How to pay for the Nation's roads - a case for public private partnerships

How to pay for the roads still traveled

Notwithstanding increasing mass transit ridership and more prudent use of cars, automobiles will dominate U.S. transportation for decades to come. So how do we pay for roads? Variable tolling is one answer, and in the age of GPS the logical next step should also be explored: a fee on miles traveled everywhere by individual vehicles.
By Matt Rosenberg
October 21, 2008.

I had a telling conversation with an old friend several months ago, a devoted environmentalist who's a community college biology teacher living south of San Francisco in a pleasant small town abutting the Pacific. I don't recall how it came up, but she declared, "We've just got to get more people out of their cars." Then came a pregnant pause, followed by her admission that of course, because of where they lived and worked and their packed daily schedules, she and her husband drove themselves and their children everywhere.

I've been thinking about this lately because, well, the roads are still chock full of cars and trucks, and despite an uptick in transit and bicycle use, traffic is still congested here in metro Seattle, and metro regions nationwide. Meanwhile, U.S. surface transportation needs will require some $12.5 trillion (yes, with a "t") over the next 50 years, according to a landmark federal report issued this year. But the way we fund such projects is broken, relying too much on dwindling by-the-gallon gas taxes due to improved fuel efficiency, and ever more difficult local and regional sales tax hikes.

The historical trends show whopping increases in U.S. miles driven and gasoline supplied. We've gone from 2 million barrels of gas a day in the 1950s to more than 9 million per day by 2007, the U.S. Energy Information Administration reports. The U.S. Bureau of Transportation Statistics reports that U.S. vehicle miles traveled (VMT) multiplied more than fourfold from 1960 to three trillion in 2006. Though the term "highway" is sometimes attached to VMT, they are estimated monthly for all U.S. roads and streets, drawing from data gathered at 4,000 continuous traffic counting locations.

What of the future?

BTS projects that VMT will grow by more than half the current level to 4.7 trillion in 2030, while U.S. population grows about 23 percent from 2005 to 2030. In Washington state, annual VMT nearly doubled between 1980 and 2007, and is projected to rise another 54 percent by 2030.

In the four core counties of metro Puget Sound, daily VMT has more than doubled between 1980 and 2007.

During the oil and gas price run-up earlier this year, drawing considerable media attention were marginal decreases, of a few percentage points only, in monthly and calendar year-to-date U.S. VMT compared to a year ago. Even a slight dip in VMT draws notice in a time when some celebrate the end of suburbia and advocate "carectomies."

One can hope. These days, it seems that every seminar addressing surface transportation and every green "visioning" session includes earnest discussion of how to "reduce vehicle miles traveled." To the skeptic, the imperative sounds like one of those wishful commands sported on the seven-bumper-stickered Subaru Outbacks endemic to Seattle, like "World Peace Now," or "End Poverty." It's an appealing idea, sure. But the devil is in the details.
The infrastructure crumbles

In the meantime, there's still a pressing need to deal with roadway and bridge wear and tear, and increased congestion resulting from exponential VMT growth during a post-Interstate-building era when transportation investment chronically lagged. One reminder comes via veteran Chicago Tribune transportation reporter Jon Hilkevitch, who this month wrote that despite a five percent regional drop in VMT, traffic congestion there has remained high. One big reason:

Roadways were already so badly saturated with traffic before the recent spikes in fuel prices that the decline in miles traveled hasn't significantly loosened the gridlock.

Most daily trips in metro regions actually aren't to and from work, a point often overlooked. But many of those trips by their nature are less likely to involve transit. If you're going to Costco or Lowe's or Target, to your in-laws in Olympia or friends in Lynnwood, to curriculum night at your kid's school across town, or your cottage on Whidbey Island, you're most likely to be driving. Of total daily trips in the four-county core of the Puget Sound region, only 4 percent were via scheduled public transit, according to a 2006 Puget Sound Regional Council survey (second paragraph of p. E-6, here).

Work-related travel is somewhat more predictable, and there's more room, potentially, to change behavior and actually get some people out of their cars, some of the time. But progress there had been scant. The BTS also reports that — based on federal surveys and Census data — between 1989 and 2006 the percentage of U.S. workers for whom the principal means of transport to work was solo driving remained at 76. Those workers usually carpooling declined very slightly, to 10 percent of the workforce over the same 17-year stretch, and those usually taking public transportation decreased from 4.6 percent to 4.3 percent. Walking, biking, taxi, and "other" principal means of conveyance to work grew from a combined 4.7 percent of the workforce in 1989 to 5 percent in 2006, while telecommuting increased from 2.6 percent to 3.9 percent.

Numbers for 2007 and 2008 will likely show some decrease in solo driving to work, and a shade more transit use nationally, but without drawing up a whole new landscape, prospects remain iffy for reducing VMT or merely curtailing its growth.

As politically unpalatable as it seems now — and that would be "very" — some experts believe within a few decades we'll be tolling not just managed highway lanes with time- or congestion-related variable fees but tolling every mile traveled, via GPS devices planted on most if not all vehicles. "VMT tolling" or "mileage fees" have already been studied in Puget Sound and Oregon, and imposed on heavy trucks in Germany. This month, the Atlanta Regional Commission mused publicly about the unsustainability of the federal gas tax and the attractiveness of mileage fees. The Atlanta Journal-Constitution reported:

The board of the Atlanta Regional Commission is studying the idea of eventually dropping the federal gas tax, the main source of transportation funding, as it looks for "sustainable" transportation funding. The gas tax doesn't rise with inflation and gets weaker every year. The ARC, metro Atlanta's planning agency, hasn't approved a final statement on the issue and has no authority to implement it. The agency is giving its recommendations to Congress, as it begins to look toward renewing the multiyear federal transportation funding law.

The gas tax is charged as cents-per-gallon instead of cents-per-dollar, so the same size tank always reaps the same amount of money in taxes, no matter how much the price of gas goes up. In addition, as people get more fuel-efficient cars, they use less gas, and so pay less gas tax. The ARC suggests more research on one of the more talked-about ideas, an odometer charge, or vehicle miles traveled. Such a charge would tax drivers by the amount of miles they drive. The idea is for drivers to pay for the wear they put on the roads. Depending on how sophisticated the tracking is, it could send the tax paid directly to the jurisdictions whose roads the driver uses. To avoid getting weaker every year, as the gas tax does, it would have to be designed to rise with inflation.

For now, to untie Atlanta's grimly congested traffic, the state transportation department is pushing a $400 million-plus plan to convert the region's 44 miles of carpool lanes to electronically-tolled high-occupancy and toll (HOT) lanes, which are open to carpoolers and transit for free, and to solo drivers for a variable fee depending on time of day or congestion levels. Nearly half of the spending would be for added bus service and park-and-ride lots along the HOT lane corridors.

Closer to home, the rationale for considering mileage fees was also well-stated by Oregon officials. A report from ODOT to the Legislature makes the case for advance planning even if political acceptance isn't an immediate prospect.

The first question people ask about the pilot program for mileage fees is, "Why are you doing this?" The answer is simple. Oregon is preparing for the day when a substantial number of motorists are driving highly fuel efficient vehicles and no longer paying enough gasoline taxes to support their road system. ... that day may come about ten years from now. No one in Oregon proposes immediate implementation of an electronically collected mileage fee. Investigation and preparation for a new revenue system, however, is warranted because of the long lead time necessary for any change.

The Los Angeles Times, in an editorial last month titled "America's Broken Infrastructure," provocatively argued:

The vehicle mileage tax is probably the answer. Rather than taxing people based on the amount of gas they buy, it would tax them based on the number of miles they drive. Most likely, this would be done by installing tamper-proof devices in vehicles that would transmit mileage information to a tax office, though the data also could simply be confirmed by a certified mechanic. Some states are performing pilot studies on mileage taxes, but they're a long way from having all the bugs worked out — there are serious technical and logistics questions, not to mention privacy concerns (many people are uncomfortable beaming information about their driving habits to the government). Nonetheless, a mileage tax makes sense because it rightly puts the burden for building and maintaining roads on the shoulders of those who use them, even if they happen to drive high-mileage cars.

I'll admit to deep ambivalence about tolling every mile traveled. It's not about the privacy concerns, which to me seem exaggerated. But mileage fees feel like pervasive fiscal over-reach, no matter how reasonable the peak-hour charges and how meaty the off-peak discounts which would need to be part of any such package. I always eschew a car rental agreement that includes any kind of mileage fee. So I'm not supporting mileage fees here, and Cascadia Center has made no such endorsement, either. But we have hosted public conversations on the topic, and the national dialog on mileage fees will continue to gain impetus because tax funding for surface transportation will need to be leavened more and more with a variety of updated pay-as-you-go strategies.

Whatever one's feelings — and they are likely to be intense — mileage fees with off-peak discounts, and a robust but revenue-neutral national carbon tax could drive increased off-peak travel, greater transit usage, and tele-work.

How soon any of this will happen, if ever, is unclear. What's more clear now is that we like living in the suburbs and that driving is often a necessity. In the suburbs, housing costs are less, though bargains have crept toward the edges, which in turn increases VMT. Suburban public schools aren't always ideal but are much less problematic than urban public schools. More and more jobs are dispersed across metro regions, in varied suburban locales. Meanwhile, the vision of "living close to work" is reality only for a lucky, small slice of the populace.
The shortcomings of present gas taxation

Puget Sound voters will get a chance to weigh in on a $17.9 billion second-phase Sound Transit proposal next month that would extend the starter north-south light rail line in both directions and east, and add to existing ST express bus and commuter rail service. Other regional needs include replacing the shaky Alaskan Way Viaduct and the Highway 520 bridge across Lake Washington; fixing dangerous Highway 2 in Snohomish County; revising tangled interchanges and repairing cracked pavement on Interstate 5 in Seattle (a crucial but unfunded $2 billion job that's rarely discussed); and building key missing links in Pierce County, such as the Cross-Base Highway and the Highway 167 connector to the Port of Tacoma.

Funding the roads piece, and any major additions to the regional transit infrastructure beyond the pending "Sound Transit 2" plan, will be daunting. Regional taxpayers here aren't a bottomless well. And the federal role in surface transportation funding has been heading into permanent decline, as Atlanta's planners and the Los Angeles Times both pointedly note. The federal gas tax hasn't been raised since 1993, and no amount of Beltway jabber and finagling will produce any substantive hike in it soon, or quite possibly ever again. The federal gas tax trust fund was poised to land about $4.3 billion in the red by last month's end, but as Logistics Management reports, Congress threw the troubled account a one-year life preserver of $8 billion from the U.S. Treasury General Fund.

State gas taxes, which often support state bonding for transportation projects, are losing buying power, too. Oklahoma's road and bridge bonds are getting pricier because of tighter credit. Connecticut couldn't find a refinancing deal for highly-rated transportation project bonds worth nearly half a billion dollars, a never-before challenge for a state with serious surface transportation needs. Syndicated columnist Neil Peirce writes in The Seattle Times, "The Wall Street fiscal crisis effectively shut the state-local government sector out of borrowing." Well before that storm hit, state transportation project budgets had already been smacked by sharply rising costs for construction materials and equipment fuel, plus a tightening global labor market. India, China, and other fast-developing nations are on a global road building binge.

It's true that a proposed U.S. infrastructure bank could raise some $60 billion over 10 years for deserving projects. That'd be a start, but as Congressional Quarterly reports, the National Surface Transportation Policy and Revenue Study Commission, in a major report issued earlier this year, said $225 billion per annum is needed for the next 50 years for repairs and upgrades to meet future needs. That's $12.5 trillion. The commission noted that current expenditures are less than 40 percent of their recommended yearly nut and that future funding will need to be closely tied to cost-benefit analyses and performance-based outcomes. Expect some major wrangling next year when the new Congress takes up reauthorization of the surface transportation bill, which is rather hopefully named the Safe, Accountable, Flexible, Efficient, Transportation Equity Act, a Legacy for Users — or SAFETEA-LU to you. The commission's scarifying estimate dovetails, roughly, with one by the American Society of Civil Engineers: Just to get moving on vital projects, the nation's infrastructure needs an infusion of $1.6 trillion over the next five years.

A promising development, as much or more for its cost-saving peak-hour rationing incentives as for its revenue-raising potential — is variable-fee highway tolling, now spreading across the U.S., often in so-called HOT lanes. A HOT lane pilot project is under way on Highway 167 in metro Puget Sound, and a federal grant to help fund the Highway 520 bridge replacement requires state legislative approval of pricing on 520.
Even Democrats embrace public-private partnerships

Whether Puget Sound decides to move toward regional variable-fee highway tolling, there's another important tool we're going to be hearing more about: public-private partnerships, or P3s, which help share taxpayer risk and dramatically speed up project delivery. They're not a solution for every occasion, but they deserve leeway to support more of our region's and nation's staggering surface infrastructure needs. P3s are widespread in Europe, Canada, and Australia and now are beginning to gather steam stateside.

High-profile Democrats such as Pennsylvania governor Ed Rendell, House Speaker Nancy Pelosi, Los Angeles Mayor Antonio Villaraigosa, and Chicago Mayor Richard M. Daley are all supporters. The new, Democratic Governor of New York, David Paterson, is interested in transportation P3s, too.

P3s need not involve the sale of public assets such as highways and bridges or transit systems but, rather, the leasing of such facilities, which then yield toll or fare revenue for the private operators. These operators are not reviled foreign sovereign concerns. They are either transit service firms or special "private" infrastructure investment groups which may be headquartered in Europe or Australia but are increasingly bankrolled by U.S. public employee union pension funds or those of building trades unions. Those funds have lost some value in their stock portfolios lately, but they're still flush and see infrastructure as good risk diversification for their long-term obligations to pensioners.

The Washington State Investment Board, representing a slew of state employee retirement funds, plans to invest 5 percent of its sizeable portfolio in infrastructure. The board explains here (p. 2) that it has come to view "tangible asset types" (other than real estate and) including infrastructure as capable of producing "long-term" and "high-quality" revenue streams. A number of others public employee union pension funds in North America have invested in infrastructure, and more have announced similar plans.

They tend to go with the private infrastructure investment groups because directly buying state highway bonds doesn't meet their fiduciary duties to pensioners. Interest earnings on state bonds are tax-exempt, so interest rates are correspondingly a bit lower. Yet public pension funds are already granted a tax exemption on interest earned, so unlike individual investors they have no financial incentive to go for the state bonds. In fact, they have a disincentive, as Robert Poole of the Reason Foundation explains.

For the WSIB and most other public-employee pension fund managers, investing in privately held companies is simply a part of smart portfolio diversification and risk management. As of last year, WSIB had already earned $9.7 billion in private equity profits since 1981 and had one-seventh of its portfolio in private equity.
The proliferation of P3

Can P3 investments that are paid off in toll revenue still prove viable as worries persist about gas prices and road travel volume? In a word, yes. Travelers value their time most of all; private vehicles are usually more direct, flexible and faster than transit; and tolls for managed lanes guaranteed to maintain traffic flow of 45 mph or higher yield a valued benefit, like housing, utilities, and groceries. This perspective cuts across income levels. UCLA and USC researchers in a case study released this year found a sizable percentage of lower-income drivers used HOT lanes and that it was less regressive in terms of tax policy for them to pay related tolls versus sales taxes for transportation projects.

Fears tend to be overblown about runaway toll rates to cover P3 finance costs and profit margins. Governments retain control over P3 toll rates and transit fares. The contracts between private partners and governments are long-term, usually 35 years or more. That's plenty of time to make the margins. In the meantime, P3s deliver transportation projects sooner rather than later or not at all, thus providing quantifiable economic benefits that are rarely counted by critics.

A slew of P3s and traditional-procurement projects studied by The University of Melbourne showed the P3s were up to 30.8 percent more cost-efficient from inception; that cost overruns were nearly non-existent for P3s; that they were completed faster, even when large; were far more transparent; and their benefits tended to be underestimated because the hefty value to the public of quicker project completion and integrated professional management aren't part of the present calculus.

Cal Marsella, the Executive Director of Denver's Regional Transportation District, which is now pursuing a P3 bid process (and, yes, perhaps a small sales tax hike) to complete an over-budget regional light rail program within the original timeline, states in this presentation that P3s can save 10 percent to 25 percent in the design-build phase and 10 percent to 30 percent in the course of operations and maintenance.

This approach to P3s emphasizes bundling of design, construction, operations, and maintenance services provided by private consortiums of industry-leading transportation firms. The payments occur over time and can be pegged to strict contractual performance standards. Exemplified in British Columbia, it's a strategy well-suited to controlling cost overruns during construction, meeting construction deadlines, limiting operations and maintenance costs after project delivery, and ensuring good service. Partnerships BC has employed design-build-operate P3 contracts, or some variation thereof, to construct a new rapid rail line to the airport and the suburban center of Richmond, to rebuild the treacherous road north to Whistler before the 2010 Winter Olympics, and to develop an electronically-tolled bridge across the Fraser River in Vancouver's east suburbs.

The American Public Transit Association in a white paper on public transit P3s says they're no silver bullet but need to be encouraged as part of the financing mix and as a good management tool. Europe, Asia, Australia, and South America are far ahead of the U.S. in implementing public transit P3s, APTA says, although Houston, the Bay Area, and Denver are highlighting the approach. Private investment in transit-oriented development is a related tack and should be encouraged, according to APTA, by working with developers to learn their needs and by encouraging value-capture strategies pegged to new development around transit stations. To facilitate broader consideration of highway and transit P3s, APTA's P3 task force has drafted model legislation for state governments to consider.

Another organization, the National Council For Public-Private Partnerships, holds a special conference this week on transit P3s, including officials from the regions of Boston, Miami, Atlanta, Dallas, and Charlotte, as well as federal figures and private firms.
Zero miles, shared miles, efficient miles

While the U.S. struggles to fund the surface transportation infrastructure backlog and shift the balance from fossil-fueled vehicles to greener alternatives, the world is undergoing a vehicle population boom. A New York University study projects total vehicle stock will more than double globally between 2002 and 2030, with the highest annual percentage growth rates in vehicles per 1,000 population in Asia and South America.

BTS data show that since 1960, the number of passenger vehicles in use globally has about quadrupled, while the U.S. share of that total has decreased more than five-fold. Global commercial truck population is five times greater over the same period, with the U.S. share holding steady at less than a third.

However, in the U.S. we tend to drive longer distances and use a disproportionate share of available fossil fuels. The holy grail in the auto industry is substitution of renewable-source electricity for fossil fuels, in "flex-fuel" plug-in hybrid cars. The vision is that they'll be able to run not only on clean electricity (itself a major undertaking) but also net-green second generation bio-fuels, which don't require acres of food-producing farmland to grow.

GM, Toyota, Ford, and Chrysler are among the automakers focused on bringing plug-in electric flex-fuel hybrids to market in the next few years, with lithium ion battery packs. Those haven't been fully debugged, but engineering teams are working hard to do so. Congress has passed a tax exemption of up to $7,500 per vehicle for plug-in buyers, and large government and corporate fleet purchases would allow manufacturers to scale up production for the masses.

There are still environmental and financial reasons to try to engineer boundaries on growth of vehicle miles traveled. A good framework was provided last month in Redmond by Microsoft Chief Environmental Strategist Rob Bernard at Cascadia Center's "Beyond Oil: Transforming Transportation" conference. (TVW video of Bernard and a full transcript of his remarks.)

Bernard set out a hierarchy of descending transportation preferences that he calls "zero miles, shared miles, and efficient miles":

*

The first priority entails schedule-juggling and trip avoidance through tele-work from home, with small meetings as needed in locales near workers' home bases. More than a few Microsoft employees have discovered they can meet near home at a coffee shop rather than drive to Redmond, Bernard said. An astounding 40 percent of the workforce at British Telecom (a Microsoft client) work from home regularly, Bernard said.

With current virtual conferencing tools, and an emphasis on "deliverables" from tele-workers, many other employers — albeit not those in fields such as manufacturing, construction, or retail — could raise their percentage of tele-workers.
*

"Shared miles" would cover public transit, but at present transit routes here just aren't convenient for that many people, said Bernard. He evangelized for an alternative of matching ride-sharers on the fly through smart carpooling, using networked real-time data on the shifting locations and schedules of riders. The same basic principles could help better consolidate freight shipments, said Bernard.
*

"Efficient miles" entail alternative fuel breakthroughs and more of the real-time traffic data purveyed by companies such as the Microsoft spin-off Inrix, of Kirkland, to help drivers optimize routes and departure times.

As far as behavior change around driving, there's a long way to go. If we were constantly reminded of the cost to the infrastructure every time we used it, would that change our actions enough to make a difference, a "zero miles more often" difference? It's not unimaginable.

For surface transportation funding, the federal teat is running dry. States and especially regions will shoulder the brunt in coming decades as we try to catch up before the rising tide of population threatens to overwhelms us. So we're going to have to do a few things differently. We can start sooner, or we can start later. But the longer we wait, the higher the price.

Matt Rosenberg is a senior fellow at the Cascadia Center for Regional Development, a transportation think tank that is part of the Discovery Institute in Seattle. E-mail him at mattr@discovery.org.
View this story online at: http://crosscut.com/2008/10/21/transportation/18586/