Toll prices cut on San Diego toll road

I’ve written extensively about the “renationalisation” of a private toll road in San Diego, the South Bay Expressway as follows, which gives you background about this poorly performing investment:

- Why does San Diego want to buy a bankrupt toll road?

- San Diego "nationalises" a private toll road

- San Diego debates how to pay for the South Bay Expressway

The new owner, the San Diego Association of Governments decided to cut tolls in order to spread demand between the toll road and the existing parallel untolled I-805.

CBS8 reports that tolls have dropped by between 21% and 41% from a range of US$0.85 to US$3.50 to US$0.50 to US$2.75 per trip for account holders with tags. Cash or credit card payment at toll booths will drop US$0.50 (a new range of US$2-US$3.50 compared with US$2.50 to US$4).

What will be of interest to some in the industry will be the extent to which the lowered tolls induce a shift in demand patterns, and whether this will more than offset the reduced yield per trip.  There being two relevant goals.

The primary goal is likely to still be to maximise revenue, with the hope that lower prices are more than offset by increased demand.   

Yet the secondary goal will be to enable enough shift in demand from the congested parallel highways to mean overall time savings for traffic on those highways are valued sufficiently highly enough to offset any reduction in toll revenue.

I doubt that the revenue maximising toll is the utility maximising toll (or indeed that cutting rates will be more than offset by increased demand, as the elasticities of demand on single roads are not that great).

SANDAG will be hoping for both of course, because even though there can be a net benefit of reduced congestion which, in overall economic good terms, could be much higher in theory than the loss of revenue, it will be embarrassing for SANDAG to have turned a toll road that was not a financial success into being even less financially successful.

More details on tolls on the road's recently updated website here.

SANDAG debates how to pay for the South Bay Expressway

I've written before about the bankruptcy and "nationalisation" of the South Bay Expressway near San Diego California. Why does San Diego want to buy a bankrupt toll road? and San Diego Association of Governments (SANDAG) deciding to buy the toll road.

Sign on San Diego reports on SANDAG attempts to figure out how it is going to pay for it:

It cost $847.3 million to build with a combination of private bank and federal Department of Transportation loans. On emerging from bankruptcy, the South Bay Expressway was valued at $309 million although outside parties have placed the figure as high as $896 million.

So SANDAG has decided it should pay $247 million in cash, with loan payments paid to the federal Department of Transportation of $92.6 million from toll revenue, while retaining a small lien for the banks and federal DOT of $4.5 million.

The options to raise the cash include:

- A toll revenue bond (effectively what a private buyer might have done);

- A loan from TransNet, which manages the 0.5c sale tax dedicated for transport projects (I'll let you guess why people buying food or books should pay for a road);

- Using other sources of public funding.

Despite the need to find the money, Mayor Cheryl Cox of Chula Vista says it is good value being at a "60% discount". Property developers and residents of South Bay have high expectations, hoping for growth if tolls get cut in half. In other words, they are hoping that San Diego taxpayers subsidise the new asset.

If successful, then SANDAG can lower the tolls, but still make enough money to pay for the purchase and pay to keep the road maintained.  The expectation being that it will relieve the parallel congested Interstate Route 5.   The difference between public and private ownership will be the difference between maximising usage of the road and maximising revenue from it, or rather whether it can generate a financial surplus or need an effective subsidy.

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.

News briefs: London, Illinois, San Diego, Texas, Pennsylvania

Short items from the UK and US today..

London

One of the problems for Transport for London (TfL) is enforcement of the congestion charge against foreign registered vehicles. They are not exempt (unlike in Stockholm), but can pose a problem for enforcement if the vehicles have left the country. TfL uses the SPARKS network, which was set up by London local authorities to form partnerships with motor vehicle registration and enforcement agencies across all 27 EU Member States. As a result, there are now agreements with several of them to recover congestion charging fines from vehicle owners in their home countries. Now the problem of evasion is not high. I recall a figure from two years of around 12%, but have no source for that. However, around a third of that is able to be recovered through SPARKS (let's exclude the non-payment of several embassies, notably USA, from that figure, which totals £50 million from those non-compliant embassies).

Yet there is one way TfL can enforce - it can impound vehicles that have fines beyond a certain threshold.  One group that has been particularly problematic are the expensive luxury and sports cars of the super-rich who fly them to London for summer, from the United Arab Emirates.  UAE paper The National reports that Emirati cars owe TfL £8,280.  The problem is not just the congestion charge, but parking fines, illegal use of bus lanes, running red lights and speeding.  In short, they are young carefree and carless Emirati men who care not a jot for the delays and danger they are placing Londoners in (and of course they are not unable to pay).

The paper continued:

London’s Metropolitan Police have seized cars worth millions of dirhams in a clampdown on groups of young Arabs who gather on the quiet backstreets of affluent Knightsbridge to race their luxury motors.

Police conducted random checks on high-performance vehicles in the area during July to make sure drivers had valid UK driving licences, insurance and number plates.

Seems like the only appropriate approach.

Illinois

Woodridge Patch reports that the Illinois Tollway plans a 35c toll increase to help fund a $12 billion programme of capital investment. The plan includes reconstructing the Jane Addams Memorial Tollway (Interstate 90) to link Rockford to O’Hare Airport, a new interchange to connect Interstate 294 to Interstate 57 and a new all-electronic Elgin O’Hare West Bypass that can provide western access the airport. (Full map here)

It is supported by the as it is the first toll increase in 28 years!  The tollway is quite a network of 460km of toll roads in the environs of Chicago.

The Mundelein Review is endorsing the plan, saying:

Tollway officials have analyzed the existing system and developed projects that keep the current roads in good repair, but also position the region for growth. The widening of I-90, for example, will include room for a bus rapid transit lane one day. The Elgin O’Hare west bypass should prove to be an engine for economic development. All these changes, we hope, will lessen the intense traffic jams that make the Chicago region the nation’s most- congested.

A good example of how tolling a network of highways can help maintain that network, but provide a basis to allow that network to be upgraded and expanded with a source of revenue.  It is especially encouraging that the increase in tolls is accepted because it will deliver improvements for those paying and help improve public transport.

San Diego

The San Diego Reader reports that the bankruptcy court put the value of the bankrupted, and now re"nationalised"(by SANDAG) South Bay Expressway toll road at $285 million.  SANDAG bought the road off the creditors for $345 million. I’ll leave it to taxpayers of San Diego to decide if they think it is a good deal to spend more than the market price for a toll road that is intended to be subsidised.

Landline magazine reports: "When it was opened in November 2007, the South Bay Expressway was projected to lure 60,000 vehicles per day from Interstate 5 and other roadways connecting the Otay Mesa Port of Entry to State Route 54. But just two years after opening, the South Bay Expressway was only realizing 22,600 vehicles per day. The operator filed for Chapter 11 reorganization in March 2010 in an effort to restructure $510 million in debts."

Texas

US TV network ABC reports on how the Texas Department of Motor Vehicles has issued a number plate twice resulting in a man receiving toll violation notices for roads he hasn't been on.

"Scott loves to show off his 1929 Model-A Ford, but he insists he's never driven it to the Austin area, not when its top speed is just 45 to 50 miles an hour...Sure enough, wouldn't get in it and drive it over there," he said. "That'd be an all day drive!"...The Texas Department of Motor Vehicles admits it has issued some plates twice with the very same numbers...We do recognize that it's a problem and we're working to resolve that problem as we speak," said Randy Ellingston with the Texas Department of Motor Vehicles"

By far one of the more important things to get right is to ensure the motor vehicle number plate database does not contain such errors.  Anecdotal evidence is that there are plenty of such agencies with dated databases without the budgets or political will to tidy them up.  Electronic free flow tolling demands this as an enabler, and it is a major threat to the success of such systems when they have errors such as this.

Pennsylvania

Morning Call reports the Pennsylvania Turnpike Commission is considering moving to fully electronic free flow tolls, and is surveying users to establish their opinion.  Wilbur Smith and McCormick & Taylor were hired to conduct a year long study (honestly shouldn't take that long) into such a conversion.

San Diego "nationalises" a private toll road

I wrote in July about how the San Diego Association of Governments (SANDAG) was considering “nationalising” (there isn’t a handy word for governments short of central government acquiring businesses) the bankrupt South Bay Expressway. The reasons being that the concession for the toll road had gone bankrupt and so it was seen as a potential “bargain”. However, SANDAG isn’t looking for a way to give taxpayers a good return, but to effectively cut the tolls to make it a more general use route. It is seeking to subsidise it.

One report suggests that the road is seen as a cheaper alternative to expansion of Interstate 805, which is estimated at a cost of US$700 million. So as a result, SANDAG bought the South Bay Expressway (SR 125) for US$345 million. It had been a dud investment for the Macquarie group as traffic turned out to be half that of forecasts.

However, as much as this may be sold as a bargain, one politician is clearly getting a rush of blood to the head saying "Could those tolls be half that price? Could they be one-fourth? Could they go away? Anything is possible," said Chula Vista Mayor Cheryl Cox. Apparently Cheryl Cox’s voters are happy to pay more taxes in response. Currently, tolls are based on vehicle type and distance. The maximum for a car is US$4 for a 10 mile trip, with a minimum of US$0.85 at the moment, obviously reducing this would increase demand, and a free road would do the most, but do taxpayers really want to pay for that?

One approach could be to treat a calculation of the fuel tax revenue generated from the road’s use as a shadow toll to offset the existing tolls (after all, anyone using fuel tax is already paying to use a road). However, assuming SANDAG just want to optimise use of the road, there will need to be some demand modeling about what tolls would maximise the economic efficiency of the network.

Of course this is exactly what has been advocated by some for the UK's M6 toll road, but the government here is uninterested in finding money (that it doesn't have) to buy a road that it wont make money from (and it is NOT bankrupt, but has a relatively content owner).   Yet it isn't on the cards for the bankrupt toll roads in Australia.   The simple reason being that the road doesn't close, and unless a government is keen to use taxpayers' money to subsidise tolls, there isn't much point in having taxpayer money risked on the road. It is interesting that the USA, oft cited as the example of unfettered free market capitalism, is now an example of quite the opposite.

Why does San Diego want to buy a bankrupt toll road?

The South Bay Expressway has been a financial disaster in the world of private concession toll roads. It opened in 2007 as a new 10 mile stretch of tolled highway, but has never generated enough demand to be profitable enough to service its debts.  TollRoadsNews has a long list of reports on the project.

Where is it?

Its website says:

Beginning at SR-905 in Otay Mesa, the Expressway provides fast and convenient access to and from Mexico and communities across San Diego County.

It filed for bankruptcy in March 2010 and since then has been owned by the banks and federal government, which supplied the debt for the road. However, the San Diego Association of Governments is seeking to buy it. This is rather strange.

Why? Because the road is there now, working and providing service to users. It isn’t going to close down. The concession agreement hands it back to state ownership in 2042 regardless. In addition, SANDAG would presumably have to borrow money or raise taxes to buy it back. Unless it believes reducing or eliminating tolls on the road would create net economic benefits that outweigh the purchase, it seems like a very strange move indeed for a public body.

Another report quotes Gary Gallegos, Executive Director, saying the road is strategic and demand will be increasing – implying that it would be money making. He also said money to buy it back could come from an existing sales tax.

Bankruptcy court apparently valued the road at US$287 million, but it is apparently now generating an operating surplus. SANDAG thinks that as a result it wont be a bad investment, although I’d have thought it would not be a good investment if the return on capital is less than the cost of debt to buy it (or the interest gained from a bank deposit).  However, it is likely that the consortia of 10 banks that own 68% of the road will want out of it quickly, as will the US Department of Transportation which holds the other 32% because of loans it made to the previous owners.

Note: This was one dud investment for the Macquarie Group, which was at one time a 50% shareholder in the road.  It wrote off the entire value of the investment in 2009 according to the Bond Buyer.

Empty arguments against tolling in San Diego

A columnist called John Van Doorn in the North County Times in San Diego is opposing proposals for a new toll road to bypass a congested section of the I-5.  The arguments against tolls are nothing new, and easily refuted.  Indeed three comments on the column already make good points in response.  

This is what he argues, with my response

1.  Toll booths add to delays:  It is wilful blindness to ignore electronic free flow tolling, even though deployment in the US has been glacial.  This argument should be left in the 20th century where this thinking belongs.  Any new toll road in the USA should be built with electronic free flow technology in mind.

2. Studies claim collection costs can be up to one-third of revenues:  I can say "studies show journalists rarely are experts in things they write about", without quoting a study.  Any toll road with such high costs is either grossly inefficient, heavily underpriced or is not viable (for having too little traffic).  Efficient operations today of any toll road should manage costs well below 10% of revenues. 

3. If there isn't congestion, more will use the free original road congesting that route:  So it is better to not have a new route then?  It is entirely circular.  If the current route is congested, the toll route will relieve it.  It wont be empty, so it benefits users of the original route.  You might believe a new route could induce demand, but if tolled that will put a price on that and besides demand could always increase on the untolled route regardless.  The solution is to price ALL roads efficiently, but Van Doorn shows scant knowledge of economics so he wouldn't consider that.

4. Motorists would be tracked:  After implying a toll road means manual collection, he then jumps on an assumption made for electronic tolls.  It is also empty.  Electronic free flow toll roads are charged usually through a tag and beacon system that only identifies a vehicle crossing a particular point so the account associated with it can be charged.   It reads number plates in other systems either to charge or for enforcement purposes.  It isn't tracking, it is no different from paying for your shopping with a card, leaving a record of your presence in a shop at a particular time.  Yes, in theory if done by government entities they would know that you had, driven past a point at a particular time, but that isn't tracking.  Automatic number plate recognition cameras could be placed all over road networks to do this, and mobile phones do it more effectively than conventional electronic tolls.   Now it is more complex if GPS and distance charging are involved, but that isn't what is being discussed and even if it was, it doesn't involve tracking either.  It involves measuring distance.

Tolling has many opponents, typically they are people confused with technology, with little understanding of transport economics, but also understandably sceptical of government agencies running toll roads.  There are good reasons to be resistant of politicians incompetently using tolls as a quick fix, but not to resist tolling per se.  Tolls can be a low-cost and efficient way of raising funds for new roads and maintaining existing ones, and debate about tolls should be about their viability, not on the basis of ill-informed presumptions.