Continuing the Times discussion to respond to emails I’ve received

I had a flood of emails after the privatization piece appeared in the Times, and I don’t have time to respond to everybody, I’m sorry to say. However, to the guy who spent roughly a page and a half telling me that of course I would support higher taxes because I am a blood-sucking professor growing fat off the taxpayer, I just want to say one thing: USC is a private university, m’kay?

Now that I have that out of my system, we can talk about some of the other, more interesting questions that came in.

Are you saying we should or shouldn’t privatize?

I’m not saying either one. I am saying that privatization is inevitable if Americans don’t want to pay taxes for infrastructure.

We can cut back on supposedly “wasteful” projects (and we should), but those are about a millionth of a fraction as important to the total, overall maintenance needs budget than Tea Partiers make them out to be. We’ve had years and years of shrinkage in value from the gas tax because we don’t index it for inflation; in the interim, demand has risen. The fund shrinks, on and on. With the recession, demand has scaled back a little, but when you are using facilities and your funds are shrinking, the money for maintenance and repairs has to come from somewhere. And in a no-tax situation, that means privatization, or letting your maintenance go.

In general, there is very little evidence that suggests private infrastructure costs anybody less than projects simply owned and operated by governments. There are many reasons for this finding: privatization deals are often hamstrung politically–e.g., concessionaires limited in what they can charge no matter what the demand or unforeseen operating issues they can’t recover, etc etc etc, forced operation in faraway, unprofitable areas, etc. Many argue we haven’t seen terribly fair experiments with privatization, and they may be right. But they also may be wrong.

Is the US really in as much trouble as Greece?

No. The US economy, even with our recession, is massive; our debt is a portion of our total productive capacity. Greece, on the other hand, is underwater for lack of a better term. There’s a big difference there.

Forced privatization, however, can come from multiple sources. In Greece’s case, they have to sell, period. In our case, we could decide tomorrow to tax ourselves to get the revenues we need to maintain our existing system.

But if you simply defund infrastructure maintenance, the assets go to pot or you force governments to go looking for private investors. And that’s where the US is. We’re making bad decisions to defer maintenance and to seek public-private partnerships on new projects (which everybody still loves, all the chattering about “cutting the fat” notwithstanding).

The basic point of the op-ed is that yes, we can try to force gummint to privatize its services. But cutting off the funding and not maintaining the assets is a terrible way to do that, and forcing down government bond ratings is a Stupid McStupid way to do that.

But I think government is just too big and out of control. I want more privatization.

The better way to go forward with privatization, if you really, really, really ideologically hate government and would rather live in a world of tolls and fees for quasi-public goods, is to let government negotiate privatization deals when the assets are in good condition (desirable), and they can bring to the table something other than the concession rights—the ability to absorb some of the capital risks associated with large-scale infrastructure. That ability to deal with the risks associated with building and maintaining large-scale facilities, with bond financing, is really what governments can bring into public-private partnerships. If you constrain that ability with tax aversion and letting bond ratings go to pot, you hamstring the ability for institutions, both public and private, to draw on the sort of deeper, longer-term revenue-smoothing commitments that you need to build something like a train line between San Diego and Sacramento rather than a hotel.

Not keeping our infrastructure maintained is a bad strategy, even if we DO want to get parts of it out of gummint hands: private companies do not necessarily want to run concessions on poorly maintained facilities, and they do not want to inherit a maintenance risk. Used cars that have a certified maintenance record with them usually have a price premium over those that don’t–just so.

My taxes are already too high. I can’t stand anymore.

That may be true, but one final word of caution. There’s a reason why every single commentary on infrastructure privatization always includes the words “there’s no such thing as a free lunch.” Because there is no such thing as a free lunch in infrastructure. If you privatize infrastructure, you may (or may not) have lower taxes over time as those facilities move into private hands.

But Santa Claus doesn’t run private infrastructure projects: profit-making companies do. They need to charge tolls and fees for you to use their stuff so they can stay in business. So on the one hand, I’m told that Americans HATE tolls and fees, too. Well, best get over that if you want privatization because that’s how road/parking/park/school/etc concessionaires make their money.

Maybe the sum total of what you pay when you select out of some services and select in to only those you patronize, but there is little evidence to suggest that actually works out. There are always cross-subsidies, even in privately produced goods (the beer pays for a lot of the food in restaurants, etc).

Gummint workers are lazy and incompetent. We’d get better service if our roads were in private hands.

Ok, but if we weren’t all working in the same place, Dilbert wouldn’t be as funny as it is, now would it?

One thing that private companies do tend to be able to do better than governments: they differentiate levels of service to let people buy into the service level they want. It’s very hard for governments to charge a “first class” and “third class” fee on tax-supported goods. Service differentiation can really make a big difference in how well services are fit to market demand.

However, service quality on privately owned concessions tends to vary, too, for a whole bunch of reasons. Remember when United Airlines was putting the hammer down on its employees in the mid2000s? Worst. Service. Ever. Heaven Help You if your flight got cancelled.

Of course you want us to spend money on infrastructure! That’s how you make your living! You’re writing out of self-interest.

I hear this charge a lot. Truth be told, it doesn’t matter to me professionally whether we privatize or not. I have private companies asking me to consult, I have governments that ask me to consult. My skills are portable between sectors.

Ultimately, I think it’s an open question about whether we need to spend more money overall on infrastructure. Is it more important than education or health care? I can’t presume to answer that question. But it’s really hard to maintain markets and everything Americans say they believe in if nobody can get decent water service, our energy grid is outdated, and we have potholes big enough to swallow 1980s Buicks. Infrastructure is one of those things where you have to spend money to make money: casinos, for example, have routinely built their own little transit and road projects to make it easier for their customers to come gamble.

So whether we strategically disinvest or not, whether we decide never to build HSR or anything new ever again, we do have to maintain our system if we want to function as an economy. It’s like this: you either pay for repaving, or you pay for new shocks and struts on your car more often than if the roads were in good repair.

Keep the questions coming if you like, and thanks for reading.

What I learned from Professor Per-Olof Gutman about two-loop controls on HOT lanes

On Monday, Metrans hosted Professor Per-Olof Gutman, who discussed some of his work in control engineering for the HOT lane connecting Ben Gurion airport and Haifa (Highway 2).

The HOT lane, like most, is operating under two political mandates. First, those who pay to enter the HOT lane are guaranteed to be allowed to travel 70 kph for the stretch of the HOT lane, and there is also a limit that tolls can go no higher than 30 shekels, which is about $10. Given those constraints, it’s not likely that the franchisee can get to a profit-maximizing strategy–whether there’s a profit at all is the question.

The original automatic control algorithm for setting tolls didn’t function properly: it overestimated the costs and contained a measurable lag: so cars and congestion would be clearing on the tollway and on the free lanes and the automatic control algorithm, responding to previous conditions, would raise the price as congestion was going down. Not what you want with a dynamic pricing model where you want to give people the right price signal when they are confronted with the decision to take the HOT lane or the free lanes.

Professor’s Gutman’s improvement suggested a two-loop control: an interior loop that monitors entry and an exterior loop that monitors changes in flow that cascades back to the interior loop as speeds increase or decline. That enables the company to maintain the floor speed of 70 kph.

The kicker on this–the rickety part of policy–is going to be the 30 shekels, not Professor Gutman’s controls. Because there will be a time, if demand grows, when it’s going to become impossible for the company to attain that speed floor with a $10 toll–if it isn’t there now. One of those performance constraints–the speed floor or the price–have to allowed to vary more once the HOT lane faces higher demand.

I can’t find Professor Gutman’s manuscript online, so he’s probably working on it now. I’ll post a link when we see it. One of my wonderful colleagues, Barak Fishbain, said that there are Youtube videos of some of Professor Gutman’s system control work on robotic motorcycles, but I can’t find those. I’ll post them if I find them.

Aha! edited, thanks to Barak, links to the YouTube of the Unmanned Motorcycle project!

Prices, simply, work

For 40 years, the US has spent billions investing in transit systems hoping to get people out of their cars. We have obdurately ignored economists who note that pricing gasoline more appropriately with a gas price floor or carbon tax would raise the costs of driving, would give us revenues to invest in public transit, and would do what everybody wants everybody else to do—stop driving gas guzzlers and stop driving so much.

Instead, we’ve built and built transit that has underperformed for years simply because driving is still so cheap. But we haven’t invested probably enough to prepare for the demand for public transit because we don’t have the revenues to do so, partially because we’ve stuck to the policy of keeping gas cheap.


Stupid, short-term thinking.

The Financial Times has a series of very good articles recently on where we are.

Gasoline consumption shrinks vis-a-vis higher prices (what? REALLY?? HOW CAN THAT POSSIBLY BE?) as US Congress questions $2 billion in tax candy handed out Big Oil.

Gas prices spur inflation (of course they do, if everybody is getting around by car, everything from labor to other inputs are higher in prices)

And it’s not helping the trade deficit (again, basic math)

Gas taxes are bad bad bad, private investment is good good good

Polls, don’t you love them? There are so many ways that polls can be done badly.

Like this one cited in the WSJ, with a great revelation: people think it’s important to spend money on transport, but they don’t want gas taxes, either. And it would be ok if more private investment went into transport.

Awesome with awesome sauce on top.

This popularity of private funding raised for transportation infrastructure can be seen the universal love that people have for paying tolls and parking charges, and the long history of extremely successful private franchising arrangements we’ve had.


Maybe we should try to start our very own philanthropic organization: Fill a Pothole for Humanity. We could have sincere-looking spokespeople come on, in between the miserable child and miserable animal charity commercials, and talk in urgent terms about how swell it would be if you were to voluntarily send in your money right now, if you feel like it, in your spare time between driving too much and using inefficient vehicles while worrying about US national security policy.

Just so long as nobody is actually expected to pay for stuff they use.

Edited to add: Columbia’s David King writes that the pothole charity idea has been tried in Germany.

The Expo Line and Who is Overpaid in Transit Construction Contracts

Richard Green notes on his blog that:

A light rail line going by USC–the Exposition Line–has been under construction for some time now. For a considerable time, the site featured a sign that said the line would open in 2010. Now the estimates are that it will open some time in 2011 or 2012. At the same time, when I walk by the project, I can’t say that the workers building it show a great deal of, shall we say, urgency about getting the thing done.

At the same time, I don’t hear a lot of people who are upset about how far behind schedule the project is. Maybe this is because no one is planning to take the Expo Line. Maybe it is because peoople have such low expectations of LA Metro that they are not surprised, and therefore not outraged. Either way, it suggests a problem.

First off, it’s a bad idea to conclude anything about work effort based on what you observe by walking by. That’s like the people who judge professors by saying we “only teach two hours a week.” It’s not a valid sample, and it’s very had to evaluate other people’s work effort when you have never done the job yourself— and that’s particularly true of white collar workers passing judgment on blue collar workers engaged in dangerous and often tiring work–during a recession, no less, where anything that extends their work hours has direct implications for their family’s ability to eat and pay rent (unlike salaried work).

More to the point, Richard is mistaken when he concludes that people are not upset. The LA Weekly recently published a story called L.A.’s Light-Rail Fiasco which eviscerates the CEO of the Exposition Metro Line Construction Authority, Rick Thorpe, for salary and his conduct. Rick Thorpe is exactly the sort of transit guy who becomes a free agent and CEO: relentlessly self-promotional and confident, any previous successes get attributed to his leadership. So he picks up stakes, gets recruited away, commands an enormous salary, and builds a brand for himself that he delivers projects on time and on budget.

From the LA Weekly Story:

The reasons behind the fiasco are as numerous as they are complex. But at its core, it’s a simple story: Somebody had a clever new idea, and it backfired.

In this case, that somebody is Rick Thorpe, CEO of the Exposition Metro Line Construction Authority and one of the leading lights in light rail. He sold elected officials on a new type of contract, which he said would bring the project in cheaper and faster than it could be done by traditional means.

Colleagues from other transit agencies warned that the idea might not work. In the name of holding down costs, it could inadvertently create incentives that would drive costs up. But Thorpe pressed ahead anyway, and the elected officials charged with overseeing the line put their faith in his expertise.

Now, four years into the project, the results are plain.

“It just doesn’t work,” says Dan Peterson, an arbitrator with 50 years of experience in public works projects. “They’re trying to save 20 cents and it’s costing them $20 million.”

Thorpe and the MTA board argue that the contracting approach does, in fact, work. It is a process of negotiated design-build that, in Thorpe’s mind, prevented contractors from getting windfalls as they sometimes did under the design-bid-build process that has been industry go-to contracting process for a long time. However, the project where Thorpe’s innovation is supposedly working is not just behind schedule: it’s now 40 percent overbudget (to the tune of $260 million).

Now, you would think that Thorpe would know better than to be too fussy about contractors making money, based on this bit of info:

As CEO of the Expo Authority, Thorpe oversees a staff of 15 and earns a salary of $334,000. He makes more than the CEO of the Metropolitan Transportation Authority, who is responsible for 8,000 employees.

Thorpe’s self-branding that captured this salary is one of the major flaws of leadership both in the public and in the private sector. Once shareholders or board members believe you are some kind of magician, and they will if you are fortunate and if you blow your horn hard enough, competence is no longer enough. And as anybody who has built anything or completed any public project knows: 1) given all the barriers and problems, it’s amazing that anything gets built, ever, let alone on time and on budget, and 2) nobody, no matter how smart, confident, or charismatic gets anything built all by themselves. It takes a team, and while teams need managing, it is really easy to overstate and overcompensate the contributions of management when things go right and to make excuses when things go toes up.

There is another side. Why shouldn’t public managers good at their jobs make more than doctors or other professionals? Thorpe is a CEO, after all, and this is a major project, and major projects are tremendously hard to deliver, and private-sector CEOs make much much more.

However, the management and incentive contradictions emerge quickly. If you are paid $300+K a year to run something, your desire to finish it on time–particularly when you still have a board that rushes to your defense and you are no longer a hungry young guy building your brand–is low. Unless there are bonuses in Thorpe’s contract for on-time performance, he has little reason to protect the project from delays at this point, given all many reasons why projects get delayed in construction and the halo surrounding him personally.

Moreover, if you make your money because you are such an excellent manager, there is also the desire to innovate practices that reinforce the need for *management* on this project and future projects.

And from the what the LA Weekly reports, this “make management work” approach is right at the center of the problem. Instead of hammering out the details of the contacts up front–as with traditional design-bid-build contacts–Thorpe’s “negotiated design-build” requires the agency to keep their hands in project management more so than under traditional design-build where they would have been managing the contracts primarily–instead of negotiating as they go along.

In the end, I’ve always argued that there is very little wrong with the design-bid-build process.The US built most of the Interstate system with the approach and most existing transit, water, sewer, and other infrastructure this way. Where Thorpe sees the potential for “windfalls”, I see an incentive for construction companies to keep costs down so that they can increase profits. In the hands of a competent agency contract manager keeping track of the as-builts and project specifications, you shouldn’t end up with a poor-quality project. Instead, you provide an incentive on the part of the construction companies to keep employees hopping and to strike hard bargains with suppliers in the hopes of getting in under budget so that you can walk away with that the built-in cushion. The bidding process keeps companies from building in too much of a cushion. Innovations here have almost always struck me as cases of fixing something that wasn’t broken–to the overall detriment.

the MTA budget cuts and the need for long-term transit finance reforms

David King pretty much sums up how I feel on the cuts, except for one thing: I was surprised they weren’t worse. However, the MTA is a sharp outfit: if they have to, they’ll announce 4 percent this month, another 4 percent three months from now, and another 4 percent after that until they can meet their payroll. It’ll be…interesting…to see where we are a year from now.

There has to be long-term finance reform in transit, and no, the 30/10 doesn’t get us there. The 30/10, wonderful as it is, would enable us to build more stuff that, ultimately, we won’t be able to operate.

These cuts are going to get worse and worse, not just in LA, but everywhere, and eventually, those cuts are going to hit the train operations, too. Um, yeah. Without long-term finance reform, eventually we’re going to get to the point where the bus cuts that all the transit blogs treat as little more than a passing headline will be joined by rail service cuts.

New York is already there.

Train cutbacks might actually make people in the streets blogging and transit-advocating world actually care …maybe…about operations.

Then maybe they will spend as much time talking about the hardship that ensues from cutting services as they appear to want spend gossiping about which of their favorite celebrity transit advocates might work in Los Angeles to replace retirements.

Nah. Talking about transit’s operations problems–like getting back and forth to work in a world where services are getting cut–would be a distraction from treating transit like the jungle gym in the ultimate urban playground for twentysomethings raised on a steady diet of Friends rather than as a place where transit needs to work for people other than trust funders on pub crawls.

Whatever, right? Everybody knows operations are just a waste of money in transit. Building is where the professional and political payoff is. Advocacy for projects gets you in the position where you get to be part of the buzz. Who was the last bus operations drudge you saw featured on a transit blog, or given an high-profile award for their work?

So what to do–other than grow the hell up? I haven’t run any numbers yet, but it’s pretty clear that the Feds are not going to hand out candy for operating subsidies. Which means we are probably left with local funding sources. A place to begin thinking in terms of reform:

a) When we find new a dedicated source of funding–and we’ll have to–we’ll have to have the self-discipline NOT to promise to spend it on our addiction to building new transit projects.

New sources of funding = political nightmare. But some suggestions: Ratchet back on property tax insanity in California–ideally. So how about a 3-cent gas tax increase on local pumps? We can tell everybody we are solving congestion even though we aren’t. Sure, let’s have parking charges a la Don Shoup. But whatever funding it is, it’s not for geegaws or fripperies or extensions or new services in far-flung suburbs, at least not right now. It’s about keeping existing routes and frequencies.

With whatever funding victory may come, we can’t fall the into the political expedience trap of earmarking new funds for projects. We love to do that because taxpayers like to be able to point at a map and see what they think their money goes to.

We can’t keep indulging that. We have to start learning how to make the social marketing case for operations.

b) Create a dedicated pot for operations at the local and regional level, and expect to put money into that pot forever for transit as the municipal public service it is.

Nobody expects street sweeping to pay for itself; ditto police protection or libraries or snow clearance. Transit in cities should be treated the same way as those services. We don’t talk about “garbage collection subsidies.” It’s time to talk about funding services instead of obsessing about subsidies.

(And yeah, in case you can’t tell, I’m pissed.)

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