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The Great Traffic Projection Swindle

This is the final piece in a three-part series about privately-financed roads. In the first two parts of this series, we looked at the Indiana Toll Road as an example of the growth in privately financed highways, and how financial firms can turn these assets into profits, even if the road itself is a big money loser. In this piece, we examine the shaky assumptions that toll road investments are based on, and how that is putting the public at risk.

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A consultant predicted traffic on the Indiana Toll Road would rise 22 percent in seven years. Instead, traffic fell 11 percent in eight years. Photo: Jimmy Emerson/Flickr

For privately financed toll road deals, traffic projections are critical. These forecasts tell investors how much revenue a road will generate, and thus whether they should buy a stake in it, and what price to pay. While traffic projections have underpinned the rapid growth in privately financed highways, the forecasts have a dismal track record, consistently overstating the number of drivers who will pay to use a road.

Private toll roads have been sold to the public as a surefire something-for-nothing bargain — new infrastructure with no taxes — but it turns out that the risk for taxpayers is actually substantial. The firms performing traffic projections have strong incentives to inflate the numbers. And the new breed of private finance deals are structured so that when the forecasts turn out wrong, the public incurs huge losses.

Given the huge sums of money involved, even small errors in traffic projections can result in huge problems down the line — and, as Streetsblog has reported, traffic projections everywhere have tended to be wildly off-target. A whole financing scheme, meant to last for generations, can easily be sunk in just a few years by exaggerated traffic projections. The Indiana Toll Road, purchased in 2006 for $3.8 billion, is a great example. The firm that owned it, ITR Concession Co. LLC, declared bankruptcy in September.

Wilbur Smith Associates had predicted that traffic volumes on the Indiana Toll Road would increase at a rate of 22 percent over the first seven years. Instead, traffic volumes shrank 11 percent in the first eight. The result was financial disaster for the concession company, owned jointly by Australian firm Macquarie and Spanish firm Ferrovial. By the time they filed for Chapter 11, debt on the road had ballooned to $5.8 billion.

The company blamed the recession for putting a damper on truck traffic. The same story was offered on another bankrupt Macquarie-owned project, San Diego’s South Bay Expressway. But is that explanation sufficient?

UK-based consultant Robert Bain literally wrote the book on traffic projections, warning in 2009 against forecasters who blamed faulty predictions on the economy [PDF]. Commenting on the flurry of global toll highway bankruptcies that was just starting then, Bain said they had “less to do with the present economic climate, and more to do with a market readiness to be seduced by hopelessly optimistic traffic and revenue projections.”

Bain went on to list 21 ways in which forecasters systematically overestimate future traffic. Each one may tilt the forecast by a tiny amount, but cumulatively they result in huge errors. Some of the errors indicate that forecasters have not yet acknowledged the broader decline in driving and sprawl underway, while others “underestimate the reluctance of some to paying tolls.” Bain argued for a paradigm shift in the use of traffic projections, recognizing that many of them “resemble statements of advocacy rather than unbiased predictions.”

Phineas Baxandall, a senior researcher with the U.S. Public Interest Research Group who’s written extensively for Streetsblog on trends in driving, says the engineering firms that provide the figures know how things work. “Companies seeking investment for privatized toll roads shop for the forecasting they want,” he said. “[There's] no incentive to tell bad news. And if the deal appears promising, then the forecasting company gets other opportunities to sell further analysis, legal advice, raising debt, selling equity, etc.”

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Talking Headways Podcast: I’m Not a Scientist

podcast icon logoDo you ever think about the ecology of the city you live in? Not just the parks and the smog. Scientists are starting to examine urban ecosystems more holistically: the trees and the concrete, natural gas lines and soil, water pipes and rivers. The natural and the synthetic feed off each other in surprising ways. We’re not scientists, but we found it interesting.

Then we move from the ecosystem to the highway system — specifically, the argument made by Evan Jenkins in The Week to abolish the National Highway System. Chuck Marohn at Strong Towns thinks it’s a good idea. Jeff and I aren’t so sure. Could rail really pick up the slack? Would states make better decisions? What funding source would replace the federal gas tax?

Enjoy this, our 42nd episode of Talking Headways. Find us on the Twitters already. And oh yeah, also on iTunesStitcher, and the RSS feed.

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The Idea That Families Don’t Belong in the City Is Antiquated and Harmful

The notion of cities as playgrounds for the young and unattached remains a pretty pervasive concept.

Why do so many people think city living has an expiration date? Photo: Wikipedia

Why do so many people think city living has an expiration date? Photo: Wikipedia

The blogger at Family Friendly Cities has encountered it plenty. A young parent, he says that in his circles, the social stigma against raising children in the city remains irrationally strong:

As a young couple we lived in a garden style apartment in a car dominated city with two automobiles in what is one of the most sprawling cities in the country. We wanted more. So after we married we moved to a more urban city, one that still gets a rather unfortunate rap for sprawl but has a thriving urban core. We also dropped one of our cars. We primarily relied on transit except for our grocery store trips. Our home was more urban, and so was our neighborhood. That was fine, we were still young and childless, and we were constantly reminded of it. “Good thing you are doing it now before you have children” was a common sentiment, as if our urban lifestyle had an expiration date. It was set to die the moment we added a new family member. So we did, and it didn’t. Despite the auto-centric place we lived we walked to the hospital to give birth, and to the horrified look on the nurses’ faces we walked our newborn home. Even when we proclaimed that you could probably see our home from any of the windows in the maternity ward they thought we were crazy. Crazy to choose to walk her home the equivalent of three city blocks, rather than drive. And so came more of the comments once she was home; advice, and questions: “Have you looked for a house outside the city,” “Once she gets older you are going to need more space,” “You will need a yard,” “Living in the city is fine while she is so young, but not when she gets older” and the always important “The schools are better in X County.” So we followed their advice. We packed up a yellow truck and moved: to the second most dense census tract in the city smack dab in the heart of downtown, across the country.

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Today’s Headlines

  • House Transpo Panel: Shuster Re-elected Chair, DeFazio Ranking Dem (Herald Mail, Oregonian)
  • Obama Picks NTSB Member as New Highway Safety Chief (The Hill)
  • Foxx Says Feds “Bullish” on High-Speed Rail, as Plans Develop for NEC (USA Today, Philly.com)
  • Does Uber’s PR Snafu Signal Bigger Political Problems? (Politico)
  • Safety Concerns Delay Debut of Atlanta Streetcar (AP)
  • New State Transportation Advocacy Network Kicks Off (T4America)
  • Study: Bike Infrastructure Pays Off More Than Road Maintenance (Bike Portland)
  • After Metro-North Investigation, Feds Recommend Screening for Sleep Disorders (AP)
  • New Jersey Transpo Commissioner Urges Mayors to Find “Revenue Enhancers” (NJ.com)
  • Amtrak Considers Options for New Rail Line Through West Baltimore (Baltimore Sun)
  • Why Isn’t Lansing, Michigan, Talking More About Transit? (Michigan Radio)
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How Pittsburgh Builds Bike Lanes Fast Without Sacrificing Public Consultation

pfb logo 100x22 Michael Andersen blogs for The Green Lane Project, a PeopleForBikes program that helps U.S. cities build better bike lanes to create low-stress streets.

Four months — that’s how long it took Pittsburgh to announce, plan, and build its first three protected bike lanes.

One of the country’s most beautiful (and probably still underrated) cities has proven this year that it’s possible for governments to move fast without neglecting public outreach. Instead of asking people to judge the unknown, the city’s leaders built something new and have proceded to let the public vet the idea once it’s already on the ground.

That’s part of the magic of the simplest protected bike lanes: unlike most road projects, they’re flexible. The construction phase can come at the middle or the beginning of the public process rather than the end of it.

For a city full of hills, narrow streets and short blocks, building a great bike network isn’t easy, a point acknowledged by Mayor Bill Peduto in the above video.

“We have all of the detriments to building a bike system that people could argue,” Mayor Bill Peduto says in the video above. “But we’re still doing it. And we’re going to beat every other city.”

You can follow The Green Lane Project on Twitter or Facebook or sign up for its weekly news digest about protected bike lanes.

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How Macquarie Makes Money By Losing Money on Toll Roads

This is the second post in a three-part series about privately financed highways. Part one introduced the Indiana Toll Road privatization as an example of shoddily structured infrastructure deal. Part three looks at how faulty traffic projections lead bad projects to get built, and how the public ends up paying for those mistakes.

When you invest in Macquarie Atlas Roads, now-worthless shares in the Indiana Toll Road (and four “Other Toll Roads”) are an almost-free bonus with your purchase of shares in APRR, which runs profitable toll roads in France. Image: Macquarie Atlas’ September 2014 Investor Presentation

Macquarie Group, the gigantic Australian financial services firm with some $400 billion in assets under management, has made a lot of money in the infrastructure privatization game.

The publicly traded company owns the Brussels Airport, the Dulles Greenway, telecommunications towers in Mexico, a wind farm in Kenya, and much more. One of those assets was the Indiana Toll Road, which Macquarie purchased in 2006 with Spanish firm Ferrovial — whose most profitable assets include Heathrow Airport and the 407 toll road ringing Toronto. The Indiana Toll Road was housed in a spinoff company called ITR Concession Co. LLC., which filed for chapter 11 bankruptcy in September after a disastrous eight-year run.

Macquarie and Ferrovial paid the state of Indiana $3.8 billion for the Indiana Toll Road. At the time, it was the largest infrastructure privatization deal in U.S. history. Eight years later, the road was saddled with an astounding $5.8 billion in debt, far beyond the original, unexpectedly-high purchase price.

Traffic fell well short of the projections offered by the engineering firm Wilbur Smith (now CDM Smith), and the company blamed the bankruptcy on the fallout from the recession.

But some observers also pointed to the risky financing underlying the deal. Macquarie and Ferrovial each chipped in just $374 million of their own money to finance the deal. The other $3 billion was borrowed from seven European banks, six of whom have since been bailed out by their respective governments.

Granted, the deal happened in 2006, when debt was flowing freely. According to a 2007 profile by Fortune’s Bethany McLean, Macquarie borrowed its billions using loans resembling a balloon mortgage. It would purchase a type of derivative, called an “accreting swap,” to get a low teaser interest rate, all the while assuming that a refinance was just around the corner. But when credit markets froze entirely, Macquarie couldn’t extricate itself from punishing interest payments.

McLean cited the example of the Macquarie-owned Chicago Skyway: “In 2007 the Skyway will pay interest of just $129,000 on $961 million of debt. But the interest payment for 2018 is to be $480 million — that’s not a typo.”

That helps explain how Macquarie and Ferrovial ended up owing almost twice as much as they paid for the Indiana Toll Road, after collecting tolls for eight years.

Randy Salzman, associate editor of Thinking Highways North America, has reported extensively about P3s, saying that it’s common for privately financed roads to go bankrupt. He says that firms acquiring infrastructure typically provide very little of their own cash, and because of a complicated mix of fees and tax breaks, they may benefit financially even when the deals go sour.

“You’d think that they wouldn’t be investing in these things because so many of them go bankrupt,” he said. “You’d think that the money would be running away.”

But Salzman says he’s seen these kinds of bankruptcies happen over and over again. “The only question is when.”

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Will Arlington Streetcar Foes Support BRT Instead?

Arlington, Virginia's streetcar plans are kaput. Photo: Columbia Pike Revitalization Organization

Arlington’s streetcar plans are kaput. Photo: Columbia Pike Revitalization Organization

News broke yesterday that Arlington, Virginia, is abandoning plans for a 7-mile streetcar along Columbia Pike.

Proponents had advanced the streetcar for more than a decade and had secured some $65 million in state support for the $333 million project. But this month’s election delivered a crushing blow, writes David Alpert at Greater Greater Washington. Going forward, he says, one major question is whether streetcar opponents who said they supported Bus Rapid Transit instead will now follow through on those statements:

Following John Vihstadt’s strong win in last week’s [County Board] election, a race that revolved largely around the Columbia Pike streetcar, Arlington officials have voted to stop work on planning or contracts for the project.

It’s not immediately clear if the door is open for some version of the project to move forward in the future. It’s also not clear whether Arlington can shift to any other transit project the $65 million that Virginia had committed to the streetcar.

Michael Perkins and Chris Slatt point out that we “reported” this in April 2013 as an April Fool’s joke. In the joke post, we said that Arlingtonians for Sensible Transportation leader Peter Rousselot and county board member Libby Garvey, all of whom have insisted they support high-quality Bus Rapid Transit, suddenly start criticizing bus plans as also “too expensive.”

If the county board now proposes spending money on bus transit on Columbia Pike, we might have the chance to see whether this comes true; hopefully, these folks are being genuine and will support other transit investments. It’s important to understand, as always, that the state of Virginia will still not allow a dedicated lane on Columbia Pike.

Elsewhere on the Network today: Strong Towns comments on an editorial calling for an end to the interstate highway system, and explains why maybe it’s not as far fetched as it seems. Bike Walk Lee reports that Florida DOT’s Bill Hattaway, the man charged with making the Sunshine State safe for walking and biking, has been named an “outstanding government official” by Governing Magazine. And Streets.mn says opposing bike/ped projects might not be a winning strategy for Minnesota Republicans.

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Today’s Headlines

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The Indiana Toll Road and the Dark Side of Privately Financed Highways

This is the first post in a three-part series on the Indiana Toll Road and the use of private finance to build and maintain highways. Part two takes a closer look at how Australian firm Macquarie manages its infrastructure assets. Part three examines the incentives for consultants to exaggerate traffic projections, making terrible boondoggles look like financial winners.

Who owns the Indiana Toll Road? Well, as of the bankruptcy filing in September, Macquarie Atlas Roads Limited (MQA Australia), which is joined at the hip to Macquarie Atlas Roads International Limited (MQA Bermuda) on the Australian stock exchange, has a 25 percent stake. Macquarie’s investment bank arm brokers the various transactions related to ownership of the road, collecting fees on each one. Welcome to the world of privately financed infrastructure. Graphic: Macquarie prospectus

In September, the operator of the Indiana Toll Road filed for bankruptcy, eight years after inking a $3.8 billion, 75-year concession for the road with the administration of Governor Mitch Daniels.

The implications of the bankruptcy for the financial industry were large enough that ratings agency Standard & Poor’s stepped in immediately to calm nerves. In a press release, the company attempted to distinguish the Indiana venture from similar projects, known as public-private partnerships, or P3s: “We do not believe this bankruptcy will slow the growth of current-generation transportation P3 projects, which have different risk characteristics.”

But the similarities between the Indiana Toll Road and other P3s involving private finance can’t be ignored. And as we’ll see, even the differences aren’t all good news for the American public. Once hailed as the model for a new age of U.S. infrastructure, today the Indiana deal looks more like a canary in a coal mine.

At a time when government and Wall Street are raring to team up on privately financed infrastructure, a look at the Indiana Toll Road reveals several of the red flags to beware in all such deals: an opaque agreement based on proprietary information the public cannot access; a profit-making strategy by the private financier that relies on securitization and fees, divorced from the actual infrastructure product or service; and faulty assumptions underpinning the initial investment, which can incur huge public expense down the line. Though made in the name of innovation and efficiency, private finance deals are often more expensive than conventional bonding, threatening to suck money from taxpayers while propping up infrastructure projects that should never get built.

For the parties who put these deals together, however, the marriage of private finance and public roads is incredibly convenient. Investors are increasingly impatient with record-low returns on conventional bonds, and are turning to infrastructure as an asset class that promises stable, inflation-protected returns over the long run.

Meanwhile, governments are eager to fix decaying infrastructure — but without raising taxes or increasing their capacity to borrow. On the occasion of yet another meeting intended to drum up investor interest, Transportation Secretary Anthony Foxx recently wrote on the U.S. Department of Transportation’s blog: “With public investments in our nation’s important transportation assets steadily declining, we need to find better ways to partner with private investors to help rebuild America.”

Those investors are lining up to get in the infrastructure game. According to the Congressional Budget Office, about 40 percent of new urban highways in America were built using the private finance model between 1996 and 2006. Since 2008, that figure has jumped to almost 70 percent.

In an attempt to get even more deals done, the current federal transportation bill ramped up funding for the TIFIA program — which offers subsidized federal loans and other credit assistance, often to projects that also receive private backing — by a factor of eight.

Major private investors have stepped up their lobbying efforts to close more of these lucrative deals. Meridiam North America recently hired Ray LaHood, Foxx’s predecessor as Transportation Secretary, and Macquarie Group — which orchestrated the Indiana fiasco — hired away a White House deputy assistant to “continue strengthening our relationships with key elected officials… while also exploring new investment opportunities.”

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The Parking Tax Benefit: A $7.3 Billion Subsidy for Traffic Congestion

Graph: TransitCenter/Frontier Group

Not only does the parking tax benefit pay people to drive during the most congested times of day, the whole system of commuter benefits functions as a gigantic transfer from poor workers to affluent workers, who have greater access to subsidized travel to work. Graph: TransitCenter/Frontier Group

The federal government spends billions of dollars a year on tax subsidies that make traffic congestion worse, according to a first-of-its-kind analysis by TransitCenter and the Frontier Group. The culprit is the parking commuter tax benefit, which costs taxpayers $7.3 billion in foregone revenue each year, all while adding more than 800,000 cars to rush-hour traffic on the nation’s roads each workday, the authors estimate.

The parking tax benefit allows people to claim up to $250 in parking expenses as tax-free income per month. It originated in the late 1970s, when, in the name of fairness, Congress prevented the IRS from taxing the free parking perks that employers gave their workers, without any thought to the effect on transportation. The new report shows that not only does the parking tax benefit have a disastrous effect on traffic, it’s not even fair to car commuters — amounting to a gigantic transfer to the most affluent drivers.

Most advocacy efforts centered on commuter tax subsidies attempt to raise the transit benefit — currently capped at $130 per month. Last week, for instance, two members of Congress pledged to fight for an equal commuter benefit for transit and parking. TransitCenter and the Frontier Group argue that this is the bare minimum to strive for. The real impact lies in simply getting rid of the parking benefit.

The transit benefit, they write, is a “relatively inefficient tool for motivating changes in transportation behavior” and “only weakly counteracts the negative impact of the parking tax benefit” — and should be thrown out, as it were, with the bathwater. If commuter benefits are retained, however, they recommend some key reforms: equalizing the transit benefit, and mandating that employers who offer parking benefits also provide the option of receiving a cash equivalent instead.

TransitCenter and Frontier Group estimate that while most people don’t change their commuting behavior based on the incentives created by these tax benefits, about 2 percent do — and that 2 percent drives 4.6 billion additional miles per year.

To make matters worse, they do that extra driving at peak hours, in crowded downtown areas, worsening congestion that the country’s transportation policy is supposedly oriented toward fixing.

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