Mr. Chairman and members of the committee, my name is Geoffrey Segal. I am the director of government reform policy at the Reason Foundation, a public policy research and education institute based in Los Angeles.
Reason first began researching privatization and public-private partnerships (PPPs) in the late 1970s, and transportation PPPs since the late 1980s. Our experts have advised numerous governments, including many departments of transportation on how innovative road operations and financing can help relieve congestion and improve mobility.
The average rush-hour commuter in Phoenix wastes 49 hours a year sitting in traffic. And with the area's population projected to swell by another 2 million people over the next two decades, traffic congestion will get much worse.
Today a rush-hour trip in Phoenix takes 35 percent longer than it would in clear traffic conditions. By 2030, Phoenix's delays will nearly double. What is supposed to be a 30-minute commute will take more than 49 minutes - 65 percent longer than it should. That's worse than traffic experienced today in congested cities like San Francisco and Chicago.
Congestion costs Arizonians a "hidden congestion tax." According to the Texas Transportation Institute (TTI), Phoenix area drivers spend about 26 hours per year in congested traffic at a per person cost of about $431, while drivers in the Tucson area spend about 19 hours in congested traffic at a cost of $324. Sadly, these figures grossly understate the true costs of congestion. True costs—when you add the costs of goods movement, unreliability, safety, and environment—are about 2.25 times the TTI estimate.
When you consider the impacts on local businesses and goods movement, you can imagine a "shrinking pie," with congestion reducing the job choices, worker choices and customer choices for a business or person.
Despite significant investments in transit and High Occupancy Vehicle (HOV) lanes, congestion continues to get worse. Congestion is not inevitable—we can beat it with a variety of transportation solutions. It will require a comprehensive strategy that incorporates new road capacity, converting underutilized HOV lanes to high-occupancy toll (HOT) lanes, and more-efficient transit solutions.
New Paradigm Equals New Opportunities
The global environment of transportation is entering a new paradigm. Like many states, Arizona finds itself at the convergence of two intersecting trends that demand fiscal attention: First, growing transportation needs are outstripping available capacity, and second, the need for maintenance and renovation of existing systems is eating up available resources. A failure to address these twin challenges will lead to even greater congestion in various forms and lowered relative reliability of service in the future. By any measure, these realities impact Arizona's economic competitiveness and its citizens' quality of life.
We can beat congestion. The challenge isn't as difficult as some perceive, but some fundamental reforms and innovative thinking will be necessary to help Arizona achieve its desired ends. How? If we take a global perspective, the answer becomes more clear—we must seek greater private sector participation and investment in providing for our transportation needs. Government cannot do it alone.
While the vast majority of transportation projects around the country continue to be funded from traditional sources—gas and vehicle taxes—a new funding paradigm is rapidly emerging. State and local transportation agencies are increasingly looking to supplement these sources with private investment. While public-private partnerships (P3s) are just one "tool in the tool box," they remain a promising and valuable tool available to policymakers that has been relatively untapped in Arizona. P3s come in many forms; the most relevant to this discussion is the operation of HOT lanes and express toll lanes.
Advantages of PPPs
Toll financing can help Arizona close the financing gap for new infrastructure. In addition, the PPP model has several advantages over the traditional model of transportation financing.
1. Access to large new sources of capital
The concession model is attractive to many different types of investors, including equity investors and lenders. More important, it opens the door to institutional investors such as pension funds. Infrastructure has become a fashionable asset class for a host of investors that don't invest in toll-agency bonds. Billions of dollars of private investment is available, as we've seen recently with the concession agreements for the Chicago Skyway and Indiana Toll Road.
2. Ability to raise larger sums for toll projects
New highway capacity is far more costly these days than it was when the Interstates were built. Hence, rebuilding and modernizing our freeways and Interstates will be far more costly than most people realize. There is growing evidence that the long-term concession model can raise significantly more funding for a given toll project than the traditional toll agency financing model. For a new toll road in Texas, for example, a toll traffic and revenue study estimated the ability to finance $600 million, but the project's cost was $1.3 billion. Texas DOT turned to a long-term concession approach, in which the private sector will finance the entire $1.3 billion project, in exchange for a 50-year concession. Three factors seem to drive such results. First, the concession agreement adds certainty to future toll increases that we've never seen with toll agencies. Second, the private sector seems more aggressive in both attracting traffic and holding down costs. And third, the private sector can take depreciation as a tax write-off, like any other business, but toll agencies can't, since they pay no income taxes.
3. Shifting risk from taxpayers to investors
Public-private partnerships involve parceling out duties and risks to the party best able to handle them. For example, the state is the party best able to handle right-of-way acquisition and environmental permitting, so those tasks and risks are assigned to the state. The private sector in these deals nearly always takes the risks of construction cost overruns and possible traffic and revenue shortfalls. Given the poor track record of the public sector in transportation mega-projects, being able to shift construction and traffic/revenue risk to investors is a major advantage.
4. More businesslike approach
The typical U.S. toll agency and the typical European or Australian toll road company are miles apart in their approach to everyday business. Private toll road companies are less constrained by political pressure and are more customer service oriented. They are quick to adopt cost-saving and customer-friendly technology and specialized products and services to meet customer needs.
5. Major innovations
One of the most important advantages of investor-owned toll road companies is their motivation to innovate, in order to solve difficult problems or improve their service to customers. Today, we know that variable pricing (also known as value pricing) works very well to eliminate traffic congestion during peak periods, actually maximizing throughput while maintaining high speeds. Electronic toll collection makes value pricing possible—but it was a private toll company in California that took the initiative to introduce and perfect value pricing; no state toll agency was willing to take the risk of doing so. Toll road companies are also good a value engineering—thinking outside the box to dramatically reduce the costs of new capacity. A case in point is the forthcoming HOT lanes project on the Beltway in northern Virginia. Virginia's DOT plans to add two HOV lanes in each direction on that section of the Beltway would have cost $3 billion—money that VDOT did not have. The private sector team's unsolicited proposal called for adding two HOT lanes in each direction, the same amount of physical capacity. That project will cost under $1 billion; thanks to value engineering that reduced or eliminated many "bells and whistles" that added large costs but very little real benefit. In France, an unsolicited proposal from a private toll firm resolved a 30-year impasse over completing the missing link—through Versailles—of the A86 Paris ring road. The company is completing the link as a deep-bore tunnel underneath Versailles, and is financing the $2 billion project with value-priced tolls.
Tolls as a Demand Management Tool
High Occupancy Vehicle (carpool) lanes were heralded as a solution to congestion. They were an early form of demand management, yet there is excess capacity on those lanes. Many are beginning to transition those lanes into High Occupancy Toll or HOT lanes to maximize the available capacity.
HOT lanes are freeway lanes priced (like other scarce commodities) so that demand will equal the supply of uncongested road space. Having some freeway lanes always operating under "free-flow" conditions is of great benefit to (1) emergency vehicles, (2) buses, (3) carpools and (4) everyone who really needs to get to his or her destination on time and is willing to pay a price to do so.
How do they work? Using variable pricing, congestion can be mitigated to ensure a free flow of traffic. As demand goes up so does the toll; equally, the price goes down with a drop in demand. This enables the operator to manage the flow of traffic dynamically and keep the lanes relatively free of congestion even at the height of rush hour.
Southern California—home to the country's worst gridlock—has had great success with HOT lanes. On Orange County's 91 Express Lanes, drivers pay a variable toll that goes up during rush hours, in exchange for access to a lane that is guaranteed to be moving at 65 miles per hour. If the average speed is less, commuters see their toll refunded.
In addition to Orange County, HOT lanes are currently operating in Houston, Minneapolis, Salt Lake City, Denver and San Diego. What they show is that variable pricing works. It maximizes throughput while remaining free-flow even at rush hour. Despite only having 33 percent of the capacity, the 91 Express Lanes handle 49 percent of freeway's traffic at rush hour.
And the region's entire transportation system is benefiting from the lanes. The 10-mile toll road generated nearly $40 million in revenues in 2005, money that will soon be enough to pay for upgrades to other freeways.
Success has resulted in a proliferation of proposals for more congestion-relief lanes in congested urban areas. Denver recently completed an HOV-to-HOT lane conversion with private-sector management. The Virginia DOT has received private-sector proposals to add two HOT lanes in each direction to the southwest quadrant of the Washington Beltway (I-495) and to add HOT lanes to I-95 approaching the Beltway and the Shirley Highway (I-395) within the Beltway.
As mentioned earlier, the toll lanes currently being negotiated on I-495 rescued a traditional road widening project collapsing under a barrage of local opposition. The concessionaire came up with a proposal that nearly eliminated the need to acquire extra right of way for the road, saving hundreds of homes from eminent domain condemnations, and reduced the project cost from about $3 billion to $700 million.
In a subsequent effort on I-395 and I-95, two private teams proposed expanding the HOV lanes and open them to single-occupant vehicles willing to pay a toll. The proposals involve adding a third-lane of about 28 miles on the existing facility, plus 20-mile extensions southward and new entry and access points and ramps. Further, substantial improvements to park-and-ride and bus facilities will also be completed. Currently the Virginia DOT is working out the details of a $999 million long-term concession.
In Maryland, the State Highway Authority has requested the private sector to advise it on the feasibility of private projects to add Express Toll Lanes to the Maryland portion of the Capital Beltway (I-495), the Baltimore Beltway (I-695), and several other major highways in the area.
Converting current carpool lanes won't be enough, though. The private sector could help finance a network of HOT lanes connecting all of the area's existing freeways. A HOT Network is an interconnected network of HOT lanes on the freeway system of an urban area, allowing congestion-free travel throughout the region. There are currently no HOT networks in operation, but a number of metro areas (including the San Francisco Bay Area) include them in their long-range transportation plans.
While Arizona doesn't have the money to finance such a project, private companies are willing and able. Arizonan and U.S. Secretary of Transportation Mary Peters recently said there are "billions of dollars that the private sector and lenders have amassed to invest in transportation."
The private sector has committed nearly $2 billion to add high-occupancy toll lanes near Washington, D.C., and $7.2 billion to build toll roads from Dallas to San Antonio. There are more than $25 billion in public-private partnership highway projects planned or already approved across the United States.
This model can benefit transit riders as well. Indeed, there can be real synergy between HOT or express toll lanes and bus rapid transit (BRT). The BRT concept has attracted much recent attention as a way of achieving service quality akin to that of rail transit, but at much lower capital cost thanks to the ability of buses to use already existing infrastructure. However, for the long-haul portions of express bus service, BRT proponents much prefer exclusive busways in order to guarantee reliable high-speed service (giving BRT a speed advantage over driving). But except in very rare cases (where one or two buses per minute can be justified), an exclusive busway is an enormous waste of the costly, exclusive right of way. Some time-saving can be achieved by operating express buses in HOV lanes (as in Houston and on the El Monte Busway in Los Angeles), but since successful HOV lanes fill up with traffic, the speed and reliability gains for buses are not sustainable long-term.
A much better solution is to operate BRT service on HOT lanes, as proposed in Reason's 2003 report. Electronic market pricing can ensure that the number of vehicles per lane per hour is limited to an amount compatible with free-flow conditions (typically no more than 1,700 vehicles/lane/hour). Hence, the HOT lane becomes a "virtual exclusive busway." From the transit operator's perspective, it obtains the service quality of an exclusive busway, but does not have to pay for it, thanks to the premium tolls paid by the automobiles that share the use of these lanes.
The first "virtual exclusive busway" is currently under construction on the Katy Freeway (I-10) in Houston. A number of other metro areas are currently studying the possible creation of a network of such managed lanes, serving as both congestion-relievers for drivers and as BRT infrastructure. They include Dallas, Miami, Minneapolis-St. Paul, and the greater Washington, DC area.
Concerns About Toll Roads
There are some common concerns about toll roads. I will address those concerns individually.
1. Double Taxation
Some are concerned that toll roads constitute double taxation. However, it's important to note that no one will pay a toll to use any lane that they are now using for free. It cannot be said more plainly: drivers in regular freeway lanes will still use those lanes at no charge. Furthermore, carpoolers in what are now HOV lanes will still use them at no charge when they become HOT lanes. The only difference is with solo drivers. They will have a choice of staying in the regular lanes, at no charge, or they can choose to use the HOT lanes if they're willing to pay a toll.
Where brand-new HOT lanes or express toll lanes are added to a freeway, or new toll roads are built, the only ones who will pay tolls are those who choose to use them.
It's also worth noting that the gas tax typically does not even cover the costs of ongoing maintenance of roads, let alone raise enough money for needed expansions and new roads. As a result, a substantial percentage of the costs of building and maintaining roads comes from sources such as property and sales taxes, where payments are completely unrelated to how much one actually drives. Money raised by congestion tolls could be used to replace these non-transportation taxes.
2. Induced Demand
If you build it, will they come? The idea of induced demand is really a way of measuring our failure to adequately invest in roads to begin with. Most research shows that induced demand, if it even exists, is really minor. Building more road capacity reduces congestion much faster than new cars come on the road. The problem is when we stop building new capacity and let congestion overtake us again.
Evidence shows that our demand for travel is maxing out—just about everyone has a car and is driving, so our ability to keep up with travel demand through new investments makes more sense than ever.
Furthermore, we've built our way out of congestion before. The interstate highway system added huge amounts of road capacity that kept congestion in check for 50 years. In fact, congestion really didn't begin to increase significantly until after 1980—about a decade after we stopped seriously investing in new capacity.
Cities like Houston that have increased road capacity to match rising travel demand have been able to make serious headway on congestion. Sadly, most cities always end up playing catch up, and with significant population growth investment and capacity expansion is the only way to go.
Enforcement is done by a combination of technology and visual checks for occupancy (as with HOV lanes). All electronic toll systems include video enforcement equipment, in which the license plates of a vehicle without a valid transponder and account are imaged so that follow-up action can be taken due to non-payment. Police can also use a handheld reader to ensure that the transponder on the vehicle is operating. Milwaukee has found a reduction in violations from the traditional HOV lanes, because frustrated solo drivers tempted to cheat and use the faster lane now are able to pay to do so, and the toll is cheaper than risking a ticket.
Transponders with embedded money work essentially as cash; the toll is deducted from the transponder itself and no record is kept of the transaction. Another option uses license plate recognition to identify users, and bills are paid through credit cards or other means.
4. Lexus Lanes
Opponents used to call the 91 Express Lanes "Lexus Lanes," implying only the rich would use them. But they've been proven wrong. The reality based on experience with California projects is that people of all income levels use these lanes, but very few people use them every day. Over a decade of data are available from the 91 Express Lanes in Orange County and the HOT lanes on I-15 in San Diego indicate that the vast majority of drivers—high and low income—use the HOT lanes only on occasion, instead of every day.
While studies of the 91 Express Lanes indicate that use increases slightly with income group, 20 percent of the users are from the lowest income group, and another 23 percent are from the second-lowest income group.
A 2001 telephone survey of San Diego I-15 Express Lane users revealed that 80 percent of the lowest income motorists in the corridor agreed that "People who drive alone should be able to use the I-15 Express Lanes for a fee." In fact, they were more likely to agree with that statement than the highest income users.
In 2005 there were more than 12 million trips on the 91 Express Lanes, with most people using the lanes as "congestion insurance." When people have to pick up their kids at day care, they know the toll is less than the late fees. When they have to make a flight or get to a child's soccer game, they know they have a traffic-free alternative. The lowest income users are least able to afford these costs of congestion, and studies show they welcome the choice.
Bottom line: It's not 10 percent of the people using the lanes all the time; rather, 90 percent of people using them 10 percent of the time.
5. Eminent domain
There is understandable concern that toll road privatization might lead to private companies acquiring the power to condemn land for right of way. To the best of my knowledge, none of the nearly two dozen state PPP enabling acts has delegated any such power to private partner companies. The eminent domain power is always reserved by the state, in its traditional role of acquiring rights of way for public-use infrastructure.
6. Uncontrolled tolls
The main purpose of value-priced tolling is to manage traffic flow. In those cases, pre-defined limits on toll rates defeat the purpose. Those rates must be allowed to vary, as needed, to keep traffic flowing freely at the performance level specified—such as Level of Service C. When such value-priced lanes are operated under a concession agreement, instead of limiting the toll rates, the agreement should limit the rate of return the company is allowed to make, with any surplus revenues going into a state highway or transportation fund. That is how California's original pilot program for long-term concessions dealt with the issue.
7. Losing control
The widely expressed fear that states will lose control of vital highways reflects a misunderstanding of a concession agreement. These documents typically run to several hundred pages, and may incorporate other documents (e.g., detailed performance standards) by reference. These agreements establish guidelines for who pays for future expansions and rebuilding, how decisions on the scope and timing of those projects will be reached, what performance will be required of the toll road, how to deal with failures to comply with the agreement, provisions for early termination of the agreement, what protections (if any) will be provided to the company from state-funded competing routes, what limits on toll rates or rate of return will be, etc.
8. Non-compete clauses
Clauses designed to protect toll road operators from the construction of new, parallel "free" roads have evolved over the years. The approach has changed from an outright ban on competing facilities to a wider definition of what the state may build—generally, everything in its current long-range transportation plan—without compensating the toll road developer/operator. And for new roadways the state builds that are not in its existing plan and which do fall within a narrowly-defined competition zone, the current approach is to spell out a compensation formula. The idea is to achieve a balance between, on one hand, limiting the risk to toll road finance providers (of potentially unlimited competition from taxpayer-provided "free" roads) and, on the other hand, the public interest.
Two recent long-term lease transactions provide a useful illustration. For the Chicago Skyway, there were no protections for the private-sector lessee. For the Indiana Toll Road, the agreement set up a narrow competition zone alongside the toll road. The state may add short, limited-access parallel roads (e.g., local freeways), but if it builds a long-distance road within the competition zone, there's a formula for compensating the private sector for lost toll revenue.
The success of existing private sector participation in transportation services highlights the potential benefits for the vast majority of transportation projects needed in Arizona. Public-private partnerships offer some major advantages, none more important than relieving congestion and improving mobility.
Business as usual won't work any longer. Arizona's policy makers need to embrace a new paradigm for highway funding and operation.
Variable pricing has become widely accepted as sustainable congestion relief technology, and is supported by the political left and the right, from environmental groups like Environmental Defense, to local business associations.
Implementing variable pricing is a top priority of the US Department of Transportation's National Congestion Initiative, and has been highlighted by the President in his annual budget blueprint revealed February 5 of this year. The US DOT will be offering financial support to urban areas who implement new pricing project.
As the think tank that has done the most research on public-private partnerships and their applicability to transportation infrastructure, the Reason Foundation welcomes the opportunity to be of further assistance this committee and body as a whole, as you learn more about these new approaches. Please feel free to call upon us.