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Surface Transportation News #160

Wednesday, February 15, 2017 11:22
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(Before It's News)

In this issue:

Reinventing the Port Authority of New York & New Jersey

The Port Authority is America’s largest and oldest transportation authority. After a number of headline-making scandals and an array of reports calling for reforms, the Manhattan Institute last winter commissioned me to take a fresh look at the agency and propose a fundamental rethinking of what it is and how it operates. They published the study late last month, and we’ve also posted it on the Reason Foundation website. (http://reason.org/files/new_york_nj_port_authority_reform.pdf.)

In the report I argue that the agency’s highly centralized model from 1921 is obsolete and needs to be replaced. Ironically, the original aim in creating the agency—to eliminate politics from major transportation infrastructure decisions—has been completely subverted by the political appointees from both states who comprise the PA’s governing board. And the engine that enables their pork-barrel spending is common-pool funding. Basically, the PA has run its airports and toll bridges and tunnels as cash cows, amassing large sums in a common pool that its board can spend on money-losing real-estate projects and propping up heavily subsidized ports and a rail transit line that is subsidized solely by airport and highway users. Among the results are the nation’s worst-ranked airports (Kennedy, LaGuardia, and Newark) and America’s most-costly traffic congestion (after decades of not adding any trans-Hudson bridge or tunnel capacity).

While a half-dozen internal and external reports made some valuable suggestions for change (including getting the PA out of the real estate business), the fundamental solutions I propose are to end common-pool funding and monopoly provision of  facilities. In addition to exploiting airport and highway customers and subsidizing turkeys, common-pool funding obscures the actual performance of each of the PA’s facilities. Instead of continuing as the monopoly owner-operator of facilities, the report proposes that the three airports be separately leased under long-term P3 concessions, to compete with one another for customers. Likewise, the individual bridge and tunnel facilities would also be concessioned in this manner. Both kinds of infrastructure would be free to implement variable pricing in order to maximize their throughput. Each would be directly accountable to its customers. The same would hold for the seaports, several of which would likely be forced to shut down without today’s extensive cross-subsidies.

The report uses global transaction data to estimate the likely market value of the airports, toll facilities, and seaports—low, medium, and high values based on earnings before interest, taxes, depreciation and amortization (EBITDA) and finds that the mid-range market values total $48 billion. That compares with $22 billion in outstanding bonded indebtedness, meaning that over time the agency could pay off its existing bonds via the proceeds from the P3 concessions. Implementing these proposals would convert the PA from the owner/operator of monopoly infrastructure into an agency that still plans bi-state transportation facilities, but no longer finances and builds them. It would become the manager and overseer of a portfolio of long-term P3 concession facilities.

While this would be a radical change for the New York metro area, it is hardly unprecedented. London’s three major airports are owned by three competing companies, with portions of their shares held by major pension funds. The Chicago Skyway, Indiana Toll Road, and the rebuilt I-595 expressway in Florida are operated as P3 concessions, in each case with pension fund investors. Australia and Canada both have national policies favoring what they call “asset recycling.” The basic concept is for government agencies that own and operate major revenue-generating infrastructure to sell or lease those facilities to investors, including pension funds—and use the proceeds to renew aging infrastructure for which charging user fees is not feasible (e.g. schools, courthouses, small bridges).

While I have no illusions that the Port Authority will be reinvented along these lines in the near term, initial media response to the study has been encouraging. Given the extent of Port Authority scandals in the last decade or so, conditions have never been more favorable for dramatic reforms.

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Infrastructure Wish Lists vs. Sound Investments

The months since Election Day have brought forth a proliferation of lists of “needed” infrastructure projects. First came the Treasury’s list of 40 mega-projects that I critiqued last month. This was followed in short order by a list of 50 projects that was presented as if it came from the new Trump Administration (but was actually generated by a DC lobbying firm). And not to be outdone, Senate Democrats released their own $1 trillion plan—no specific projects but many billions allocated to categories such as schools, rail, electricity and broadband, etc.

The only one of these to even raise the question of benefit/cost analysis was the report from Treasury—and those estimates were provided by project proponents and could not be taken seriously. The lobbyist list and Senate Democrats’ announcement both focused instead on job creation, a justification that would be satisfied just as easily by building pyramids or (as Keynes once suggested, half in jest) by paying people to dig holes and fill them in again.

Against this backdrop, it was a great relief to receive the U.S. DOT’s 2015 Status of the Nation’s Highways, Bridges, and Transit: Conditions & Performance (generally known as the biennial C&P report). In addition to providing an update on the current (actually 2012) conditions and performance of roadways and transit, both FHWA and FTA employ benefit/cost analysis to review possible scenarios for capital investment. The agencies’ methodologies are continually improved, and their work is far more meaningful than the simple engineering wish lists that are the focus of media and political attention.

For highways and bridges, FHWA does analyses for (1) all highways, (2) just federal-aid highways, (3) just National Highway System (NHS) highways, and (4) just Interstates. In this discussion, I focus solely on all highways, at all levels of government. The baseline capital investment is the total spent in 2012: $105.2 billion. That number was somewhat higher than usual due to federal stimulus spending in 2012. FHWA ran three future scenarios (2012-2032), and estimated the capital spending associated with each (based on B/C analysis):

Maintain 2012 conditions and performance

$89.9 billion/year

Sustain 2012 spending levels

$105.2

Improve conditions & performance

$142.5

FTA carried out a similar analysis, using its own modeling system:

Maintain a state of good repair

$17.0 billion/year

Sustain 2012 spending levels

$17.0

Expansion, low growth in ridership

$22.8

Expansion, high growth in ridership

$26.4

To illustrate the difference between economically sound investments and engineering wish lists, let’s compare these DOT results with the 2016 report card of the American Society of Civil Engineers (ASCE). Its section on highways, bridges, and transit posits an investment “gap” for the 2016-2026 decade of $1,101 billion, or $110 billion per year. In the DOT C&P report, the gap for FHWA is the difference between the “improve” scenario and the current 2012 spending: $142.5B minus $105.2B = $37.3 billion. For FTA, the comparable gap, using the low ridership growth (1.4% per year) scenario is $5.8 billion. That makes a total gap of $43.1 billion per year—just 39% of the ASCE number.

One of the reasons I am so positive about public-private partnerships for major infrastructure projects is to sort out economically sound projects from pyramid-building. You will not find investors willing to put equity into projects whose costs exceed their benefits (which are what economists refer to as “value-subtracting enterprises,” meaning that the value of their outputs is less than the value of their inputs). Over the years I have learned not to take seriously grandiose lists of projects or mega-buck investment “needs” that have not been subjected to a rigorous, independent benefit/cost analysis. A trillion dollars of private capital investment would likely yield a large array of economically sound infrastructure improvements. A trillion dollars of net new federal spending risks funding numerous value-subtracting enterprises.

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Progress on Trucks and Tolling?

Politico reported last week (Feb. 8th) on an interview with Chris Spear, the relatively new CEO of the American Trucking Associations. Spear told Politico that ATA sees room to compromise on toll finance—for newly constructed roads or bridges. But he drew the line on tolls for “existing roads that we’ve already paid for.” The previous week, House Transportation & Infrastructure Committee chairman, Rep Bill Shuster (R, PA), was quoted in the Washington Post along similar lines—that tolling “existing” Interstate highways is “a non-starter.”

As one who has lambasted some toll agencies for diverting toll revenues to canals, economic development, and transit, I agree with the underlying point made by Spear and Shuster. Charging a second time for infrastructure that users have already paid for is unfair and should not be allowed.

But what about when a highway or bridge wears out and needs replacing? And what if all the existing highway revenue (from fuel taxes) is already spoken for by the numerous programs embedded in the overall federal highway and transit program, each with its own vociferous constituency that will work very hard to make sure that any increase in fuel taxes is shared among all those programs? That is the actual situation we face today. There is no source of funding for the $1 trillion or more it will take to replace and modernize our aging Interstate highways.

So I invite my friends in the trucking industry to consider the use of toll finance solely to replace worn-out infrastructure on the most-vital corridors their business depends on: Interstate highways. The Interstates were designed and constructed with a 50-year design life, if properly maintained. Many corridors are already past their expiration date, and most of the rest will reach that status over the next two decades. Moreover, the trucking industry complains (justifiably) about the top 100 truck bottlenecks around the country—nearly all at interchanges on urban Interstates. And many of the most important Interstates for trucking lack enough lanes to handle the truck traffic FHWA projects between now and 2040—they are good candidates for dedicated truck lanes.

All these reasons would make it sensible for the trucking industry to support a carefully limited expansion of the current federal pilot program for toll-financed Interstate reconstruction/replacement. As laid out in the 2015 Reason study, “Truck-Friendly Tolls for 21st Century Interstates,” federal restrictions should include:

  • All-electronic tolling (no toll booths);
  • Toll rates limited to covering the capital and operating costs of the replacement Interstates (no revenue diversion);
  • State legislation to guarantee no revenue diversion;
  • Rebates of fuel taxes for the miles driven on toll-financed replacements (no “double taxation”); and,
  • Tolling to begin only after the replacement facility is finished and open to traffic.

On February 1st, the Alliance for Toll-Free Interstates send a letter to all members of the House T&I Committee, arguing against any expansion of tolling and for repealing the three-state pilot program. Interestingly, while every state trucking association and ATA all signed, as did various truck-stop groups, conspicuously absent were most of the major trucking companies themselves, including Fedex and UPS. Those two firms, along with major trucker YRC Worldwide, various shipper groups, the U.S. Chamber, and the National Association of Manufacturers recently created a coalition called Americans for Modern Transportation. Let’s hope that this group is willing to think outside the box about how we are actually going to pay for and implement a 21st century Interstate highway system.

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Removing Obstacles to Major Infrastructure Projects

Last month I summarized a new Reason report on federal barriers to public-private partnership (P3) infrastructure investment. In her confirmation hearing last month, new DOT Secretary Elaine Chao embraced P3 investment, and added the following point: “In order to take full advantage of the estimated trillions in capital that equity firms, pension funds, and endowments can invest, these partnerships must be incentivized with a bold new vision.” Then she added that the Trump Administration will look at how to remove current legal and regulatory roadblocks to P3s.

The January issue of Public Works Financing (the newsletter of record for P3 infrastructure) devoted eight pages to itemizing federal roadblocks and obstacles. Editor Bill Reinhardt sought input from the P3 community, and got substantive responses. The lead article proposed a “Fast Track Now” for major P3 projects, including the following:

  • State and local governments identify top priority projects suitable for P3 investment, to be fast-tracked through federal permitting and approval processes.
  • Environmental permitting approvals for these projects within one year.
  • Technical assistance to states to get up to speed on P3 procurement.
  • Reform of the ban on Interstate highway tolling.
  • Liberalization of the airport privatization pilot program.
  • Increase the $15 billion federal cap on Private Activity Bonds for transportation projects.
  • Eliminate the Alternative Minimum Tax on PABs.
  • Streamline and increase the size of the TIFIA program.

The second article described, agency by agency, changes to reduce or eliminate the “regulatory creep” of recent years so as to “untie the regulatory noose.” These ideas came mostly from the American Road & Transportation Builders Association. Those included in the PWF article are the Department of Transportation, Environmental Protection Agency, Department of Labor, Department of the Interior, Equal Opportunity Employment Commission, and Council on Environmental Quality. Those interested should read PWF‘s summary, and may turn to ARTBA for more details on 20 programs where they suggest regulatory changes.

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Facial Recognition Cameras at Tolling Points Coming to New York City

The good news is that long-suffering motorists who use the nine tolled bridges and tunnels operated by the Metropolitan Transportation Authority will be able to speed through tolling points by the end of this year, as the MTA finally implements all-electronic tolling (AET) at these crossings. The conversion to cashless tolling is part of Gov. Andrew Cuomo’s New York Crossings Project that will also add color LED lighting to all the bridges, to provide “spectacular, multi-color light shows that will be visible for miles.”

The bad news is that the plan also involves serious privacy violations, in the form of planned facial recognition cameras at all the tolling points. That system is not even defined yet, but MTA recently sent out a Request for Information to technology companies for a system where “license plate images are taken and matched to occupants of vehicles” using facial detection technology. Gov. Cuomo’s spokesman for the project, Rich Azzopardi, told the New York Daily News that, “We’re seeking to use emerging 21st century technology to combat emerging 21st century threats.”

In other words, that system appears intended not merely to supplement now-standard license-plate imaging systems that are needed to bill motorists without a transponder such as E-ZPass. It is also clearly aimed at trying to spot criminals and other persons of interest to law enforcement. Speaking of whom, Cuomo’s plan also calls for stationing 150 state troopers at tolling points, nominally to crack down on chronic toll evaders.

This is a very worrisome trend, and could fan the flames of populist opposition to tolling. And it’s not limited to the New York MTA. According to an article by Michael Donlevy, “Less Is More: The Added Benefit of ETC Gantries” in the current issue of Thinking Highways, the Massachusetts DOT’s new AET system’s tolling algorithm includes a “hot list” feature that will alert police when cars with specified license plate numbers pass beneath the gantry. Needless to say, the American Civil Liberties Union has already raised privacy concerns and the potential for “misuse and abuse.”

The International Bridge, Tunnel & Turnpike Association rightly envisions a bright future for tolling in the United States. But I think they and their members should think very hard about becoming an arm of Big Brother.

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Upcoming Transportation Conferences

Note: We don’t have the time or space to list all transportation events that might be of interest to readers of this newsletter. Listed here are events at which a Reason Foundation transportation researcher is speaking or moderating.

Cato Hill Briefing, March 6, 2017, Cato Institute, Washington, DC (Baruch Feigenbaum speaking). Details at:  https://cato.org/events

USC Real Estate Law & Business Forum, March 9, 2017, Jonathan Club, Los Angeles (Baruch Feigenbaum speaking). Details at: http://gould.usc.edu/why/academics/cle/realestate

Mileage-Based User Fee Alliance Annual Conference, March 16, 2017, New Zealand Embassy, Washington, DC (Adrian Moore speaking). Details at: www.mbufa.org

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News Notes

Missouri Seeks Six-Month Extension on Pilot Program Slot. AP transportation reporter Joan Lowy (Feb. 9, 2017) noted that Missouri DOT has asked FHWA for a six-month extension of its slot in the three-state pilot program to rebuild an Interstate highway with toll financing. Under the FAST Act, incumbent slot-holders were to lose their slots if they had not taken definite steps by December 2016 to make use of their slot. Missouri’s plan would toll-finance reconstruction of 200 miles of I-70 between St. Louis and Kansas City, adding dedicated truck lanes. MODOT Director Patrick McKenna told Lowy, “That type of project is, I believe, what the Trump administration is talking about.”

New Ohio River Bridges Generating Traffic and Revenue. During January, the first month of all-electronic tolling on the two new (and one refurbished) bridges between Louisville and southern Indiana, 2.2 million vehicle trips were made across the bridges. By January 26th, the Riverlink toll agency reported more than 200,000 transponders ordered, both Riverlink local and E-ZPass multistate, with orders being filled as rapidly as possible in the face of high demand.

I-405 Express Toll Lanes Mostly Successful. After the initial year of operations, the new 17 miles of express toll lanes on I-405 in metro Seattle are serving 51,000 customers per day. They save an average of 11 minutes southbound and 14 minutes northbound during peak periods, compared with the general-purpose lanes. And even the GP-lane users are saving an average of 5 minutes in the AM peak, despite an overall increase in vehicle miles of travel. The average express lanes toll is $3, but the highest rate during the busiest peak times is the $10 state-set maximum for at least a few minutes per day. The only serious problem is that the northern section (from Bothell to Lynnwood) has only one toll lane each way, compared with two each way for the rest of the corridor. Faster-than-expected VMT growth in the corridor means there is a bottleneck where two toll lanes funnel into one.

Indiana May Charge Plug-In Vehicles. As part of wide-ranging transportation bill, Indiana legislators are considering a $150 per year charge for plug-in electric vehicles; the bill also includes a state fuel tax increase and provisions to consider Interstate toll-financing. Nine other states already charge annual fees for electric vehicles, since those vehicles either pay less than conventional gasoline-fueled cars or pay nothing at all for highway use.

Louisiana DOT Considering P3 Upgrade for I-10. On January 30th, the Louisiana Department of Transportation & Development issued a Request for Information for a potential project on the I-10 Capital Corridor in Baton Rouge, to include widening and interchange improvements. The P3 project would require a funding source from either tolls or an increase in the state’s fuel taxes. The state’s financial difficulties make it unlikely to issue bonds for the project; hence the attraction of private financing.

Primer on Federal CAFE Standards. My Reason colleagues Baruch Feigenbaum and Julian Morris have released “CAFE Standards in Plain English,” which reviews the evolution of these federal fuel-economy requirements and then explains how the current program works. This is the first of a series of policy briefs on the subject. Go to: http://reason.org/files/pb137_cafe_standards.pdf.

Rethinking Express Toll Lane Freebies. I’ve reported previously that as the need for revenue to build and operate new express toll lanes sinks in at state DOTs and legislatures, there is a trend away from giving away capacity to two-person carpools (which are often fam-pools) and alternative-fuel vehicles. Beginning Jan. 1, 2017, such lanes in Colorado now require at least three people in a car to qualify for free passage; this change was decided on four years ago by the state Transportation Commission. Current Virginia plans call for ending “clean fuel vehicle” freebies as of the second quarter of this year, but that change is now being challenged by a group of hybrid vehicle owners who have been allowed to drive solo on I-66 inside the Beltway (which operates HOV-only during peak periods). That highway is being converted to express toll lanes requiring either a toll payment or three persons in the car.

“Why a High-Speed Rail Skeptic Likes All Aboard Florida”. That’s the title of a piece I wrote for the James Madison Institute, a free-market think tank in Florida. I assess this under-construction project by a subsidiary of Florida East Coast Railway, which uses mostly existing railroad-owned right of way and is also investing in a commercial station complex in downtown Miami, also on railroad-owned land. Go to www.jamesmadison.org/blog/detail/why-a-high-speed-rail-skeptic-likes-all-aboard-florida.

San Antonio to Get First Express Toll Lanes. In December the Alamo Regional Mobility Authority voted in favor of adding express toll lanes to Loop 1604, which is heavily congested during peak periods. And last month, the region’s Metropolitan Planning Organization approved the $880 million project as the “centerpiece” of its long-range transportation plan for the area. There will be two express toll lanes each way.

One-way Bridge and Tunnel Tolls Cause Problems in New York Metro Area. New York City Council member Margaret Chin this month called for the city government to examine the negative impact of one-way bridge tolls on highway safety. Critics cite a “New Jersey trucker’s special” under which trucks cross the non-tolled Manhattan bridge and use city streets to get to the westbound Lincoln or Holland Tunnel, which charge only for eastbound trips. Truckers do this to avoid the westbound-only toll on the Verrazano Bridge, which is $80 for a heavy truck. One-way tolling was instituted decades ago to minimize the cost of manual toll collection; it is obsolete in the age of all-electronic tolling (which is now being implemented in the metro area). Elected officials in Brooklyn are also calling for two-way tolling.

$2.7 Billion P3 Toll Bridge Approved in Canada. Earlier this month, the government of British Columbia gave its environmental approval for a $2.75 billion, 10-lane toll bridge to replace the aging Massey Tunnel over the Fraser River. Construction is set to begin later this year, with the bridge planned to open in 2022. The government plans a 30-year P3 concession, with the concession company to be compensated by availability payments.

Revised FAQs on P3 Concessions Now Online. Several months ago I revised and updated the Frequently Asked Questions about P3 concessions that I first posted a number of years ago. The new version is on the Reason Foundation website at: http://reason.org/news/show/toll-concession-public-private-part.

Amtrak Blocks Reason Website. Reason Foundation board member Manny Klausner recently attempted to open the website of Reason magazine (http://reason.com) while on board an Amtrak train. He was astonished to receive this response: “The website you are attempting to access has been blocked by an automatic content filter.” He contacted Reason Editor Katherine Mangu-Ward, who responded, “We’ve been having this problem on and off for years. [Publisher] Mike Alissi has been waging a noble war against the block”—thus far without success.

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Quotable Quotes

“Trump’s plans, from what we know, will rely on this kind of public-private partnership (called a P3). It’s not a new idea. In Europe—hardly a bastion of laissez-faire governance—many major infrastructure assets are owned and operated by private firms, including mass transit, high-speed rail, and airports. America’s preference for government-owned and operated infrastructure is in fact rather exceptional, driven more by ideology (and special interests like unions and consultants) than rigorous policy analysis. An asset like LaGuardia Airport, which is run by the notoriously corrupt and inefficient Port Authority of New York and New Jersey, will almost certainly be more efficiently rebuilt by a private company that can’t afford to take a loss.”
—Harry Zieve Cohen, “How Trump Can Build a Powerful Political Machine,” The American Interest, Dec. 10, 2016

“It is almost ironic that a discussion about incentives for private capital and new financing tools is taking place in the U.S. at this point in time. Infrastructure fund databases currently list hundreds of billions of dollars of private equity and debt ready to be deployed on infrastructure projects in North America. What all this private capital is looking for is continuous growth of a pipeline of viable and community-supported infrastructure projects—no further incentives are needed.”
—Thilo Tecklenburg, Meridiam, “Demystifying Funding vs. Financing,” Public Works Financing, January 2017

“User fees are usually, but not always, the best funding model. Glaeser suggested that expecting users to pay market prices for public infrastructure generally will lead to more rigorous cost-benefit evaluations of prices and to a better allocation of infrastructure to its highest benefit. But, he noted, in cases where people other than [only] users benefit, we should try to come up with creative funding models. ‘I’m a big fan, for example, of Hong Kong’s mass transit system, which funds itself not with higher user fees, but by building skyscrapers atop new subway stops and turns a tidy profit as a result. . . . Something that ties more closely to property tax revenues near the infrastructure that benefits, like tax increment financing, is not crazy,’ Mr. Glaeser explained.”
—Anna Malinovskaya and David Wessel, “Larry Summers vs. Edward Glaeser: Two Harvard Economists Debate Increased Infrastructure Investments,” Brookings Institution, Jan. 18, 2017

“[T]ransportation is at a pivotal point in its history and needs to transform itself into a sustainable utility model to survive. The lifeblood of any enterprise is funding. Transportation is bleeding itself to death under existing funding policies. Whilst the fuel excise tax model has provided sufficient funding for the last century, carbon-based fuels in the form of petrol and diesel fuels are slowly but steadily decreasing as the power source for modern vehicles. . . . At the same time, our road infrastructure is aging and being stressed by the sheer number of vehicles using our road networks. . . . Each and every member of [our] team is dedicated to solving these issues and transforming transportation into a utility model where it is self-supporting. In our terms, that means we transfuse the system with a new transport funding policy based on road usage measured in the distance we drive rather than the fuel we consume.”
—Jack Opiola, “D’Artagnan Consulting: Order of the Sword,” Thinking Highways, Vol. 11, No. 3, January 2017

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Source: http://reason.org/news/show/surface-transportation-news-160

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