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[MUSIC PLAYING] SPEAKER 1: This is a production of Cornell University.
[MUSIC PLAYING]
SPEAKER 2: Welcome to the podcast, a Mann Library's Chats in the Stacks book talk series. In today's talk, originally given at Mann Library on October 20, 2011, Cornell Professor of Policy Analysis and Management R. Richard Geddes surveys the current state of US ground transportation and finds that like the roads themselves, transportation policy is in desperate need of repair.
R. RICHARD GEDDES: Thank you for the kind introduction. And thank you and Lynn for your work on getting the group together here, getting the chat together. Very excited to be invited to speak. I want to-- I guess I'll give you a little bit of background as to how I got into this area because I'm relatively new to this as far as scholarship goes, where the gentleman who's John Cawley, my colleague, who's going to speak on obesity, has been studying obesity now for I think well over a decade and is an expert on this.
But this is actually only a few years old for me. And I was working in a couple of different other policy areas. And I was kind of getting bored with those. And I thought things were dead in that area. And that was policy surrounding the US Postal Service. And this area came up because of this request to serve on this commission that Mary mentioned, which was a 12-member commission created in the 2005 SAFETEA-LU highway bill.
And so just to give you a little bit of policy background, the way this works is every time you buy a gallon of gasoline at the pump, 18.4 cents of that gallon that you spend on goes to the federal government. And they put it in this funds, supposedly walled off from the rest of the federal government, called the Highway Trust Fund. And the Highway Trust Fund actually has really two main accounts in it. One is for highways, which is the way we pay for our interstates, and the other is for transit projects.
So some of that goes to transit, like fixed guideways, subway systems, and commuter rails and things like that. But the majority of it goes to fix up, maintain, and expand our highways. And I'm using highways for roads and bridges and tunnels. There's thousands of these on the interstate highway system. It's amazing how much infrastructure we have. Roughly every six years, Congress gets around to reauthorizing spending out of the highway account.
And this is a truly massive bill because there is so much money involved that's being allocated by Congress. We are commissioned with section 1909 of the 2005 highway bill. And Congress thought, gee, our current transportation spending is misdirected and misallocated. And we don't have a really good focus on exactly what the federal role is in transportation spending at this point.
And we want you guys, this 12-member commission, to do some thinking and to figure out, how are we going to pay for the improvements that we need? Because-- and I'll get into it in a minute-- revenues into the Highway Trust Fund are falling at unexpectedly high rates. So we need to figure out how to pay for it, but we also need to figure out, what is the broader federal role in all of this?
So as a result of service on that commission, I became fascinated with this issue of public-private partnerships and private involvement in the funding of infrastructure in part because it seemed like other countries, a lot of other both developed and developing countries, had gone much farther down the road of incorporating private investment into funding for you name it in infrastructure, roads, bridges, tunnels, ports, airports, intermodal connectors where you take stuff off of ships, and you put it onto rail and haul it that way.
And it seemed like the United States was a bit behind in this area. So and I guess I didn't really know what I was getting into when I agreed to write this book and study this issue of private investment in infrastructure because it is truly an enormous and expanding in importance. And it's in the area. So what I'd like to do is to give you a little bit of background on the current US infrastructure problem.
Because this is such a big area, I'm going to focus on transportation infrastructure. But a lot of the concepts that we're talking about apply to other critical non-transportation infrastructure. Water systems, for example, in this country are old, dams, the pipes to haul water. A lot of other types of non-transportation infrastructure need investment as well. But because of the size of this area, I'm going to focus on transportation.
So specifically, a couple of problems related to transportation that most of us are familiar with, particularly in the Northeast, is rising traffic congestion, which is an issue, overuse of roads, which I'm calling demand side problems, but also supply side problems. And as an economist, I automatically break things down into supply and demand. But on the supply side, of course, we're faced with severely deteriorating infrastructure, inadequate infrastructure in a lot of ways.
And I think there's an important role for private investment to play in this. And it is-- we have had some examples of private investment in transportation infrastructure in the US. So we have some groundwork laid, but we need to think about policies going forward that are going to protect the public interest. So obviously, these are public assets. States and localities have legal title to these assets. Just a footnote, the interstates are called the interstates, but they are owned by the states.
We normally think of that as a federal thing. But in fact, in a legal sense, the states own the interstate system. And the federal government provides some of the funding for that through the federal gas tax. Roughly 80% of the funding, however, comes from the states for the interstates. So there is a role within this framework that I think has some benefits. Again, I'll talk about how we can protect the public interest while getting private investors involved in this.
There's benefits, I think. You say benefits. Well, who do they accrue to? I think there's social benefits associated with private investment. I think that our society, we have they always say the broadest and deepest capital markets in the world. I don't know if that's still true with the rise of Kong as a financial center, but nevertheless, we do have a lot of private capital in this country. And I think it can be utilized to the benefit of society.
There's also benefits to motorists, I think. And there's also benefits to investors. And I think like most of us in the room, whether we aware of it or not, are investors through an intermediary probably. So there's a range of things. And I do want to be sure to clarify what I think are the key issues we need to worry about in terms of protecting the public interest when we bring in private investment. As they say, this is not chopped liver to do. It's actually a pretty complicated thing.
You're talking about very costly, giant assets and oftentimes, large amounts of investment required. You need to structure that relationship with the private sector in a careful manner. But I think we have a lot of data to borrow from the experience of other countries that have been much more proactive than we have in doing this. And maybe I'll just drop in some examples of that as we go along.
But let me talk about what I call the demand side problems associated with our infrastructure. Most of us are familiar with the phenomenon of traffic congestion and relatedly, overuse of infrastructure. The congestion problem is a familiar problem to a lot of economists. It's the idea that everybody tries to get on the road at the same time.
You get on at 8:00, and you observe the effects of everybody else trying to get on at 8:00. And pretty soon, the facility is locked up and everyone moves along very slowly. The economists' term for this is an externality or a negative. This is an example of a negative externality.
And most people who have taken econ 101 might be familiar with the standard example of air pollution or water pollution, where a factory dumps bleach or some pollutant into a river. And they cause a third party harm associated with the dumping of that bleach into a common resource. And there's a standard econ. The professor will write the graph on the board and show you how to use policy corrections for this.
People don't often think of an externality associated with traffic. But that's precisely what it is. The cost is that-- the external cost is that when you get on the road at 8:00, you are focused on getting to work. But you're not concerned or not aware of the cost that you impose on other drivers as a result of your use of that scarce road space. So think of the road space as being a scarce commodity. You have to use so much of it to get to work.
And of course, the fact that you're using it means that somebody else cannot also be using it. So everybody does this, basically thinking about the costs that they, themselves, bear in terms of time and fuel and wear and tear on their car and maybe stress of driving, et cetera, but not this third-party external cost that they impose on others. And that gives rise to this issue. Road use becomes unsustainable.
This is a severe issue. There's a whole lot of recent studies that I'll just briefly mention that are documenting increased social costs associated with traffic congestion. And there's obvious things like lost time. It takes you-- if you go to work at 3:00 AM, you can get there in 30 minutes, perhaps, or, say, 20 minutes. But if you go there at 8:00 AM, it might take you 40 minutes. So that's the lost value of your time when presumably you could be doing something else that you would prefer to be doing rather than stuck in traffic.
It also turns out that cars get absurdly horrible gas mileage when they're creeping along in stop and go traffic. Really terrible. So there's all the social costs associated with the fumes that this air pollution causes. Stress and anger. The accidents might be of lower fatalities, but certainly higher levels of accidents. A recent study actually showing that babies that grow up near congested traffic have worse health outcomes as a result.
Recent study out of Sweden shows that divorce rates are higher for people who have long commutes, hopefully controlling for other things. This was the social cost highly nonlinear in traffic volume. What I mean is-- and you see this. You can actually see this on a road in the morning or in the afternoon when everything seems to be moving along fairly well. And then just a few extra cars on the road getting on will lock it up.
5% more, 7% more you add to the road, and then, all of a sudden, it becomes congested. So that last 5% or 10% can be enough to really add to the traffic congestion. The reverse of this is interesting in the sense that if you are able to do something to reduce that traffic flow by between 5% and 10%, you could increase the average speed of vehicles significantly as a result.
So this is some data. The main source of a lot of data is the Texas Transportation Institute. They do these urban mobility reports. The social costs of congestion, this includes all different things, is over $115 billion as of 2009. Probably higher than that. Wasted fuel is big, cost to the average commuter. How many times-- how many hours per year of delays there are as a result of this.
So this is one of just a really brief overview of what I call the demand side problems associated with transportation infrastructure. So there's some pretty severe social costs. The studies indicate that it's bigger than people thought in terms of the health outcomes associated with congested traffic. But there's also what I call supply side problems associated with infrastructure.
AUDIENCE: Sir?
R. RICHARD GEDDES: Yeah.
AUDIENCE: One quick question.
R. RICHARD GEDDES: Sure.
AUDIENCE: What do they mean by design life of 25 years? They talking about the surface of roads or the general usefulness of the road? I don't quite understand that.
R. RICHARD GEDDES: Yeah. So I'll give you a little bit of background. I'm sort of limited by my lack of engineering training, but I'll give you a little bit of historical background that might address that. So the story is that President Eisenhower was fighting in Europe in World War II and fighting the Nazis and saw the Autobahn and this giant, divided two-lane highway.
He saw it partly as a military-- he was a general. So he saw the military application of the Autobahn for moving military vehicles quickly around Germany. And he saw it excellently engineered. And he had traveled-- I think this was sometime after World War I-- across the United States with a military group and saw the deplorable state of US roads-- there were no real highways at that time-- and how difficult it was for his unit as a display to the public to get across the country.
And he knew that the US was way behind Germany after World War II. And of course, after World War II, a few years later, we're in the grips of the Cold War with the Soviet Union. And so he said, look, the US needs to do something so that we don't have these little state roads, and you go through a town, and there's all these intersections and all this stuff. And we need it for defense, and we need it for transportation.
So in 1956, he signed the National Highways and Defense Act. I might be getting the name a little bit wrong. But that was-- the 1956 act was a landmark in this policy area because it was the law that created the US interstate system. And the problem was, if you look at a map of the lower 48 states, we have this huge area that you have to cover if you want to-- if you want to have the interstate have decent coverage, it's got to go through Montana, North Dakota, Colorado, et cetera, et cetera.
You're talking about a lot of mileage and a lot of money to fund it. So what they did, they couldn't build it as deep as the Germans did. So my, again, rudimentary engineering is if this is the road and vehicles are passing across the road, what wears out the road is the flexing like this. So if a truck goes-- you may not be able to see it really well, but the flex causes the cracking and then the ice and snow and everything to work into the cracks.
So if you build it deeper, you have much less of this flexing. So we didn't have the money, as a country, to build our interstates really deep. I don't know the depths, few feet, kind of shallow. And that led to estimates that the design life, they knew it. I mean, the engineers just knew it, wasn't going to last that long. So then there's, depending on the climate that the interstate is in, there's pretty mechanical calculations that you can do about how long that road is going to last before it needs to be resurfaced.
So this was just a fact-- just a technological factor of the US that I've heard that number 25. I've heard some variation around that number. And it's certain to vary depending on the climate that the interstate is in. The point is that it was not a long life, and they were expecting to rebuild it probably. So here we are. We're at the end of that design life. Does that address your question? I mean, we can talk about it some more over cookies if you want. OK.
And then there's this-- I can't tell you how much this is cited in this literature is the American Society of Civil Engineers assigns grades, lo and behold. So you never can escape grades in your life, even if you're a bridge or tunnel. And they have a-- they have a-- I'm not making this up. They have an annual report card that they put out that rates US-- and I don't know if they're doing overseas, probably not-- but US infrastructure.
And they go through roads, bridges, tunnels. Keep in mind, everything I'm talking about can, to some extent, be applied to what's called social infrastructure, schools, courthouses, jails, social infrastructure. You can bring in private investment there. But these guys are focused on the big stuff. This number, about 27% in 2003, of bridges, for example, being structurally deficient or functionally obsolete is something the media has picked up with.
Some people have pushed on, what does functionally obsolete mean? It may not just be big enough. It's not going to fall down. If you push the engineers on this and say, look, are a bunch of bridges going to fall down in the next month, they'll back away from this and say, well, no, no, they're safe, but we need to do a lot. I'll talk a little bit about this issue of the funding gap, which I think is very interesting. But by the funding gap, what I mean is the engineers tell us, what are the needs?
In other words, what amount of money do we need to keep our transportation infrastructure in good condition? And that's the standard. And then they look at the revenue that they have coming from state fuel taxes, state gas taxes, other sundry taxes. Like there's a tax on truck tires from the federal, coming back from the federal program. And $200 billion. Our commission came up with some number. I think it was about $240 billion.
There was another commission that came up with $220 billion. So there's variation around this number. But it's a big number. So let's talk about a little bit of things. There's good points. And I'm being heroic here and using the perfect storm. Sebastian Junger is one of my favorite guys. But I do believe we are facing a really tough policy situation in how to fund this critical public asset. And I'll tell you why.
About 80% of the total funding comes from some type for what we've been talking about, comes from some type of fossil fuel tax. It is a tax on fossil fuel use. And if we go back to President Eisenhower-- there's a little bit of a history to be written here. President Eisenhower was in favor of user fees. He said, I want the people who use the interstate system to pay for the interstate system. He's a general.
And his advisors sat down and said, well, Mr. President, the purpose of the interstate highway system is to make high speed travel feasible with limited entry and exit ramps. And if we have to toll it, as you're suggesting, that would mean people in those days would have to stop and pay a toll and actually, in those days, throw money into the basket. And that would defeat the purpose of a divided limited access highway for high speed travel. He said, OK. What's the next best thing?
Well, Mr, President, the next best thing is to charge people on the basis of their fuel use, a per gallon charge, in those days, a couple pennies per gallon. And Mr. President, that is fair because basically, in 1956, all the passenger cars got about the same gas mileage. So the Oldsmobile got about the same as a Buick, got about the same as a Ford. So everybody's going to pay about the same amount per mile driven under this system of a fossil fuel tax as they would under some other system.
So you'll be pretty-- fair trucks are a different story. So he said, OK. So that's how he-- and he made it clear, apparently, according to a former US Transportation Secretary I spoke to that he did prefer tolling, but he understood this business about fuel tax being better. That's how we got to where we are today. The fuel tax has been increased over time, as I said, 18.4 cents per gallon. The trucker guys pay 24 and 1/2 cents per gallon in diesel fuels.
The states, as you may know, have their own state gas taxes. Huge variation across states in the amount that they charge per gallon for that. For better or for worse, we are in a situation where the funding for this public asset and all the roads, bridges, and tunnels that go with the interstate system are dependent on fuel use. And that, of course, depends on the price of fuel.
So econ 101, I tell my students, demand curves slope down. Price of something goes up, people use less. So when you have a fuel price spike, people drive less. Yes, they do. And the revenue goes down. You take a short term hit the revenue. So the revenue is unstable.
The other thing about this is that it is a cents per gallon. It is not 10% of your purchase price. It is cents per gallon. So that means that as inflation goes up, it deteriorates the purchasing power of that revenue that you get from a fossil fuel tax. So somebody tell me, when was the last time the federal gas tax was raised? Let's get some audience participation. What do you think?
AUDIENCE: '99.
AUDIENCE: No, in the '80s.
R. RICHARD GEDDES: Close. '93. So President Clinton was there. Democrats held the House. I forget what the increase was, but that was the increase to 18.4 cents. So you'll recall, in '94, the Republicans took over the House with the leadership of Newt Gingrich in part based on opposition to the federal gas tax increase.
So this has become-- and I don't know why my fellow commissioners couldn't see this. But nobody is going to touch an increase in the federal gas tax. It's political suicide to get out there and, particularly in the Great Recession like this and tell your constituents, we are going to raise your price of gasoline. So everybody looks back to that early '90s thing. So what my point is, getting back to inflation, just go to the GDP deflator, which you can find on bunch of internet sites.
Basically, the value of a dollar has deteriorated by about one third, almost exactly one third, since 1993. So that means the purchasing power of the revenue from the 18.4 cents has declined by a third since the last time this was increased. So this is what I'm talking about, the perfect storm. President Eisenhower was tremendous. We built the interstates as best we could. But they were not built to last forever. Nothing lasts forever.
And at the same time, the revenue is declining just because of inflation. But it actually gets worse. Sorry about this. Sorry to bring this bad news. Basically, US federal policy-- this is not a-- this is a bipartisan thing-- has been to push car companies to increase the efficiency of their vehicle fleets.
So if take out trucks, your fleet of passenger cars, what's the average efficiency? That's the CAFE, or Corporate Average Fuel Economy, standard. In the last years of the second term of President George W. Bush-- I guess George H.W only had one term-- but George W. Bush was to increase CAFE. And President Obama has pushed to increase that even more.
So we have these policy reasons, greenhouse gas effects, other environmental harms from emissions, energy independence. We're getting these wars in the Middle East. Is there some relationship there to petroleum products? This also applies to the trucks. So by trucks, I'm not referring to pickup trucks. I'm referring to 18-wheelers here out on the interstate. There was a recent increase in-- mandated increase in their efficiency.
Hybrids. Now we're talking about electric cars. Hydrogen-powered cars. A lot of social reasons for doing this. But if you have a system in place that depends on the use of fossil fuel to pay the maintenance and expansion of all this infrastructure, you're in a tough place. And that's kind of where we are.
So I love this quote from Mary Peters, who is a former US Secretary of Transportation. Testified probably in the House of Representatives T&I, Transportation and Infrastructure Committee, that this was a policy at war with itself. I mean, I hate the circumstances, but I love the quote. So basically, we're pushing drive a hybrid, drive a hybrid. Don't use gas. Gas use is bad.
But then the states and the feds who have to pay for everything are saying, oh my gosh. Where's the revenue going to come from? The engineers or civil engineers are saying, how are we going to pay for this new surfacing, this bridge on the interstate? I was shocked when I saw the numbers about how many bridges there are just on the interstate system. It looks like it's going to fall down. How are we going to pay for that? About 80% of the total funding-- and I'm going to get these numbers, as you suggested-- but 80% of the total funding for all of the stuff we're talking about is at the state level.
So the states have sales taxes. They have their own fuel taxes. About 80% of it, tolls. Pieces of the interstate were grandfathered in when the interstate was built. There's a law in Title 23 of the US Code that says the state is not allowed to toll an interstate without federal approval. But so just to keep in mind, the majority of it is done at the state level.
The 20% mainly is from that 18.4 cents per gallon that you pay every time you buy a gallon of gasoline. And if you're a trucker, you pay 24 and 1/2 cents. Now, what they do is they take that money-- and it's going on right now, ladies and gentlemen. Congress has announced-- Speaker of the House Boehner and with Representative Mica, who is a Congressman from Florida's-- head of the House T&I committee, have announced that they want a bill.
They I don't think want to wait till the fall elections next fall. They want to push for a six-year transportation reauthorization bill. Now, this generates the biggest lobbying frenzy on K Stree-- the lobbyists just go bonkers because there's so much money being allocated out of that account for a new road, a new bridge. Some of it's for a museum. Some of it's for preservation of historic covered bridges in Vermont.
Some money for an Elvis museum was in a highway bill. I mean, a lot of stuff gets allocated. And about 85% of the spending out of that account is spent on the basis of what's called a federal formula. And they call them formula funds. And tell me if this is going to answer your question or not. What they do is they sit down, and there's a formula that the feds use to allocate money back to the states from that 18.4 cents.
And the formula includes what you talked about, miles of interstate, condition of roads, a whole bunch of things that-- it changes over time. But a whole bunch of things go into that formula. They run the numbers through the formula, and then it goes back to the states on that basis. I talked to some folks who, when I was at the Council of Economic Advisors, had much more DC experience than me. They said the rule of thumb is that the big square states win.
So you know what they mean, Colorado, North Dakota. So the sparsely populated states win. And by winning, I mean they get more money back from the feds than they pay in gas taxes. They are called donee states. States like us, New York, we are donor states. I can't remember the ratios exactly, but we, as a state, pay in more money into the federal Highway Trust Fund than we get back through the formula.
Does that address your question? So miles of interstate go in that formula. That's a really-- I'm really glad you brought that up because I want to ask you guys. I said 85% of the funding is-- and this is going to happen in the next year if you believe Boehner and you believe Representative Mica and a number of senators. 85% is reallocated by formula. What's the other 15%?
AUDIENCE: Pork.
R. RICHARD GEDDES: Right. It's earmarks. It's pork. It's pork. So another guess. So our bill. Hold on, hold on. Guess how many earmarks there were in the 2005 bill that created our commission?
AUDIENCE: 3,814.
R. RICHARD GEDDES: 6,371. I love that number. 6,371. So we think Congress got so embarrassed with itself that they created our commission to tell them when to redirect the program. So we can talk about earmarks, but I wouldn't want to get bogged down in that. Yeah.
AUDIENCE: Oh, I was just going to say, does that mean all the 15% will be going states with Democratic representatives because the Republicans were all [INAUDIBLE]?
R. RICHARD GEDDES: [LAUGHS] That will be very interesting to see. I will be-- so put your money where your mouth is. Eliminate all earmarks. One of the recommendations of our commission that we all agreed on was, as a principle, eliminate earmarks. And I can tell you why. There's no review process that they go through.
You have things like-- I hope I'm not offending anyone, but the Bud Shuster Highway in Pennsylvania. Bud Shuster was a long-time representative from Pennsylvania. The Bud Shuster Highway in Pennsylvania gets the same amount of traffic in a year that the DC Beltway gets in three days.
AUDIENCE: How about West Virginia?
R. RICHARD GEDDES: West Virginia, they call them Byrd droppings for Senator Byrd. So OK, go ahead. I don't know. Fire away.
AUDIENCE: Well, i have the Warren Anderson Highway state level-- same thing.
R. RICHARD GEDDES: So you know what I'm talking-- I mean, yes, West Virginia is the--
AUDIENCE: I guess--
R. RICHARD GEDDES: --poster child.
AUDIENCE: --make one political remark, though. The sense of the larger-- of the big square states presumably being subsidized by the more popular states, I'd be interested to see if somebody were to measure, let's say, across the Interstate 80 on Wyoming, how many of the folks from Wyoming go by in a day versus folks making the cross-country trip?
R. RICHARD GEDDES: Yeah, the truckers. Interstate trucking?
AUDIENCE: Or people in cars from one large population center to another. I don't think that Interstate 80 goes across Wyoming to benefit Wyoming. It goes across to benefit folks who want to get to New Jersey, San Francisco.
R. RICHARD GEDDES: Yeah. So if you were to try to go to this, then that's the kind of argument you're going to hear. I'm just saying this is the way the system works. I think there's actually a lot of merit to having a national system. And these kinds of cross-subsidies are-- and this is all, by the way, very transparent.
The US DOT produces a table that says-- it says how much money is state-- and this is all very well-known in this community, of how much money is state paid in through the fuel tax and how much it got back through the highway bill. And they calculate the ratio. So they know exactly who's a donor, who's a donee. They know how much. So it's not like it's a big secret or something like that.
It's just that the argument is we have a national interstate system of highways, and it's proper for California-- think of the population centers, Texas, California, Florida, New York, DC area, Chicago, that population center in the Midwest, is going to subsidize the rest of that system. I know you had your Amtrak hat on. So we could talk about how the Amtrak system works too, which is similar. It's interesting. Yes, sir.
AUDIENCE: Well, it's a related question [INAUDIBLE]. You mentioned truckers. Particularly for the interstate highway system, [INAUDIBLE] huge portion of the functionality that is to move goods, not just passengers, from one part of the country to the other. And you're also talking about there being different tax on diesel fuel. I was wondering if that differential [INAUDIBLE] logic of moving goods versus moving passengers, and would that [INAUDIBLE]?
R. RICHARD GEDDES: You mean why would it be higher?
AUDIENCE: Well, I could ask just, why is there a different rate on diesel?
R. RICHARD GEDDES: The answer is it's all political pressure groups. The American Trucking Association is extremely politically powerful.
AUDIENCE: [INAUDIBLE] a higher rate.
R. RICHARD GEDDES: Yeah. Yeah, but it's way-- so I'll tell you another fact I recently read. So this may be going back to the '60s. But it's a famous series of studies conducted by AASHTO. You know AASHTO? The American Association of State Highway and Transportation Officials, AASHTO. And what they did was they took a piece of highway built like the US interstate system is built. Maybe it's a couple miles long.
And they took vehicles, and they drove them across the stretch of highway, test highway. And then they measured the damage to the highway as a result of vehicles, particularly trucks, of different weights. And they did this over and over again to get a lot of observations. And they came up with a mathematical relationship. And I was surprised to see this.
So if you take-- if you take d, take d, d, damage to the road-- so this is this flexing thing. So you have your truck. I always draw these pictures for my kids. So this is the flexing thing where it flexes the piece of road. That's d.
W is axle weight, weight of the-- axle weight of the truck. D is equal to probably some coefficient a times w. It's nonlinear. What do you-- what do you think the exponent is I should put on w?
AUDIENCE: Put on what?
R. RICHARD GEDDES: W. So it's a non-- so here we go. We're at Cornell. We're supposed to do this stuff. Huh?
AUDIENCE: I think slightly over 2.
AUDIENCE: I would guess a little [INAUDIBLE].
R. RICHARD GEDDES: [LAUGHS] Ooh, I love it. I almost fell out of my chair in MVR Hall. That tells you-- I mean, now, I don't know if AASHTO has redone the studies, but the axle-- so if you talk about-- because I'm getting back to your question on the diesel tax. The damage to the interstates is way disproportionately being done by the heavy vehicles, and it is highly non-linear in the axle weight.
So who's costing us in terms of interstate deterioration? It's heavy trucks. And they are willing to accept that 24 and 1/2 cents or whatever it is because they know they're being subsidized by the passenger cars. And they don't want to pay anywhere close to what their true cost is. What brings supply in-- so this is demand is the green line. Here's supply. VMT is Vehicle Miles Traveled, again, a US DOT calculated number.
Lane miles, flat, basically. I'm wondering if that blue line is entirely accurate. I would think it'd be going up a little bit. Big differences between the two, for sure. So econ 101, again, what brings supply and demand together is a price. And the problem is is that there's no marginal price for road use. And here's your answer. This is Doug Holtz-Eakin, who gave a ta-- he used to be up at Syracuse Public Policy.
Gave a talk in our college a few weeks ago. Testified before the Joint Economic Committee of Congress on congestion. And his solution is just a variable price. Price would be VMT, based on your vehicle miles traveled. So just like you pay a price per gallon of water you use, per minute of cell phone use, per therm of natural gas, going down the list, per kilowatt hour.
AUDIENCE: [INAUDIBLE]
R. RICHARD GEDDES: There's two different ways in the US. Now, basically, the one is actually a friend of mine, Cornell class of president '74, John Foote, it's his company. I have to tell this story. I know we're running out of-- I have to tell this story. Do you know John? So John Foote, Transcore. So the technology was-- and this is such a Cornell thing. John was an engineering grad from Cornell civil. And he's told me this, so I guess it's not private, I don't think.
But he said he didn't think he was going to be a great engineer. So he went into business. And I want to be a failed engineer from Cornell because these guys go out, and they all do these tremendous business things. So he worked for Citibank when it was Citibank for a while. And then he got into his buddies, I guess some Cornell buddies, and they started an investment company. And one of the technologies they invested in was an agricultural company in Texas.
And what they-- they had these guys that developed this thing. And what it was was you put this little device on a cow's ear, and the cow would be walking around. She would go into the barn, and there would be an overhead reader that would know that Bessie was in the barn. And it would dispense her food. She would go to her spot. It would give her her special diet, measure her milk. All of this would be done through this technology. But they couldn't figure out how to make any money in ag with this.
So John Foote's company bought the technology, the transponder on the ear, the overhead thing, and they gave it to some toll road engineers. And they said, what can you do with this? Well, lo and behold, that was E-ZPass. It came from a cow. So the next time you're driving through and saying, gee, I'm glad I don't have to stop, think about that cow. Anyway, so John Foote's company's Transcore. You can look at it on the web. He got out of it a few years a-- I think they sold it once, bought it back, et cetera, et cetera.
Overhead transponder, overhead gantry technology with a dashboard reader is technology A. Technology B is even better. So this is-- if you're into this area, I highly recommend you look at this blog called Toll Roads News. And this guy, Peter Samuel, God love him, this guy must live and breathe this stuff. Always into it. His big thing is what are called sticker tags. So what is a sticker tag? It's about the size of a big Band-Aid.
It's very inexpensive to produce and about this big. You stick it on your windshield. It is a unique identifier for your vehicle that can be read by satellites. So you don't need the overhead gantry. They are giving these away for free in Mexico because they want people to use that technology. Basically, the answer to your question is you're charged per mile driven.
With this technology-- so I'm just telling you, it's not a technological issue. They can bill you on the basis of road type, time of day, get down to the gory details of your vehicle. The VIN number is programmed in there. So it's not a technological issue. It's a social one. Back to congestion variable tolling. This has a long and distinguished history in economics. William Vickery at Columbia won a Nobel Prize. I forget what year. But he first proposed this in 1952 for the New York City subway system, which it's just peak load pricing is another term for it.
Alfred Kahn, who recently passed away, was at Cornell for many years. Actually did this in New York State for electricity rates. So just variable pricing. Basically, the idea is when demand is short, you increase prices. Does that address The question about-- my answer of how do you regulate demand and increase supply is price. So I mean, we got to believe this supply and demand model.
It'll induce private investment if you can get particularly facility-specific revenue, so from a piece of road. Then it's just arithmetic. The private investors will come in, and they'll say, OK, we'll take over operation of this road, and we'll take over maintenance of this road. We'll be contractually held to-- safety is a huge issue. If we mess up safety on this road, you can penalize us.
So if we don't maintain the signage, the lines on the road, if there's a dead animal on that road and we don't get it out of the roadway in 15 minutes, you can penalize us. If there's a fender bender and we don't get whatever the number is, get that off the road in 20 minutes, you can penalize us. So you can make-- part of my soapbox about private contracts is that you can make performance standards not only explicit, but you can attach penalties and rewards. So if you run the road better than the contract says, you get some reward for that.
So the US is just starting to get into this. It's basically converting the roads into a utility is what I'm talking about, where there are standards. So for electricity, there are standards for reliability that the electric provider has to provide. Telephones, there's a standard. So if you pick up the phone-- in the old days, you pick up the phone. How many seconds before you get a dial tone, that's a standard of performance for telephones.
Same thing is what I'm talking about. The key is being able to price the thing. The idea with public-private partnerships, getting the private capital markets to bear some of the risk. By the way, these projects can be enormously risky. I think if people-- so if you say tunnel under the Port of Miami, OK. What's under there? Well, even with all our technology, we still don't really know what you're going to hit until you start tunneling. You could hit a giant block of granite. What's that?
AUDIENCE: Remember Boston.
R. RICHARD GEDDES: Right. Right. Right. Well, that's a different-- that's a different problem. There was a-- it's called Citylink in Melbourne, Australia. And Citylink is a network of roads and bridges and tunnels. And during the tunneling part of Citylink, they hit a lot of geological problems. And it ended up costing a lot more. But that's a risk.
And the risk in the PPP case is borne by investors. In other words, their rate of return is lower because the costs were higher. But if you did it publicly, it's not like the risk goes away. It's just that the risk is borne by taxpayers. So part of the advantage of using private participants is that you get some of the risk, at least, borne by the private participants associated with this.
AUDIENCE: So is your slide then-- the last bullet point, that maybe should say private sector?
R. RICHARD GEDDES: Yeah. Oh, I'm sorry. Yeah. That should be private sector. Thank you for-- Thank you for picking up on that. Yeah. So transferred from the public sector to the private sector. And of course, there's a ton of these different risks. I mean, the US now, basically, the-- I have a slide here on a little bit of the history, how did we get here? Part of this story is tax exempt municipal financing.
So if you talk to people from a city who are a state, they're looking at a new project, they're saying, OK, what's it going to cost me if I do it through your PPP way? What's it going to cost me if I do it the traditional way? Well, the income on bonds for municipalities, qualifying municipalities, is tax exempt to the lender. So that lowers the effective interest rate that municipalities pay on municipal debt.
So historically, that has-- and it's just because of a tax-- part of the tax code. And but what that's done is lowered the cost of government financing relative to private financing historically. There's a bunch of issues with that. Congress has tried to address that with what are called PABs, or Private Activity Bonds, where for certain P3's, they can get that tax exemption to lower the cost of debt playing field.
But what that did for a long time was made the US weird because public sector financing was so much cheaper that you always went to the muni bond markets. But now, those markets are, I think, pretty much tapped out. And a lot of municipalities are having trouble. Harrisburg filed for bankruptcy. Vallejo, California filed bank-- et cetera, et cetera. So it's not clear how much longer or even-- I just don't know, even if now you could rely on muni bond financing to do this anymore.
So you're almost in a situation where, given the drop in tax revenue from fuel taxes-- I just read about municipalities. For some reason, this didn't click for me immediately. I don't know why I didn't think of it. But municipalities, a lot of times, localities depend on property taxes for their revenue. Well, guess what? When you have a real estate bust, property taxes go down with the value of the real estate. So they're laying off people left and right as a result of the declining revenue.
So the public sources of revenue are really drying up. And this is why I think the P3 thing is important for the US to understand at least. Again, I mean, feel free. I don't want to-- I don't want to hold you. But Mary Peters' numbers, $400 billion internationally of private infrastructure investment. And there's plenty of interest in investing in US infrastructure. It's just a question of structuring the project properly.
And I'll just give you a quick example. I think I may have put this on a slide over here. Scoot forward. Sorry about this. Where is it? Anyway, maybe I didn't. But there is obviously a lot of other countries. There is a project to add lanes to the DC Beltway on the Northern Virginia side. They're being constructed as HOT lanes. HOT lanes are either High Occupancy, or you pay the Toll.
That is being built entirely with private funding as a public-private partnership through two companies got together. Fluor is one of them, then an Australian operating company called Transurban, which also operates the system in Melbourne. And they are constructing, and they're going to operate the HOT lanes. That's a big-- that's a big part of this. Another part is what are called HOV conversions. I don't know if people have heard of this. But we've done HOV lanes in the US in the past, which are just high occupancy vehicle lanes.
Probably familiar with these. Sometimes there won't be many people using those lanes. In some places, those lanes are being converted to toll, variable toll lanes, in addition to being HOV. Well, if you do that, you create a revenue stream on the supply side from that lane, where you can get the private sector to operate it or, as in Northern Virginia, to build it. I can give you projects in Texas where they're being built by P3's.
If you're interested-- I mean, I'm shocked that people aren't throwing me out yet. But I'll just go through the most controversial ones. And let's talk-- we love controversy. So let's do it. Brownfields. I'll just give you the two distinctions. Brownfield and Greenfield. You got to know these terms. Brownfield refers to the lease or concession of an existing road. You got the thing built.
It might be old and run down, but it's built, typically tolled, and you are leasing that to private investors, typically for a fairly long period of time. We can talk about the lease length. There have been-- typically, the way this has been done in the US is they will bid on the basis of the size of the upfront concession fee. So who wins the bid? Well, here's the contract. It lays out all the terms.
And this was Governor Rendell when he was governor of Pennsylvania wanted to do the Pennsylvania Turnpike, 476 miles. It's huge, right? Old and tolled. And the terms of the contract would have required the concessionaire to completely redo the Pennsylvania Turnpike. Took bids on the basis of the size of the upfront concession fee.
We can talk about that didn't work because the legislature-- Rendell I guess irritated the legislature in Pennsylvania, and they vetoed it, even after he got a bid for $13.8 billion in terms of an upfront concession fee. Big upfront payment. But let me get-- let me get to the-- this has been the most controversial, has been the Chicago Skyway. This was Mayor Daley in Chicago.
You may have heard about the Chicago parking meters. I don't know the P3 on that, which has been a real thing. But this is like number two in terms of problems. The city decided that the 7.8-mile Skyway-- which I've driven. I went to the U of C, so I've driven on this a lot. The Chicago Skyway was not a critical city asset. And the city's job really wasn't to manage toll roads. It was more to worry about homeless shelters and remove the snow and that sort of stuff.
So they did a lease. And I'm really sorry that this is the way these things started in the United States because it would have been better-- because it gave it a bad rap from the beginning. Macquarie is a Australian investment bank. They are the world's leaders in the financing and banking behind infrastructure by far. These guys, I don't know why, but they are. Cintra is a Spanish toll road operating firm. They may be the oldest in the world. They're huge.
They teamed up and won a bid for-- and the city determined the lease length. It wasn't them. So the city said 99 years of a lease on this toll road. They gave a basically $2 billion upfront lease payment to the city. The city said, great. We're going to plug a hole in our budget with this upfront lease payment. They diverted part of that $2 billion to other stuff that had nothing to do with transportation.
I don't know. But 70% of the city's annual budget. I have here caps toll rates. The cap, though, is-- well, the cap, it doesn't make sense from an economic perspective. There's a bunch of different caps actually in there, one of which is the average increase in GDP per capita, which from a utility regulation standpoint, doesn't make any sense. Anyway, this has been derided as probably not a good way to do it. Governor Mitch Daniels in Indiana is generally thought to have done a better job with his lease. Yeah.
AUDIENCE: [INAUDIBLE] is it that it makes money or it's just a cooler tract or--
R. RICHARD GEDDES: It's more-- So again, the gentleman left. But John Foote has told me a lot about this. There is no entity within the city of Chicago to monitor the terms of the lease. There's no off-- there's no off- I mean, this lease is like-- we're not talking about signing your apartment. This is a lease to a public asset, a toll road.
AUDIENCE: We'll take the money, and we'll be on our way, basically.
R. RICHARD GEDDES: Yeah. Well, they took the upfront payment. They put weak caps on the tolls. There's stuff in the lease that probably says you have to maintain it in this fashion. But you got to make sure they stick to the terms of the lease. John's point is that the city just doesn't have the-- they haven't allocated or created a department or a commission or whatever you want to call it to protect the public interest in this case.
And this is-- again, everything in my life goes back to econ 101. But there's potential monopoly power here. And it's a highly congested urban area. People have been on this. So it's very difficult to put a competing road here. So there's a lot of issues that I think you need to think about in terms of protecting the public interest that were not thought through as well as they could have been in this case.
Now, the general consensus, and I'm just telling you, is that Governor Daniels in Indiana did a better job. And I want to be clear that these leases that I'm talking about, I'm only talking about them because they're controversial. This is small beer compared to the new construction. So I think the real oomph of PPPs is going to be in constructing new stuff. But these are more fun, in some sense. I don't know.
The Indiana toll road is 157 miles. Maybe you know it. Runs along the northern border of Indiana and connects to the Chicago Skyway. The same group, Macquarie/Cintra, won the lease in 2006. Slightly shorter time period, 75 years. But still way out there in the future. More sensible caps on toll increases. Almost a $4 billion upfront concession fee from this.
I think Governor Daniels got the most credit-- and Pete probably like this-- for the way he used the proceeds. Basically, Governor Daniels said zero, none of this money, will be used for non-transportation purposes. All of the lease payment is going to go for other transportation projects in the state of Indiana.
And so he funded, for 10 years, a program called Major Moves, where Indiana was going to invest this $4 billion-- it's a lot of money, but this is expensive stuff-- all around the state because they had a lot of stuff that was run down, et cetera. And the bond rating agencies took a look at that.
And they said, hey, this actually makes Indiana's books look better. So we are going to rate their debt more highly. So I think it was AAA, whatever the top rating was, which lowered their debt costs as a result of this. So Governor Daniels is-- people can argue about the terms of the lease. I'll just give you a-- since we're now into the P3's.
AUDIENCE: [INAUDIBLE]
R. RICHARD GEDDES: I don't want to-- yeah. Should I-- yeah. I'm happy to go on, but we should wrap up. I'll just tell you one thing is controversial here, and that is what's called a non-compete clause in the lease. And the non-compete clause is a clause within the lease that restricts or limits the ability of the government to build a competing road with the concession road.
And there was a non-compete clause in this one, in the Indiana lease. And that has been the subject of some controversy. So anyway, why don't I-- I'll be happy to chat about questions. There's a ton of benefits of this. We have to continue to protect the public interest. But why don't I stop there and just chat. Yeah. Thank you.
SPEAKER 1: This has been a production of Cornell University on the web at Cornell.edu.
Despite record levels of government spending, America's transportation system is plagued by traffic congestion, decaying infrastructure, and politicization of transportation funding--leading to calamities such as the 2007 collapse an interstate highway bridge over the Mississippi River and political fiascos such as Alaska's infamous "Bridge to Nowhere."
In his new book, "The Road to Renewal," Cornell professor of policy analysis and management Rick Geddes surveys the current state of U.S. ground transportation and finds that, like the roads themselves, transportation policy is in desperate need of repair.
In a "Chats in the Stacks" book talk held at Mann Library on October 20, 2011, Geddes discusses key highlights from the book to suggest promising new approaches toward road financing in America.
