Ohio Turnpike not to be privatised

As has been previously reported, there had been a lot of debate as to whether it was worthwhile to privatise the Ohio Turnpike.  

According to an article on Cleveland.Com, the revenues for the 241 mile long Ohio Turnpike for 2012 were at a record US$270 million (with an expected profit of US$15 million).

Governor John Kasich is keen to utilise the value of the toll road to support other transport infrastructure projects in the state.  The law currently restricts the net revenues to being spent on transport projects within one mile of the road.

Tolls increased by 10% in January 2012 and traffic volumes have increased, making the toll road a lucrative asset for the state.  It has been reducing staff and consequential costs.

So the decision has been made not to privatise the road, but instead have it issue bonds which will essentially mean the state is borrowing against future revenues from the Turnpike to pay for other transport projects.  US$1.5 billion in bonds will be issued.  

A website called Ohio Turnpike Analysis contains more details. With a specific report of more in-depth analysis here, supported by Big Four accountancy firm, KPMG.  Indeed that report had been commissioned to specifically restrict options to those that exclude privatisation, but could include a lease to a concessionaire for the revenues.

In announcing the decision on the Turnpike the website states:

While the state could have realized more money by leasing the Turnpike, maintaining public control of the Turnpike and keeping the Turnpike Commission independent helps keep tolls low and workers on the job. Better coordination with ODOT keeps virtually all Turnpike revenue in Northern Ohio.

The Ohio Turnpike Commission is to be expanded into the Ohio Turnpike and Infrastructure Commission, which will have new "expanded authority" over major transportation projects in Ohio.

In addition, there will be a cap on tolls as follows:

Tolls for local passenger trips that are paid with EZ Pass will be frozen at current levels for the next 10 years. For all other tolls (longer passenger trips and all truck trips) any increases will be capped at the rate of inflation, or approximately 2.7 percent annually, assuming sustained traffic growth at the historic 1 percent rate. This low, stable rate will be less than half the rate of increase that passenger tolls have seen over the past 20 years and almost a full percentage point less than past increases to truck tolls.

Comment

It is always curious to see how reluctant authorities in the United States are to embrace private enterprise, capitalism and free markets when it comes to roads, especially when compared with countries that many Americans would consider to be more regulated and pejoratively, socialist (e.g. France, which has had little hesitation to have a large network of privately owned highways).   The rhetoric around it is remarkably parochial (with the implication that only people from Ohio could run the road "properly").  

What is almost completely absent is this analysis is any idea of the capital value of the Turnpike. The private sector has to account for its assets, but the public sector should as well.  It should make a return on that capital value, because taxpayers' money is tied up in it.  They should understand why their money is making more than a market return or less than that, otherwise it isn't clear whether the asset is being well managed or not.  Of course the only way to get a market capital value would be to talk to the market.  What would it be worth if it was sold, unencumbered (or encumbered by specific legislation)?  It would be dependent on revenue forecasts and expected costs, then the analysis can be done as to whether the surplus, after renewals and depreciation is worth more than the expected sale price.

There is a reasonable case to be made for reducing the risk of monopolistic pricing of the Turnpike, but beyond that if pricing can be efficient, and also reflect demand, there is scope for it to improve utilisation and get better value out of the asset.

In short, it appears that retaining the asset in state ownership is a political decision based on parochial and  long term financial grounds (better for the money to stay in Ohio, and better for the state to spend the revenues rather than monetise the asset, and let the private sector enjoy the revenues).  

The estimated value of a lease was a net NPV of US$1.8 billion, but I would have liked there to be some consideration of the most radical option - selling it.  Not that this is what should be done, but that it would provide a benchmark of value, to measure others against it.  The value of the sale money can then be treated on its own merits.

What I hope is that the new Ohio Turnpike and Infrastructure Commission efficiently transitions to fully electronic free flow tolling, adopts international best practice in asset management and customer management, and so replicates as much as is possible the efficiencies the private sector would bring to its operations.  It should also apply this to how it will supervise and manage other infrastructure projects financed through the forthcoming bond issue.

However, I also hope that the broader issues of sustainable revenues for Ohio are looked at more widely.  The Ohio Turnpike is not enough in itself to generate revenues to replace declining fuel tax yields.  Moreover,  Ohio should look at how it can leverage revenues from transit traffic and improve pricing overall to get better network utilisation, and better distribution of charges across users.  

The Ohio Turnpike may not be privatised now, or in the near future, but it should raise the debate for others. Why should states own roads, especially toll roads?  What are the deadweight unseen costs of maintaining that ownership?

News shorts - Florida, India, New York, North Carolina, Ohio and Texas

Florida pursuing tolled upgrade of existing highway

The Florida Times-Union/Jacksonville.com reports that the Florida Department of Transportation is to commission an upgrade of the First Coast Outer Beltway that will see it widened to a grade separated four lanes highway with tolls.  Tolling will be done on a segmented basis, with rates of US$0.20-US$0.60 for cars per segment, effectively creating a distance based toll along the highway.  Florida Turnpike Enterprise (a business unit of Florida DoT) will finance the project estimated to cost US$230 million which will be recovered from tolls which will be entirely electronic free flow using the established SunPass system.

Despite criticism from some quarters, based on a vote in 1988 that saw Jacksonville abolish tolls in favour of a small sales tax (an economically regressive and irrational measure) "Florida Transportation Secretary Ananth Prasad said the current sales taxes and gas taxes that fund transportation are not sufficient to build something like the Outer Beltway"

Potholes on Indian toll road highlights poor incentives

The Times of India reports that "The Ghoti-Padhga toll-way stretch on the Mumbai-Agra national highway has been ridden with potholes, for nearly the past one month, making it difficult for motorists to drive through the affected sections".

Apparently, the company responsible is simply uninterested in maintenance with the report continuing:  "maintenance was looked upon as a part of expenses rather than looking towards it as re-investment for earnings and hence the proposal had not received a response till date".

Such scant regard for some basic standards on a toll highway indicates an appalling failure on behalf of the procurement and contracting regime for the road.  However, a market led approach would suggest that motorists will increasingly abandon this toll road on the basis that it isn't worth the money.  On the other hand, if the development of PPPs for toll roads in India is on the basis that the private sector will maintain minimum standards of service, then there need to be constraints on such behaviour built into concessions.

New York - Governor "considering" Sam Schwartz's tolling plan

The New York Observer reports that Governor Andrew Cuomo is apparently "reviewing the proposal" of former New York City Department of Transportation Commissioner Sam Schwartz to reform tolling on crossing adjacent to the city in the state.  I wrote extensively about the proposal, which is adamantly NOT called congestion pricing, because it effectively delivers an integrated approach to tolling of major crossings in New York, reducing the prices for trips more distant from Manhatten and introducing tolls on untolled East River crossings.

The article rightly says it is far too early to say whether it will get support, but it is encouraging that the Governor at least appears to be open minded on the issue.  It has the potential to raise more revenue and help reduce traffic congestion, but it also will balance support from those who will pay less on some crossings and those who will pay more or start to pay on others.

North Carolina story shows importance of quality control in enforcement

TV station WRAL, Raleigh North Carolina reports on the case of Jerry Hester, a man who was pursued for enforcement of an unpaid toll bill for the Triangle Expressway, because of human error that mistook the letter N for the letter M.   It appears it took the intervention of a consumer advocacy TV programme (5 On Your Side) to get it resolved with "NC Quick Pass" - the operational arm of the North Carolina Turnpike Authority.

Electronic free flow tolling is being rolled out across the US, although it is some years behind the likes of Australia which has had it now for well over a decade.  Unfortunately, some key lessons learned from free flow systems elsewhere don't always seem to have been embraced.  In this case, it should have been easy for enforcement appeal staff to double check the number plate image and eliminate the penalty altogether, rather than it remaining in the escalating bureaucracy of enforcement.

It certainly shouldn't take a TV programme to highlight such a problem.  This is standard best practice in the tolling industry.

Ohio Turnpike Director advocating wider use of revenues

Columbus Morning Call reports that the Ohio Turnpike Director Richard Hodges is advocating a law change to allow surplus revenues from the toll road to be spent on transportation projects in the state further than 1 mile away from the road.   It appears to be driven by concerns about the growing reserve in the accounts of the Turnpike, which could reflect a lack of useful projects that can be funded from surplus revenues.  Of course, if the turnpike is privatised, this will effectively be the return on the capital asset value that could be distributed to shareholders.

The report also summarises the financial position of the road:

The turnpike, which has $50 million in its reserve, expects to generate $270 million in revenue this year, the newspaper reports. Its operating expenses stand at about $122 million and the turnpike will spend about $90 million on capital projects this year.

Ohio Turnpike thwarts trucking scam

The Trucker reports on how the Ohio Turnpike has stopped a scam whereby truckers avoided paying the full toll price by lying about "lost" toll tickets.  Being a closed toll system (whereby toll tickets are issued at the start, and used to calculate the total toll price depending what exit the vehicle departs from), there was scope to cheat, as described on the website below:

The scam worked this way: A trucker taking a ticket at the turnpike's entry near Indiana would travel across Ohio and claim the ticket was lost when he hit the last interchange before Pennsylvania.

The trucker would pay $44 for the "lost" ticket, the same he'd pay if he had turned in the ticket. After delivering his load to the east, the trucker would head back on the turnpike.

Instead of crossing the state and paying another $44, the trucker would leave the turnpike several exits before the Indiana border and feed the "lost" ticket to an automated fare machine. Toll tickets don't designate east or west travel.

To the machine, the trucker had traveled only a short distance from the Indiana border and would pay, depending on the exit, a toll less than $10, turnpike officials said.

Of course the state is contemplating privatising this toll road, which would raise the incentive to plug any potential holes in revenue, most likely by better incentivising electronic tolling accounts.

Texas concerns about enforcement of free flow tolls against Mexican vehicles

The Texas Tribune reports that officials in El Paso, Texas and some other Texas authorities are increasingly concerned about the inability to enforce violations of tolls on electronic free flow toll facilities on vehicles registered in Mexico.

In short, this is an issue that has been an emerging concern in Europe which faces much of the same issues around cross-border enforcement of such offences.

At the moment Mexican vehicles appear to be a very small proportion of vehicles on Texan roads, but the fear is that more free flow tolling offers opportunities for free-loading.  One idea proposed by El Paso Mayor  John Cook would be the ability to impound vehicles with such fines - effectively the London approach to those who persistently evade the congestion charge.

The report notes:

The situation that some El Paso officials fear is already emerging in a border community more than 800 miles away. The first portion of State Highway 550 opened in Cameron County last year. When completed, the toll road will connect the Port of Brownsville to U.S. Highway 77.

Cars from Mexico on the road, minimal so far but expected to increase, are not being billed, said David Garcia, the assistant coordinator for the Cameron County Regional Mobility Authority. 

One option would be to enable the border crossing to also be a check for such liabilities, but enabling that is likely to be far from easy.

News briefs: Ohio, San Diego, Stockholm, Philippines, South Africa, congestion charging helping car pooling

Ohio

Bloomberg Business Week has a good article reviewing the issues around the leasing of the Ohio Turnpike.  Some points include:

-  $600 million of any lease would be used to pay back turnpike bonds issued by the state;

-  Former Governor Ed Rendell (Democrat) said that "The bid for the 545-mile Pennsylvania Turnpike by Abertis and Citi Infrastructure Investors died because the Legislature didn’t want to lose patronage jobs at the Turnpike Commission...But could they get a good deal? I think probably yes"

- Ohio Turnpike collected $232.2 million of toll revenue in 2010;

- Fitch has a negative outlook on the debt, based in part on the need to replace the road’s original concrete base, “a project that could possibly result in significant capital or debt needs in future years that are beyond current expectations";

-  Ohio expects a lease term of about 40 years, compared with Indiana’s 75-year deal and Chicago’s 99-year agreement...It also would retain a percentage of the toll revenue over time, even if that reduces the upfront payment" said said Jerry Wray, director of the state transportation department.

- "it’s unlikely Ohio would get offers comparable to what was received by Indiana, Pennsylvania and Chicago’s $1.8 billion lease of its Skyway in 2005 because they were highly leveraged deals with an expectation of economic growth that didn’t materialize"

On balance, it still looks like a potentially good deal can be gained for Ohio, but key to all of this is price and ensuring the road is kept in a good condition throughout the life of the lease.

San Diego

Sign On San Diego has an editorial commending the "nationalisation" of the South Bay Expressway.  It says:

- "Jerome Stocks, chairman of the SANDAG board, says the agency may only have to come up with about $245 million of the purchase price because the remaining $100 million or so is owed to the federal government";

- "Purchase of the road would likely obviate the need to add four express lanes to Interstate 805 south of SR-54, scheduled for around 2030 and estimated to cost nearly $700 million, making more money available for other regional projects";

- "As a government agency, SANDAG would have no multimillion-dollar property tax bill to cover, it already has the employees to operate the toll road, and SANDAG would be looking only to maximize the movement of people and goods, while a private operator would be looking to maximize profit".

SANDAG surely has to factor in not receiving property tax revenue as well as not making the same money from the toll road.  The key public policy benefit must be in deferring other works, yet if they were tolled as well, would the case for the buy back still stack up?

Stockholm

Norwegian tolling equipment supplier QFree has won the contract to continue servicing and maintaining the Stockholm congestion charging infrastructure that it originally installed. The contract is only for 1 year started 1 January 2012 at a value of US$2.9 million.

Philippines

The Manila Standard reports that the Supreme Court of the Philippines has confirmed that toll operators must charge VAT of 12% on their tolls.  They have been resisting this on the basis that it is not akin to a "service", but of course because putting up the price will reduce demand (and revenue).

South Africa

Comments from the South African Transport Minister and the Energy Minister indicate a firm commitment by the government there to tolling. IOL News reports that Transport Minister Sibusiso Ndebele said "If there is an outcry and people say they won't pay tolls, then we can't put the freeway in...Freeways are not free." and Energy Minister Dipuo Peters said: “Those rejecting the tolls were the worst of people who spent their money on comforts and not on essential services such as electricity...People buy cellphones, they pay for airtime, but when it comes to water, electricity and transport, people complain about the user-pays principle, knowing quite well that we need resources to maintain and operate this infrastructure.” That was in response to dismay expressed by COSATU - the Congress of South African Trade Unions - which opposes the tolls as an imposition on car commuters who have "no other choice".

Car pooling

The New Zealand Herald reports comments by Ridesharing Institute spokesman Paul Minnett claiming that congestion charging could support growth in car pooling. Given the propensity of so many authorities to promote car sharing through HOV lanes, it is welcome to see someone note that road pricing is likely to be highly effective in promoting car pooling, without segregating special lanes for that traffic.

Huffington Post's shallow critique of privatising toll roads

The online rag, Huffington Post, has published an article by Dave Jameson that claims to dish out lessons to Ohio regarding the proposed privatization of the Ohio Turnpike. Unfortunately, it offers nothing new besides the old fashioned left wing political clichés that find suspicion in the private sector involvement in the road sector, but offer no credible or rational answers to the problems besetting US land transport policy.

I've written three times (here, here and here) about the Ohio Turnpike privatisation concept, which I believe has merit.

It damns the privatisation of the Indiana Toll Road because the price has gone up. Presumably if it was cheap and congested, and badly maintained, it would criticize that as well. So much of the US highway infrastructure is crumbling and has bottlenecks, you might think there would be some pause for thought about the quality of service on the Indiana Toll Road – which doesn’t come for free.

It engages in mindless xenophobia saying the profits go to “overseas investors”, you know those people who when they are Americans in other countries making money, are heroes and entrepreneurs, but when they come to the US and invest in infrastructure, are horned devils out to rip Americans off. Those Australians and Spanish after all, how dare they? I don’t doubt Jameson would be upset if both countries shut out US exports or companies.

Jameson does point out the state did gain US$3.8 billion, of foreign cash, for the lease on the road, and that there are claims Indiana got paid above the odds for the road. All good, but then he says it is “too early to tell” if it was a good deal. Hopefully Indiana has invested the money wisely then.

Yet he contradicts himself  in his article to suit his obvious opposition to the idea. He claims “No one knows how expensive it might get” which presumes that the owners would want to choke off demand, which is absurd. However, it is easy to tell how expensive it might get because he tells you “The road's leaseholders can now raise the toll annually at one of three rates -- at a flat two percent, at the percentage increase in the consumer price index or at the percentage increase in gross domestic product -- whichever is highest.”  Yet does he know how expensive fuel is going to get, or bread?

So you see in Indiana the state set a limit on how much the tolls can be increased. However the real discipline is the price mechanism, something Jameson doesn’t quite understand.   The incentives on the owner are to maximise revenue, which means balancing price with demand.

He quotes a Professor saying “they are going to regret that”, but then let’s look at the wider picture. There is a crisis in highway funding in the US, as politicians have been unwilling to raise fuel taxes to pay for it on the one hand, have been happy to divert fuel tax revenue onto other projects with the other, and have mismanaged highways to the extent that bridges collapse. He doesn't have a solution to the chronic failure of the current system.

Jameson asserts about privatisations that “they can place a considerable burden on taxpayers two or three generations from now”. How? When they get the road back for free having been well maintained and fully operational the whole time, and able to be privatised again?  If a state foolishly leases out a toll road with no conditions, it could be returned needing much maintenance, but that can be fixed by having conditions on the concession about maintaining minimum service standards.   It is a lease after all, not a sale.

He quotes an Oregon Democrat politician as saying “One of the most basic things government does after public safety and law enforcement is infrastructure”. Does it? In much of the world privately owned roads are the norm, as in France, Italy and Spain. Almost all US railroads are privately owned, and the entire electricity and telecommunications infrastructure are privately owned.

Continuing with the choir he has assembled, he quotes Ohio Congressman Tim Ryan (D) who says “It’s a quality roadway, and I think we really risk an increase in tolls and a decrease in quality if this thing gets privatized.... To me it's another example of pure ideology, where everything that government does needs to be abolished or privatized”.

Hold on. Where has there ever been a decrease in quality seen in privately owned highways? Isn’t it just pure ideology to say that the private sector owning and running a road will mean prices go up and quality down? Besides, who in Ohio is saying sell all of the roads?

Jameson then says “The private sector may or may not manage highways better than state governments”, but does he investigate examples? No. He wouldn’t look overseas of course, given that he thinks foreigners are the devil incarnate, but is the Indiana Toll Road badly maintained? No.

The one useful example he brings is “when fees on the toll road were temporarily waived for safety reasons during a serious flood in 2008, the state ended up reimbursing the toll operators for lost revenue. Had the state not leased the road, the waiver would have cost it nothing.” Sounds concerning yes?  However he is wrong. The state would have been the toll collector so would have foregone tolls it otherwise would have collected, oh and it wouldn’t have had U$3.8 billion in cash from the lease.  It would have been preferable for this to be born by the leaseholder, but that is a lesson in contract negotiation, not a reason to throw out the proverbial baby.

Give Jameson his due, he finally interviews the well known tolling advocate Robert Poole who says of the Ohio Turnpike “I see a road that will need major reconstruction in the next decade or two.... Given that the toll road industry has a very good track record of financing and building, I think [privatization] is an acceptable alternative to look at."

Indeed.  Roads cost money.

Opposition to the temporary privatisation of toll roads is largely ideological. As long as a good price can be gained, and the road is handed back in good condition, the incentives exist for such a road to be well managed, for tolls to be at levels to ensure the road is well maintained, and can even manage congestion.

Dave Jameson’s article engaged largely in an ideologically driven beat up which isn’t bore out by experience. Privatising toll roads is an option, if done well it can deliver major benefits for motorists and the government involved, as well as profiting the new owners. I thought in the USA that people selling good quality services at a profit to willing buyers was what the country was all about?

Ohio turnpike privatisation faces opposition

According to Cleveland.com, Northeast Ohio Areawide Coordinating Agency (NOACA) has voted to oppose a lease of the Ohio Turnpike as proposed by the State Governor John Kasich. Kasich was seeking a lease price of at least US$2.4 billion for the toll road in the hope it would help raise money to fix other roads, bridges and waterways. NOACA fears tolls would be increased, resulting in diversion to parallel routes and the standards of maintenance of a lessee would be lower. NOACA does not have the power to stop a lease, but its arguments ought to be addressed. 

A lease can put a cap on toll increases (e.g. inflation only, or approved congestion based increases) and ensure the road is returned to the state to a high standard of maintenance.  This is the experience of those letting out concessions in various countries, such as Australia and the UK.  It isn't a reason to oppose the lease, but certainly a reason to ensure a minimum price is obtained under satisfactory conditions.

My view is that any lease ought to be a matter of price and contract conditions, which will mean much money spent on the transaction. Yet if even US$5.8 million is spent on advice in such a deal (which would be fair over a year) it would still be 0.2% of the net revenue from a lease!  A bit of time and money seeking the right advisors should save the state hundreds of millions.

Ohio Turnpike lease under further discussion

On 4 December 2010 I reported on how the new Governor of Ohio had proposed privatisation of the Ohio Turnpike, as he sought to realise some value from the asset to improve the state's fiscal position.  It was seen as at least being able to realise US$1 billion.

Ohio Turnpike map from website

Now Associated Press is quoted on Trucker.com as saying that it is more likely to be leased than sold and the Governor has said he is unlikely to approve of any deal worth less than US$2.5 billion.  There is also concern for tolls not to increase at a rate that would encourage traffic to divert onto parallel routes.  One early step mooted is conversion to electronic free flow tolling to reduce operating costs.    It is reported by the Ohio Transportation Director Jerry Wray that any net proceeds from a lease would be used to pay for highway improvements and "harbor dredging". 

Certainly I'd encourage Ohio to proceed with any form of privatisation it wishes, as long as it can get a good price and that the terms and conditions do not hinder the use and development of other assets.   There are great potential benefits in having such roads privately owned, as they can emphasise efficiencies and ensure a core piece of infrastructure is well run.  Concerns over monopoly profits can either be addressed by having price cap formulae and avoiding restrictions on parallel route development (although no subsidised parallel routes).   Obviously there are risks beyond getting a poor price and getting an owner interested in making money with minimal expenditure on service, but these can be managed. 

The bigger issue is whether the current investment climate will be keen to put so much money into one asset.  There are good reasons to consider a very long lease on such a strategic and potentially profitable asset, but the toll road concession sector has been burned badly in some cases with the recession.  It will take some convincing and advertising to show investors that this is a far better deal that relatively new toll roads in countries like Spain and Ireland (and yes, it does mean any residual xenophobia about foreign buyers will have to disappear if Ohio wants a good price).

Ohio next major toll road privatisation?

Associated Press is reporting that the newly elected Ohio Governor, John Kasich (Republican) has said he is interested in privatising the Ohio Turnpike Commission, which is responsible for the 388km long Ohio Turnpike toll road.   The road runs east-west from Indiana to Pennsylvania, and is the I-76, I-80 and I-90. 

The privatisation is being investigated, with one concern being whether the price obtained in current market conditions would be worth it - although given the size and scale there is little doubt it would raise well over US$1 billion.   The toll road fully funds its own operation and maintenance and is so successful that the previous Governor diverted surplus revenue from the road to fund other road improvements in the state.

Hopefully if sold the new owners will be able to invest in new capacity and to vary charges to manage congestion.  Such privatisations should enable owners to optimise utilisation of their assets.

In any case, privatising the Ohio Turnpike would be an enormous transaction, rivalling the Chicago Skyway and Indiana Toll Roads, and showing once again, that government need not finance or manage highways.

UPDATE:  One report states that a sale is unlikely according to a spokesman for the Governor elect, because the state would not get a good price in the current investment climate.