Revenue-Risk or Availability Payment for Highway P3 Concessions?

Posted on November 29, 2017 by matt ohern
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It’s pretty clear that since 2009, there has been a trend toward greater use of the availability-payment model for long-term P3 concessions in the highway sector.

Nine such projects have been financed since 2009, including the Port of Miami Tunnel, the Goethals Bridge, and the East End Bridge. During this same period, eight highway projects have been financed as revenue-risk P3 concessions, including the LBJ in Dallas, the North Tarrant Express in Fort Worth, and the Midtown Tunnel in Virginia—and just this month the $3.5 billion revenue-risk I-66 project in Virginia, making nine such projects. Prior to 2009, all such projects were done as revenue-risk concessions.
There has been debate about the relative pros and cons of the AP and RR models at transportation conferences in recent years. Some state DOTs (e.g., Florida) have done only AP concessions for tolled P3 projects, preferring for the state to keep control of toll rates and revenue, despite thereby retaining traffic and revenue risk. Several other states, including Texas and Virginia, do not permit AP concessions. For highway projects where tolling is not an option, AP concessions—based on a dedicated stream of existing transportation tax revenue—are the best choice, to obtain the benefits that long-term P3 concessions can bring.
Because many governors and legislators are not yet familiar with P3 concessions, a new Reason policy study aims to explain the overall benefits of procuring highway projects as long-term P3 concessions and to then explain the differences between the RR and AP models. As the author of this peer-reviewed study, I’m writing this article to provide an overview of it. (http://reason.org/files/infrastructure_availability_payment_revenue_risk_concessions.pdf)
Both forms of concession encompass design/build/finance/operate/maintain (DBFOM), which offers many benefits compared with traditional design/bid/build and design/build procurement models. These include:

  1. Financing the project, via debt and equity, so that needed infrastructure gets built or rebuilt now, rather than many years or decades from now;
  2. Better project selection, due to the need to demonstrate a return on the investment made;
  3. Reducing cost overruns and late completion, due to the incentives facing the concessionaire to get the project finished and generating revenues;
  4. Minimizing total life-cycle cost, rather than only initial construction cost; and,
  5. Guaranteeing maintenance over the entire long term of the agreement.

These are powerful reasons for embracing the long-term P3 concession model for large projects.
Revenue risk (RR) concessions offer several additional benefits. First, because they create a customer/provider relationship with highway users paying tolls directly to the concessionaire, the latter has a strong incentive to design the project to maximize easy access and to keep its lanes uncongested over the long term of the agreement. Second, because RR concessions often lead to tolls where they would otherwise not be used, this model increases total highway investment, compared with AP concessions that are financed based on allocating a stream of existing transportation revenues. And third, the bonds that partially finance RR concessions are not state debt. They are examples of pure “project finance,” in which only the concessionaire is responsible for the debt, not the taxpayers.
By contrast, while AP concessions do lead to designs that minimize life-cycle cost, there are no incentives for the concessionaire to design for increased traffic and revenue. And in cases where the state sets and collects tolls on an AP project, the concessionaire has no direct relationship with highway users: they are customers of the state, not the concessionaire. And in those cases, the state (i.e., taxpayers) carries the traffic and revenue risk. Both models shift the risks of construction cost overruns, late completion, and ongoing highway quality to private investors, but only the RR model shifts traffic and revenue risk to investors.
The study identifies six situations where the AP concession model is likely the better alternative than RR concessions—including cases like the Port of Miami Tunnel where tolling would have been counterproductive to the goal of diverting heavy trucks to use the new tunnel rather than city streets. Another section explains the emerging law and policy at the state level that recognizes AP obligations as a form of state debt that may be subject to existing limits on debt issuance.
Overall, my conclusion is that for highway projects where either model could work, RR concessions are the wiser choice, due to their greater likelihood of increasing total highway investment, better serving their paying customers, shifting more risk from taxpayers to investors, and not being subject to state debt limitations. For a more detailed explanation, I urge you to download and read the study.
(This article first ran in the November 2017 issue of Surface Transportation Innovations)
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Judicial Extortion in California

Posted on November 29, 2017 by matt ohern
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The California office of Environmental Health Hazard Assessment (OEHHA) under what is called Proposition 65 “…must warn Californians about the presence of chemicals that are known to the state to cause cancer.”
In July, OEHHA issued an opinion declaring that glyphosate or Roundup was to be added to the list of chemicals which are “known” to California to cause cancer and thereby be subject to the requirements of Proposition 65.
OEHHA did not conduct any scientific review to conclude that glyphosate is carcinogenic. California relies on the International Agency for Research on Cancer (IARC) to support its decision. IARC’s conclusion “…is opposed by every global regulatory body that has examined the issue, including OEHHA itself.”(This article first ran in Farm Futures on November 28, 2017.)
Numerous farm organizations filed a lawsuit on Nov. 15, 2017, opposing OEHHA’s listing. (In January, 2016, farm groups and Monsanto sued California in state court and lost.)  In federal court farm groups and Monsanto argue the listing of glyphosate under Proposition 65 violates the First Amendment of the U.S. Constitution because such listing requires Monsanto and distributors of the product to make false and misleading statements about glyphosate. It is also argued that California’s warning requirement is preempted by other federal statutes and also violates the Due Process Clause of the Fourteenth Amendment.
The farm parties include the National Association of Wheat Growers, National Corn Growers Association, Durum Growers Association, Western Plant Health Association, Missouri Farm Bureau, Iowa Soybean Association and, of course, Monsanto.
The complaint filed by these groups ironically notes that OEHHA “…has concluded that glyphosate is non-carcinogenic.” In 1997 and 2007, according to the complaint, OEHHA reviewed several glyphosate studies and concluded “…that there was no evidence demonstrating that glyphosate causes cancer.” In fact, on June 1, 2007, OEHHA published a document declaring “Based on the weight of the evidence, glyphosate is judged unlikely to pose a cancer hazard to humans.”
Proposition 65 in California prohibits businesses from exposing California residents to cancer-causing substances without providing a warning. Consequently, OEHHA maintains a list of chemicals “known” to California officials to cause cancer. Because IARC listed glyphosate as a “probable carcinogen,” OEHHA believes that it must automatically list glyphosate to be carcinogenic. 
Proposition 65 is known in the legal profession as a “bounty hunter” regime. The complaint asserts “Wide-scale abuse of the Proposition 65 regime through ’strike suits’ by bounty hunters is broadly recognized.” The complaint further describes a long history of bounty hunter suits and the complaint asserts “A long history of these strike suits demonstrates what typically happens in practice: in face of this litigation threat, businesses are forced to simply acquiesce and post a warning, regardless of the fact those businesses know the warning is affirmatively false and misleading.”
In fact, it is noted in the complaint that Starbucks, Whole Foods and 80 other businesses in California which sell coffee must post a Proposition 65 regarding coffee because it might cause cancer. Even soda drinks apparently need a warning because a consumer might drink a thousand soft drinks a day and if so might have an increased cancer risk, which of course compels a Proposition 65 warning.
One California judge claimed that Proposition 65 “…results in ‘judicial extortion’ where bounty-hunting plaintiffs bring proposition 65 claims, admitting they have no specific evidence of any danger, and force the defendant to settle to avoid legal fees and the costs of performing an expensive expert scientific assessment.”
So notwithstanding views from the U.S. Environmental Protection Agency and numerous members of the international community, California has listed glyphosate under Proposition 65. California is relying solely because IARC identified glyphosate as a “probable carcinogen.” California’s law declares a substance must be “known.” 
The complaint attempts to describe the impact of California’s listing of glyphosate as a carcinogen. The plaintiffs believe that the Proposition 65 listing will require businesses to print false and disparaging glyphosate warnings, engage in expensive testing to demonstrate that glyphosate residues found in their finished product poses no risk, or stop using glyphosate treated crops. 
Such a result could be disastrous for grain producers and finished food producers. Once again, California is attempting to dictate how food is produced in the United States. The claims for relief listed in the complaint are compelling. Let’s hope the court listens.
(This article first ran in Farm Futures on November 28, 2017.)
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The Tax Cuts and Jobs Act: Many Won’t “See the Forest for the Trees”

Posted on November 15, 2017 by matt ohern
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The Tax Cuts and Jobs Act currently being considered by the Congress, according to Martin Feldstein, Chairman of President Reagan’s Council of Economic Advisors and renowned Harvard Economics professor, “could increase the U.S. capital stock by $5 trillion and cause a $500 billion rise in annual income.” Yet, many special interest groups will take aim because their tax preferences are being eliminated or reduced. Most Virginia families, however, will benefit significantly, as would the Virginia and U.S. economy. It is critically important that Virginian’s look at the overall benefits of job creation, investment, economic growth and simplification and focus on the forest and not the individual trees.   
The tax code has not been reformed since the author worked on the 1986 Reagan tax reform. The tax code has become a mess of special interest provisions, complex global tax rules and loopholes and a burden on U.S. business and our economy. Our corporate tax stifles small business, is too complex and encourages multinational corporations, many of which reside in Virginia, to hoard their global income abroad in lower tax environments. The Tax Cuts and Jobs act will reduce taxes on pass through small businesses from 35% to 25% and the overall corporate tax rate will drop from 35% to 20%, from almost the highest in the world to one of the lowest. This will stimulate significant wage increases of $3,500 to $9,000 per worker annually, according to economists Laurence Kotlikoff and Kevin Hassett.   
While measures of who bears the incidence of the corporate tax are constantly debated, it should be understood that corporate taxes are passed on to owners (shareholders via reduced dividends and stock prices), consumers (in higher prices) or workers (in lower wages or fewer jobs). Shareholders, consumers and workers are all benefit from a lower corporate tax rate.
In recent years, Virginia’s position as a low tax and pro-business state has dwindled.  According to the Tax Foundation, we now rank 33rd out of 50 in its “Tax Climate Index” calculation. Since Virginia’s tax code dovetails with the federal tax code, the positive impact of tax reform on the Virginia economy could be profound.   
The increase in the standard deduction to $24,000 will greatly simplify the tax code for the majority of Virginia families and allow them to keep more of their hard earned money. Individual rate reduction will also reduce taxes on most wage earners, reducing 7 tax brackets to four, at 12%, 25%, 35% and the current top rate of 39.6%. Most Virginian’s would fall into the 12% and 25% brackets. In high income Northern Virginia, married taxpayers earning under $260,000 per year would fall into the 25% rate. The 35% tax rate and top rate of 39.6% would fall on only the estimated top 2% of income earners.   
And what will the regional impacts be for Virginia from these proposed tax changes? Some high income Northern Virginian’s could see overall increases… those who have several homes and earn over $500,000 per year. However, if they are small business owners, they will likely see tax reductions. With lower corporate tax rates, the U.S. will again become a target for foreign investment and it is likely that Virginia will gain investment capital and global business startups due to our lower rates.  Allowing 100% of expensing for corporate investment will be a huge boon to our technology and manufacturing sectors.   
Government workers, even two income families, will likely see reductions in taxes and lower level government workers most certainly will benefit from the increase in the standard deduction. Wages for private sector corporate workers will also rise. Some of the corporate tax reduction will be passed through to workers and productive investment will rise.   
Finally, military families should see benefits and the Port of Norfolk should thrive. The lowering of rates and increase in the standard deduction, as well as the increase in the child tax credit to $1,600, should significantly help active duty military families.   
Some special interests will attack reductions for the high income earners in state and local tax deductions, a cap on mortgage interest at $500,000 instead of current $1 million, and eliminating mortgage interest on second homes or vacation homes. These are just a few of the individual and decaying trees and underbrush in the forest. Their advocates will pull out all stops to save their trees, and ignore the fact that nearly all Virginia taxpayers will benefit from reduced rates, more jobs, more exports, higher wages and a greatly simplified tax system.   
The tax code has become a forest filled with old and dying trees that need to be culled for more vibrant growth and expansion. It is critical to support this effort since a growing GDP, higher wages and lower unemployment cannot be overlooked in the coming debate.  
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Virginia Could Get Its Own Clean Power Plan

Posted on November 15, 2017 by matt ohern
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Terry McAuliffe’s days as governor of Virginia are rapidly drawing to a close, but proposed carbon-dioxide regulations working through the administrative process could prove to be his most lasting legacy. If adopted, the rule would cap carbon emissions at large power plants in 2020 and then require 3% reductions annually for 10 years, reports the Richmond Times-Dispatch.
After convening a working group more than a year ago to develop recommendations on cutting power plant emissions, McAuliffe signed an executive order in May directing the Department of Environmental Quality to prepare the regulations. The State Air Pollution Control Board is expected to vote on the measure Thursday.
The regulations will be tied to the Regional Greenhouse Gas Initiative (RGGI), a cooperative including nine other states in the Mid-Atlantic and New England. The regional initiative will allow power companies to purchase carbon allowances from one another. The regional approach allows utilities in one state to purchase offsets from utilities in other states that might be able to reduce carbon output more cheaply.
DEQ models indicate that Virginia’s rule could increase the wholesale cost of electricity by about 7% by 2030, although the actual impact on consumers should be lower, say backers of the rule. In other states, expanded energy efficiency programs have offset the higher electricity rates with lower consumption with the result that electric bills are no higher.
While Attorney General Mark Herring has rendered the opinion that the state air board has the power to regulate carbon under its existing authority, others disagree. Air board regulations prevent it from enacting regulations more stringent than federal requirements, Jay Holloway, a partner with Williams Mullen, told the Times-Dispatch.
Republicans also have problems with the rule, arguing that it will weaken the Virginia economy. John Whitbeck, Republican Party chairman, accused McAuliffe of catering to liberal votes in Iowa and New Hampshire for his presidential bid.
Dominion Energy has remain notably silent as the carbon-cap proposal has wended its way through the system. “We already are a low-carbon producer of energy, and have continued to work to lower emissions both in anticipation of future state or federal regulation and because it’s the right thing to do,” said Dominion spokesman David Botkins.
The carbon-cap initiative ties back to the debate over the electricity rate freeze. Critics have lambasted Dominion for the freeze, which arose from fears of the impact of the Obama administration’s proposed Clean Power Plan. Dominion agreed to keep its base rates fixed, which has locked in excess profits for the first couple of years, in exchange for taking the risk of asset write-downs if the federal carbon regulations forced the utility to close one or more of its coal-fired power plants. The Trump administration is rolling back the Clean Power Plan, so Dominion critics say the freeze is no longer justified. But Dominion countered that the McAuliffe initiative still could compel a reduction in carbon emissions, and that the company still is at financial risk.
Bacon’s bottom line: The point that intrigues me is the argument that a 7% increase in electricity rates would not harm Virginia consumers because, by adopting energy efficiency measures, they would offset the higher rates with lower consumption. Voila! With this new alchemy, we can impose regulations that cost hundreds of millions of dollars to comply with, and miraculously, everybody wins and nobody loses!
Pardon my skepticism. The carbon-reduction rule may be justified (if you buy into the more alarmist predictions of the global warming movement) but let’s not pretend there is no cost to consumers. Yes, it’s true, business and homeowner investments in energy efficiency can counter the higher rates. But someone has to pay for those investments!
(This article first ran in Bacon’s Rebellion on November 15, 2017)
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Job Openings – Facts and Figures

Posted on November 15, 2017 by matt ohern
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Every once in a while, I hear someone say tens of thousands of jobs are open in the Richmond region and candidates can’t be found for those positions.
There might be only some truth to that.
From August through October, for instance, more than 65,000 jobs were posted online for positions in the Richmond region.
But just because a job is posted on the internet does not mean that candidates can’t be found.
The median number of days of 65,167 job postings in Richmond was 27 days, meaning that 32,583 get filled in less than 27 days and the remainder take longer.
In fact, 52 percent of the job postings in the Richmond area were filled within a month, and about 70 percent were filled by the 45-day mark.
But about 13 percent of jobs remain unfilled after three months.
It seems reasonable to interpret these unfilled jobs after being open for a long while as those difficult to fill due to supply-demand imbalances. Of the 65,167 total job postings from August through October, more than 8,400 may be hard to fill.
The amount of time a job stays open in the Richmond region varies by occupation.
Highly skilled jobs and those needing specific licenses or certifications, such as education, arts and design, engineers and health care practitioners, stay open longer.
For low-skilled jobs such as office, retail sales and personal services, it takes a shorter time to fill open positions.
There is one exception — food service, which shows a high percentage of open positions. In this case, rather than advertising job postings for specific vacancies, companies hiring in these occupations often keep a posting open perpetually in order to collect an applicant pool, which they then draw from when a vacancy arises.
A few firms, including Chmura Economics & Analytics, collect online job postings to identify current job demand and trends for occupations and regions. These job postings can provide some insight into how many jobs go unfilled, but there are some caveats.
For example, some openings are not posted on the internet. This is particularly true in the construction industry, where openings are often communicated by word of mouth.
On the other hand, some job openings may be posted on the internet even though a candidate is already identified for the job. This is more prevalent in large businesses where the human resources department requires that jobs be posted for a period of time or for firms that are constantly recruiting for the same positions due to high turnover.
Despite those caveats, job posting data collected by Chmura Economics generally are consistent with national reports and can yield useful insights on what jobs get filled and how soon.
The data show that there were 25,765 active open positions to be filled in the Richmond metro area as of last week.
These numbers appear to be in line with the U.S. Bureau Labor Statistics’ Job Openings and Labor Turnover survey which reports 6.1 million open positions in August across the nation.
With the Richmond area having about 0.4 percent of the national population, proportionally, it is likely that about 24,400 of the nation’s job openings are in the region.
How does Richmond stand relative to the nation on job postings?
Using the nation as a benchmark, the Richmond metro area, with 65,167 total postings from August through October, has 28 percent more job openings than the average region based on the number of people employed here.
That ranks Richmond 93rd among the 381 metropolitan areas in the country.
The Charlottesville and Washington metro areas have higher job openings — 29 percent and 33 percent, respectively.
(This article first ran in the Richmond Times Dispatch on November 6, 2017)
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