Monday, March 06, 2006

Permit Me to Introduce the Concept of Return on Investment

Philip Shucet, Virginia's former VDOT commissioner, has published a column in today's Richmond Times-Dispatch making the case for more transportation spending. In a nutshell, he argues that traffic congestion carries a high price tag for Virginians: about $580 million per person in Northern Virginia, $240 in Hampton Roads, and $155 in Richmond.

"Without additional money for transportation," Shucet writes, "your tax-payer dollars will be used to maintain the system we have, while your cost of sitting in congestion goes up year after year."

I have respect for a lot of Philip's ideas for increasing the efficiency of Virginia's transportation system, which we've highlighted on this blog, but I don't think he's thought his argument through here. The Road Gang wants to raise taxes by about $1 billion per year. Based on the state's share of population and income, Richmond taxpayers would pay roughly one-eighth that amount, or $125 million. What bang for our buck do Richmonders get for that $125 million? (If you're from NoVa or Hampton Roads, plug in your own numbers.)

How much of that $1 billion in extra transportation revenue, after it gets filtered through an arcane funding formula that favors rural areas, will wind up in Richmond? What projects will it finance? And by what percentage will those projects reduce traffic congestion? Will they reduce congestion by one percent? Two percent? Ten percent? Will the congestion savings to Richmonders be $1 per person? $10 per person? $20 per person?

No one knows. No one has even made the calculation (or if they have, they've chosen not to release the results to the public).

But the numbers matter. If Richmonders spend pay $125 per person in higher taxes, congestion mitigation of $1 per person is a lousy investment, less than a one percent return -- we'd all be better off sticking the money in a money-market fund. If Richmonders get $10 in congestion mitigation, that's equivalent to what they could get from investing their money in a diversified stock and bond portfolio. If Richmonders got a $20 per person benefit, then there's an economic case to be made for raising taxes.

We don't have the faintest idea what the return on investment will be. Asserting that it makes economic sense to tax Richmonders $125 per person a year to offset traffic congestion is a pure act of faith. I'm sorry, but that's just not good enough. The private sector doesn't make billion-dollar investments on the basis of a wild stab in the dark, and either should the Commonwealth of Virginia.


At 11:55 AM, Anonymous Rob Whitney said...


The interesting fact is this-- the only region that would pay less in taxes than the cost of congestion is Northern Virginia. This of course assumes that every single dollar taken in new tax revenue goes directly into relieving congestion and that the congestion relief will bring the "price of congestion" to zero.

Simple fact is every dollar will not go into congestion relief and we will never be at a "zero congestion cost" in the eastern half of the state. Therefore the dollar impact argument is frankly flawed.

You will be paying more and the cost of congestion will go up for the foreseeable future as you pay new taxes, but idly wait for new roads.

At 8:20 PM, Blogger Ray Hyde said...

Ahh yes. Metrics.

Isn't this the point I have been trying to make? We don't know anywhere near enough to make rational economic judgements, a case frequently reitierated by TAMU.

Lacking that we are left with political decisions, which for practical purposes means those made by the Road Gang.

But if you actually get the data that will allow you to make rational economic decisions, then you need to be prepared to accept decisions that don't necessarily fit the idea of what is desired, dysfunctional or proper.

Anyway, who cares what Richmonders pay? Northern Virginia and Hampton roads are the tails wagging this dog.

At 3:47 AM, Blogger Larry Gross said...

After reading Shucets words, I too, am not reassured and remain skeptical that more money is the fundamental answer without further changes to transportation policy itself - which still is oriented to more road infrastructure - despite - what should be clear by now even the most dull-witted is simply not going to happen in major urban areas without almost superhuman efforts to ram something through despite enormous cost and opposition.

How many more Springfield Interchanges at 700 million and 7 years are NoVa folks willing to pay for? Surely they don't think those folks in Wise and Highland county are going to pay for it - even if they could.

I agree with Shucet's claim that the on-time, on-budget performance has improved but the improvement came as a direct result of dumping many projects in the 6yr plan and taking a financially constrained approach to what remained.

Kudos to Shucet on that issue but I've yet to see a change in the process for ADDING projects back neither at the state or local level. We're back to the "lets see what VDOT will pull out of it's hat" stage.

It's ironic that the phrase "return on investment" is being used because it implies that if we add more money - that we'll get more return on investment automatically using the same VDOT processes that got us into this problem in the first place.

The phrase "you cannot build your way out of congestion" is one that when first proffered was derided by VDOT and others who claimed that indeed you could.

VDOT even went so far as to put a price tag on it - 100 Billion - which was a simple tally of all of the projects it has ever thought of, but we now know never had a prayer to build. (this is what you get when you ask local politicians to think "big"... ha ha ha).

Well.. there aint no way in Hades that the GA or anyone else is going to come up with a funding plan at about $142 per capital per Billion to fund such a thing so the obvious question is which projects that were dumped from the 6yr plan would be the first ones to be put back into that plan ... and why those rather than the others? (I know... I'm being such a booger for bringing up this "detail").

The basic proposition being advanced by Mr. Shucet is simply - "give us more money or really bad stuff is going to happen" and... to "trust VDOT to spend that new money wisely and to be able to figure on how to ahemm... give folks the best bang ... "return on investment".

I thought Mr. Shucet had... "more vision" than this. Perhaps I was wrong.

If NoVA wants to deal with congestion, I'd suggest that sending more money to Richmond for VDOT to figure out a plan is dumber than a stump logic that folks in No Va figured out back when they dumped the transportation referenda that suggested that exact approach.

Not that I think that NoVa folks are going to be willing to cough up enough money to build ALL of their wish lists either - especially since Wash Metro - like many other urban areas is operating under non-attainment rules which (unless changed) means new infrastructure cannot increase the pollution levels.

That's why the only major proposals right now are for HOT and HOV and transit infrastructure.

You know.. folks ought to take a road trip... say to Southside Va or for that matter anywhere in Virginia away from our urban areas and see their "congestion" and "road crisis".

For them... better, safer roads ARE the answer and while they'd like to receive more money, most know that they'll be lucky to get back what they pay in gas taxes.

The "Transportation Crisis" in Va is NOT in those areas. It's primarily a problem in No Va and Tidewater and I'd posit, at the end of the day, it's not something that they should expect some fellow working at a mine or teaching in a rural school to fork over more of his own paycheck to deal with.

I vote for NoVa to fund their own projects - and to determine which projects they can afford and will deliver the best "return on investment".

Show the rest of the state how to get things done. When you're done with that job.. go show VDOT and the GA and Mr. Shucet how you accomplished what you did - then we'll have a model for the entire state to follow. :-)

At 11:12 PM, Blogger Ray Hyde said...



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