How Good Are Consultant Traffic Projections

Do you remember these graphs I posted once before? They were presented by the Bridge Co. at the Senate Bill C-3 hearings.

Just this once, humour me. Would you please assume that the Bridge Co. actually knows what it is talking about, being the most succesful bridge operator between Canada and the US. What they said and what the graphs show is the huge variation between projected numbers by consultants and the actual traffic volumes at Sarnia and Windsor.

Aren't the upward consultants' lines very similar? Would you have liked to have been an investor in Sarnia based on these projections? Where would your investment be today? Would you invest in Windsor based on actual vs. projected?

Numbers are significant. They are the basis upon which projects are built and financed. In Windsor, the huge volume of traffic projected in the future is one of the main reasons supposedly why we neeed a new crossing and why someone might want to finance the project in a P3.

If the Bridge Co. is right, and the numbers seem to show they are, especially as evidenced by DRIC revising them downwards several times already, then why do we need another crossing costing multi-billions?

There seems to be available capacity even now when DRIC itself said that the bridge was operating at under 60% capacity. If the volumes aren't there, then who but taxpayers could afford a project that can cost as high as $6 Billion? Can you figure out as well the millions in operating losses that crossing would have that taxpayers would have to pay out every year.

If the projected numbers are right, no problem. As I have Blogged before, if they are wrong, what are the potential consequences:

1. Bankruptcy of the new crossing
   
2. Someone buys the new crossing for pennies on the dollar in a fire sale
   
3. Government forced to take over the project and bail it out
   
4. Lawsuits
   
5. Bankruptcies of some or all of the Ambassador Bridge, Detroit/Windsor Tunnel and the Blue Water Bridge

Go back and read my BLOG on April 18, 2006 "Machiavellian Megaprojects" where we learned that

• "Which projects get built? We found it isn’t necessarily the best ones, but those projects for which proponents best succeed in conjuring a fantasy world of underestimated costs, overestimated revenues, undervalued environmental impacts and overvalued regional development effects...
  
  In fact, there seemed to be a formula at work: (underestimated costs) + (overestimated revenues) + (undervalued environmental impacts) + (overvalued economic development effects) = (project approval)

This is not a mere academic exercise. The NATIONAL FEDERATION OF MUNICIPAL ANALYSTS in its article, Recommended Best Practices in Disclosure for Toll Road Financings, stated:

• "While issuers generally provide significant disclosure for toll roads, the disclosure is not necessarily adequate. Higher quality disclosure must be provided to investors in both the primary and secondary markets...
  
  The feasibility study is the investor’s primary consideration when assessing the economic viability of a toll road and its ability to produce adequate and timely toll revenues to meet financial obligations. To date, many of the feasibility study’s projections for stand-alone start up toll roads have overly estimated traffic and revenue performance."

In an article, "Expert Forum on Road Pricing and Travel Demand Modeling," a commentator stated:

• "Despite the enormous sums of money spent on traffic and revenue forecasts, there is growing concern about the accuracy and reliability of these expensive forecasts."

Another report by Halcrow Fox stated:

• "With large infrastructure projects, the Danish Transport Council state that:
  • Cost overruns of 50 to 100% in real terms are common; overruns above 100% are not uncommon;
  • Traffic forecasts that are off by 20 to 70% compared with actual development are common; and
  • Forecasts of project viability are often over-optimistic to a degree that such forecasts correspond poorly with actual viability"

One of the key ingredients for an "investment grade" traffic and revenue study according to the Washington State Comprehensive Tolling Study is "an objective assessment of the local economy and growth potential." After reading the latest Gord Henderson Economic Statement for Windsor, can anyone legitimately argue that there is economic growth potential to support an investment of billions in a border crossing?

This study continued:

• "In 2002, the bond rating agency Standard & Poor’s (SP) published a report on toll forecasting performance. The basic argument in this report, and in three annual updates, has been that there is a considerable amount of optimism bias in toll revenue forecasts around the world... The point of the SP’s work was that there was a considerable trend towards the overestimation of traffic and revenue, leading to their conclusion of an optimism bias.
  
  S&P suggests that first-year toll revenue estimates have been overestimated by an average of 20 to 30 percent over the sample of projects that they studied. In the 2005 update to the study, they tested traffic performance through the fifth year, and did not find any marked improvement. They also looked at truck forecasts in particular, and found that these were a particular concern, because trucks typically pay considerably higher tolls than light vehicles, and variation in this forecast can have a much bigger effect on actual toll revenues."

A GAO report in 2004 discussed problems with major toll-roads it studied:

• "Four of the five toll roads have faced an additional barrier to financial success because they were or are being built in anticipation of future growth and development... each has struggled financially because the expected level of traffic has not been achieved.
  
  [As an example] SR 125, is also a stand-alone toll road that is being built in anticipation of future growth and development and is scheduled to open in 2006. According to an FHWA official, the traffic studies for this project may be optimistic because, while they are based on anticipated development in San Diego County, they are also based on traffic from Mexico that may not materialize if anticipated development south of the Mexican border does not occur."

The importance of the Ambassador Bridge's testimony and the Danish Professor's thesis as well as these articles was brought home to me recently when I found on the Internet a story written in Forbes magazine a number of years ago. I think you may find it enlightening:

• Roads Less Traveled
  Kelly Barron, Forbes Magazine, 09.03.01
  
  New toll roads have been a bonanza for consultants, but not for bondholders.
  
  
  Florida Governor Jeb Bush's recent veto of a $1.4 million bailout of the Garcon Point Bridge spanning Pensacola Bay was the final indignity in the troubled history of the controversial toll bridge.
  
  A pet project of former Florida House Speaker Bolley (Bo) Johnson, recently released from jail for tax evasion, the bridge was partly built on land he once owned. The builder was charged $4 million in fines and restitution for violating federal environmental laws. Adding to the folly, the toll bridge was built parallel to a nearby free bridge.
  
  But the bridge likely would never have been built at all were it not for the seal of approval it received from URS Corp. of San Francisco, one of a handful of consultants that specialize in traffic projections for public projects. Using URS' 1992 projections that 6,500 cars would drive over the bridge daily and pay what is now a $2.50 toll, promoters flogged $95 million in bonds to finance the project. Today only 3,500 cars a day use the bridge.
  
  "The bridge is an Edsel," sighs Joseph Mooney, a financial adviser who resigned in 1993 after a dispute with local officials over the numbers from URS, a publicly held engineering company whose largest shareholder is investor Richard Blum, otherwise known as the husband of Senator Dianne Feinstein (D-Calif.).
  
  They should have listened. It has become painfully clear to bondholders and politicians that many of the public toll-supported projects built in the past decade, the majority blessed by URS and its ilk, have become financial albatrosses. The Garcon Point Bridge bonds, for instance, trade at 71 cents on the dollar, following multiple downgrades to junk status by the ratings agencies. Local officials will likely have to tap a reserve account next year to meet debt service.
  
  URS defends its record in Florida as solid. But the company has overestimated revenue projections on toll roads elsewhere in the state, including the Seminole Expressway, the Polk Parkway and the Suncoast Parkway. On the 15-mile Veterans Expressway in Tampa, annual tolls are $15 million, barely half what URS projected in 1992. Tolls from the main portion of the state's profitable turnpike go to subsidize those clunkers.
  
  "Many of these deals shouldn't even be brought to market," says Robert Muller, a managing director with J.P. Morgan Chase, who has researched toll-road feasibility studies. Muller figures that at least half of the traffic projections for toll roads--mostly performed by URS, Wilbur Smith Associates in Columbia, S.C. or New York-based Vollmer Associates--vastly overstate the potential.
  
  But that hasn't stopped politicians, bond salesmen and contractors from relying on them. "It's almost an accident if the projection comes in perfectly," admits Edward Regan III, a Wilbur Smith senior vice president. For its part, Wilbur Smith's initial projections in 1992 for the 15-mile San Joaquin Hills Toll Road in Orange County, Calif. were 40% above actual traffic counts. By 1997, $1.1 billion in bonds had to be replaced with lower-rate bonds or risk default. Still in need of riders, the local toll-road authority recently handed out discount coupons.
  
  Despite their mixed track record, the consultants who do the traffic projections have a nice little business, yielding upwards of $500,000 per study. Although traffic studies for revenue bonds probably brought in less than 5% of URS' $2.2 billion in revenues last year, the stock is still doing better than the average revenue bond these days--it's up 239% in the past five years.
  

Before billions are spent on capital costs, before millions are spent on annual losses, doesn't it make sense to look at actual numbers for a change? Isn't it time to revisit traffic volume projections to determine how good they really are?

When we have a private enterprise solution with required Government oversight, once Bill C-3 passes, and an almost 80 year "public/private partership" between the Bridge Co. and Governments, I am having difficulty understanding this desire to waste money on something that may not required based on projections that may not be valid.

If there is a "hidden agenda", it is time already that it see the light of day so we taxpayers can determine its legitimacy. After all, it is OUR money.