Surface Transportation Innovations Newsletter

Surface Transportation Innovations #78

Highway reauthorization bill and transferring risk in toll road deals

In this issue:

  • Reason Foundation on Reauthorization
  • Conditions & Performance Report Breaks New Ground
  • Risk Transfer in Toll Road Concession Deals
  • Questioning EPA on Smart Growth
  • Greenhouse Gases and Transportation
  • Upcoming Conferences
  • News Notes
  • Quotable Quotes

What Does Reason Propose for Surface Transportation Reauthorization?

I’ve been getting a lot of questions about what Reason Foundation is recommending for the reauthorization of the federal surface transportation program. The Reason transportation policy team has been working on reauthorization policy since early last year, but due to the continued delays in serious congressional attention to the issue, we’ve held off publishing any of the resulting material. But now that the congressional health-care debate is over, we will be moving into high gear on reauthorization.

Our opening statement has gone up on the website this week ( It’s an overview of the principles we think should guide what could well be a historic rethinking of the federal government’s role in surface transportation. We agree that a rethinking is needed, but as may be evident from some of my newsletter and Public Works Financing articles, we differ sharply from the highly centralized approach set forth in the draft bill from Rep. James Oberstar (D, MN)-and not just because of that bill’s very restrictive approach to tolling, pricing, and PPPs. We also differ sharply with what appears to be the Administration’s major shift away from highways and auto-mobility toward “livability” as the new paradigm for federal transportation policy.

Our reauthorization efforts are built around seven principles, which the policy statement explicates:

1. Focus federal policy on national transportation priorities;

2. Restore the user-fee nature of highway taxes;

3. Leverage public funds with private revenues;

4. Elevate commercial freight issues to a national priority;

5. Give metro areas the tools to reduce congestion;

6. Begin the transition to a new transportation funding framework;

7. Address energy and climate-change objectives via economy-wide policies.

I won’t attempt here to draw out all the implications of these seven principles. But in coming weeks and months you can expect a succession of policy studies and issue briefs that translate those broad principles into specific policy proposals. Those of you in Washington, DC will be able to hear me summarize our first policy paper-on rethinking the federal role and the Highway Trust Fund-at the Road Gang luncheon on May 6th.

FHWA’s Conditions & Performance Report Breaks New Ground

Congress has long required the Federal Highway Administration to produce a report on the conditions and performance of the nation’s highways, bridges, and transit systems. Although nominally biennial, we’ve been waiting nearly two years for the 2008 Conditions & Performance (C&P) report (which uses data as of 2006). But the report is finally out, and it’s a significant advance over previous versions, so perhaps it was worth the wait. (

The 2008 C&P report does the usual job of documenting the trends in highway conditions and performance, from 1997 through 2006. There’s some good news here, in that there has been continued progress in improving the condition of highways and bridges. For example, for roads on the National Highway System (Interstates plus other major highways), the percentage of vehicle miles of travel on pavements with “good” ride quality is up from 39% in 1997 to 57% in 2006. The share of all bridges categorized as deficient has decreased from 32.7% in 1997 to 27.6% in 2006-with most of the decrease due to reducing structural deficiencies. Safety has also improved, with reductions in fatality and injury rates. Unfortunately, in terms of “performance,” congestion kept increasing despite the large increase in highway spending over this time period: 28.7% of urban-area travel was congested in 2006, versus 24.9% in 1997.

But the important changes in the new C&P report are in its second part, which analyzes how much investment is needed in future years. Past C&P reports generally produced just two numbers: annual highway capital investment (federal + state + local) needed over the next 20 years to “maintain” current conditions and performance and the comparable figure needed to “improve” conditions and performance. The first of these is a moving target, in the sense that with each new report, it begins with the new status quo. Thus, if congestion gets worse every year, then what’s needed to maintain the status quo is about maintaining a worse status quo. And the second number began as a simple summation of state project wish lists, though in recent years the C&P reports have used economic modeling that aimed to include only projects with a benefit/cost ratio of at least 1.0. That’s a far cry from a commercial rate-of-return measure, but is certainly better than nothing.

This time the C&P team created 24 different capital investment scenarios. They used three different benefit/cost screens: 1.0, 1.2, and 1.5. And they also used three broad types of funding methods: non-user taxes, fixed-rate user taxes/fees (fuel tax, tolls, VMT fee), and variable-rate user fees (congestion pricing). Needless to say, the various combinations of these approaches produced an array of investment levels. I won’t try to summarize them all here, but I just want to give you some idea of how much of a difference they make.

Without pricing, for the entire roadway system (federal + state + local), average annual spending over the next 20 years would be $105.6 billion to sustain current conditions and performance. To improve performance, with a B/C screen of only 1.0 that number would increase to a whopping $174.6 billion. But change the B/C screen to 1.5 and the investment level drops considerably, to $137.4 billion. Now what happens if we assume congestion pricing applied (immediately) to all congested portions of the highway system? For the “sustain” approach, the annual investment number drops to $71.3 billion, about 10% less than the current level. And the amount needed to improve performance–with pricing and a B/C of 1.5– would be just $101.8 billion.

I hasten to add, as does the report, that immediate use of congestion pricing on all congested portions of the entire US road system is completely unrealistic. It may be wiser to look just at the Interstate system, which the report does in Chapter 8. Current Interstate capital spending is listed at $16.5 billion per year. The “sustain” scenario with no pricing calls for $24.8 billion-but with pricing that drops to $11.6 billion, less than is now being spent each year. But of course, today’s urban Interstates (where most of the congestion is) also need major improvements, such as the rebuilding the interchange bottlenecks that I wrote about last month. If that were done along with congestion pricing, the annual Interstate investment would be $24.0 billion using a B/C screen of 1.5 (or $30.4 billion with B/C of only 1.0). Without pricing and with the same B/C of 1.5, the annual capital investment would climb to $47 billion.

Again, immediate pricing of all congested portions of the Interstate system is not a plausible scenario. But these new scenarios suggest very strongly that some combination of pricing and a meaningful benefit/cost screen (such as 1.5) would permit large-scale productive investment in modernizing the Interstate system, without bankrupting the country. And that’s something I think we should be aiming for in the forthcoming reauthorization.

Risk Transfer in Toll Road Concessions

One of the least-appreciated benefits of long-term toll concessions is the ability to shift important risks from the public sector (taxpayers) to the private-sector parties doing the toll road project. This is not just hype from PPP promoters; we have solid evidence that significant risk is actually transferred in properly structured deals of this type. Among the risks that can be transferred are construction risk, traffic risk, and revenue risk. I was reminded of this point by some of the foolish media blather about the recent Chapter 11 filing of the concession company for San Diego’s South Bay Expressway (SBX). This two-year old toll road fell victim to the housing market collapse, leading to traffic less than half of what was projected.

An ill-informed (but much e-mailed) Washington Times editorial on March 30th, “The Trouble with Tolls,” claimed that the bankruptcy filing showed that the private concession toll road model “is a road to nowhere.” Various bloggers alleged that the taxpayers would get stuck with paying off SBX’s debts, and that if traffic and revenue studies were not kept “secret” until such deals are approved, private toll road deals wouldn’t get off the ground.

South Bay Expressway CEO Greg Hulsizer, in a letter to the public released on March 31st, said that the overall experience with this project shows that the PPP mechanism works. The much-needed road (on the drawing boards since 1959 but perennially unfunded) got built decades earlier than without the PPP mechanism. And, most important, “The financial risk on the project was transferred to the private sector. We and our lenders took the risk that things wouldn’t work out as planned. They haven’t. But the State isn’t on the hook for that. It’s up to us to work it out.”

This is not the first time we’ve seen traffic and revenue risk transfer work successfully in PPP toll roads. Back in 2000 the Camino Colombia toll road opened to traffic in Laredo, TX. Built by investors at a cost of $90 million, it was intended as a truck bypass from the border crossing to I-35. Actual traffic was a small fraction of what they’d projected, leading to a bankruptcy filing several years later. The road was sold at auction in January 2004 to John Hancock Insurance Co. for $12 million-just 13 cents on the dollar. Texas DOT later acquired the like-new toll road from John Hancock for about $20 million, still a great bargain, and it continues as a toll road today.

Two toll tunnels in Sydney, Australia, have also gone into receivership due to initial traffic being less than half what was projected. The Cross-City Tunnel was placed into receivership in December 2006, after which the receivers auctioned off the A$1 billion tunnel for A$700 million; the lenders were repaid, but the equity investors recovered only 10-20 cents on the dollar. More recently, the Lane Cove Tunnel experienced similar difficulties. This A$1.6 billion project went into receivership last year, and has not yet been auctioned off; estimates of its market value are in the A$450-600 million range, and several major toll road operators have expressed interest at such prices.

Lest you read these cases as suggesting that PPP toll roads generally flop, let me assure you that hundreds of such toll roads have been financed, built, and operated over the past 40 years or so, with only a handful of failures. Greenfield (start-up) toll roads are inherently high-risk projects. One of the populist Texas opponents of toll roads who circulated the Washington Times editorial also cited a recent University of Texas study of problems with toll road traffic and revenue studies. I downloaded and read the report, “Actual vs. Forecasted Toll Usage: A Case Study Review,” and it’s an excellent piece of work. While it points out limitations in the methodology used in the five case studies it examined in detail, it also concludes that there is “no evidence to point to a systematic optimism bias in T&R forecasts.” So much for the populist rant against “secret” T&R studies. The bottom line is simply that toll roads, especially start-up toll roads, are risky ventures. And that is precisely why they are better suited to global companies and sophisticated investors, rather than well-meaning but inexperienced local agencies. (

Questioning EPA on Smart Growth

That old line about “torturing the data until they confess” came back to me as I read a March 24th New York Times story headlined “‘Smart Growth’ Taking Hold in U.S. Cities, Study Says.” It was based on a new EPA study which the Greenwire reporter said suggested that a “fundamental shift” has begun in residential real estate markets, in which people are moving back to urban centers. The article claimed that the EPA study found that “In 26 of the nation’s 50 largest metropolitan areas, the share of residential construction taking place in central cities more than doubled since 2000.” Being something of a skeptic, I downloaded the study, “Residential Construction Trends in America’s Metropolitan Regions.” (

What EPA did was review residential building permits, not population movements. For the 48 cities analyzed, they compared annual average permits for 1990-95 with 2003-2008 (it’s not clear why the years 1996-2002 were left out), and also reported numbers for bubble year 2008. Since one year does not a trend make, I will ignore 2008 and focus on the trend comparison. Here is how EPA itself groups the results. In 10 of the 48 cities, the later period has a “substantial increase and a significant share” of permits in the central city. In another 10, there was a “substantial increase, but less than a fifth of regional permits” in the central city. Another 12 showed “minimal change or a decreased share.” And for 16 others-mostly Sunbelt places like Houston, Phoenix, Orlando, Raleigh, Tampa, etc.-it was “difficult to distinguish redevelopment from construction on greenfield sites.” So there are really only 10 out of 48 that showed both a large increase and a significant share. And when I tried to verify the claim that in 26 of the locations the share “more than doubled,” I counted only 19, not 26, and 11 of those were in places where the new share was less than 15% (e.g., Richmond which went from 2% to 7% and San Francisco from 5% to 11%).

That’s not the only problem. Urban advocate Aaron Renn pointed out that building permits do not equal net new residents. “Many of our urban cores have experienced significant housing abandonment and demolition.” So a proper analysis would have to factor in net population changes. ( And demographer Wendell Cox analyzed recent residential price changes for central cities, inner suburbs, and outer suburbs for Los Angeles, San Francisco, San Diego, Atlanta, Chicago, and Portland, finding that-contrary to smart-growth lore-price declines were slightly worse in central cities than in the suburbs. And he pointed out another fallacy in EPA’s building-permit methodology: developers recently vastly overbuilt central city condominiums, in a misguided belief that smart growth was the overwhelming trend. The EPA report quotes a starry-eyed Urban Land Institute report from 2006, “Both empty-nesters and their young adult offspring gravitate to live in more exciting and sophisticated 24-hour places . . .,” etc. Yet empty condo towers in Miami, Atlanta, Los Angeles and even Portland suggest that the developers drank their own Kool-Aid. (

EPA, HUD, and DOT are working together to promote “livability,” which seems to mean federal mandates for higher densities and transit-oriented development. It will be easier to sell such policies to a skeptical public if there’s already a strong trend in that direction. But sound public policy depends on real information, not tortured data.

Good Questions About Transportation and Greenhouse Gas Reduction

There are many transportation planners and public officials who’ve assumed that public policies for reducing GHG emissions should follow the same model used over the past four decades to reduce “conventional” tailpipe emissions. But as a new report from the National Cooperative Highway Research Program makes clear, things are not that simple. The report is NCHRP Web-Only Document 152: “Assessing Mechanisms for Integrating Transportation-Related Greenhouse Gas Reduction Objectives into Transportation Decision Making.” (

One of its most important points is that GHGs are fundamentally different from other air pollutants. Unlike ozone or NOx or PM10, the environmental impact of GHGs is the same wherever they are released, and they persist in the atmosphere for decades. It’s the cumulative total, not the annual flow, that really matters. “There are no means of using air quality monitoring data to designate nonattainment areas that exceed safe levels,” the study notes. And because of the global nature of GHGs, “there is not a clear health basis for setting limits of GHG emissions for specific regions or states.”

The report goes on to walk the reader through some of the implications of these facts, noting the poor match between the nature of GHGs and the nation’s 385 MPOs of greatly varying technical capability. If there have to be geographical targets, it implies, don’t do this at lower than state level.

A critically important (and all too brief) section discusses regulating GHGs directly versus regulating vehicle miles of travel (VMT) as a means of reducing GHGs. It notes that “the utility of VMT as a proxy for GHGs diminishes as vehicles and fuels become more efficient,” as they will in coming decades. And it notes that although heavy-duty trucks account for only 7.5% of VMT nationwide, they produce 35% of on-road transportation CO2. The authors note that a VMT target would be easier for transportation agencies to deal with, but that’s kind of like the old joke about the drunk looking for his keys under the street light, because that’s where the light is. And they also point out that a VMT target “will not capture the potential GHG benefits of transportation system management and operations strategies, such as lower speed limits, traffic signal improvements, and incident management programs” that reduce congestion.

One point touched on only briefly in the report deserves greater emphasis. It is economically foolish to set policy based on the idea that every sector of the economy must reduce GHGs in proportion to its share of GHG emissions. The authors hint at this by saying that “a multisector climate action plan could help to put transportation sources into context and enable better consideration and tradeoffs among sectors.” In plain English, this means that a rational policy would look for the least-costly ways to achieve a given reduction in overall, economy-wide GHG emissions. If changes in buildings can lead to large reductions at $12/ton of GHGs and changes to heavy industry can give large reductions at $15/ton and changes in electricity can give large reductions at $20/ton-but large reductions in surface and air transportation can only be obtained at $50-100/ton, the wisest course is to harvest the low-hanging fruit first. Instead of micromanaging various aspects of transportation, we need an economy-wide price on carbon emissions, which will lead directly to the most cost-effective reductions in GHGs.

Upcoming Conferences

Note: I don’t have space to list all the transportation conferences going on; below are those that I or a Reason colleague are speaking at.

Infrastructure Investment World Americas, April 26-29, New York, NY, Bridgewaters. Details at:

(Shirley Ybarra speaking)

Intelligent Transportation Society of America 29th Annual Meeting, May 3-5, Houston, TX, Hilton Americas. Details at: (Sam Staley speaking)

Innovations in Pricing of Transportation Systems: Workshop and Conference, May 13-14, Orlando, FL, Royal Plaza Hotel in Walt Disney World Resort. Details at: (Adrian Moore and Robert Poole speaking)

Fourth International Conference on Financing Surface Transportation, May 19-21, New Orleans, LA, Roosevelt Hotel. Details at: (Adrian Moore speaking)

The Future of Tolling: Going Mainstream through ORT and Interoperability, May 23-25, Boston, MA, Park Plaza Hotel. Details at:

(Adrian Moore speaking)

National Road Pricing Conference, June 2-4, Houston, TX, Westin Galleria Hotel. Details at: (Robert Poole speaking)

Infrastructure Investor: Southeast, June 3, Miami, FL, Kovens Conference Center. Details at: (Shirley Ybarra chairing)

8th Annual Preserving the American Dream Conference, June 10-12, Orlando, FL, Orlando Doubletree Resort. Details at: (Sam Staley and Robert Poole speaking)

News Notes

California Kills “Cool Cars” Rule

Last year the California Air Resources Board proposed a regulation that would require all new cars sold in the state, starting in 2012, to have reflective metallic windshield coatings to reduce heat buildup and hence the load on air conditioners. That, in turn, would have saved a bit of fuel and CO2 emissions. Needless to say, anyone with a FasTrak transponder, a cell phone, or even an ankle bracelet (paroled felons) would have had trouble with signal interference. Fortunately, on March 29th CARB rescinded the rule.

States and High-Speed Rail

Two weeks ago I was one of a number of transportation researchers asked to make a presentation before the National Conference of State Legislatures’ transportation committee on the subject of high-speed rail. You might find my written testimony to be of interest. It’s available on the website:

Second Thoughts on Smart Growth Planning

Slate‘s architecture critic, Witold Rybczynski, posted an interesting piece the other day, questioning the assumptions behind creation of the White House Office of Urban Affairs headed by “urban czar” Adolfo Carrion, a big advocate of walking, mass transit, bike paths, and high densities. He noted that “the last binge of centralized city planning in the 1960s produced urban renewal, city expressways, and acres of housing projects,” with consequences cities are still living with. He presents a far more decentralized model of city planning, involving the private sector and numerous civic organizations, not just urban planners. (

Water-Repelling Concrete

Forbes magazine’s March 15th issue has a one-page article on Hycrete, which is the name of both a company and the concrete additive that it makes. The water-soluble molecule, when mixed with concrete, reacts with calcium to form a water-repellent polymer; the other end of the molecule bonds with steel, protecting rebar. Founded in 2005, the company’s product has been used in the concrete of about 200 buildings, including those of several high-tech companies (Nintendo, Amazon). It has not yet been tried in roads or bridges, but the company has a $2 million contract with the Army Corps of Engineers to test the product. (

Clean-Trucks Plan without Owner-Operator Ban

The unholy alliance of the Teamsters’ union with environmental groups that pushed the Port of Los Angeles into linking a clean-trucks program with a ban on owner-drivers (which is still being litigated on interstate commerce and federal pre-emption grounds) has lost a second battle. A year after having failed to persuade the Port of Long Beach to accept this package deal, last month it also failed with the Port Authority of New York and New Jersey. The Port Authority’s new Clean Trucks program will be similar to that of Long Beach, phasing out pre-1994 diesel trucks and eventually pre-2007 ones, but leaving companies free to use owner-drivers as before.

North Tarrant Express is Global Transport Deal of the Year

Infrastructure Journal last month recognized TxDOT’s North Tarrant Express toll concession project (in Ft. Worth) as the 2009 Global Transport Deal of the Year. This $2 billion project was the only toll concession project in the United States to reach financial close in 2009 (along with two Florida concession projects financed based on availability payments). Congratulations to our friends at Cintra and TxDOT.

Does Bus Transit Reduce Greenhouse Gas Emissions?

It seems like just plain common sense-you see lots of gas-guzzling cars with a single occupant and nearby is a bus full of commuters. Obviously bus transit means more passenger miles per gallon of fuel-and hence less GHG emissions. Before you conclude that’s the end of the story, take a look at this fascinating exchange between transit consultant Tom Rubin and the authors of a recent Duke University study. We need to take care with numbers if we’re going to make sensible policy decisions, and this short piece can serve as an object lesson. (

Sobering News re Public Opinion on Federal Gas Tax

The March issue of Better Roads magazine carries its regular column by former editor Kirk Landers, this time discussing the results of a poll of Americans on the federal fuel tax. Turns out 60% of them think it has been rising steadily instead of not having been increased since 1993. This mistaken impression is shared across demography and politics, and certainly helps to explain why increasing this tax has become politically radioactive. The survey was conducted by Public Opinion Strategies and Greenberg Quinlan Rosner Research, for Building America’s Future.

A Primer on Value-for-Money Analysis

State-of-the-art assessment of whether a long-term PPP delivers greater value than traditional project procurement employs value-for-money (VfM) analysis, such as the public sector comparator (PSC), which I’ve written about in previous issues. A good introduction to this subject is “Value for Money Analysis in U.S. Transportation Public-Private Partnerships,” by Dorothy Morallos, et al., in Transportation Research Record No. 2115, available from the Transportation Research Board.

Feedback on Interchange Bottleneck Benefit/Cost Analysis

Doug Lee of the US DOT’s Volpe Center emailed in response to my article last month on the benefits vs. costs of rebuilding the 233 freeway interchange bottlenecks identified in a 2004 Cambridge Systematics study. He pointed out, correctly, that since the costs would occur up-front while the benefits would occur over the 20-year analysis period, the value of those benefits in future years should be discounted to present value. That’s correct. My calculation was only a back-of-the-envelope exercise to see, in gross terms, how the benefits compared with the costs. Had this come out at or below 1.0, it would have been grounds for moving on to something else. But the undiscounted estimate of between 11 and 15 suggests that a serious B/C analysis is worth pursuing.

Your Highway User-Tax Dollars at Work

Ever hear of the Potosi Brewery in Potosi, Wisconsin? No reason why you should have-except that the $7.5 million project to redevelop this historic building was funded in part by a grant from the Federal Highway Administration’s National Scenic Byways Program. And they wonder why people aren’t eager to support an increase in the “highway user fee”?

Quotable Quotes

“We have to get the private sector involved if we really are going to be able to do all these things we want to do. There’s just not enough money here in Washington to do that, and we’re going to encourage [private investment] in any way that we possibly can.”

–Secretary of Transportation Ray LaHood, interview, Infrastructure Investor, February 2010.

“The National Highway System (NHS), which includes the Interstate highway system, represents only one mode and has no consistent foundation for inclusion or exclusion and is thus inconsistent in the type of roads included or excluded in every state. As the current threshold for eligibility for most federal highway funds, it is not focused, consistent, or effective in distinguishing federal from state from local leadership roles. It is therefore unsuitable for the purpose of understanding the true national system. It includes many facilities that are providing primarily local benefits and thus should not be eligible for federal funding to cover a majority share of the preservation costs.”

–JayEtta Hecker, Bipartisan Policy Center, testimony before the Senate Environment and Public Works Committee, March 11, 2010

“Not many years ago, tolling was the darling of the transportation community. There was excitement about toll financing, about private financing, about electronic toll collection and open road tolling. Now we are looking at a draft reauthorization bill in the House that suggests that Congress has the right to regulate toll rates across the country. . . . Sleepy industries aren’t threatened. But industries that are in the forefront of the transportation debate are vulnerable to other forces with other interests.”

–Larry Yermack, Telvent Transportation, in “Getting It Right: Report of the Interoperability Forum,” International Bridge, Tunnel & Turnpike Association, Jan. 6, 2010

“We are concerned with the administration’s proposal to divert $527 million of state apportionments to an ill-defined livability initiative. Given the lack of funding in just about every state, if not all 50 states, for a basic highway maintenance and improvement program, shifting money from ‘must-have’ projects to ‘nice-to-have’ projects is simply irresponsible, and is not a good use of taxpayers’ money.”

–Tim Lynch, American Trucking Associations, testimony before a House transportation subcommittee, quoted in The Journal of Commerce, April 5, 2010.

“Memo to LaHood: Check the title on the office door. It says ‘Secretary of Transportation.’ We have precious little money enough for transportation projects. Roads and highways, and runways and ATC systems are, yes, transportation. Bike paths and trails where people can walk their Golden Retrievers are not transportation-they’re recreation. They have no earthly relationship with transportation systems for the nation’s commerce. And, by the way, what significant parts of our transportation system can be shifted to nonmotorized?”

–Mike Boyd, Boyd Group International, March 29, 2010 (