In this issue:
- Urban highway tunnels
- Senate puts tolling and PPPs at risk
- Managed lanes lauded by Fitch
- Rest areas and rhetoric
- Misguided attack on TIFIA
- Upcoming Conferences
- News Notes
- Quotable Quotes
For the past two decades, the United States has missed out on one of the most significant advances in urban highway engineering: the deep-bore tunnel. Such tunnels are now in operation in Madrid, Paris, Sydney, and a number of large metro areas in China. But until very recently, bored highway tunnels were not on the radar of most state DOTs and metropolitan planning organizations (MPOs). Fortunately, that is changing.
The key enabler of most of these 21st-century tunnels is the tunnel boring machine (TBM). Initially used mostly for water and subway tunnels up to 20 feet in diameter, TBMs have evolved to the point of being able to bore 60-foot tunnels. Years ago, the Discovery Channel produced a captivating documentary on the use of a TBM for a combined highway and flood-control tunnel in Kuala Lumpur, explaining in great detail how these amazing machines work. And while I have had the good fortune in recent years to visit the A86West tunnel near Paris and the M30 tunnel in Madrid, shortly before each one opened, until last month I had never actually seen a TBM.
In March I was given a detailed inspection tour of the under-construction Port of Miami Tunnel. It included a walk-through of the 428.5 ft. long TBM (while it was down for scheduled maintenance, typically four hours out of every 24). The cutter head on this TBM is 42.3 feet in diameter, which will allow each of the twin tubes to have 39 ft. inside diameter, to permit two full 12-ft. traffic lanes in each tunnel. As the machine moves forward underground, its conveyor system shifts the excavated material to the tunnel portal, where it is trucked away for use as fill. Another section of the machine installs precast concrete segments to form the finished wall of the tunnel.
The Port of Miami Tunnel is being procured under a 30-year design-build-finance-operate-maintain concession by the team of Bouygues Civil Works Florida (design-builder) and Transfield Services/VMS as tunnel operator. The cost of the tunnel itself is $607 million, which works out to $191 million per lane-mile for the four 4,200-foot lanes. The tunnel links MacArthur Causeway to the Port of Miami on Dodge Island, by tunneling under the Government Cut channel. It will for the first time permit big-rig trucks hauling containers to bypass the surface streets of downtown Miami, giving them direct access to the region’s expressway system via MacArthur Causeway.
Because tunnels are considerably more costly to build than even elevated expressways, their use is limited to special situations. In the French A86West example, a tolled tunnel solved a decades-old problem of how to complete the missing link in the A86 ring road without cutting in half historic Versailles. A comparable situation in Los Angeles—the more than 40 years’ delayed missing link in the I-710 freeway through South Pasadena-- is on the way to being solved via a comparable tolled tunnel, now in a several-year environmental impact assessment.
Another kind of special case is replacing aging elevated freeways through downtowns. The classic example of how not to do this is the notorious Big Dig in Boston, whose cost ballooned completely out of control, with taxpayers and motorists bearing those costs. This is where long-term concessions, especially toll concessions, dramatically change the incentives of the players and shift construction cost risk and traffic & revenue risk to the concession company, as Peter Samuel and I explained in a 2011 Reason Foundation policy brief (http://reason.org/files/transportation_mega_projects_risk_big_dig.pdf)
The first U.S. project of this type is being carried out in Seattle: replacing the seismically challenged Alaskan Way Viaduct—an elevated expressway along the waterfront—with a 1.7-mile double-deck toll tunnel. That project received its final federal approvals last year and is set to begin construction next year. There will be more such cases, as first-generation elevated Interstates cutting through downtowns reach the end of their design lives and need to be replaced. Columnist Neal Peirce recently wrote about a February conference in Philadelphia on the topic of “highway removal.” One case in point was a section of I-95 along the riverfront in that city. While some of those attending waved away the question of “where the traffic would go” if that stretch of I-95 were simply torn down and not replaced, the realists cited the Seattle tunnel example as a more realistic alternative.
Another such example is the crumbling I-278 in Brooklyn. Last fall the New York State DOT abandoned the idea of replacing this vital link, lacking anything like the billions that would be required; its plan is to simply do emergency repairs on an as-needed basis. But as Peter Samuel has reported in TollroadsNews.com, “One of the alternatives being considered would have replaced a looping section of elevated highway [mostly along the waterfront] with a direct 1.5 mile (2.2km) tunnel under Brooklyn.” And although the state does not have fuel-tax money for such a project, Samuel points out that a long-term toll concession might well be feasible, given that this section of the Gowanus/Brooklyn-Queens Expressway carries between 120,000 and 160,000 vehicles per day, 15% of them trucks. That option is now getting support from two state senators, who have introduced PPP legislation. Brooklyn Borough President Marty Markowitz has written to Gov. Cuomo supporting this approach. (www.tollroadsnews.com/node/5650)
As you know, last month the Senate passed its surface transportation reauthorization bill, S.1813. While some infrastructure advocates cheered its passage (with some bipartisan support), others expressed serious concerns. Ken Orski, in Innovation NewsBriefs, reported that the last-minute 221-page Manager’s Amendment (which most Senators could not possibly have read before voting) transferred $5 billion in general funds to the HighwayTrust Fund without any offsets, and that the offsets that were included are to take place over 10 years (to fund spending over essentially 18 months). With the most recent extension of the old law expiring as of March 31st, the House voted for a 90-day extension, which the Senate reluctantly approved at month-end.
Now that the Senate bill has passed and we can find out what’s in it, advocates of tolling and public-private partnerships are dismayed. The dueling tolling amendments that I reported on last month were set to be voted on during the final days of Senate deliberations, but on the morning of that vote, both the anti-tolling Hutchison amendment and the pro-tolling Carper/Kirk/Warner amend were dropped, by mutual agreement of their sponsors. Apparently both sides feared that their amendment might lose and the other one win, leaving them worse off than with the status quo. So S.1813 emerged with no tolling provisions. And that, in turn, means none of the eight more states wanting to finance the reconstruction of aging Interstates with tolls (besides those holding the three slots in the reconstruction pilot program) can gain legal authority to do so.
Not only that, but S.1813 contains three provisions aimed at making long-term toll concessions less attractive, all introduced by Sen. Jeff Bingaman (D, NM). Two would reduce the financial attractiveness of such concessions to private investors, by (1) forbidding them from using accelerated depreciation like all other industries, and (2) by prohibiting them from using tax-exempt private activity bonds (PABs), thereby increasing their debt service costs. Another provision would make states think twice about such PPPs, by subtracting miles of privatized highways from a state’s total highway miles in the allocation formula for federal highway funding. To be sure, these provisions are technically applicable only to “brownfield” projects (i.e., leases of existing highways and bridges), but since many potential projects (e.g., Interstate reconstruction and modernization) combine elements of both “brownfield” and “greenfield,” they would have potentially large negative consequences even if no further states sought to lease an existing tolled Interstate.
These legislative threats occur just as transportation PPPs are reaching their stride in the United States. A status report in the March issue of Public Works Financing finds that four transportation PPP projects worth $3.74 billion are expected to open to traffic this year; another eight valued at $9.62 billion should reach financial close in 2012; and RFPs for another 10 estimated at $10.2 billion are expected to reach the RFP stage this year. That is a lot of much-needed investment to be put at risk via foolish federal policy measures.
The PPP community has been busy responding to these threats. Building America’s Future, co-chaired by Ed Rendell and Michael Bloomberg, sent a strong letter of opposition to all Senators who had voted for the Bingaman language. And the heads of nine state DOTs (AZ, FL, IN, KS, OH, PA, NC, TX, and VA) sent a joint letter to House Speaker John Boehner (R, OH) pointing out the harm these provisions could do and urging that nothing like them be included in the House bill, HR 7.
On tolling and pricing, the same coalition that promoted the bipartisan tolling and pricing Carper/Kirk/Warner amendment in the Senate is communicating with House members on the Transportation & Infrastructure Committee, seeking to have such language included in HR 7. My own contribution to this discussion is a policy brief released last week, making the case for increased tolling flexibility for state DOTs and recommending the approach of simply removing the numerical limits from the existing tolling and pricing pilot programs. (http://reason.org/studies/show/congress-states-tolling-flexibility)
For some years now, although more and more managed (express toll) lanes are being developed, the conventional wisdom viewed them as financially dubious and difficult to fund. That may in part be due to a number of conversions of HOV lanes having taken place in relatively uncongested corridors, where even with HOV-2 vehicles still allowed to use the converted lanes without paying, the capacity of the priced lanes was not fully used even during peak periods.
But a new report from bond rater Fitch Ratings offers a more sophisticated view. It focuses primarily on what some have dubbed HOT 2.0 (or Managed Lanes 2.0) projects: those like the Express Lanes on SR 91 in California and the I-95 Express Lanes in Miami that were introduced in highly congested corridors, give free passages only to HOV-3 or higher vehicles, and have added at least some physical lane capacity (two each way for SR 91, one new lane each way for I-95). Fitch concludes that such projects are financially viable, if located in the right kind of expressway corridor.
One of the key findings of the analysis is captured in its title: “Paying for Predictability.” Fitch’s analysts were initially surprised to find that even during non-peak periods, these priced managed lanes manage to attract about 20% of the total expressway traffic. We observed this early on with the 91 Express Lanes, and researchers like Ken Small of UC Irvine figured out years ago that managed lanes customers are paying for two things, not one: both time savings and the reliability (predictability) of travel time.
Fitch also concludes that, unlike new urban-area toll roads—which typically serve outlying suburbs (Dulles Greenway, San Diego’s South Bay Expressway)—managed lanes are more centrally located and in corridors with already proven traffic demand. Hence, from a financing standpoint, they are more like “brownfield” projects than suburban “greenfield” toll roads. Managed lanes, therefore, are inherently less risky than new toll roads in the suburbs, though ML traffic levels are somewhat more volatile than traffic in regular lanes due to swings in the economy and in fuel prices.
Overall, the Fitch report is a solid vote of confidence in managed lane projects, reinforcing the case for carefully vetted investments in them. I continue to find it noteworthy that four ML megaprojects—the I-495 Capital Beltway express lanes in northern Virginia, the I-595 reconstruction/express lanes in Fort Lauderdale, the LBJ (I-635) express lanes in Dallas, and the North Tarrant Express project in Fort Worth—were all financed successfully during the credit markets crunch.
That said, I must note a few small errors in this report. It is not true that Florida DOT follows an “HOV-2 free” policy for express lanes; that policy is unequivocally HOV-3, consistent with the second-generation managed lanes model. And the report’s list of U.S. managed lanes omits some first-generation projects, including I-15 in Salt Lake City, SR 167 in metro Seattle, I-35W in Minneapolis, and I-680 in the San Francisco East Bay area. But those are minor glitches in an otherwise well-done, landmark report.
Note: reports from ratings agencies are typically available to subscribers only. But this report is available online at: http://tollroadsnews.com/sites/default/files/FitchReport.pdf.
If you believe a February news release from the “Partnership to Save Highway Communities,” a proposed bipartisan amendment to the House surface transportation reauthorization bill would “change the highway bill from a jobs creator to a jobs killer by jeopardizing thousands of businesses operating at the exits along the nation’s Interstate highway system.” And in March the same group cheered the defeat of an amendment to the Senate bill by Sen. Rob Portman (D, OH) that would have removed a federal ban on the sale of food, fuel, and convenience items at Interstate rest areas, saying the amendment’s defeat “sends a clear message that state DOTs cannot fix their state budget problems on the backs of small businesses or at the expense of American jobs and local communities.” Whew!
The status quo that this group seeks to protect is the relative absence of competition for franchisees of major oil companies and fast-food restaurants that provide such services adjacent to Interstate on- and off-ramps. All such businesses do face competition from additional outlets opening next door or a block down the access road, but somehow the idea that those businesses must be protected from additional competition from service plazas along the Interstate itself (as is routine on tolled Interstates) is simply bizarre. It reflects a static view of what is supposed to be a free-market economy. In the Partnership’s view, real competition to serve Interstate drivers must be forbidden by law. (Somehow, the gas stations and fast-food purveyors at turnpike service plazas survive the competition from similar facilities at turnpike off-ramps.)
Moreover, the very same oil companies and chain restaurants that operate at Interstate off-ramps are the ones who would be competing for franchises at Interstate service plazas, like those I use on Florida’s Turnpike and which millions of families and truckers use on Interstates like the Ohio Turnpike, the New York Thruway, and I-95 in Maryland, New Jersey, and Connecticut. (Although Connecticut removed its tolls back in 1985, it is grandfathered in along with the Interstates that retain their tolling.)
And both Connecticut and Maryland are benefiting from new PPP agreements to upgrade and modernize their service plazas. Connecticut led the way, signing a 35-year concession agreement with Project Service LLC in 2009 to renovate and operate 23 service plazas, four of which are now completed and the remainder to be finished by 2015. Maryland has recently finalized an agreement with Areas USA to rebuild and operate two service plazas on its stretch of I-95; their estimated cost is $56 million, compared to the state’s estimate of $80 million for in-house provision. Areas USA, one of Europe’s largest airport and highway hospitality operators, is also reconstructing and modernizing the eight service plazas on Florida’s Turnpike.
I hope House Republicans have the courage to defy the status-quo advocates at the “Partnership” and put first the interest of those who actually use the Interstates. It would certainly be consistent with their claim to be in favor of free markets and limited government.
Sen. Jim DeMint (R, SC) is a strong advocate of limiting the size and scope of the federal government. He’s also a hero to numerous “Tea Party” Republicans. That’s why I’m concerned about his poorly-informed attack on the federal TIFIA program. In a blog post on March 7th, DeMint took after the provisions in the Senate reauthorization bill that would expand TIFIA while increasing the fraction of a transportation project’s budget that could be supported by a TIFIA loan. He complained that the changes would “transform TIFIA into a first-come, first-serve feeding trough, which will allow wasteful pork barrel projects to be funded.”
Since I have defended TIFIA as both a key tool to help finance PPP projects, and a way to begin transitioning states to loans rather than grants from our insolvent federal government, it’s incumbent on me to respond. (My original policy brief from last year is at http://reason.org/files/transportation_infrastructure_finance_brief.pdf.)
First, the Senator totally misunderstands the proposed shift from administrative discretion in project selection (which he naively calls “merit-based decision-making”) to a system in which there are detailed and relatively objective criteria which a project must meet in order to be eligible, and those projects that meet all the criteria get funded—no administrative earmarking! Since demand for TIFIA loans (mostly for worthwhile PPP projects) greatly exceeds supply under the current tiny ($122 million/year) budget authority, this proposed change only works if the size of the program is increased, which both House and Senate bills would do.
Second, he criticizes the provision that allows states to use some of their federal highway or transit money as part of the initial project construction budget. But that is what those federal monies are for; the difference is that with TIFIA, the state must have a dedicated funding source to repay the TIFIA loan as well as its primary, investment-grade debt. (He might not be aware that one of the eligibility criteria for TIFIA is an investment grade rating on the project’s senior debt.) So his characterization of this being “the equivalent of GM and banks paying off TARP bailout money with other government bailout money” is false, as well as being a cheap shot.
Third, the Senator misunderstands some complicated credit-risk calculation data from OMB about potential losses, stating that the government expects to lose 41% of the value of all TIFIA loans. The actual projected subsidy (the present value of expected losses as a share of nominal credit provided) is currently 9.5%, which is about the historical weighted average for the program so far.
I do agree with two of Sen. DeMint’s criticisms. First, he rightly faults the Senate bill for increasing the maximum size of a TIFIA loan from the current 33% of a project’s budget to 49%. That would transform TIFIA from providing “gap financing” to being potentially a project’s largest funding source, and that would reduce the effectiveness of the other eligibility criteria (such as an investment-grade rating on senior debt and a dedicated revenue source for debt service payments). It would also reduce the leverage of the TIFIA program, meaning that a given amount of TIFIA budget authority would be concentrated on fewer projects. At a time when state transportation budgets are very squeezed, Congress should aim to make whatever they allocate for TIFIA help as many qualified projects as possible. That is a lot more do-able if the maximum per project is 33%.
Second, DeMint faults the very large increase in the program’s size, going all at once from $122 million/year to $1 billion/year. Many thoughtful and knowledgeable supporters of TIFIA have concluded that so rapid an expansion may be problematic, since FHWA would have to greatly expand its staff and modify its processes in a very short time to competently handle a much larger program. The Bipartisan Policy Center, for example, supports an increase to $450 million rather than $1 billion. And the Administration has recommended TIFIA funding at $500 million per year while maintaining the current 33% of project cost limit.
His fellow Senators ignored DeMint’s concern in passing S.1813. My worry at this point is that some of his mis-informed arguments could influence House Republicans to reject this small but valuable financing tool.
Footnote: Sen. DeMint may be unaware that a 2001 TIFIA loan (of $215 million) to South Carolina DOT for the $675 million Cooper River Bridge project was repaid last year, six years after the project opened to traffic. The loan was replaced with tax-exempt revenue bonds, issued at a lower interest rate than the TIFIA loan. This was the largest contract in SCDOT history, and was part of its innovative “27 in 7” Program.
Note: I don’t have space to list all the transportation conferences going on; below are those that I am (or a Reason colleague is) participating in.
Future Transportation Funding Options and Strategies, April 14, Institute for Transportation Research and Education, North Carolina State University, Raleigh, NC (Bob Poole speaking). Details available from Christie Vann at ITRE: email@example.com
2012 Design-Build in Transportation Conference, April 25-27, 2012, Renaissance Glendale Hotel, Phoenix, AZ. (Bob Poole speaking) Details at: www.dbia.org/conferences/transportation/2012/default.
2012 Symposium on Mileage-Based User Fees, April 29-May 1, 2012, Hyatt Regency on the Hudson, Jersey City, NJ. (Adrian Moore speaking) Details at: www.ibtta.org/Events/eventdetailwithvideo.cfm?ItemNumber=5679.
14th International HOV, HOT, and Managed Lanes Conference, May 22-24, Marriott Hotel, Oakland, CA. (Bob Poole presenting) Details at: www.trb.org/Calendar/Blurbs/163615.aspx.
HSR Lessons from Spain. The March issue of Public Works Financing includes an outstanding article on the high-speed rail program in Spain, by Prof. Germa Bel of the University of Barcelona. “When We Were Rich: High Speed Rail and Taxpayers Throughout the World” explains the politics and economics of that country’s large and still-growing HSR system. Bel is co-author of the forthcoming book, Economics and Politics of High Speed Rail: Lessons from Experiences Abroad (Rowman & Littlefield), which I highly recommend based on Bel’s previous writings on the subject.
Arizona Revises PPP Law. Early this month, Arizona Gov. Jan Brewer signed a bill amending the state’s relatively new PPP transportation law. On the positive side, it added critically needed toll enforcement provisions. On the negative side, it eliminated a provision that would have provided fuel tax rebates for miles driven on tolled lanes—which had overcome trucking industry opposition to the PPP bill. The Arizona DOT opposed this provision, fearing fuel tax revenue losses, but my view is that such losses would be insignificant compared with the new toll revenues as time went on.
New CAFE Standards Will Decimate Fuel Tax Revenues. Assuming the Administration’s 2025 CAFE standards (calling for 56 mpg by 2025) are put into effect, how much will they affect fuel tax revenues? Transportation Weekly published a quantitative analysis in its March 15th issue. It traces the impact of existing mpg requirements for new cars from 1978 through 2011 and projects the impact from there to 2025. The calculations are presented in inflation-adjusted 2011 cents/mile and take into account only the highway account portion (80%) of fuel tax revenue. As of 2011, the average new car generates 0.511 cents/mile, compared with 0.763 in 1998. By 2025, that will decline to 0.204 cents/mile. The impact on the overall automobile fleet will be similar, but delayed somewhat as new (higher-mpg) cars replace older ones.
Poole Comments on FTA New Starts Evaluation Procedures. Now available on the Reason Foundation website are the comments that I submitted last month to the Federal Transit Administration’s docket on the agency’s proposed major revision in how it analyses the cost-effectiveness of rail and bus rapid transit projects. Go to: http://reason.org/news/show/insights-on-the-federal-transit-adm.
More Express Toll Lanes Projects. The second component of the San Francisco Bay Area’s planned network of 570 miles of Express Lanes opened last month. It is the first such project that permits toll payers (and qualified HOV vehicles) to zip through a congested interchange—in this case, the I-880/I-237 interchange in Milpitas. It is also the first such project in Santa Clara County. In Georgia, GDOT and the State Road & Tollway Authority are holding public meetings on adding express toll lanes to the Georgia 400, a portion of which is already a toll road.
Construction Industry Likes Transportation PPPs. A survey of U.S. construction and engineering company executives found that transportation is seen as the most promising field for long-term PPPs, far outpacing other kinds of infrastructure. Conducted by KPMG International, it found 56% saying that transportation is the most attractive infrastructure market, compared with 26% selecting water and 19% favoring energy projects.
An Evolutionary Approach to Freeway Pricing. I recently revised and updated a policy paper originally done for one of the TRB annual meetings. “Gaining Public Support for Freeway Congestion Pricing” sets forth a strategy for moving gradually from individual express toll lanes to a seamless network of such lanes and eventually to a two-tier pricing system (regular and premium lanes). Each step would only be taken when and if public support has been developed, based on the results of the previous step. (http://reason.org/studies/show/public-support-congestion-pricing)
Oil at $40 per Barrel? From the aviation field comes a startling projection. Adam Pilarski, of consulting firm Avitas, told the International Society of Transport Aircraft Trading conference in Phoenix last month that proven oil reserves have climbed markedly, to 50 years supply (compared with 30 years worth in the early 1980s). Despite China’s rapid growth, global oil demand rose just 0.5% between 2005 and 2011. Projecting these trends to continue, Pilarski expects the oil price to decline to $40 per barrel by 2018.
“The bill before the Senate spends more than we can afford by financing two years’ worth of costs over as many as 10 years. In two years, the trust fund will still be insolvent, requiring us to fill the gap with billions more to support even the current funding levels. And as the years go by, that gap will continue to grow, digging the hole even deeper. Republicans justifiably cried foul when President Obama’s health-care law used 10 years’ worth of revenue to cover six years worth of costs. So how can we now be part of a more aggressive effort to use a similar gimmick to fund this highway bill?”
—Sen. Bob Corker (R, TN), “Senate Must Face Fiscal Reality in Pending Highway Bill,” The Washington Post, March 6, 2012.
“The decision to go ahead with a major infrastructure project should, where at all possible, be made contingent on the willingness of private financiers to participate without a sovereign guarantee for at least one-third of the total capital needs. This should be required whether projects pass the market test or not—that is, whether projects are subsidized or not . . . . Private lenders, shareholders, and stock-market analysts would produce their own forecasts or conduct due diligence for existing ones. If they were wrong about their forecasts, they and their organizations would be hurt. The result would be added pressure to produce realistic forecasts and reduced risk to the taxpayer.”
—Bent Flyvbjerg, “Survival of the Unfittest: Why the Worst Infrastructure Gets Built—and What We Can Do About It,” Oxford Review of Economic Policy, Vol. 25, No. 3, 2009, pp. 344-367.
“Unfortunately, the entire high-speed rail debacle says something about the way California does politics—and it’s not flattering. All too often, voters and politicians in this bluest of blue states vote for bills and propositions based on their sexiness, not their practicality. High-speed rail sounded sleek, progressive, and cutting edge, so like an impulse shopper at the mall, Californians were all too willing to put it on the card without checking the price tag. Ken Button, a transportation specialist at George Mason University, put it succinctly: ‘Californians have a tradition of committing funds first and thinking about who will pay later.’”
—Sam Hoel, “Crazy Train,” The California Aggie, March 6, 2012 (www.theaggie.org/2012/03/06/column-crazy-train/)
“The proposal to switch funding of the FTA New Starts program to the general fund has been around since the 1987 reauthorization debate. It was originally proposed by FTA staff as ‘the swap,’ which would have reversed the funding sources for the New Starts and Operating Assistance programs so that the former would have been funded from general revenues—and thus at the whims of the annual appropriations process—while the latter would have been rescued from the capriciousness of Congress and placed on a stable footing. Of course, the idea never succeeded, for all the reasons that it will undoubtedly fail again—an unholy alliance of Democratic big-city politicians, labor unions, and construction interests—to which we can now add the self-appointed urban visionaries populating the current Administration, who detest cities organized around suburban employment centers and believe streetcars actually provide transportation service as opposed to decoration. Likewise, the bias against BRT within the ‘transit industrial complex’ has a long history and is by now firmly rooted. Maybe the one bright spot in this Administration is that some people in DOT view rubber-tired vehicles as a potentially acceptable form of transit, even if they do it skeptically.”
—Personal communication from a senior US DOT researcher, name withheld by request, March 2012