Highways, Buses, Rail, water and airports: Literature Review

1
Privatizing Transportation Systems

• Highways, Buses, Rail, water and airports
  Literature Review

2
The Problem with Highway funding

• Congestions cost America 168 billion a year. If
  not resolved then cities will die as centers of
  economic productivity, as centers of culture, and
  a pleasant place to live. Over half of
  interstate are congested and one fourth of
  bridges are rated deficient.
• The annual investment needed to maintain the
  current level of pavement condition using public
  funding is 8.3 short.
• In order to just keep pace with the growth in
  driving and truck usage, capital spending should
  be higher by 74 than current capital spending of
  68.1 billion.

3
Advantages of P3 in Transport

• PPPs have been widely recognized over the last
  several years as an innovative approach to
  transportation funding and procurement that can
  reduce project costs, accelerate project
  delivery, transfer project risks to the private
  sector, and provide valuable, high-quality
  projects but these benefits alone do not explain
  the growing number of PPPs that are being
  procured in the United States.
•  

4
Reasons for P3 in transport

• PPPs are being utilized at a record pace because
  they
• Respond to congestion and system unreliability by
  providing high-quality, well managed projects and
  better performance
• Address the demand for transportation investment
  by providing access to a vast amount of private
  capital available for investment in
  transportation
• Reduce the wasteful effects of political and
  special purpose spending by incorporating
  financial accountability for investment decisions
  into the transportation funding process
• Help align the Nations transportation funding
  policy with critical energy and environmental
  policies by substituting private capital for fuel
  tax revenue
• Accelerate project delivery by providing upfront
  private capital for a projects full cost.

5
History of P3 Hwys in US

• Prior to 2005 P3 were from DB to DFBOM.
• Since 2005, long term concession-based P3.
  Private sector assumes significant financial risk
  related to operation maintenance, and for new
  projects risks related to design and
  construction. The private partner assumes
  greater financial risk. For existing highways
  risks involved in operation maintenance. For
  new projects the design, and construction.

6
Benefits of P3

• P3 save 6-40 in construction cost, and limit
  potential overruns through fixedprice contracts.
  Private capital ease public debt.
• A good example is the Miami Port Tunnel project.
  The planners calculated 68M a year payments by
  FLDOT for design, construction, operation, and
  maintenance. The bidder selected required annual
  payment of just 33M.
• P3 are no riskier than procurement approaches.
  P3 can reduce public sector exposure by well
  structured concession agreements. Financial
  incentives to concessioners can assure high
  operation and maintenance standards. Proper
  allocation of risk between the two sectors can
  reduce overall risk, accelerate project delivery
  and reduce cost.
• A good example is P3 of VIDOT for I-95/Capitol
  beltway corridor where the concessionaire assumed
  the financial, technological and operational
  risks of implementing a variable toll rate based
  on congested (peak time) system. It assumed the
  risk for the expected return if the project is
  successful.

7
Benefits of P3

• P3 encourage innovations and greater introduction
  of IT at the construction stage to achieve lower
  DPV for the project. Life time savings in
  operation and maintenance costs.
• P3 shortens project completion significantly.
  Immediate availability of private capital
  accelerates the project that otherwise will be
  delayed until public resources become available.
• The concession for improving 800 bridges in
  Missouri was assigned to one private partner per
  bridge. It will take 5 years instead of 20 years
  to the public sector.

8
Private Toll Roads in the US, 2008
9
Long term (LT)Concessions of Existing Highways

• Chicago Skyway P3
• Description 1st LT concession of existing toll
  road in US. 7.8 miles. Connecting the Dan Ryan
  EXPWY in south Chicago with the Indiana toll
  road. Private consortium includes Spanish Cintra
  and the Australian Macquarie. Both toll roads
  developers.
• Terms The Concessionaire paid upfront the City
  of Chicago 1.8B and will operate and maintain
  the toll road for 99 years, collect all revenues
  for the 99 years. Revenues will be used for
  operations, and maintenance, repay debt, and
  contribution to equity. Annual toll prices were
  preset through 2017, and capped thereafter at the
  greater of 2, CPI, or Per Capita GDP. Chicago
  used the proceeds to fund several programs.
• Indiana Toll Road (ITR)
• Description Competitive bidding to operate and
  maintain the east-west 157 miles road connecting
  the Chicago Skyway and the Ohio Turnpike. Again,
  Cintra and Macquarie won the contract.

10
Chicago Indiana P3 Toll Roads
11
LT Concessions of Existing Hwys

• ITR (cont. )
• The concessionaire paid upfront 3.8 B. Again,
  BOT for 75 years. Unlike Chicago, Indiana
  invests all in the 10 years road improvement
  projects, and transportation projects for the IN
  counties.
• Evaluation Both significant upfront private
  capital. Long term concession. Mature with
  existing customers.
• Pocahontas Pkwy
• No proven customer base for a large upfront pay
  by concessioner. 9 miles bypass, southeast of
  Richmond VI connecting I-95 with I-295. State
  funded through a non-for-profit entity that
  issues construction bonds. When opened no
  sufficient toll revenues to pay the debt. VI
  decided to convert from non-profit to LT
  concession type P3.
• Terms 99 years concession with an Australian
  toll road operator. Price Included debt,
  maintenance and repairs by VDOT and the
  transaction costs. Prices capped to provide
  necessary returns. If excess revenues result
  then shared with VDOT.

12
PPP New Highways

• Impetus Intermodal Surface Transportation
  Efficiency Act (ISTEA), 1991. Expanded toll
  facilities eligibility for Federal aid for
  construction (re), resurfacing, rehabilitation,
  conversion to toll roads. Allowed also State
  funding and shared responsibility with private
  sector. Exception Interstate system.

13
PPP new Highways Principles

• Always PPP where ownership shifts to public
  entities
• Always existence of non-toll alternative road

14
Rt. 91 in Ca.

• Description 10 miles 91 express 4-lanes within
  the median area of SR 91. Connecting 55 Freeway
  near Anaheim to run east-west to the border of
  Riverside County. Affluent local population, 8
  annual increase in traffichigh congestion.

15
SR 91
16
Rt. 91 Ca. Nature of PPP, Operation

• BTO. CPTC Corp. built it, cedes ownership to
  State in exchange for 35 years lease to operate
  the road. Toll charged and 50 discount for 3
  people in car.
• Demand sensitive pricing by time of day and
  distance.
• Guaranteed 65 MPH otherwise money back
• Fully automated operation
• Immediate removal of non-operating vehicles.
• Results Profitable from first year. Average
  occupancy 1.65 where 20 of which are carpoolers
  (3)
• CPTCs revenue increased 45 in its third year of
  operations, mainly because it was able to steeply
  increase average tolls. Vehicle trips rose 8 to
  25.4k/day for the year.

17
Dulles Greenway

• Built as BOT in 1995 in Virginia. 15 miles from
  Dulles Internl Airport to Leesburg. 4 lanes and
  250 ft right of way. Private consortium
  financed, built, and operates it. Connecting the
  Beltway near D.C. (I-495) with Dulles Airport.
• Special legislation to establish prerequisites
  for construction operation of a private toll
  road
• A commission was set up to regulate applicants,
  supervise, control operators, and approve/revise
  prices.
• Total estimated cost 326M. 68M initial
  investment by partners of which 22 equity and
  46M guarantee against project risk. 202M by
  consortium of 10 lending institutions.
• http//americancityandcounty.com/mag/government_ma
  king_inroads_private/
• http//americancityandcounty.com/mag/government_ma
  king_inroads_private/

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19
Dulles private Toll Road
20
Greenway Features

• BOT. Transferred to State (VI) after 40 years.
  Subjected to utility style regulation. Targeted
  return 21.
• Prices fixed for all day and all 7 interchanges.
  In 1995 price 1.75 ridership 10K vs. anticipated
  30K. In 1996, price lowered to 1 ridership
  grew to 17K. In 1997, price increased to 1.15.
  Toll collection below anticipation.

21
Lessons learned

• Drivers are reluctant of paying tolls that do not
  vary by distance and time of day. Demand
  sensitive pricing (discriminatory prices) also
  assure higher revenues, and avoidance of
  congestion.
• Private toll road companies face difficulties in
  land acquisition and managing environmental
  concerns. Rt. 91 had no land acquisition while
  the Greenway suffered additional cost related to
  delay in land purchase. DOT enjoys eminent domain
  provision in assembling land. Timely land
  acquisition added to the cost of the Greenway.
• Private companies unlike public entities cannot
  finance using tax exempt securities. Thus,
  private companies pay higher interest.
• Private companies unlike public entities do not
  enjoy sovereign immunity. Full liabilities for
  accidents adding in case of BOT additional
  operating cost.
• Toll roads should enjoy existing demand and not
  be subjected to induced development that will
  produce travel demand. The initial cost of toll
  roads includes high land acquisition and
  construction while revenues are low extending for
  a long period of time.

22
Lessons learned (Continued)

• Metropolitan roads that serve peak time traffic
  (e.g. Rt. 91) are more financially viable than
  intercity roads (e.g. the Greenway).
• Most private investments have alternative use in
  case of failure. No alternative use for failed
  toll road which raises uncertainty and higher
  financial costs.
• Success requires one company to build and operate
  the toll road for a long period of time.
• Success requires simple and immediate land
  acquisition
• Success requires a committed political champion

23
Problems with Dulles Greenway

• Fixed price for tolls. Demand sensitive prices
  over distance traveled, time of day, week
  day-weekend
• Excessive regulation by State/lenders for toll
  restructuring, change of speed
• Real cost of regulation in time and expenses
• No tax exempt securities raising developers
  interest payments
• Accidents and other liabilities absent for public
  roads that enjoy sovereign immunity
• No eminent domain provision to acquire necessary
  land. Negotiations for land took time and
  additional resources adding to cost
• Expensive project that is contingent upon
  stimulation of land use or induced traffic in the
  remote future with high risk

24
BOT Tunnel in Hong Kong

• Feb 1988, the HK Govt granted a 30 year
  franchise to a private consortium. Longest road
  in HK 4 KM twin tube 4 lanes tunnel and
  approaching lanes. Completed 2 months ahead of
  schedule at TC of 276.5M
• Financed completely by private sector
• Shareholders contributed equity 1 to 2.6 debt
• Risk for non-completion ran for just 18 months
  construction period. Risk was low because the
  tunnel method used was well known. Good
  reputation of contractor, and 400K per day
  penalty
• Cost overrun risk was overcome by several
  guarantees of shareholders. To ensure project
  quality, a 10 year performance bond to address
  performance risk was put up by contractor
• Post completion risks ran for 12 year loan
  period. Shareholders purchased i.r. cap. Cash
  flow risk was mitigated by HK govt approval to
  increase tolls.

25
LT Concessions for New Hwys

• Texas, Virginia and Florida lead in P3 for new
  and capital
• improvements. TxDOT initiated the innovative
  Trans-Texas Corridor
• (TTC) projects. TTC is a proposed network of
  super-highway
• corridors that could include separate lanes for
  passenger vehicles, and
• large trucks, freight and high speed commuter
  railways, water lines,
• oil and gas pipelines, electricity and
  communication services.
• TTC must be built with P3. Principles of TxDOT
• It will oversee planning, construction,
  maintenance.
• Government needs innovations of private sector.
• TTC is a LT, concession based P3 which includes
  private sectors share in design, construction,
  financing, operation and maintenance(1).
• For each segment 1. A competitive bidding. 2.
  The consortium provides a master development and
  financial plans. 3. Development of 1st facility
  under a separate facility agreement.

26
Hi Occupancy Toll Lanes (HOT)

• VIDOT and a private consortium agreement for a
  concession to design, build, operate and maintain
  2 HOT lanes on 14 miles portion of the Capital
  Beltway. Concessionaire will construct 2 general
  purpose lanes and convert the two innermost to
  HOT.
• Toll revenues will finance 1.4B of the 1.8B
  expected cost. 588M loan from USDOT, 589M
  private bonds, and 350M consortium equity, and
  409M of state sources.
• PPP is possible for projects that generate
  negative profits bidding on minimum subsidy.
  Used for low traffic bridges in Missouri, and
  BARTs Oakland Airport connection.

27
Federal Programs encouraging P3

• Private Activity Bonds. IRS allowed issuance of
  public issuer of private Tax exempt bonds (PABs)
  to finance privately developed and operated hwys
  and freight transfer facilities. The private
  developer is deemed the borrower and is
  responsible for the repayment. The total Federal
  PABs is limited to 15B and allocated by the
  Secretary of USDOT.
• TIFIA. The Transportation Infrastructure Finance
  and Innovation Act, 1998. Federal direct loan,
  loan guarantee or a line of credit. For direct
  loans, payments start up to 5 years and final
  maturity 35 years after project completion.
  USDOT may allow payment deferrals. Private
  sector is allowed to combine TIFIA with PABs for
  P3 transactions.

28
Managing Risks in P3

• LT Toll concession (or lease, franchise)
  agreements where private consortium design,
  finances, builds, and maintains a toll project
  for 35-99 years in exchange for toll collection.
• Advantages pool risks and deploy expertise
  across multiple countries. Innovations in toll
  collection eliminate any congestions at the
  booths.

29
Managing Risks in P3

• New innovative approach to transportation
  funding. Risks exist to the public sector,
  however, they are manageable and can be
  mitigated. Create well balanced P3, perform due
  diligence before committing to project, and
  negotiate well structured concession agreements.
  
• Agreements should specify performance standards
  for facility conditions, safety measures, levels
  of service, and maintenance obligations. Failure
  to obey may revert right to collect tolls. Also,
  existence of public alternative will reduce use
  of the poorly maintained P3 facility.
• Private operators accountability to public
  authority and to the users which are the source
  of revenues assures high standards. In Indianas
  Toll Road Concession, standards were higher than
  when the State operated it. No formal standards
  for public operation.

30
Managing Risks in P3

• Public-Public Partnerships are not a good
  substitute for P3
• Public entity does not enjoy unlimited authority
  to issue debt, and public funds are limited.
  Thus, PPPs equity contribution that yields
  higher return than debt should not be avoided.
• Private equity is another source of investment
  proceeds that is less confined than debt.
• Equity risk is borne by the private rather than
  by the public sector.
• Much of the success of P3 is attributed to the
  innovative and superior service, and
  accountability for its customers. Protection of
  equity investment in a competitive environment
  lead to innovations. Private bidders for P3 must
  incorporate cost and service innovations in their
  proposals. Congresss PAB program that allows
  tax-exempt bonds enables private entities be at
  leveled field with public sector.

31
Managing Risks in P3

• Private investors will be interested in just
  profitable routes
• 1. Investment of private capital frees public
  sources of revenues and debt to other
  transportation projects.
• 2. Possible packaging in P3 procurements of
  various return and risk projects. Used in Mexico
  for toll roads and bridges.
• 3. Bidding on the lowest subsidy for
  non-profitable projects. Example, the Port of
  Miami Tunnel or the Oakland Airport Connector for
  design, construct and operate.

32
Managing Risks in P3

• Price regulation when Private toll operators
  enjoy monopolistic power
• Concession agreements for toll facilities often
  set ceiling limits. Hikes are allowed for
  inflation, changes in GDP per capita, a fix
  percentage etc. In case of congestion pricing,
  allow operator to vary tolls based on demand
  price elasticity.
• Failure to comply lead to shift control to the
  public authority.
• Setting toll rates is important in a constrained
  or monopolistic market. Prices should not exceed
  marginal social cost. In a constraint market
  with monopolistic power, shadow tolls can be
  established and the revenues are paid by the
  public authority. Thus, the concessionaire
  efficient performance is reflected in the amount
  of traffic generated while shadow tolls are paid
  by the public authority.

33
Managing Risks in P3

• Price regulation when private operator enjoys
  monopolistic power
• Another option is a regulator that approves
  private charged rates. For Dulles Airport the
  regulator is allowed by State law to approve the
  higher price of the three for the period 2013
  through 2020 1. The increase of CPI plus 1. 2.
  The increase of GDP. 3. 2.8.
• Revenue sharing to regulate the private
  partners return on investment. Limits private
  partners incentives to develop innovations since
  the public partner can reap extra profits. Can
  encourage the private partner to overcapitalize
  the project in order to increase revenues without
  reaching the maximum rate of return. Best is to
  protect consumers by regulating prices without
  hurting incentives to innovate. Price regulation
  rather than regulation of rate of return.

34
Managing Risks in P3

• Congestion pricing appears to improve traffic
  flow and social benefits on all routes
• 1. On such toll roads, traffic is diverted from
  peak to off-peak times and NOT to other roads.
• 2. Diverts traffic from other roads to toll
  roads because of time saving and certainty.
• 3. Managing demand on freeways by congestion
  pricing during peak time improves traffic flow.
• 4. Congestion pricing can divert traffic to
  transit, which leads to increase net benefits.

35
Advantages of Tolling

• A safe and predictable source to serve the debt,
  maintain the road in good condition.
• Creates a direct voluntary (market) link between
  the provider and the consumer, assuring high
  performance by both the producer and employees to
  satisfy customers. Customers pay for service
  they receive every time they enter the road and
  will enter only if the benefits exceed the toll
  price.
• Under tax-and-grant system, the public sector
  produces a wish list of transport projects.
  Assuming no net social external benefits, private
  investments in roads justifies economic viable
  projects. R. 91 in CA is an example of combined
  private sectors initiatives and tolling.
• Variable tolls best to manage traffic flow.
  Stop-and-go traffic reduces capacity of vehicles
  per lane from 2,000 per hour to 1,200. Traffic
  engineers can calculate pricing to maintain
  1,700-2,000 veh/hour/lane.

36
Advantages of Tolling (cont.)

• Price adjustment raises the efficient use of
  lanes. Example, tolled R. 91 is 1/3 of the
  entire lanes but carries ½ of rush hour total
  traffic because of its free flow flexible pricing
  (1).

37
Reasons for Customers Use of Toll Roads

• Research in Ontario, Canada related to the 407
  Express Toll Route revealed 3 reasons
• Time saving
• Reliability and convenience of the trip
• Safety of the hwy.

38
407 Private Toll Road, Ontario, Canada
39
407 private Toll Road
40
Traffic Revenue Model

1. Projections of population and land use in
   corridor
2. Estimate Trip Generation
3. Traffic Assignment to different roads based on
   origins Destination the time on each route
4. Time saved ( per hour) and likely toll rates
5. Forecast volumes willing to pay the toll and
   divert to the new road
6. Annual revenues calculated
7. Annual operating costs
8. From 6 7 annual profits

41
Costs Estimates

1. Capital costs estimated include design,
   permitting, land, construction, legal and
   financing fees plus reserve fund for uncertainty
   and bond insurance against default (to raise the
   debt rating and lower the interest rate).
2. Landers want cushion termed coverage ratio
   between net revenue and debt services obligations
   at 1.3 ratio.
3. 25-30 years bonds with fixed interest rate. Toll
   rates are set based on constant debt service
   requirements through the life of the loan. Holds
   if revenue forecasts are conservative and no
   inflation.

42
Problems with Traditional Model

• Traffic forecasts were on the high side.
  Population growth or real estate development in
  corridor did not materialize.
• This uncertainty creates pressure for larger
  reserve funds, reduces credit rating, need to
  raise faced interest, call for shared tax money
  and elimination of some road projects.
• The old model of paying off the bonds and
  removing the tolls is impossible. Also, roads
  need complete rebuild every 30-50 years.

43
Innovative Financial Alternatives

• GARVEE bonds State DOTs borrow by pledging a
  portion of their future federal highway grant
  receipts to service the debt. A method of
  financing projects but is small in relation to
  the amount available for investment.
• Shadow tolls A way to enlist the private sector
  in financing, building, and operating existing
  road. Government commits a consortium over the
  life time of agreement, pre-defined per vehicle
  driven or per vehicle/mile of traffic. Saves
  tolls collection costs. Limitation No new
  revenues are generated. Portugal, Spain,
  Finland, Britain. Politically popular to current
  officials while letting future government pay the
  cost. New European version is Availability
  Concession where long term rental payments are
  made. Like of prisons cells, and schools.

44
Innovative Financial Alternatives (Cont.)

• Non-Profit Corporations allowed to issue
  tax-exempt toll revenue bonds. Termed also 63-20
  corps, after the numbering by IRS. Non-profit
  corp. had to be an arm length from both state
  DOT, and from for profit construction corp.
• Initiated by engineering and construction firms
  interested in design and construction projects.
  The State is the other interested party in
  getting a road it may not otherwise get.
• The firms lose interest once the project is built
  and their fees are paid. The non-profit has no
  equity and no shareholders with vested interest.
  Its directors are chosen after the road is
  complete and thus unaccountable for failure.
  Indeed all failed.

45
Long Term Toll Concession Advantages

• Greater access to capital. Traditional bond
  investors in toll roads get no upside advantage
  because they do not share profits and are only
  concern with downside risks. Debt coverage
  ratioannual revenues/annual debt services 1.25
  to 2.00. This reduces the amount of capital that
  can be raised for construction in tax-exempt
  markets.
• Private concessionaires can fill in the gap with
  equity money. In Australia large IPOs of stocks.
  Concession Cos. are flexible in the ratio of
  debt/equity. Bond financing recovers capital
  entirely in 25, 30 or at most 40 years.
  Concessions can be structured for 75 years.

46
Long Term Toll Concession Advantages

• Financing based on bond markets requires large
  amount to reserve funds since all the capital is
  under debt that must be met. Provider of equity
  can deny dividends when revenues are tight for
  years. Thus, concession toll road funded by a
  mix of equity and debt can better survive during
  years of low revenues.
• New financial instruments Goldman Sachs and a
  British report estimate 250B available for toll
  roads. In the 1st half of 2006, 100B was
  globally raised for infrastructures mostly in the
  US. Pension funds are interested because of long
  term prospects. The problem is lack of
  investment opportunities not in available
  capital.

47
Long Term Toll Concession Advantages

• Toll rate flexibility Set at market value and
  raised by the concession limits. Tolls of public
  roads are not raised as long as debt service is
  paid, and do not reflect rising opportunity cost
  of time saved or increase of the time saved.
  Tolls seldom reflect the effects of inflation.
  The Indiana Toll Road kept prices constant over
  20 years regardless of increase in traffic flow,
  causing congestion. Often when a road needs
  significant improvements, tolls are raised by
  1/3, causing a decline in usage which could have
  been avoided if LT inflation would have been
  used.
• Private vs. public operator can upgrade
  electronic systems while public agencies face
  difficulties in raising the capital to do so.

48
Long Term Toll Concession Advantages

• (Occurs approx. every 7 years).
• Private operator can easier adjust staffing and
  training.
• Public operators defer maintenance when necessary
  while private operator must comply by contract or
  to maintain customers.
• Private operator has easier time implementing
  congestion tolling responding to changing demand
  level and price elasticities.
• Labor cost of toll collectors in the public
  sector is double of the private sectors. Also,
  raises in the public sectors wages are input or
  seniority based rather than by productivity.
• When toll roads are operated by cities then
  maintenance is conducted by the relevant city
  department and is queued there with all other
  jobs uncontrollable by the road management.
• Private toll road operators can combine toll
  collection across state lines.

49
Long Term Toll Concession Advantages

• Expertise gained of major projects can be
  globally transferred by private operators from
  one place to other. State Turnpike experience is
  lost if no more major projects are internally
  initiated.

50
Funding of Roads

• US toll revenues enable tax exempt bonds, and
  hwy trust funds supported by dedicated motor fuel
  tax.
• Europe No hwy trust fund nor tax exempt bonds.
  Toll funded long term concessions 1st France
  then Italy, Spain and Portugal. The toll roads
  companies started out as state owned and
  controlled while since the mid 90s they were
  sold. These companies invest in Latin America,
  Eastern Europe and the UK.
• Australia Toll road companies operate under LT
  concession agreements operate all urban
  expressways in Melbourne and Sidney since 1990.
  Now, these companies went global and developed
  road mutual funds for LT investors.

51
LT Concession Models

• Works well for large scale hwy, bridge and tunnel
  projects. Reasons
• Private equity can be raised if excess demand and
  willingness to pay exist for LT right to toll.
  Patient capital is less vulnerable to default in
  the early years of new toll roads.
• The private sector absorbs the risks of cost
  overruns, unmet construction schedules, traffic
  shortfall. Accountability.
• Concessioner that operates and maintains the road
  has no incentive to cut corners in the
  construction phase.
• Innovations by private sector e-collected tolls,
  demand sensitive pricing by time of day and the
  day of the week (R. 91). Same in Paris, the
  mother co. of R. 91 where a tunnel was built
  under Versailles to complete a ring road (A86).
• In Melbourne, a private toll co. linked 3
  existing roads in densed urban areas by tunnels
  and elevated roads.

52
References

• Samuel, Peter, 2007. The Role of Tolls in
  Financing 21st Century Highways, the Reason
  Foundation, Policy Study 359, Los Angeles.
• US DOT, 2008. Innovation Wave An Update on the
  Burgeoning Private Sector Role in U.S. Highway
  and Transit Infrastructure, July 18.
• US GAO, 2008. Highway Public-Private
  Partnerships More Rigorous Up-Front Analysis
  Could Better Secure potential benefits and
  Protect the Public Interest. GAO-08-44.
• Poole, Robert, and Samuel, Peter, 2006. The
  Return of Private Toll Roads, Public Roads, Vol.
  69 (5) March/April.

53
Privatizing Transit Systems

• Problem Real Cost per transit trip has increased
  three times since Congress gave cities and states
  incentives to take over private transit in 1964.
  Worker productivity expressed as number of riders
  carried by worker declined by more than 50
  percent, the amount of energy to carry a bus
  rider one mile increased by 75 percent, and the
  number of transit trips per urban resident
  declined from over 60 per year in 1964 to 45 in
  2008. Over the same period, real operating
  costs per rider tripled, while fare revenues rose
  merely 8.
• (For entire discussion, Randal OToole, Fixing
  Transit The Case for Privatization, CATO
  Institute, November 10, 2010)

54
Cost of Moving passenger one mile

• Mode Cost per Passenger Mile Public Subsidy
• Airlines 15c 1c
• Driving 23c 1c
• Amtrak 60c 30c
• Urban transit 1.00 79c
• Buses use far more energy and pollute much more
  per passenger mile than the average car. Transit
  agencies try more to get federal and state
  appropriations than sales from satisfied
  consumers leading for visible capital improvement.

55
Privatizing Transit

• Significance of Problem Dependency on state tax
  collection makes transit funding vulnerable to
  economic trends. State operating funding are
  based on sales and income taxes that are very
  elastic to economic down trends. Property taxes
  collections that are less sensitive to economic
  trends provide only 2 of transit operating
  funds.

56
History

• Until 1964 most urban transit privately owned
  profitable.
• Commuter rail service in Boston, Chicago, NY, and
  Phila were losing money and threatened to
  discontinue service
• These cities could not afford the increase that
  will result in auto traffic to these cities and
  the RR lines crossed state lines.
• Congress chose to support these transit systems
  but could not limit funding just to these 4
  cities thus allowing all transit authorities to
  apply for capital grants. Congress expected that
  operating costs will continue to be covered.
• Private goal was just max. of profits. Public
  goals became mixed solve urban problems, save
  the CBD, help the poor handicapped

57
Productivity

• Routes were added into unprofitable areas
• Average people onboard of a bus declined from
  12 in 1977 to 12 in 1977 to 9 in 2008.
• of people per bus mile declined 40 from 1964
  and 2008.
• of transit riders per employee declined from
  60K to 30K after 1964
• Amount of energy used to move an auto passenger
  one mile declined 30, and increased 76 per
  transit bus between 1970 and 2008.
• In 2008 transit used 3,360 and auto 3.440 BTUs
  per passenger/mile

58
Fares Costs

• 1964 through 2008 Fares per trip using GDP
  deflators) declined 4 while operating cost
  inclined 184
• 1965 through 2008 Total operating subsidies have
  grown (again, using GDP deflators) from 0.6B to
  24.5B.
• Reasons for the rise in costs S Congress
  required workers unions endorsement for grant
  applications. Transit agencies invested in
  unnecessary high cost systems.
• Since 1995 all governments provided 500B in real
  terms in operating subsidies.
• 1965 through 2008 Use of transit declined from
  60 per year to 45. Half of urban areas generate
  less than 10 trips per resident a year.

59
Transit Trips per Operating Employee (Randal
OToole, 2010 4
60
Findings

• Presence of expensive rail transit system does
  not affect ridership.
• Per capita transit ridership remained steady at
  40-50 trips per year while personal driving grew
  120. From 1970 to 2008, transits share of
  motorized urban travel declined from 4.2 to
  1.8.
• As a result of the 2008-9 recession, over 100
  transit agencies raised fares and/or cut service.
  NYs MTA raised fares by 30 and eliminated 2
  subway and 35 bus lines. NJ Transit raised fares
  25

61
Transit Tax Crisis

• 1/3 of operating costs comes from fare box, 1/3
  from state or local mostly dedicated sales tax,
  7 federal and 25 annual unsafe appropriations.
  Sales tax are vulnerable to economic conditions.
  Transit agencies are reluctant of creating
  reserves for recessions when mostly sales tax
  decline. The reason being that government may
  require the use of such reserves. Thus, transit
  agencies often resort to low return investments
  to avoid surplus. With little reserves, agencies
  have to cut service at a slight recession when
  dedicated sales tax decline.
• In most cities fares cover less than 20 of
  operating costs. So, 10 increase in fares
  covers raises only 2 increase in revenues. It
  is perceived as tax increase, unions do not
  regard it as their problem. Instead of the
  riders and providers, demands are aimed to the
  State.

62
Transit Debt Crisis

• The federal government pays up to 50 of capital
  outlays on rail while the rest is mostly debt
  borne by the city.
• Federal funds pay most of new buses which are
  also inexpensive. Thus, bus only agencies do not
  need to borrow.
• MBTA of Boston spends over 2 of 3 spent on
  operations. St. Luis Metro spends 3 of every 5
  spent on operations.
• A huge burden is the healthcare costs. Portland
  1.18 on every 1 of salary NJT, San Franciscos
  BART, Washington Metro 0.75-0.85 in benefits on
  1 salary. Transit boards agree to future
  liabilities that unaffect their present
  operations.

63
Transit Infrastructure Crisis

• A 78B backlog of work to bring transit assets
  into a state of good repair (Federal Transit
  Administration, 2010). Annual maintenance
  spending is less than is needed just to keep rail
  and bus systems in their current state of poor
  repair. The highway system is funded adequately
  by gas tax, tolls, and other user fees. The
  highway and bridges have improved since 1990.
• Bad maintenance condition of seven largest
  systems which carry over 50 of all transit trips
  totaling 50B of which 46B was for rail transit.
  ¾ of the 400 transit agencies was due to rail
  deficiency.

64
Transit Infrastructure Crisis

• The critical time when most of a rail lines
  infrastructure needs rehabilitation or
  replacement is when it reaches 30 years. The
  oldest parts of Atlantas reached 30 in 2009, San
  Diegos original light rail line in 2011, and
  Baltimore, Buffalo, Miami, Portland, Sacramento,
  and San Jose before 2020. None of them has the
  financial resources for the necessary
  rehabilitation when they are worn out. Some rail
  lines will cease to exist.
• Obamas head of the Federal transit
  Administration suggests not to expand rail when
  operating costs are not fully covered. Instead,
  to designate painted bus rapid Transit.

65
Transit Innovation Crisis

• Public transit agencies incorrectly replaced
  low-cost buses with high-cost rail.
• Dial-a-ride allows people to connect for a
  small bus pick up close to their door while
  allowing others to be picked-up or dropped. San
  Joses Santa Clara County transit District
  adopted the service but failed due to access
  demand. Taxi Cos sued the District for
  infringing on their exclusive right to carry
  people door-to-door. The District ceased
  service. Automation through the internet could
  solve the excess demand of the call center.

66
Transit Innovation Crisis (Contin.)

• Rigid commuter rail that is a capital most
  expensive form and leads among limited of
  points have been constructed rather than adding
  dial a bus.
• In the 1970s, Atlanta, D.C., San Francisco
  creating rail with technology dated back to 1904
• In the 1980s, San Diego, Portland, Buffalo
  built light rail of 1939
• In 2001, Portland added streetcars of technology
  dated back to 1888.
• Mass rail transit built after 1976 still carry
  less than 1 of passengers travelling.

67
Transit Subsidies

• Supporters of such subsidies justify the
  subsidies by exaggerated externalities. Randal
  OToole showed in a 2008 CATO publication that
  per passenger/mile it is the same as driving.
  BTUs by car is 3,400, while 3,400 by bus. Rail
  transits is 2,500 but include also high building
  energy. Total energy cost of driving is 5,500
  BTUs for driving and 6,400 for rail transit.
• Considering fare box charges including capital
  and operating subsidies, cost per passenger/mile
  for transit is 0.98 while for car only 0.22.
• No federal or state subsidies for highways. All
  is funded by user fees. Congress authorized in
  2008 diversion of more funds from highway user
  fees to transit.

68
Privatize Transit

• Transit productivity has declined since transit
  managers are not required to cover costs.
  Greater budget leads to improve stance of
  managers.
• Transit creates new programs during economic boom
  time that are not sustainable in the long run.
  Lobbying groups demand increased subsidy in
  recessions when revenues from State sales tax
  diminish.
• Politicians invest in expensive infrastructure in
  the short run, ignoring long term financial
  consequences.
• Public failure to innovate unlike the private
  sector.

69
Examples of Private Transit

• Atlantic City Jitney Assoc. Group of private bus
  owners that operate routes from NJ Transit to the
  hotels subsidized by the latter and 4 charge
  fares. Operates since 1915.
• With the construction of bridges, highways
  tunnels, and trains, Hudson subway, ferry service
  across the Hudson ceased in the 1960s. In 1986,
  the NU system of Ferryboat service across the
  Hudson started, including ferryboats and
  buses-one fare. Following 9/11 with the
  interruption of subway service, many boats were
  added. NY Waterway is doing well despite
  competition by subsidized buses and PATH subway
  trains.

70
Contracting Out Bus Services

• Colorados legislature required that half of
  Denvers bus service is contracted out. The
  private operator charged 5.01 per bus mile in
  2008 compared with publics cost of 9.65 (plus
  taxes and fees).

71
Effects of Privatization

• Focus on high demand areas like CBD and reduced
  service in suburbs.
• Use more technology and reduce on infrastructure
  investment.
• Use vehicles size to address demand and economize
  on labor.
• Private investors will use low cost, flexible bus
  service to replace when amortized rail,
  streetcars, light rail.
• Private operators may keep subways, suburban rail
  where 60 of operating costs are covered by
  fares.
• Bus service will continue in highly dense areas
  in low density use 20 seats buses instead of
  existing 40 seaters.

72
Privatization Action Plan

• Switch from gasoline tax to currently 1.5c per
  mileage fee of driving. Allow higher fees on
  congested roads all electronically collect.
• End subsidy of transit. Transit federal funding
  aimed at specific objectives like reduce
  pollution or congestion. User fees will enable
  privatization of transit. Beware of monopolistic
  power.
• Federal funds should be based on user fees
  collected to encourage transit agencies to
  improve service. Rely more on user fees and less
  on general ledger.

73
Conclusions

• Public ownership of transit led to decline of
  productivity, increase in costs, and
  insignificant improve in output. 90 of federal
  subsidies are absorbed by higher wages of
  monopolistic unionized workers. Monopolistic
  transit leads to strong political lobby groups
  that promote expensive construction, transit
  contractors, manufacturing of railcars.
• Privatization will lead to responsiveness to
  users, less better service, and lower costs.
• OToole Randal, Fixing transit The Case for
  Privatization, Policy Analysis 670, CATO
  Institute, November 10, 2010.