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":

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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.
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"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.
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"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/

Dialling for Dollars in Seattle

Seattle eyes other sources to pay for big road project

By LARRY LANGE
P-I REPORTER

Left without $323 million in cash because a ballot measure failed, Seattle is looking to sources like private landowners to finance the widening of Mercer Street and the Spokane Street Viaduct.

The Nickels administration proposes to tap part of its recently enacted parking and employment taxes to help make up the shortfall.

Voters in November rejected the Proposition 1 roads and transit ballot measure, which included funding for the Mercer and Spokane projects and a railroad overpass on South Lander Street.

All three projects were justified as ways to improve street-level traffic flow during construction to replace the Alaskan Way Viaduct. Looking for support, administration officials said Friday they're focusing on finding more money for the Spokane and Mercer projects, though Lander remains a priority.

Of the newly estimated $192.9 million cost of the Mercer widening, the city now hopes to raise $36.2 million from private sources in the neighborhood, possibly from mitigation fees or providing needed property or construction easements. Officials said they've not proposed a specific method yet.

Bob Powers, deputy director of the city Department of Transportation, said the plan is to raise another $70.6 million in bonds using money from the 2006 street-improvement tax levy and from city parking and employment taxes, which officials said are producing more cash than anticipated.

Another $26 million, for utility relocation and improvements, would come from city agencies, and the city will seek $51.7 million in additional state and federal grants. About $8.4 million already has been secured.

The Mercer cost estimate has increased $78 million since late last year, chiefly because of inflation and advanced design work that now includes property costs. The project would widen Mercer between Dexter Avenue and I-5 but not include reconnecting streets above Aurora Avenue.

Some $78.9 million has been secured for the Spokane widening, now estimated to cost $168.5 million, which includes $3.4 million from the Port of Seattle; new ramps would connect the Spokane Street Viaduct to the waterfront.

The new plan, subject to approval by City Council members, is to find another $40 million from state and federal sources and $49.6 million from the street-improvement, parking and employment levies. Inflation and advanced design have increased the estimated Spokane project cost by $16.2 million since the last quarter of 2007.

The $26 million in utility costs for the Mercer project would be paid for city-wide. Officials said that's normal practice. They also said the new plan wouldn't take money from other street work to be financed by the 2006 transportation levy.

A city study said the Mercer widening would decrease some travel times and increase others. Powers said it will improve transit service and "benefits all modes of transportation."

Seattle City Council President Richard Conlin and Transportation Committee Chairwoman Jan Drago both said they were pleased the administration had developed a plan. Conlin wouldn't predict approval before reviewing it. Drago said her committee will discuss the proposal April 1.

Cascadia plan for the Puget Sound after the failure of Prop 1

Transportation Action Plan For Puget Sound

By: Cascadia Staff
Cascadia Center
November 15, 2007


Transportation Action Plan for Puget Sound
Cascadia Center For Regional Development
November 15, 2007

ON NOVEMBER 6, 2007, Puget Sound voters rejected Proposition One, a "roads and transit" ballot measure that many argued cost too much for too long and delivered too little. In the wake of what some view as a dramatic setback, however, we see the opposite: The failed ballot measure is an opportunity for the region to begin to confront and solve our transportation challenges once and for all. These challenges in recent years have been shaped not only by population and economic growth in Puget Sound, but also by climate change and growing U.S. dependence on foreign oil. More than ever before, what we do here at home in Washington state to boost mobility while protecting the environment will be influenced by - and will necessarily influence - our nation and world. We must embrace this opportunity.

Central Puget Sound and the state of Washington must begin by squarely embracing innovation. Transportation finance, decision-making, technology and environmental protection must be viewed through the lens of the future that is already upon us - one in which relying primarily on big-ticket ballot measures (and public resources only) has become as dubious as the entire roads versus transit debate. As our region's population swells a projected 52 percent during the next 30 years, we will need to spend billions on both roads and transit. We must ensure projects really serve their highest and best uses: providing reliable mobility of people and goods, and helping to stimulate economic development.

We must repair and dramatically alter the way transportation is addressed in the region, especially in our urban areas. Two important oversight panels, appointed by two separate governors, concluded that our multiple, overlapping local and regional transportation agencies have hurt, not helped, accountability and effectiveness. The conclusions reached by the Regional Transportation Commission and the Blue Ribbon Commission on Transportation, appointed by Governors Gregoire and Locke, respectively, should be reexamined.

But the steps we take next are not just about our region. Smart choices we make on transportation fuels can help change the world around us. Today, the price of oil, which was $23 a barrel five years ago, is approaching $100 a barrel. Drivers in Washington state now pay 65 cents per gallon more than they did only one year ago. Our addiction to oil, which fuels 97 percent of our transportation needs, is not only bad for the environment, but is a clear national security risk. As James Woolsey, director of the CIA during President Clinton's administration, says, we are in effect financing both sides of the war on terror. Flexible fuel, plug-in hybrid electric vehicles would dramatically cut greenhouse gas emissions from transportation and cut our addiction to foreign oil. The Pacific Northwest, steeped in innovation, should be the first U.S. region to embrace this technology.

Each major part of a regional transportation strategy - finance, leadership, technology and environmental protection - must support the whole. The Western Washington and Central Puget Sound regions must take a comprehensive approach to designing our transportation future. Starting no later than January 2008, we recommend that our region's leaders begin engineering sweeping changes in transportation. To meet the bracing challenges ahead, political and business leaders must unify around a shared and truly progressive vision. Further discussions are needed, but we believe the key elements of the right plan are here, in our Transportation Action Plan for Puget Sound.

THE WAY FORWARD: TRANSPORTATION ACTION PLAN FOR PUGET SOUND

SR 520, ALASKAN WAY VIADUCT AND I-5 REBUILD - USING TOLLING & PUBLIC EMPLOYEE PENSION FUND PARTNERSHIPS

TOLLING

# Legislature authorizes a toll on the SR 520 Bridge in 2009 and (for our proposed) Alaskan Way Viaduct bypass tunnel. Small portion of tolls earmarked for high capacity transit on the 520 corridor and surface transit enhancements on Seattle's Waterfront.


# Expand tolling in 2010 to the express lanes only on Interstates 5 and 90 initially. Treat these as HOT (high occupancy-toll) "premium lanes."


# Reconfigure express lanes within existing I-5 footprint to three bi-directional express HOT lanes allowing two-way flows and eliminating major bottlenecks at Northgate and the I-5/I-90 interchange when directions are reversed.


# On I-90, tolling can pay for expanded Bus Rapid Transit (BRT) service rather than light rail, and cross-subsidize the 520 corridor. New passenger ferry routes in the King County Ferry District Plan should also be factored in the cross-lake non-SOV strategy.


PENSION FUND PARTNERSHIPS

# Change state law to authorize "alliance contracting" and project cost-sharing between WSDOT and public employee and building trade union pension funds for SR 520, Alaska Way Viaduct bypass tunnel replacement and I-5 rebuild.


# We recommend, wherever possible, using union and public employee pension funds as primary partners for major public highway/transit projects - with foreign or private equity investors as partners only as necessary, and only under carefully-structured terms.


# In any such partnerships, the public sector should retain control of transportation assets and toll rates to protect system users and ensure the tolls also benefit transit. (Union pension funds were used previously in construction of the Pacific Place garage.)


# British Columbia offers a remarkable example of how private equity capital was leveraged with public resources to finish major infrastructure projects like expansion of Sea to Sky Highway before the 2010 Olympic Games


HOT LANE/BUS RAPID TRANSIT/LIGHT RAIL NETWORK (KING/PIERCE/SNOHOMISH COUNTIES)

# Voters approved the "Rapid Ride" BRT enhancements in King County last year. Why not expand it to the three counties through partnerships with Sound Transit and its successful ST EXPRESS bus service? Funding could come through a portion of our proposed regional HOT lane tolls, as well as potential sales and MVET taxes levied at regional level.


# Amend I-405/SR 167 master plans to extend 167 to Port of Tacoma and construct one additional HOT lane (rather than two new general purpose lanes) from Renton to Bellevue on I-405. They would be twinned with existing HOV lane to provide two continuous HOT/HOV lanes adjacent to non-tolled, general-purpose lanes from Lynnwood to Tacoma. Operationally, they would fit well with the state's current billion dollar investments in I-405 and SR 167.


# By 2020, central Puget Sound would be ringed by a complete HOT/BRT system with expanded park and ride lots serving as major transportation gateways.


# Sound Transit should complete light rail to Northgate per the 1996 Sound Move plan. (Note: Portland's Tri-Met partnered with Bechtel to extend the rail line to Portland International Airport.)


SR 520/I-405: TRANSIT HUB, CORRIDOR AND GATEWAY

BRT AND UPGRADED PARK AND RIDES

# Bus Rapid Transit should get a new look on the East-West State Route 520 corridor. Examine potential funding partnerships with union/public employee pension funds, private developers and major employers.


# Link the Microsoft Connector, and other private and public transit choices to greatly expand Park and Ride lots such as South Kirkland. Include electrification for plug-in hybrid vehicle recharge, use development fees and provide concierge services.


I-405 CORRIDOR: SAVE EASTSIDE RAIL

# In the adjoining I-405 north-south corridor, regional leaders should ensure that lightweight, biofuel-burning, bike-toting Diesel Multiple Unit self-powered rail cars ply the BNSF eastside rail line - adjacent to a string of upgraded park and ride lots modeled after the South Kirkland facility. The enhanced park-and-rides and DMU rail service would complement the planned bike and walking trail paralleling the rail line.


# Given the electoral meltdown of Prop. 1 and its hallmark extension of light rail to the north, south and east, it seems unbelievable to us that public agencies would agree to the ripping up of 31 miles of useable north-south rail track from Renton to Snohomish for a recreational trail with a vague promise to reconsider multi-billion dollar "high capacity transit" in 20 years-plus. Once the rail is ripped out it will never return. This is the result of a signed Memorandum Of Understanding between the Port of Seattle and King County.


# Cascadia has hired respected BNSF retired operations executives to walk the entire 42-mile corridor (the 11-mile Woodinville-Snohomish section would remain in use for freight rail) to see how much it would cost to upgrade the track for Diesel Multiple Unit trains going 40 miles per hour. Private sector developers would contribute to station development.


# Sound Transit has ample current funding to contract for train and BRT service between East King and Snohomish counties. Commuters from Snohomish County and South King County could transfer at the Park and Ride from the north-south rail and trail corridor to the East-West 520 BRT corridor. But saving the Eastside rail corridor will require quick action.


FREIGHT RAIL INVESTMENT TO BOOST I-5 COMMUTER RAIL CAPACITY

# State-recommended investments in Stampede Pass would allow faster movement of freight between the Ports of Seattle and Tacoma and the eastern U.S. This would also allow for expansion of Sound Transit's Sounder commuter rail between Everett and Tacoma by freeing up north-south track capacity. The proposed Eastside DMU rail line along I-405 (see above) would connect via existing track to the more westerly and parallel Everett to Tacoma line.


REGIONAL TRANSPORTATION ACCOUNTABILITY

# For five years, Cascadia and others have pushed for a consolidation of the myriad of transportation agencies in the region under a single unified board of directors, citing the successes in Vancouver, BC, Portland, San Diego and Denver in passing major regional transportation investment programs. We are always told by the establishment, "we don't have a leadership problem, we have a funding problem." Now, following Prop. 1's defeat, we have a political problem; elected leaders going in different directions.


# A Regional Transportation Commission was appointed by the legislature and Gov. Gregoire, and chaired by John Stanton and Norm Rice. Its strong and well-reasoned recommendation for a unified regional transportation board of directors in Puget Sound passed the state senate in 2007 but was blocked in the House. The Stanton-Rice report should be the basis for reforming central Puget Sound transportation leadership. We need a unified, single board of directors with powers to plan, fund and prioritize projects and consolidate agencies (similar to Vancouver and Portland).


# A regional transportation board of directors should:

1) Consolidate current regional transportation agencies;
2) Consist of elected and appointed members;
3) Include an advisory council;
4) Propose transportation projects and funding voters will approve
5) Maintain oversight and accountability on current projects, while continuing to plan for the future.


# County borders are increasingly irrelevant. Alter MPO/RTPO statutes to establish regional transportation decision-making bodies for Central Puget Sound (King, Pierce, Snohomish, Kitsap, Thurston), North Puget Sound (Snohomish, Skagit, Whatcom, Island, San Juan), and Southwest Washington - for the purpose of multi-county transportation project planning and funding. Snohomish could be part of two different regional groups, if it so chooses.


# The three regional transportation decision-making bodies would be tasked to coordinate and pool resources with WSDOT for these programs: I-5 enhancements (including cross-Columbia River bridge), freight and passenger rail improvements (coordinated with British Columbia and Oregon), multi-county and special needs transit, and corridor-based technology improvements (i.e. truck parking, diesel emission reduction and alternative fuel/plug-in stations at I-5 highway rest areas.


FLEX FUEL, PLUG-IN HYBRID ELECTRIC VEHICLES

# Cascadia Center serves on the Governor's Climate Action Team, and recommends that state and local government fleet purchases of plug-in hybrid electric vehicles should be encouraged and expanded. Either through legislative action or executive order, Washington's state government should commit to purchasing plug-ins when they become available.


# We recommend that funding be made available for state and local governments to convert standard hybrids to plug-ins. These vehicles should work with the grid, and funding would be necessary to assure they are compliant.


# Another objective should be to establish an alternative fuels infrastructure at park and ride lots, interstate truck stops, and passenger vehicle rest areas.


PASSENGER FERRIES

# The legislature should enable a Sound-wide passenger-only ferry inter-local agreement among ports, transit districts, local governments, private operators, and the state ferries to pool resources for passenger-only ferries and coordinate regional routes. The PSRC study in progress will further articulate how a regional passenger-only ferry system can best be facilitated.


# King County has formed a passenger-only ferry district and Pierce, Skagit and Whatcom also operate ferries. All would benefit from coordination at the Sound level while allowing local communities to custom design their passenger-only ferry service and encourage public-private partnerships.


# In addition to providing direct non-SOV connections between growing cities in Puget Sound (Return of the Mosquito Fleet), new technology passenger ferries could provide more boat building jobs to our urban and maritime industries and - as in the Bay Area - an emergency transportation network in case of an earthquake.


TRAFFIC SIGNAL SYNCHRONIZATION

# More than 400 transportation projects have been funded by the 2003 and 2005 state gas tax increases, but some are clearly recognized to be proving not feasible due to a range of factors. The legislature should identify those projects and redirect the money to regional traffic signal synchronization projects, which will help reduce traffic congestion in the sort term. The Puget Sound Regional Council's new Traffic Operations Committee has an excellent framework for action, including test results from recent corridor coordination efforts.


Direct comments to Bruce Agnew (bagnew@discovery.org), Steve Marshall (smarshall@discovery.org), Mike Wussow (mikew@discovery.org), and Matt Rosenberg (mattr@discovery.org).

San Diego successfully Contracted-out its Bus lines

San Diego's Competitive Transit System


People know about San Diego's sunny climate, ocean vistas, and world-class zoo, but it also has a great transit system. Why? Because, San Diegans experiment with competitive processes to get the most bang for their buck. The San Diego transit system believes that competition creates incentives that improve efficiency and customer service. They have proven this proposition year in and year out for over 15 years.

San Diego County, like King County, has a large, widely dispersed population. Its Metropolitan Transit District includes 2 million residents spread out over 570 square miles. Like King County, San Diego faces growing transit costs, increasing at a pace too quick for farebox revenues alone to cover. Growing taxpayer subsidies make up the deficit. Unlike King County however, San Diego over the last 17 years has reduced per hour operating costs by over 30%, while increasing service by 46%. How did they do this? Competition.

Creating A Competitive Environment

In the wake of California's 1978 taxpayer revolt, public agencies across the state forced themselves to operate more efficiently. San Diego Transit contributed to this in 1979 by creating a competitive contracting program for some of their bus service. In 1985, San Diego's successful program inspired further action with a formal policy of annually reviewing their bus service for contracting opportunities began.

On the surface, San Diego's transit system looks familiar: riders find bus routes near their home or workplace, board the bus, transfer as needed, paying a single fare for the whole trip. What is unique and what many riders don't know is that they may be traveling on a privately-operated bus.

Each year, San Diego's Metropolitan Transit Development Board (an organization similar to Puget Sound's Regional Transit Authority) reviews its routes and determines which, if any, should be let for competition that year. Transit agency managers, representatives from the private sector and organized labor, and citizen groups all participate on a committee that reviews routes. What kinds of opportunities does the review committee look for? Those routes which perform poorly, new routes, evening and weekend service, and whenever major route restructuring occurs. The review committee then invites qualified companies and public transit agencies to submit bids and a contract is awarded to whomever can provide the highest quality service for the lowest price. Typically, each contract is for a three-year term with a two-year extension option.

MTDB's contracting policies also extend to other functions. Private companies contract with MTDB for a wide range of services from maintenance of buses and bus stops to insurance and financial auditing services.

How Competition Performs

Contracted service operators handle about 68% of routes with at least six private firms currently holding contracts. Overall, 24% of the ridership travel on buses operated by contract. The primary public transit agency, San Diego Transit, operates the remaining routes at an average cost of $5.30 per revenue mile. Contracted routes, on the other hand, average $2.53 per revenue mile. That saving is, of course, a direct taxpayer saving.

Service contracts specify performance standards, enforced through financial bonuses and penalties which are very often shared by every employee of the contractor. If a driver leaves a stop ahead of schedule they are levied a $50 penalty. Other penalties are given to drivers who are out of uniform, or buses that are not cleaned and maintained properly. These financial incentives, which are not meaningful for most other public agencies, ensure much higher levels of performance.

Another important result of MTDB's contracting policy is how it operates as a public agency. An overall atmosphere of competition permeates MTDB's operations, making the agency not so much an all-out operator of public services, but more of a broker of services to organizations that can perform those functions at higher standards of quality and efficiency. Furthermore, those traditional services still operated by the large public carrier, San Diego Transit, have become much more efficient from having to compete with the private sector.

Implications for the Puget Sound Area

Could a competitive contracting policy work in the Puget Sound area? The record in San Diego shows that MTDB succeeds by gradually implementing competition, always looking for opportunities, but keeping disruption to riders and employees to a minimum.

One factor that makes MTDB's process successful is its status as a regional authority that coordinates and contracts with both private companies and San Diego Transit, the main public carrier. It is not, itself, bidding against the private sector. It is not comparable to King County Metro Transit in that respect, but could be more directly comparable to RTA.

The main obstacle to competitive contracting in the Puget Sound region is overcoming organized labor's concerns. San Diego, while not having as strong a labor movement as Seattle, still provides instructive lessons on how labor can cooperate in competition. In the entire history of contracting in San Diego there have been no lay-offs as a result of competition. MTDB is determined to see that loss of drivers occurs only with the attrition rate. Competition actually results in more union members, as San Diego invests the savings from contracting into more service and therefore more drivers.

Conclusion

By creating a competitive environment, and thus getting the best possible service at the best possible price, San Diego has found a means to limit demands upon taxpayers while expanding service to meet the public's needs.

Protecting the Poblic Interest in Public Private Partnerships

The Value of Public/Private Partnerships
Response on Congressional Resistance to States Using Public/Private Partnerships in Transportation Financing

By Michael Ennis
Director, Center for Transportation
January 2008

Value of Public/Private Partnerships

In light of growing highway demand and the shrinking value of gasoline tax revenues, states are finding help in the growing trend of financing transportation infrastructure through public private partnerships (PPPs).

PPPs are contractual relationships between the public sector and a private entity. These partnerships generally allow a company to build, operate and maintain transportation infrastructure. In return, the company is sometimes authorized to collect a toll on the road for a specified length of time.

Other forms of partnerships allow the public to retain full control of the asset once the private contribution is fulfilled.

There are many benefits associated with a PPP. They include leveraging private dollars for public use, shifting risk from taxpayers to the private sector, and lower costs.

In January, Washington Policy Center published, "The Case for Public/Private Partnerships in Transportation Planning," which explains the many different forms of PPPs and their benefits.[1]

In recent years, the United States Department of Transportation (USDOT) has worked with states to enter into these partnerships with the private sector as another financing option for transportation projects. Highlighting this effort is the creation of the National Strategy to Reduce Congestion, which includes a PPP element.

Former Transportation Secretary Norman Mineta remarked, "We will encourage more states to find ways to open up their transportation infrastructure to private investment opportunities…. Our goal will be to greatly expand the list of states that have flexible laws to permit greater private-sector involvement in transportation projects."[2]

Congressional Opposition

But in a recent letter to state transportation leaders, Congressman James Oberstar, Chairman of the House Committee on Transportation and Infrastructure and Congressman Peter DeFazio, Chairman of the Subcommittee on Highways and Transit ostensibly want to eliminate, or at least limit this new tool for states.

They warn that partnerships may not fully protect the public interest and jeopardize the integrity of the national highway system. The letter begins,

"We write to strongly discourage you from entering into public-private partnership ("PPP") agreements that are not in the long-term public interest in a safe, integrated national transportation system that can meet the needs of the 21st Century. Although Bush administration officials have lauded PPPs at every turn, the Committee on Transportation and Infrastructure of the U.S. House of Representatives believes that many of the arrangements that have been proposed do not adequately protect the public interest. The Committee will work to undo any state PPP agreements that do not fully protect the public interest and the integrity of the national system."[3]

This reversal of Congressional support not only jeopardizes dozens of existing partnerships across the country but also suggests doubt on the future of PPPs.

Analysis

There is little doubt that private sector participation is an effective instrument for building transportation infrastructure. Many states are facing the critical reality that without the ability to leverage private dollars, funding becomes insurmountable. And state policymakers are in the best position to decide which projects are important and how best to pay for them.

Unfortunately, the letter by Congressman Oberstar and Congressman DeFazio suggests that state policymakers are incapable of making the right decisions for their own citizens and somehow require the federal government's assistance in correcting themselves.

The letter goes on to define two main standards that decide whether a PPP meets their approval, 1) Does the PPP meet the long-term public interest? and 2) Does the PPP risk the integrity of the national highway system?

The problem is these measures can be construed so broadly that virtually any partnership could fail their test.

1) Does the PPP meet the long-term public interest?

The definition of a public interest can mean anything to anyone. Dr. Stephen King of the Public Interest Institute writes that some political theorists challenge the concept of the "public interest" because of its "vagueness and its need to be elastic, applicable to as many individuals and groups as possible." It is this "political elasticity" that Dr. King explains, "forces [the concept] to be effectively meaningless."[4] In other words, Congressman Oberstar's "public interest" test could be interpreted to render any public/private partnership outside the public's interest.

2) Does the private sector risk the integrity of the national highway system?

There has never been a centralized landlord for the national highway system. These roadways "have always been under diverse control of the 50 state DOTs, metropolitan planning organizations, counties, cities, public toll authorities, bi-state agencies, and a few private facilities," says Robert Poole and Peter Samuel of the Reason Foundation.[5] In every example across the country, the private partner must meet strict permitting, design, construction and maintenance requirements defined by the state and federal government. Diversifying the financing model for public transportation infrastructure does not jeopardize an already decentralized roadway system.

Furthermore, usurping the freedom of states to enter into legal and contractual arrangements to build local infrastructure perhaps violates state's rights and the spirit of the Tenth Amendment of the Constitution.

The amendment recognizes local rights by declaring, "The powers not delegated to the United States by the Constitution, nor prohibited by it to the states, are reserved to the states respectively, or to the people."[6]

The American Legislative Exchange Council (ALEC) agrees and opposes the Congressional effort to limit these partnerships. "It would be almost totally unprecedented and a violation of the principle of federalism for Congress to begin micro-managing the construction and funding of state highways at a time when our state governments are facing increasing demands for new roads."[7]

Conclusion

Congressman Oberstar and DeFazio's letter is a unique window into a political debate that is taking place at the federal level on whether the private sector has a role in transportation financing and if so, whether the federal government should have a regulatory role in the process.

The current administration and the USDOT have encouraged states to make it easier to enter these agreements and they have been tremendously effective at expanding local infrastructure. The market of public/private partnerships, if allowed to naturally evolve, is a powerful financing tool that states leaders choose to use to keep pace with the rising demand on their road system.

A good manager does well when his leadership eliminates barriers-to-success within an organization. Much like this manger, the federal government's role should work with the same objective. Instead, Congressman Oberstar and Congressman DeFazio are working to build barriers, rather than remove them.

The choice of whether or not to engage the private sector in public policy should rest with local leaders, not a single, centralized bureaucracy in Washington DC.

[1]http://www.washingtonpolicy.org/Transportation/LegMemo_publicprivatepartnerships.html

[2] http://www.dot.gov/affairs/minetasp051606.htm

[3] Letter from James L. Oberstar, Chairman, Committee on Transportation and Infrastructure and Peter A. DeFazio, Chairman, Subcommittee on Highways and Transit, May 10, 2007.

[4] Stephen M. King, Ph.D., "What Is 'The Public Interest?'" Public Interest Institute: Facts & Opinions, Vol. 13, No. 2, May 2007.

[5] Robert W. Poole & Peter Samuel, "Federal Interference in State Highway Public-Private Partnerships is Unwarranted." Reason Foundation, May 22, 2007.

[6] http://usinfo.state.gov/usa/infousa/facts/funddocs/billeng.htm

[7] http://www.alec.org/2/3/federal-affairs-news.html

Congestion relief must be top priority for transportation policy

Five Principles of Responsible Transportation Policy

By Michael Ennis
Director, Center for Transportation
January 2008

Washington Policy Center encourages five principles of responsible transportation policy to help guide policymakers in returning to a system that provides people's freedom of movement.

Tie spending to congestion relief
Respect people's freedom of mobility
Invest resources based on market demand
Improve freight mobility
Use Public/Private Partnerships

1. Tie spending to congestion relief
Congestion relief is the most basic tenet in transportation policy, yet most people are surprised to learn it is no longer a priority in Washington state.
In 2000, Washington's Blue Ribbon Commission on Transportation identified several benchmarks to measure the effectiveness of the state's transportation system. These performance measures were very specific and some of them were adopted into law. They include:

Traffic congestion on urban state highways shall be significantly reduced and be no worse than the national mean.

Delay per driver shall be significantly reduced and no worse than the national mean.
However, during the 2007 Legislative Session, the legislature passed Senate Bill 5412, which repealed these precise benchmarks. Instead, the legislature substituted five broader policy goals: Preservation, Safety, Mobility, Environment and Stewardship.[1]

Likewise, the spending strategy for transportation taxes is defined in the Washington Transportation Plan 2007-2026.[2] This document, created by the Washington State Transportation Commission (WTC) and the Washington State Department of Transportation (WSDOT), identifies five "Investment Guidelines" to help prioritize spending tax dollars in transportation.

The five priorities are nearly identical to the five goals passed in Senate Bill 5412: (1) Preservation (2) Safety (3) Economic Vitality (4) Mobility and (5) Environmental Quality and Health.

In both cases, Mobility should mean congestion relief, but instead state officials define it as a strategy to move people, rather than improving vehicle flows. This means spending shifts from actually fixing congestion to providing alternatives to congestion.

In other words, according to the Washington Transportation Plan, relieving traffic congestion is not an "Investment Guideline" in determining how transportation money is spent. Instead, the plan says policymakers should spend money on other forms of transportation, like buses or light rail.

Ironically, this strategy will always lead to greater traffic congestion.

According to the Federal Highway Administration, private passenger vehicles account for about 85% of all forms of transportation in the Seattle region.[3] This means all other modes like mass transit (6.2%), bicycles (0.6%), walking (3.2%), and other (5.3%) serve only about 15% of travelers.

Adopting a policy that disproportionately spends public money on only 15% of the market will always lead to greater congestion, because the system that supports the remaining 85% is left to languish.

The Washington State Auditor's Office (SAO) recently concluded that, "The Washington State Legislature should choose/identify projects based on congestion reduction rather than other agendas."[4]

Strengthening the tie between spending and traffic relief does not sacrifice safety or preservation. These are not competing priorities. Traffic relief and safety/preservation can happen simultaneously, as long as regional leaders stop spending money in areas that do not relieve congestion. Washington policymakers should return to these specific performance measures and create a stronger link between spending and traffic relief.

2. Respect people's freedom of mobility
Government serves society, not the other way around. Policies that force citizens to behave differently than they normally would disregard the natural marketplace of society and ultimately threaten to take away political freedom from its citizens.
Likewise, government policies in transportation should be responsive to the market and improve the freedom of citizens to live and work where they choose.
Manipulating transportation policies to force a particular behavior coerces people to abandon their individual liberties in favor of a socialistic benefit where supposedly, a greater collective good is created.

These measures always fail because of what Milton Friedman called, "one of the strongest and most creative forces known to man," rational self interest; or people's desire to do what they believe is best for their own lives.

Instead, proponents of social change should work in the marketplace of ideas to persuade others to share their vision and work towards it. They should not use the power of government to force through their own ideas, but should seek to change policy, if that is needed, once reform is broadly supported by the public.

3. Deploy resources based on market demand
Transportation resources should be distributed based on natural market demand rather than the current system of building infrastructure that is somehow meant to attract demand.
In economics, supply is a function of demand. This means a willingness to use a service must exist before a supply of that service is created. Boeing executives do not make 300 airplanes knowing they will only sell 100. Likewise, governments should not spend a disproportionate amount of taxes in low demand sectors, where the public's willingness to use the service does not justify the investment.

European and U.S. transit systems provide good contrasting examples of how these economic concepts apply.

European countries are often believed to have highly successful public transportation networks and one of the more familiar systems is Switzerland Switzerland lies in the center of Europe and is an important transportation hub for both freight and passenger traffic throughout the continent. The Swiss system is primarily successful, not because of the amount of service or infrastructure, but because they have certain demographic and economic characteristics that induce demand.

In other words, there is an existing market with a natural customer base and Swiss policymakers responded with proportional infrastructure investments. As a result, mode share, ridership and fare box recovery are high.

In the United States, transit resources are distributed in just the opposite way.
Under the "build it, and they will come" theory, many policymakers think that increasing the supply of transit will somehow create more public demand. This speculative model fails because most U.S. cities do not posses the economic or demographic characteristics that create enough voluntary consumers for public transit.

Using the economic principles of supply and demand shows that building excess transit capacity before there is an equal amount of willingness to use it leads to an underperforming system. As a result, mode share, ridership and fare box recovery are low.
In any market, increasing the supply of a service or product before demand is available creates a large space between costs and benefits.

In the private sector, where benefits are measured by consumer choices, this type of behavior is unsustainable. A business will simply cease to exist once costs exceed benefits to consumers.
But in the public sector economic laws are not as strict. There is a higher tolerance for fiscal inefficiency because benefits are not always measured by consumer choices. There is also an element of public value.

In transportation policy, public value should be measured by freedom of mobility and traffic relief for the public. Therefore, policymakers can keep the space between costs and benefits small by separating projects that provide these values from projects that do not.
When prioritizing transportation projects, policymakers should use consumer demand to drive investments, not the other way around. Applying these time-tested economic principles in transportation policy will improve people's mobility and reduce traffic congestion.

4. Improve freight mobility
Freight mobility possesses a significant economic role in transportation policy but ironically, the state's investment strategy is an obstacle for improving the efficiency of moving goods.
The freight industry pays about 25% of the revenues the state receives from fuel taxes and vehicle registration and weight fees in Washington.[5]
washingtonpolicy.org/Transportation/PN_i90lightrail.html

5. Utilize Public/Private Partnerships Using the Public/Private Partnership (PPP) concept, policymakers can find effective ways to fund new projects, and to maintain the current transportation infrastructure. But relative to the rest of the United States , Washington has been slow to fully embrace the PPP strategy. These partnerships can take many forms and, according to the National Council for Public-Private Partnerships, there are generally about a dozen types. They can range between mostly private to mostly public and several types incorporate a balance of both characteristics. There are many benefits associated with a PPP. They include leveraging private dollars for public use, shifting risk from taxpayers to the private sector, and lowering overall project costs. Other factors like public oversight, asset ownership, long-term maintenance, liability and labor, will dictate which PPP is a better fit. In Washington , these issues have been treated as obstacles and prevented partnerships from forming. Yet, these questions have been addressed by other states by adapting the various types of partnerships. Undoubtedly, these concerns are important but they should not deter the benefits of a Public/Private Partnership.

Using the PPP concept, a group of businesses in Pierce County have joined forces to pool financial and construction related resources from their membership to build and finance projects. Without the support of the partnership, it is unlikely there would be enough public money to build the projects. For more information, see the WPC publication The Case for Public/Private Partnerships in Transportation Planning. Partnering with the private sector is one way to increase financial resources and get roads built. Otherwise, funding problems become insurmountable, roads are not built and our system continues to deteriorate. Public/Private Partnerships have a proven track record across the United States and should be embraced by public officials in Washington.
Notes
[1]http://www.leg.wa.gov/pub/billinfo/2007-08/Pdf/Bills/Session%20Law%202007/5412-S.SL.pdf [2]http://www.wsdot.wa.gov/NR/rdonlyres/083D185B-7B1F-49F5-B865-C0A21D0DCE32/0/FinalWTP111406_nomaps.pdf [3] Based on 2000 data. Available at: http://www.fhwa.dot.gov/ctpp/jtw/jtw4.htm
[4] http://www.sao.wa.gov/reports/auditreports/auditreportfiles/ar1000006.pdf
[5] Transportation Revenue Forecast Council, June 2007 Transportation Revenue Forecast
[6]http://www.wsdot.wa.gov/NR/rdonlyres/2D30E991-6159-4F2A-A84B-284622643B79/0/I90CenterRoadwayStudy.pdf [7] http://www.washingtonpolicy.org/Transportation/PN_i90lightrail.html

Tolling and Public-Private Partnerships in Texas: Separating Myth from Fact

Tolling and Public-Private Partnerships in Texas: Separating Myth from Fact
Reason Foundation Working Paper
By Robert Poole, Jr., Director of Transportation Policy 5/1/07

Introduction/Overview
The enormous challenge of reducing traffic congestion over the next 35 years, while Texas adds 13 million people, led to enactment of sweeping legislation in 2003 to permit expanded use of tolling and public-private partnerships (PPPs). That law, as strengthened by amendments in 2005, has led to Texas attracting enormous potential private capital investment to expand its highway capacity beyond what would have been considered possible several years ago. The Texas policy has also been cited repeatedly as a model by other states enacting similar enabling legislation since 2003.

Nevertheless, now that major deals are starting to occur, serious questions have arisen about the wisdom of pursuing this path. Are long-term PPPs (called Comprehensive Development Agreements—or CDAs—in Texas) actually sound long-term transportation policy? Could existing public-sector toll agencies raise as much—or perhaps even more—funding for transportation as private toll road companies? Should the state enact a two-year moratorium on CDAs during which time it studies their efficacy? This policy brief aims to answer such questions, as a guide for concerned citizens, media observers, and public officials.

Can Public-Sector Toll Agencies Generate More Value?

Perhaps the most explosive contention in the 2007 Texas toll roads debate is the idea that whatever benefits may be achievable via CDAs can also be delivered by existing publicsector toll agencies such as Harris County Toll Road Authority (HCTRA) and the North Texas Tollway Authority (NTTA). Two variants of this claim have been made. The mild version is that a public authority could raise just as much, financially, as a private lease. That was the finding of the Citigroup/Siebert Report as interpreted by First Southwest Company for Harris County in June 2006.1 The bolder version of this proposition was put
forth by consultant Dennis Enright in his independent study comparing a hypothetical NTTA proposal for the State Highway 121 (SH-121) project with the CDA proposal from Cintra.2 In what follows, we will refer to these to reports as the First Southwest report and the Enright report, respectively.

The Enright Report

This report addresses the following question. For a brand-new “greenfield” toll road, could a public-sector toll agency such as NTTA generate more net funds for transportation investment than a CDA such as that proposed for the Dallas-area SH-121? Under the negotiated CDA, Cintra would finance and build the new toll road at its own expense, make a $2.1 billion up-front payment, make annual lease payments with a net present value of $700 million, and provide revenue sharing if the toll road exceeds certain traffic and revenue targets. Drawing on a letter from the North Texas Tollway Authority3, Enright makes a comparison between the accepted Cintra proposal and a hypothetical NTTA deal. The latter would borrow against the entire NTTA toll road system, so as to come up with an equal $2.1 billion up-front payment. Enright goes on to conclude that the public-sector deal could produce nearly twice as much value as Cintra’s CDA. This extraordinary claim deserves extraordinary scrutiny.

Enright’s conclusion stems from several key elements of his analysis. The first is to assume that toll revenues over the 50-year period would be identical between NTTA and Cintra. This is very likely to be wrong, for two reasons.

1. Unrealistically aggressive traffic and revenue forecasts: Enright’s analysis is based on
a traffic and revenue forecast that is unrealistically aggressive for a public toll agency. Toll agency all-debt financings rely on conservative, investment-grade forecasts. The one produced by Wilbur Smith Associates (WSA) for SH-121 as a public-sector toll road projects $20.5 billion in nominal revenues over a 50-year period. But Enright uses WSA’s alternative toll projection (totaling $34.7 billion), based on a more aggressive demographic forecast, which he and NTTA guess that Cintra may have used in their proposal. That higher-risk forecast is appropriate for equity investors, who do not need an investment-grade rating to finance such a project. But it’s unlikely to pass muster with rating agencies and tax-exempt bond buyers of an agency like NTTA, who expect investment-grade ratings.

2. Unrealistic projected toll increases: The other problem with Enright’s toll-revenue projection is the assumption that a public toll agency would be able to increase tolls every year for 50 years, as authorized under a CDA with a private company. Political interference in toll-setting has plagued public toll agencies as long as they’ve been in existence. The only examples we have where a public agency is making regular toll
increases are the relatively new E-470 in Denver, the TCA toll roads in Orange County, California, and the 91 Express Lanes, also in Orange County. In the last of these, the Orange County Transportation Authority understands that in order for value pricing to work to keep traffic flowing without congestion, toll rates must be kept at marketclearing levels, via an automatic process. As for E-470 and the TCA toll roads, their toll rates have been regularly increased thus far. But we have no guarantee in any of these cases that the toll road agencies will be allowed, politically, to keep doing this 20, 30, or
40 years from now. Thus far, no public agency has invented a fool-proof mechanism for ensuring the kind of 50-year revenue flow made possible by a legally enforceable CDA.

In fact, there is a long history of political interference with toll-increase plans of public toll agencies. At present, both the Miami-Dade Expressway Authority and the West
Virginia Parkways Authority are facing legislative threats to prevent toll increases, and such actions have occurred in recent years over proposed toll increases on the Delaware River bridges between Pennsylvania and New Jersey, as well as on the Massachusetts Turnpike. The financial markets are well aware of this risk, and take it into account in assessing plans for future toll increases by public toll authorities. In sharp contrast, when the government of Ontario, Canada attempted to prevent toll increases authorized by the
long-term concession agreement for the 407ETR toll road in Toronto, the courts upheld the legitimacy of the toll increases. Financial markets noted that, as well.

Another factor leading to Enright’s conclusion is his unexplained listing of the net present value of operations and maintenance costs over the 50-year period as being 42% higher for the private firm than for NTTA. By everything we’ve learned about privatesector service delivery over the years, the default assumption should be that the private sector would be leaner and more efficient than the public sector, not dramatically more costly.

Finally, there’s the question of discount rates. In order to make a fair comparison of money flows over time, it is standard practice to use some kind of interest rate to discount
future flows to present value. When a firm makes a decision about an investment, a key issue is the value of the resulting cash flows over time. From the firm’s standpoint, the interest rate used reflects the level of risk associated with these future funds. An informed investor will select the appropriate rate to use, depending on the nature of the investment.

Here Enright totally misses the mark. As the ultimate beneficiary, representing the public, the “investor” in this case is the Regional Transportation Council (RTC). It has a choice
between two “investments”: the proposal from Cintra and the hypothetical NTTA deal. Once the CDA is signed, the annual lease payment from Cintra is almost certain. It has the same priority for payment as operating and maintenance costs, and must be paid before debt service, taxes, or dividends to shareholders. But in the hypothetical NTTA deal, RTC’s future payments would come only after the payment of operating costs, debt service, and a premium that NTTA will get—and only if there is money left over. A reasonable investor would be more skeptical about the value of these future payments than Cintra’s, and would assign a higher discount rate than applied to the Cintra proposal.

But Enright does just the opposite. He uses a 5% discount rate for NTTA, but 6.17% for Cintra, which is his estimate of their respective weighted average cost of capital. This, plus his over-estimation of Cintra’s O&M costs, entirely accounts for his conclusion
about greater value from the public-sector deal; otherwise (given his assumption of equal toll revenues in the two cases), his analysis would show the two deals producing equal value. But if you also re-do the calculation substituting the more appropriate lower (investment-grade) traffic and revenue forecast for NTTA, then private CDA deal would clearly produce greater value.

Besides these basic errors, this kind of comparison leaves out a crucial difference between toll agencies and concession companies: the willingness and ability to take risks. Grandiose plans to “leverage” existing toll agencies assume that conservative rating agencies and their bond-buying customers will sit quietly for massive increases in debt



and adoption of very aggressive traffic forecasts. That’s unlikely to happen. Concession deals are not simply the same old, same old. They are a new and important phenomenon for U.S. transportation finance.

The First Southwest Report

The First Southwest report was aimed at answering a related but slightly different question: Would Harris County be better off selling or leasing the HCTRA toll road system, or could it realize comparable sums for transportation investment by, in effect, refinancing HCTRA? Three separate teams addressed these three alternatives (sale, lease, refinance), using common data on future traffic and possible toll revenues developed by WSA. The Citigroup/Seibert team looked at the refinancing alternative.

An underlying WSA report presented three possible revenue projections for the HCTRA system, for use by all the participants:

. Base Case, continuing traditional flat-rate tolls for the entire study period; B. Inflation Case, in which toll rates are increased to keep pace with 2.5% annual
inflation;

C. Revenue Maximization Case, in which tolls are reset regularly to whatever level
would maximize toll revenue.

Citigroup/Siebert then looked into the extent to which HCTRA could raise more funding from its current asset base (its existing toll roads) by a more aggressive approach to toll increases and more aggressively leveraging (borrowing against) its assets. If HCTRA adopted inflation-indexed tolling (Case B), they projected that it could fund $8.2 billion in new projects instead of the currently planned $4.5 billion. And by going to a revenuemaximizing toll policy (Case C), HCTRA could increase this total to $10.8 billion. But the report notes that those dollar totals also assume a decision “to leverage the system aggressively.” That would mean reducing the current “coverage ratio” (the ratio of annual revenue to annual debt service), which the report notes would increase the cost of borrowing. The conclusion is that “Leveraging the system aggressively beyond today’s levels would allow the County and HCTRA to approximate the present value proceeds of either an Asset Sale or Concession.”

The first thing to note is that this is a much less ambitious claim than Enright makes. This analysis concerns only existing toll roads, not the more-costly and higher-risk task of developing brand new ones. Second, its conclusion is that even in this less-demanding challenge, the best the public-sector agency could do is to equal what a private-sector approach such as a concession/CDA/lease could do, not exceed it.

After further consideration of PPP alternatives, the report concludes that, under existing laws, “preliminary indications suggest that these [PPP] alternatives would produce an uncertain amount of additional present value benefit, if any, to the value that the County and HCTRA could receive under the aggressive scenarios.” In other words, when it comes to existing toll roads such as those belonging to HCTRA, if the public sector were willing and able to adopt an aggressive tolling policy, and stick to it for 50 to 75 years, and if it were willing and able to aggressively leverage its assets (i.e., borrow a great deal more against them, at the How CDAs Can Raise More Revenue than likely penalty of a lower Conventional Toll Agency Finance
bond rating), it could
possibly approach the value The first signed CDA is for the extension of the Central
the County would receive by Texas Turnpike, SH-130 (Segments 5 and 6). The urban
portion of SH 130, in and around Austin, was selling or leasing the system.
conventionally toll-financed by the Texas Turnpike Authority. The 40-mile southward extension, to San Antonio, was projected as having lower traffic, and when
Texas DOT did their traffic and revenue assessment, they concluded that conventional toll finance could cover, at best, $600 million of the project’s $1.3 billion cost.



When the project was offered as a long-term concession,
mechanism under which a public-sector toll agency can guarantee to investors that it however, Cintra-Zachry offered to finance the entire $1.3 billion project. Not only that, they agreed to pay the state a $25 million up-front concession fee and to share in profits over the 50-year term of the deal.


Where does this huge difference come from? For one thing, the toll road company was less conservative in its projections of future traffic (and it alone bears the risk of
being wrong on this). Second, the longer term (50 years
versus the traditional 30-year tax-exempt financing)
permits them to take into account longer-term development, new interchanges, and traffic growth.
increasing a public toll agency’s borrowing (aggressive leverage) will likely lead to a lowering of i ts Third, there is clearly a greater willingness and ability by the company to keep toll rates growing in pace with economic growth over the life of the 50-year period. While governments could, in theory, plan to do likewise,
political constraints would make this highly unlikely—




Thus, there is little credibility to claims that public-sector toll agencies can generate as much or greater value for transportation investment than private companies operating under CDAs. Long-term toll road concessions (of which CDAs are one example) are not simply a private-sector version of a public-sector toll agency. They are a new and important innovation in U.S. highway finance, with a proven track record in Europe and Australia. They can mobilize more capital for a toll road project than traditional taxexempt finance (see box), while shifting significant risks from the public sector to
investors.

Specific Concerns about CDAs

Citizen groups and concerned legislators have raised a number of concerns about meeting a significant portion of Texas’s future highway needs via toll roads developed by private companies under CDAs. The concerns are all issues that need to be addressed. This section explains common misconceptions about the principal concerns that have emerged
in this debate.

Sky-High Toll Rates

In responding to the challenge of raising many billions of dollars for new highway capacity, the investor-owned toll road companies offer a different approach to tolling than their traditional U.S. public agency counterparts (such as HCTRA and NTTA). Those agencies have traditionally issued toll revenue bonds based on flat-rate tolls, which remain unchanged either for the life of the bonds or for many years. By contrast, the investor-owned companies adjust toll rates regularly by some form of inflation index, often the consumer price index (CPI) or an index of economic growth such as GDP per capita. Thus, higher-than-traditional toll rates are part of the price to be paid for expanded
investment in much-needed highway capacity—there is no free lunch.

But in fact, the case for small annual (or biennial) toll increases is quite sound. All of a toll road’s costs (other than the initial construction) are affected by inflation: wages, maintenance, construction of additions, etc. Virtually no other business in America keeps its prices flat in dollar terms; instead, if they wish to stay in business, they generally keep their prices in step with inflation. Inflation, and the need for new construction, eventually catches up with public-sector toll agencies. Typically, after 10 or 12 years without a toll increase, they must then overcome political opposition to a 50 or 70% one-time increase, to catch up with current costs. That hits customers hard. It is actually more customerfriendly to enact modest annual increases, of the kind that people expect for most goods
and services—which is what investor-owned toll roads do.

Critics of CDAs play a deceptive game, taking advantage of compound interest over a long period of time. For example, they will take a starting-year toll of 30 cents a mile, increase it by an assumed CPI of 3.5% per year and come up with a shocking $1.63/mile by the 50th year. That sounds like an outrageous amount—until you realize that wages
and salaries generally increase faster than the CPI (so the year-50 toll will be more affordable than the starting-year toll), and that a cup of Starbucks, a movie ticket, a plane flight, or a house purchase will likely also increase by the same percentage.

All concession agreements (including CDAs) contain caps on toll rate increases and/or ceilings on the rate of return the toll company can earn. And the annual ceilings are just that: ceilings. The actual amount a company can charge will be only as much as people are willing to pay. If the toll road does not offer fast, reliable trips worth the amount of the toll, people will choose non-tolled alternatives (including the frontage roads the private companies would likely be required to build alongside the toll road, as they have been in CDA agreements to date).

Too-Long Terms

Another oft-heard concern is that 50 years is simply too long a time for the state to contract with a private sector partner for operations and maintenance of a new toll road. Who knows whether cars and trucks on highways will still be our principal means of moving goods and people 50 years from now? But that uncertainty about the future is equally true of the public sector and the private sector. In a long-term CDA, the investorowned company takes on the risk that its toll road might have less value in the future. Its investors are willing to bet that the roadway’s value will increase over time, but they cannot know that, any more than Texas DOT or a regional planning agency can know what transportation will be like 50 years in the future.

For this reason, concession agreements such as CDAs typically contain provisions for amendment, in ways deemed fair to both parties. And because negotiating such changes does not always go smoothly, they also include provisions for negotiating and arbitrating
disputes, and using objective third parties to make fair valuation estimates.

To be sure, concession agreements can be for shorter terms than 50 years. In Europe in the 1970s, many plain-vanilla rural toll road concessions were for 30 or 35 years. Even today in Australia, many urban toll road projects are being done under 35-year concessions, though the government does the land acquisition, environmental clearance, and preliminary design, thereby reducing the costs which must be financed out of toll revenues. More complex toll projects today in Europe have much longer concession terms—e.g., 70 years for the $2 billion A86 West tunnel near Paris and 78 years for the Millau Viaduct in France, the world’s highest toll bridge.

Agreements less than 50 years can certainly be negotiated for many projects—but the impact of a reduced number of years during which investors can recover their investment will be significantly lower revenue to the public sector, whether in up-front concession fees, annual lease payments, or future revenue sharing (or all three). Here is one quantitative example. Credit Suisse in 2006 did a valuation analysis of a possible longterm lease of the Illinois Tollway System, at the request of a legislative body.4 They
reviewed a large number of scenarios, with different assumptions about toll rate increases, traffic growth, and length of term. One pair of scenarios differed only by the length of the concession. For a 25-year term, the valuation ranged from $1.6 to $2.2 billion. By changing only the number of years, to 75 years, the valuation changed to between $5.8 and $8.4 billion. In other words, the additional 50 years led to 3.6 to 3.8 times as much net proceeds to the public sector.

Loss of Control of Highways

There has been much concern about the state losing control of its highways. Roads built using long-term concessions such as CDAs are not privately owned; the state still owns the roadway and protects the public interest through negotiating and enforcing the terms
of the concession contract. When drafting this long-term contract (the CDA), the government must comprehensively protect taxpayers and road users by demanding full accountability.

Concession agreements are typically several hundred pages long, and may incorporate other documents (e.g., detailed highway performance standards) by reference. The public interest is protected by incorporating detailed provisions and requirements into the agreement to cover such issues as:

• Who pays for future expansions and reconstruction;

• How decisions on the scope and timing of those projects will be reached; • What performance will be required of the toll road and the toll road company; • How the contract can be amended without unfairness to either party; • How to deal with failures to comply with the agreement; • Provisions for early termination of the agreement;

• What protections, if any, will be provided to the company from state-funded
competing routes (see below);

• How to determine the value of the toll road, in case of early termination; and, • What the limits on toll rates or rate of return will be.

The first two CDAs developed thus far in Texas cover these points and many more. All the terms of a CDA are enforceable via the judicial process.

The alternative to using the private sector (via CDAs) to develop lots of new toll road capacity would be to greatly expand Texas DOT and local toll road agencies to do such projects. But as discussed previously in this paper, those agencies cannot raise as much money as toll road companies can, and they tend to be less efficient and less innovative than toll road companies.

Non-Compete Provisions

Nearly all toll roads—both public-sector and private-sector—request and obtain some degree of protection from unlimited competition from taxpayer-provided “free” roads. Otherwise, if the government could build unlimited amounts of high-quality freeway right next to the toll road, it would be very difficult if not impossible to sell the toll revenue bonds. (Would you buy such bonds?)

The question is one of striking the right balance between the benefits of large new investment in needed highway projects (from new toll road capacity) and protection of the public’s interest in mobility and having a choice between presumably higher-quality (hence, worth paying to use) roadway service and lower-quality but inexpensive roadway service. Modern day “competing facilities” provisions seek to attain this balance. They seldom, if ever, ban all “free road” additions near the toll road. And they usually provide
for compensation for reduced traffic, rather than forbidding public-sector roadway additions.

In the case of the CDA for SH-121 in Dallas, the agreement defines a “competing facilities zone” on either side of the toll road. Certain additions of taxpayer-funded highway capacity within this zone would be subject to compensation, if the toll road company can demonstrate reduced traffic and revenue from those new roads. But excluded from such compensation are:

• All portions of major freeways, including I-35E, I-635, President George Bush
Turnpike, U.S. 75, and U.S. 380;

• All limited-access highway lanes;

• All projects in the 2006-08 State Transportation Improvement Plan; • All projects in the state’s Unified Transportation Program; • All projects in the NCTCOG Mobility 2025 Plan; • All projects in the NCTCOG Mobility 2030 Plan.

To repeat, the toll road company, under the provisions of the CDA, has no right to prohibit any future road development. Its only remedy is compensation, if it can prove loss of revenue. And that remedy only applies to a narrow category of road projects other than the major projects listed above. Moreover, symmetrically with the company’s right to compensation for loss of revenue, the agreement also gives Texas DOT the right to extra toll revenues attributable to positive impacts on the toll road from Texas DOT’s own roadway improvements.

It is true that a 50-year CDA extends farther into the future than typical metro area longrange transportation plans. But the reality is (to take the SH 121 example, again) that by 2030, the area near SH 121 will be so built out as to make it extremely costly for anyone—public or private—to add new highways beyond those already planned. An example of such an area is the land near the Chicago Skyway, a toll bridge which the city leased for 99 years. The concession agreement in this case includes no protections from competition, since the area is so heavily developed as to make new roadways extremely unlikely.

To be sure, as with length of terms, some CDAs could be negotiated with little or no protections from competition. But that would further increase the toll road company’s risk, and would presumably decrease the amount of revenue it could commit to sharing with the public sector.

Foreign Firms Controlling Our Highways

In the last several years, the financial markets have discovered U.S. infrastructure as an important new asset class. Potential investors include pension funds, insurance companies, and various specialized equity investors. In response, governments (including Texas) have passed enabling legislation, to permit toll road companies—funded by the financial markets—to develop and operate toll roads. When a public-sector agency seeks to find well-qualified firms to build, operate, and maintain toll roads for a long period of time, to do a responsible job, it must seek out the best-qualified firms. That means firms with a demonstrated track record of solid performance at building, operating, and maintaining toll roads.

The fact is, because of the long U.S. tradition of public-sector toll agencies, there is no domestic toll road industry in the United States today. By contrast, in Europe and
Australia, such industries have been allowed to develop, and now possess world-class expertise in these tasks. That is why most of the important toll road concession deals in the United States (and in Canada) thus far have involved companies from places like
Australia, France, Italy, and Spain, all of which have thriving private-sector toll road industries. (A growing number of such deals do involve U.S. partners, e.g. Cintra/Zachry in Texas and Fluor/Transurban in Virginia.)

Those countries are all strong political and military allies of the United States. And by making long-term investments in immovable transportation infrastructure, they are showing very serious confidence in the legal and political environment of the United States. Ask yourself if you would tie up a billion dollars for 50 years in an immovable toll road in (name your choice of developing countries). Probably not, since the legal and political risks (as well as inflation risks) would seem far too high. Long-term investments in much-needed transportation infrastructure, by companies domiciled in long-time U.S. allies, should be welcomed every bit as much as investments by Japanese auto companies and Korean electronics companies.

Seizure of Land

A completely understandable concern relates to the involuntary purchase of private property to obtain the right of way needed for a new road. The U.S. Constitution permits this to be done by the state, but only upon payment of just compensation. Some opponents of CDAs have claimed that the enabling legislation permits Texas DOT to delegate this power to toll road companies. That is absolutely not true. This power of eminent domain remains solely with the state, where it belongs. Since the right of way for toll roads developed under CDAs will always be state-owned, only the state will acquire such land, where necessary, using eminent domain.

Private companies have a strong interest in limiting the amount of eminent domain used on their projects, and the bad publicity, lawsuits, delays, and public opposition that go along with it. On a proposal for HOT lanes on the Beltway in northern Virginia, the private firm re-designed the additional capacity desired by Virginia DOT to drastically reduce potential public-use land takings.

Obscene Profits/Guaranteed Profits

Some participants in the Texas debate on CDAs have decried such agreements for guaranteeing a toll road company a 12.5% return on its investment. In fact, the Texas agreements, like those in other states, do not guarantee any return on investment. In fact, one of the major risks that is being assumed by such companies is the risk that traffic and revenue may be far below their projections. New (“greenfield”) toll roads have a history of underperforming their forecasts, especially in their early “ramp-up” years. Recessions in the U.S. or regional economy can depress driving and revenues; so can the failure of projected real estate development to occur within the expected time frame. Numbers like 12.5% are only estimates of what such a company might be able to achieve if all goes well over many years of toll road operation.

And what if such a firm did succeed in achieving a return in the low double digits? Would that be “obscene”? Here one cannot ignore the relevant global market for infrastructure investments. The money that Texas has been (so far) attracting to invest in toll roads could equally well be invested in other states, other countries, and other types of infrastructure (port terminals, airports, electric transmission lines, etc.), and rates of return in the low double digits are expected in infrastructure in developed countries. If governments in a particular jurisdiction decide that competitive rates of return will not be allowed, much of that capital will go elsewhere—to other jurisdictions and other types of infrastructure.

Buyout Provisions

Every concession agreement needs provisions dealing with “termination for convenience”—the ability to end the agreement before its expiration date. Such terms need to be fair to both parties. Some versions of the proposed moratorium would change the provisions now being used by Texas DOT, so as to prohibit a buyout formula from being based on the market value of the concession. The fair market value of a long-term concession agreement is the net present value of its net revenues over the remaining years of its term.

This was exactly the method used to arrive at a mutually acceptable value when the Orange County Transportation Authority repurchased the 91 Express Lanes from the toll road company that had developed this project, terminating the concession with 28 years remaining. The third-party valuation study was based on the net present value of projected net revenue over those years. Any buyout at less than fair market value is a
form of expropriation. Including such a provision in the law regulating CDAs would have very negative consequences, since toll road companies would be unlikely to enter into long-term deals that involve billions of dollars if much of the value of such a deal could be recaptured by the state at a fraction of its value.

Consequences of a Moratorium

A proposed two-year moratorium would have a number of consequences. To begin with, a moratorium until September 2009, enacted in May 2007, would actually last nearly two and a half years, not just two. It is naïve to think that today’s flurry of private-sector activity in Texas would freeze-frame, to resume business-as-usual 28 months later.

A moratorium on CDA projects would be seen by the private sector as very negative for future investments in Texas. The uncertainty as to what kinds of PPP agreements will be permitted when the moratorium ends will motivate companies to turn their attention to other fast-growing states with workable PPP toll road concession laws already on their books (e.g., Florida, Georgia, Utah, Virginia, Washington) or those that seem close to enacting such laws (e.g., Arizona, California, Nevada, Tennessee). Thus, marketing and project-development offices in Texas will not likely be maintained for 28 months to see what happens. Those people and the underlying expenditures will go where the action is.

That means that even if a workable revision of the current CDA law emerges after 28
months, there will be a further delay as companies return to Texas and set up new offices. So what we are realistically looking at is at least a 36-month delay. What can we expect will be the consequences of waiting three more years to develop projects suitable for undertaking as CDA toll roads?

• Construction cost inflation over the next three years could add between 15% and
30% to the cost of projects, making them harder to finance and requiring higher toll rates.

• Much-needed congestion relief in Austin, Dallas, Houston, San Antonio, and
other metro areas will be pushed three years further into the future, costing motorists, truckers, and regional economies many billions more in wasted time and lost productivity.

• Interest rates in 2011 are likely to be higher than today’s historically low rates of
interest. That means higher financing costs for toll road projects—which again means either higher toll rates, less net revenue to the public sector, or both.

In short, a moratorium on CDAs would be very costly for mobility in Texas. Thus, it is hard to take seriously the claims of some moratorium supporters that they are not opposed to either tolling or PPPs; they just want to ensure that the public interest is protected. We have tried to demonstrate in this paper that the concerns being raised about CDAs and the public interest are already being addressed in the kinds of agreements Texas DOT has been negotiating. A policy-maker who understands this must therefore weigh the serious harm that a de-facto three-year moratorium will do.

Conclusion

Those who want to kill PPPs in Texas, and perhaps to kill toll financing along with them, are understandably supporting the proposed moratorium. But those who understand the necessity of toll finance for meeting the state’s congestion-reduction and highway expansion needs, and who understand the advantages the private sector brings to the table, should oppose any moratorium. It would be bad public policy that would seriously undermine the goal of reducing congestion and improving mobility for all Texans.

About the Author

Robert W. Poole, Jr. is Director of Transportation Studies and founder of Reason Foundation, a nonpartisan, nonprofit think tank based in Los Angeles. He has advised the U.S., California, and Florida departments of transportation, and served 18 months as a member of California’s Commission on Transportation Investment. He has also advised the last four White Houses on various transportation policy issues. 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.