Thursday, 28 June 2012

Does the New York State Thruway Authority need reform?

A curious difference in public policy between the United States and other developed countries is the preponderance of elected quangoes in the US and almost complete absence of autonomous commercial government companies.   I raised this issue with some American friends in the past and it came down to the core point that if government is ever to be involved in anything in the US, then people want their politicians to be able to interfere in the operations, planning and funding of government owned entities.  As a result, the model of government owned company "as if it were privately owned" which has been seen in countries in Europe, Australia and New Zealand is rare.  In the field of highways, ASFINAG, the company responsible for Austria's motorway network, is one of the better known examples.  All of its shares are owned by the Federal Government, but it acts effectively as a private company.

I raise this because many of the concerns raised in this article by Alan Bedenko in ArtVoice about the New York State Thruway Authority (NYSTA) would be better able to be addressed if the "state owned enterprise" model could be applied in the United States.   Such an approach would see the State appoint board members, but as it would be a limited liability company, the board members would have to act in the fiduciary duty of the interests of the shareholder - the state, which would mean operating efficiently, focusing on customers and being as profitable as it could be.  Concerns about excessive profits could then be addressed independently by regulation, which would have to be applied consistently across similar bodies - or it could be privatised and regulated.  However, I've noticed regularly that it takes a bit of effort for politicians and officials in the US to notice governance models applied in other countries, I suspect because when you live and work in the world's biggest economy, which itself consists of 50 different states, it is less of a priority to know what other models might work and how to address concerns about them.

Well first, let's establish what it is and what it does.

New York State Thruways are a network of 917km of highways that connect the state with Connecticut, Massachusetts, Pennysylvania and New Jersey, primarily a backbone connecting New York City with Buffalo.  98.4% of the network is part of the Interstate network.  It comprises six main highways with a number of smaller links.  Tolls are charged on the network including both open barrier based tolls (with both manual and EZPass options) and closed ticket based tolls (you pick up a ticket when you enter and give it over when you reach a barrier at the end to determine the price).   Tolls were originally intended to be removed once bonds used to finance construction were repaid, but this did not occur.   Tolls are complex because of the multiple entry and exit points, but the Authority has a toll calculator on its website here.

So it is a state agency responsible for a state highway backbone, which is tolled and carries 8 billion vehicle miles of traffic a year.   Its board is chaired by the Governor of the State, so it is politically controlled.  Its annual budget is around US$1 billion, but it gets half its revenue from tolls. 

It has been criticised because its revenue, according to the 2011 annual report, declined by 1.1% but costs increased by 3.9%.  The big underlying question is whether it manages its costs well and whether the tolls it sets are reflective of costs imposed and the relative values different vehicles extract from the network.

Bedenko says that Moodys and Standard & Poors changed their rating of the Authority to "negative", because it said tolls needed to increase by 45% to adequately service debt, without taking into account the need for new capital.  That looks bleak and the Authority would appear to be crying out for a detailed assessment, not just of its asset inventory (highway engineers are usually quite good at that), but its overall business, the allocation of costs among road users including demand elasticities and the long term outlook for capital investment.

If the concerns are true it will show what goes wrong when a network of high volume highways, with the direct means to recover costs through tolls, gets mismanaged by a public agency that cannot bring together the political will to charge market efficient pricing. 

Bedenko points out that if tolls suddenly increased 45% there would be some considerable diversion of traffic onto parallel roads, which makes sense.  However, what that means is a proper demand study to determine the extent to which toll revenue can be optimised without causing such a heavy distortion.  Yet the bottom line should be:
- What are the long run capital costs of the network;
-  How should these be allocated across road users efficiently;
-  What programme should be in place to increase the efficiency of the operation.

He suggests two ideas.  One being a shift to fully electronic free flow tolls, which I support.  This is moving beyond the EZPass into full highway speed free flow tolls that are seen with SR91 Orange County, 407 ETR Toronto and the like, without barriers.   In this context, it should save considerable expenses and reduce congestion.  I don't believe it is so costly as to not be worthwhile, and the Authority ought to be pursuing it.

The second is the European style vignette stickers, where access is bought in advance on a per day basis.  He doesn't know that the newest of these, in Hungary and Romania, are electronic too, with number plate recognition used to enforce (with cameras checking vehicles against databases of those who have paid).  I don't believe this would help with revenue, as it wont respond so effectively to increases in demand.

A tollway agency in a heavily populated state with substantial transit traffic shouldn't be in financial difficulty.  That is plain.  One option would be to privatise the lot, but it would be an expensive set of assets to sale (and the new owner would have to raise tolls, but would also extract a lot of efficiencies from the operation), but another is to commercialise it.   

The NYSTA should be restructured, with an independent board, clear financial goals and a target for efficiency savings, operational performance and profitability.  Its core functions should be clearly defined and one should not be to soak up unemployment.

Frankly if the State cannot adequately address this, then there is little hope of it confronting the need for reform of tolling around New York City, considering how to address the declining yields of fuel tax or reforming its dated but still relevant heavy vehicle weight-distance tax.

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