center!), Virginia’s diversion of huge future sums from Dulles Toll Road toll-payers to build the rail line to Dulles airport, Delaware’s decades of tolling interstate travelers to pay for state roads, and the specter of Interstate border tolls (aimed at exempting most in-state Interstate users from paying). And, I hasten to add, the egregious taxing of Pennsylvania Turnpike tollpayers to support other highways plus transit systems in Philadelphia, Pittsburgh, and elsewhere.
It’s precisely this kind of thing that rightly drives highway users to oppose a blank check for expanded Interstate tolling, despite the impending several trillion dollar cost of reconstructing and modernizing our aging and obsolescing Interstate system. AAA has ongoing litigation against the Port Authority over its toll diversion to the World Trade Center, and the American Trucking Associations is supporting Lautenberg’s bill.
That’s why the best way forward to allow states to use toll finance to reconstruct and modernize their Interstates is not to simply abolish the long-standing federal prohibition on Interstate tolling (except for those tollways grandfathered in and the three allowed to toll-finance reconstruction under a TEA-21 pilot program). I have privately and publicly urged AASHTO, the Tolling Coalition, the T2 Group, and others favorable to Interstate tolling to support a more nuanced position. That position is for Congress simply to remove the numerical limits on the various tolling and pricing programs that Congress has enacted in the last three reauthorizations (ISTEA, TEA-21, and SAFETEA-LU).
My reason for this approach is as follows. Both the pilot program that allows for toll-financed construction of three new Interstates and the pilot program allowing for three reconstructions of existing Interstates include specific language on the use of the toll revenues. They limit the use of those revenues to financing the construction or reconstruction, operation, and maintenance of the Interstate corridor in question. No diversions to other highways, transit, or other state budgetary demands. In other words, tolls as a pure user fee. This language is no accident. It was debated and negotiated at the congressional staff level, with the participation of highway user groups. And when the provisions were enacted as part of TEA-21 (reconstruction) and SAFETEA-LU (new construction), there was no opposition from either AAA or ATA.
Limiting Interstate tolling to the construction, reconstruction, operation and maintenance of the Interstates is the only politically feasible way forward. And it’s a far better alternative than federal regulation of Interstate toll rates.
In October, the National Academy of Sciences blew the whistle on a massive congressional foray into centrally-planned industrial policy. In the name of energy independence, Congress enacted a “Renewable Fuels Standard” in 2005 and revised it in 2007 (so it is now known as RFS2). Between 2008 and 2022, it mandates that “industry” must produce and sell increasing amounts of biofuels for use in motor vehicles, ending up with 2022 volumes of:
- 15 billion gallons of conventional biofuels (corn-based ethanol);
- 16 billion gallons of cellulosic biofuels (from wood, grass, or inedible plant parts);
- 4 billion gallons of “advanced renewable biofuels; and,
- 1 billion gallons of biomass-based diesel fuel.
To support these mandates, the legislation provides for an array of subsidies to would-be producers.
At the request of Congress, the National Academy appointed a 16-member committee of experts to document what is going on in the biofuels industry; estimate the effects thus far and likely future effects on the prices of land, food and feed, forest products, imports and exports, and federal spending and revenues; and discuss the environmental pros and cons of biofuel production under RFS2.
The verdict is in: RFS2 is a failure. The committee made nine key findings in its 650-page report, “Renewable Fuel Standard: Potential Economic and Environmental Effects of U.S. Biofuel Policy.” You can download a summary from the National Academy Press: www.nap.edu/catalog.php?record_id=13105. I can only cover some of those findings here, the first of which is: “Absent major technological innovation or policy changes, the RFS2-mandated consumption of 16 billion gallons of ethanol-equivalent cellulosic biofuels is unlikely to be met in 2022.” Using the best available information, the committee estimated that even if cellulosic biofuels could be produced in such quantities, the world oil price would have to reach $191/barrel for them to be competitive. Alternatively, the government would have to be imposing a carbon tax of $118-138/ton. (For context, most economic assessments of cost-effective measures for CO2 reduction use a ceiling of $50/ton.)
The committee explains why an effort to reach these biofuel targets will have adverse effects on land prices, food and feed prices, and water consumption, not just here but worldwide (since food and fuel are produced and sold in global markets). In addition, increased ethanol production will increase emissions of ozone, sulfur oxides, and particulates, and depending on the land-use assumptions, may not even reduce overall CO2 emissions, the committee concluded.
As an exercise in industrial policy (aka picking winners), federal loans to cellulosic ethanol producers greatly resemble the solar energy (Solyndra) industrial policy fiasco. The only plant thus far approved to produce cellulosic ethanol, Range Fuels in Georgia, filed for bankruptcy early last year after receiving $64 million in federal support-and was recently sold for pennies on the dollar. Even the EPA, which must set annual targets for biofuel production under RFS2, is complying in a minimalist way. The 2012 goal in the legislation is 500 million gallons of cellulosic biofuel, but in late December, EPA mandated only 8.65 million gallons-based on the very limited capacity of industry to produce such fuels. And to the extent that refiners cannot find even those modest amounts to purchase, they are required by law to buy credits from EPA at about $1.20 per gallon.
This misconceived approach is not confined to the United States. The European Union, Brazil, Indonesia, and Japan have similar mandates, helping to distort energy, land, food, and feed prices worldwide. As The Economist wrote in its Special Report on Feeding the World last February, “One of the simplest steps to help ensure that the world has enough to eat in 2050 would be to scrap every biofuel target.” Starvation is an unintended consequence of forced biofuel policies, but now that we know this, it’s immoral to keep pursuing them.
“Highway PPPs Don’t Always Cut Costs, CBO Warns.” That was the rather sensationalist headline on The Bond Buyer‘s January 10th news story on the release of a new report from the Congressional Budget Office, “Using Public-Private Partnerships to Carry Out Highway Projects.” Despite mutterings from some fans of PPPs, I think CBO has done the best job thus far of any federal report at explaining to Congress the real value of PPPs for highway infrastructure. (www.cbo.gov/doc.cfm?index=12647)
By far the worst assessment of PPPs was a July 2011 report by the DOT Office of Inspector General (OIG), which I critiqued in the August issue of this newsletter. That report’s main criterion for judging whether a PPP is better than conventional procurement is their relative cost of capital. Because a private concession company seeks to make a profit (in technical terms, because the cost of equity is higher than the cost of debt), OIG dismissed PPPs as “more costly” than conventional procurement. (www.oig.dot.gov/library-item/5599)
In sharp contrast, the economically literate analysts at CBO understand that a valid cost comparison must quantify the risk transfers involved in a PPP, especially long-term PPPs. In conventional procurements, the public sector takes on the risk of construction cost over-runs, late completion, and (if it’s a toll project) the risk of insufficient traffic and revenue-all of which are typically transferred to the concession company in a long-term toll PPP. Those potentially large costs to the public sector (i.e., taxpayers) were ignored by OIG in making its simplistic comparison. By contrast, CBO discusses risk transfer as one of the main benefits of a well-structured PPP procurement. And when the value of those risk transfers is taken into account (as well as today’s widespread availability of tax-exempt debt for PPPs), CBO concludes that the financing costs are about the same between conventional and PPP procurements.
The CBO report also does a good job of explaining the different role of incentives in (a) conventional design-bid-build highway contracting, (b) design-build procurement, and (c) long-term design-finance-build-operate-maintain procurement. Comparing (a) with (b), there is much larger scope for costly change-orders in the conventional approach, whereas when the designer and builder are part of a single team and operating under a fixed-price contract, they have strong incentives to value-engineer the project to stay within the budget; they also have strong incentives to get it completed on time. Even stronger incentives are at play when the same entity not only designs and builds the project but must also operate and maintain it for 50 years. That means it would be foolish for it to cut corners on construction in an attempt to minimize the initial cost, because as the de-facto owner/operator for 50 years, its aim is to minimize life-cycle costs. (Hence, it may well spend more up-front on durable construction that costs a lot less to maintain, which the public sector almost never does.) CBO’s analysts do a good job of explaining these critically important points, to which the OIG team seemed oblivious.
Those good points notwithstanding, the CBO report suffers from two blind spots which are typical of the federal mindset (from Treasury to the congressional tax-writing committees to GAO and CBO). First, the analysts argue that PPPs (in the form of toll concessions) will not increase the amount of highway investment, because, after all, the money must all come ultimately from the same tolls and/or highway fuel taxes as in purely public-sector projects. In an abstract, academic sense that may be true. But in a real-world, political sense, it is demonstrably false. What long-term toll concessions are doing is, as some critics have put it, “outsourcing the political will” to use market-based tolls-and thereby expand transportation investment.
One example (out of many) is right under their noses just outside Washington, DC: the express toll lanes being added to the Capital Beltway under a long-term toll concession. The only solution the Virginia DOT had to the Beltway’s chronic congestion was a $3 billion plan to add HOV lanes. That plan was going nowhere, partly because it required massive property takes but also because VDOT had nothing approaching $3 billion. It was the private-sector (Fluor and Transurban) that proposed instead a $1 billion project to add the same amount of lanes but using congestion pricing to pay for it (and a less-grandiose footprint that cut the cost by eliminating nearly all of the property takes). Sure, in theory VDOT might have eventually thought of that, but in the real world they didn’t. Nor should they have saddled the taxpayers of Virginia with the traffic and revenue risk that Fluor/Transurban has willingly taken on.
The other misconception concerns federal tax revenue. The CBO report repeats the mistake of considering the private sector’s use of tax-exempt revenue bonds for such projects as a net cost to the federal government. This is incorrect for two reasons. First, in the real world, few if any of these projects would be done as PPPs if tax-exempt debt were not available; hence, the model that says the feds would otherwise be collecting tax revenue from buyers of taxable toll revenue bonds is highly unlikely. Instead, if done at all, the projects would be done by state toll agencies which have always used tax-exempt municipal bonds. So there is no difference in federal revenue from bond interest between a PPP project and the traditional state toll agency alternative.
The other reason it’s incorrect, which CBO misses, is that as a for-profit toll road industry starts building and operating highways that would otherwise continue being done by public-sector bodies, the net difference to federal coffers will be the corporate income taxes paid by (we hope) profit-making toll road companies. Ironically, the OIG report acknowledged this difference, but considered it yet another disadvantage of PPPs-they have the “added cost” of paying taxes!
Despite those concerns, the CBO report is still the most insightful assessment yet from a federal agency, and is well worth reading.
Like most transportation professionals, I have long urged that transportation investments be made on the basis of serious benefit-cost analysis. In principle, analysts would review long lists of proposed projects for which only limited public funding was available, quantifying the benefits of each in a rigorous way, as well as the best available evidence on the life-cycle cost of each. Projects would then be ranked in order of benefit/cost ratios, and decision-makers would work their way down the list, in order, until all the available dollars had been assigned to the highest-valued projects; all the others would be rejected or kept in reserve.
So naturally I was intrigued by a Nov. 21st headline in the San Jose Mercury News reading, “Bay Area Transportation Projects to Be Judged on Benefits vs. Costs.” I read the article with a mix of reactions. Yes, transportation planners at the region’s MPO, the Metropolitan Transportation Commission, had indeed done what I described above. And some of the results seemed to be what I would have predicted. The highest-ranked project, at $60 in benefits for every dollar of cost, was to make greater use of an existing resource, by adding express service on some BART heavy-rail lines. That 60:1 ratio seemed high, but might be plausible, since it’s only adding operating costs, not huge capital costs. And a much-derided and very costly (though politically popular) project, extending BART to Livermore, scored very low, with benefits at best equal to costs (and several other rail projects scored even lower). Ramp meters to improve freeway operations were scored as $16 in benefits per dollar of costs, another plausible finding. And express lanes (presumably tolled) in Santa Clara and Alameda County also did pretty well, at $6 and $5 in benefits, respectively, for every dollar of costs.
On the other hand, I spotted the hugely costly BART extension to San Jose also ranked as producing $5 in benefits per dollar of cost. That’s when I started to wonder: what constituted the quantified benefits? At the end of the article was a short list of dollar values. Some were straight-forward average values for fatalities, injuries, and property damage from accidents. Others were costs per ton of various pollutants. And there were values of hourly travel time ($16 for motorists, $26 for truckers, and $35 for transit users). Those seemed at odds with any other study I’ve seen, with the value for truckers being very low (the Texas Transportation Institute uses $88/hour for truckers) and the value for transit very high (since transit users routinely put up with average commute times double the average for motorists).
All those costs could at least be seen as generally comparable-they are all in some sense externalities imposed by the transportation system, which good transportation policy should aim to reduce: deaths, injuries, emissions, time wasted due to congestion, etc. Not so, however, several others on the list. “Cost of auto ownership” was listed at $6,290 (presumably per year) and “cost of physical inactivity per adult” was put at $1,222 per year. Those are different kinds of costs, in that they are not externalities imposed on someone; rather, they are the result of individual choices and preferences. If I choose to own a car rather than depending on transit, that choice is a result of a whole variety of factors-and it’s a cost to me, not a cost I’m imposing on others. (That’s what the externality values are for, and those are already being counted.) Likewise, if I choose to read books or build model trains rather than playing tennis, that again is a personal choice that has nothing to do with decisions about the transportation system.
I have not seen the equations used to put all those costs together so as to compute the benefits of each project, but what I’ve observed from just that one article gives me pause. And it reminds me of a previous quantification exercise carried out by the good people at MTC a decade ago. In a very large-scale planning exercise as part of developing their Regional Transportation Plan for 2001, MTC analysts estimated the cost of what must have been several hundred potential transit projects-rail, bus, and ferry-as well as the estimated net new riders each one would generate. I remember seeing the long resulting list of projects, ranked from the lowest cost per new rider to the highest. For the BART extension to San Jose, the cost per new rider was just over $100 (that’s for one boarding, so annually, assuming two boardings per day, 5 days a week for 47 weeks per year would be $47,000 of annual taxpayer cost for each new passenger). Thus, BART to San Jose extension ranked near the bottom of the list. At the top of the list, 19 of the 20 lowest-cost projects were bus projects. (Go to www.mtc.ca.gov/library/pub.php and enter Blueprint to find the documents.)
The outcome of that 2001 exercise, alas, was that even though the bus package of projects would have produced nearly twice as many new passengers as the rail package, for about one-fourth the cost, MTC’s board approved $10.2 billion in capital costs for rail projects and just $281 million in capital costs for bus projects.
The 2001 exercise demonstrated the competence (and some might say the courage) of MTC’s professional staff, despite their analysis ending up being ignored in the political decision-making. I’m disappointed that their latest effort seems tailored to giving the policymakers an assessment approach more in keeping with their prejudices-such as that transportation policy should reduce car ownership and emphasize walking. The lesson I draw from this is that when someone gives you the results of a benefit-cost analysis, it’s wise to look beneath the hood.
Last month saw the release by FHWA of vehicle miles of travel (VMT) data for October. They showed a decline for the eighth month in a row, producing a variety of blog posts and other commentaries. VMT peaked in November 2007 and then declined for 18 months as the recession set in, after which monthly VMT began growing again for 21 months, until February 2011 (though not coming close to the previous peak), declining again since then. Tollroadsnews.com reports that all categories of roads have lower traffic volumes than a year ago, but with a larger decline in rural areas. Longer term, demographer Wendell Cox’s estimates that between 2006 and 2011, urban VMT is up by 0.4% while rural VMT has decreased by 6.0%. (www.newgeography.com/content/002601-the-driving-decline-not-a-sea-change)
Most analysts attribute the two declines in overall VMT since 2007 to the continuing recession, but Robert Puentes and Adie Tomer of Brookings show that VMT per capita has been declining since 2005. That figure may reflect changes in technology (telecommuting, online shopping, etc.) and may be useful in projecting longer-term trends in overall VMT (which is what highway and toll road planners must deal with).
In the short term, the recent decline in urban VMT has marginally eased congestion. FHWA’s latest Urban Congestion Report, covering July-September 2011, finds that although the average duration of weekday congestion is seven minutes more than during the same three months in 2010, the average urban Travel Time Index has decreased a bit, from 1.20 in 2010 to 1.19 in 2011. But our urban areas are still plagued by very serious congestion. November brought the release of a new report from the Texas Tranportation Institute, “TTI’s 2011 Congested Corridors Report.” It identifies the 328 worst individual directional corridors in America’s urban areas, which account for 36% of urban freeway delay with only 6% of urban freeway lane-miles and only 10% of urban freeway VMT. This report is a valuable tool for metropolitan planning organizations and state DOTs, to help them prioritize congestion-reduction investments. (http://tti.tamu.edu/documents/corridors-report-2011.pdf)
Note: I don’t have space to list all the transportation conferences going on; below are those that I am (or a Reason colleague is) participating in.
Broward Transportation Day, January 19, Ft. Lauderdale, FL, Broward Metropolitan Planning Organization. Details to come at www.leadershipbroward.org (Robert Poole speaking)
Transportation Research Board 91st Annual Meeting, Jan. 22-26, Washington, DC.
Details at www.trb.org/annualmeeting2012/annualmeeting2012.aspx. (Robert Poole and Shirley Ybarra speaking)
$2.1 Billion PPP Tunnel in Virginia
Virginia DOT and a joint venture of Skanska and Macquarie reached agreement last month on a 58-year concession under which they will finance, build, operate, and maintain a new Midtown tunnel parallel to the existing 50-year-old Midtown Tunnel, as well as upgrading two older tunnels and approach roads in Norfolk, Virginia. Skanska and Macquarie will provide $1.3 billion in debt and equity, Virginia is putting in $0.4 billion, and the feds will provide a $0.4 billion TIFIA loan. The four-year construction project will begin this year, following the financial closing.
Hamburg Will Cover Expanded Autobahn with a Park
In a $1 billion project, a congested section of the A7 autobahn through Hamburg will be widened, but to reduce noise, much of the section through the city will be depressed and decked over, with a new park developed atop it. The north-south A7 is one of the most important inter-city highways in Germany.
All-Electronic Tolling Eliminates Numerous Crashes in Miami
The 47-mile Homestead Extension of Florida’s Turnpike (HEFT) was converted to cashless, all-electronic tolling (AET) early in 2011. As reported recently in Tollroadsnews.com, crashes at the locations of the five former toll plazas (now replaced by gantries) were reduced by 74% during the first six months following the conversion, compared with the comparable period the previous year. The conversion to AET is the first step in eliminating cash collection on the Turnpike, with the next conversions, heading northward, planned for 2013 and 2015.(www.tollroadsnews.com/node/5609)
The Role of a “PPP Unit” Explained by Brookings
An excellent new report from the Brookings Institution recommends that U.S. states emulate best practices on public-private partnerships in Australia, Canada, and the U.K. by creating specialized privatization units to evaluate transportation project as candidates for PPP procurement and to manage the process. Authors Emilia Istrate and Robert Puentes document the success of entities such as Partnerships BC and Partnerships Victoria in providing the technical expertise needed to ensure that best practices are followed. “Moving Forward on Public Private Partnerships: U.S. and International Experience with PPP Units” is available on the Brookings website: www.brookings.edu/papers/2011/1208_transportation_istrate_puentes.aspx.
SANDAG Buys South Bay Expressway
The troubled South Bay Expressway (SR 125), a former toll concession that emerged from bankruptcy last spring, was purchased by the San Diego Association of Governments on Dec. 21, 2011. The agency purchased the facility for $341.5 million, from the financial institutions left as its residual owner by the bankruptcy process -quite a bargain for a new toll road that cost nearly $1 billion to construct and put into operation. SANDAG hopes to increase toll revenue by reducing the toll rate, attracting more traffic from congested north-south routes like I-805.
Express Toll Lanes for the U.K.?
With the current U.K. coalition government more favorable to highways than its Labor predecessor, the Institution for Civil Engineers in November called for express toll lanes to be added to congested motorways. The government has been stressing infrastructure investment as a way of boosting economic growth, but must look to private capital due to its own dire financial straits.
Corrections to Last Month’s Issue
Two errors crept into the December issue, for which I apologize. First, in the story on the prospects for increased tolling in the forthcoming reauthorization bill, I mislabeled Sen. Mark Kirk (R, IL) as Rep. Kirk, when I clearly know better-and failed to catch the error during proof-reading. And in the news note on the tolling vote in Seattle, I mis-stated the vote defeating the anti-toll measure; the final tally was 53 to 47 against it. Thanks to several readers who quickly pointed out these errors.
“If the politicians of this world really want to tackle food security, there’s only one decision they have to make: no food for fuel…We would never have a biofuel policy-never-if we would have given water any [market] value. [It takes] 9,100 liters of water to produce one liter of biodiesel. You can only do that because water has no price.”
–Peter Brabeck, interview by Brian M. Carney, “Can the World Still Feed Itself?” The Wall Street Journal, Sept. 3, 2011
“There may not have been a party in Times Square to celebrate, but two of the most wasteful subsidies ever to clutter the Internal Revenue Code went out with the old year. Congress declined to renew either the 45-cent-per-gallon tax credit for corn-based ethanol or the 54-cent-per-gallon tariff on imported ethanol, so both expired on Dec. 31. Taxpayers will no longer have to shell out roughly $6 billion per year for a program that badly distorted the global grain market, artificially raised the cost of agricultural land, and did almost nothing to curb greenhouse gas emissions. A federal law requiring the use of 36 billion gallons of ethanol for fuel by 2022 still props up the industry, but the tax credit’s expiration is a victory for common sense just the same.”
–Editorial, “Overcharged,” The Washington Post, January 1, 2012
“The Persian Gulf represents 16% of our imports, and Venezuela 9%. By far the largest, and growing, source of imports is Canada, which supplies about 25%; Mexico another 11%…The [recent] shift in oil sources means the global supply system will become more resilient, our energy supplies will become more secure, and the nation will have more flexibility in dealing with crises. It would also mean that economic benefits-in terms of jobs, manufacturing, and services-would register on the ground in North America.”
–Daniel Yergin, “America’s New Energy Security,” The Wall Street Journal, Dec. 12, 2011.
“We cannot overemphasize the fact that moving ahead on the HSR project without credible sources of adequate funding, without a definitive business model, without a strategy to maximize the independent utility and value to the State, and without the appropriate management resources, represents an immense financial risk on the part of the State of California. Until a final version of the 2010 Business Plan is received, we cannot make a final judgment on the Funding Plan. Therefore, pending review of the final Business Plan and absent a clearer picture of where future funding is going to come from, the Peer Review Group cannot at this time recommend that the Legislature approve the appropriation of bond proceeds for this project.”
–Will Kempton, Chairman, California High-Speed Rail Peer Review Group, report to the Legislature, January 3, 2012
“The need to reconstruct and modernize the existing Interstates which are reaching the end of their 50-year design life, combined with the necessity to expand capacity of the Interstate highway system to meet the needs of an expanding population, may soften congressional opposition to relaxing the current Interstate tolling restrictions. With the gas tax no longer able to meet the nation’s transportation investment needs, and with the concept of a VMT (vehicle miles of travel) fee still a distant vision, the year 2012 could mark a turning point in the acceptance of tolling as a serious highway revenue enhancer.”
–Ken Orski, “What Lies Ahead for Transportation in 2012?” Innovation News Briefs, January 1, 2012