EXAMPLE: Tolling the Road

Traffic congestion, the costs of subsidized transit, continual demands for more roads, and the infrastructure deficit in transportation are quickly becoming perennial urban challenges. Most of this is directly linked to a lack of pricing. Options such as "high occupancy vehicle" (HOV) lanes to end congestion and limit demand are often suggested, but they swim against the current - the root of the problem remains.

The "free" road has traditionally been seen as a public good that yields private benefits and carries huge public costs, but simply cannot be priced. But this is changing. Tolls on road-related infrastructure across Europe and the U.S. are rapidly becoming a viable alternative, turning the public road into a full cost recovery enterprise like other utilities. Tolled roads and bridges are fast becoming self-financing - the costs of debt taken on for construction is covered by users who willingly pay the toll. Variable tolls and peak pricing are reducing congestion and air pollution, and drivers who must now pay for the actual costs are turning to other alternatives whether that be transit or car pooling. Tolls are limiting the "free-rider" problem of those in bedroom communities and suburbs who freely "commute and pollute" their way into the city, and are also allowing city coffers to recover some of the costs that accrue from outsiders who drive their way through on someone else's property tax dollar.

Traditionally, tolls have failed to be a significant factor within the urban context simply because of the sheer availability of other routes to avoid the charge. However, the merger of new information communication technologies and intelligent transportation systems (ITS) are allowing for the efficient use of transport demand management tolls within urbanized regions via the electronic toll road (ETR). Recognition of vehicles is maintained through electronic transmitters that are purchased by drivers. Driving information is transmitted to electronic readers across the high-tech system and bills are sent regularly in the mail. Video cameras capture the license plates of vehicles without transmitters and bill them as well.

Toll revenues alone may not cover all the development costs of such systems as a certain critical mass of vehicles is required before any tolled road, network of roads, or bridges can be self-financing. But that does not mean cities should simply throw their hands up and continue with current practices. Tolls can still help offset a portion of construction and maintenance costs, and public resistance can be fought with the fact that if tolls are not employed, the infrastructure simply cannot be built. The success of the Coquahalla Highway in BC and Highway 407 in Toronto should not be ignored. The 407 is an excellent example in that it is privately owned by SNC Lavalin, an engineering firm in Montreal.

SOURCES: Gjertsen 1995, Samuel 1995, O'Donnel 2001, Palda 1998a, 1998b.

NOT JUST THINK TANK FANTASY:

The Experience of Indianapolis, Indiana

Indianapolis is the 12th largest city in the U.S., with a population of just under 1 million. In the early 1990s, the City was faced with a substantial budget deficit and a $1 billion backlog of desperately needed infrastructure repairs and extensions. A new mayor and council had just been elected, and were committed to holding the line on taxes. The new mayor, Stephen Goldsmith, decided to spearhead an aggressive agenda of fiscal reform that included the privatization of municipal services as one way to secure budget savings that could be reinvested in infrastructure. As discussions over a reform agenda progressed, the City came to realize that the real issue was not whether municipal services were provided privately or publicly, but that services were delivered in a competitive environment where efficiency and productivity incentives ensured that costs were kept reasonable and service quality was maximized.

As a first step, the City decided to open up the management of its wastewater treatment plant through a competitive bidding process (Goldsmith 1998). The competition went out to international tender, and one of the largest water management companies in the world, Lyonnaise des Eaux of France, won the bid. The competition resulted in a 44% annual savings to the City representing about $150 million (U.S.) over the 10 years of the management contract (Frontier Centre 2001). In winning the bid, Lyonnaise agreed to accept current public union workers and part of the original management team. The city retained ownership of the plant itself, but contracted out the management. This initial success soon started a drive to open as many services as possible to competitive bidding between city employees and the private sector.

By 1999, Indianapolis had established itself as one of the most innovative cities in the U.S. Working with international consultants, the City began a process of "activity-based cost accounting" to uncover the actual costs of delivering specific services and then opening them to competitive tender. A total of 85 municipal services were eventually bid out, including solid waste management, trash collection, pools and recreation centers, golf courses, and the municipal airport. In terms of hard dollars, the reform agenda resulted in a 25% savings to the overall operating budget and a 400% increase in reserves (Harry Walker Agency 2002). As of 2001, it is estimated that Indianapolis had saved over $450 million in operating costs spread over 10 years. Specific examples include $65 million saved in solid waste management over five years, $15 million saved in trash collection over three years, $8 million saved in the maintenance garage over five years, and $1.2 million saved annually in billing for the sewer utility (Bearing Point 2003). About 75% to 80% of these savings were then leveraged with other financing sources to support a long-term infrastructure reinvestment program that eventually totalled $1.3 billion (Frontier Centre 2001). Of that amount, $800 million was invested in infrastructure in the first five years of the reform program (Poulos 1998).

Since 1992, Indianapolis has played host to over 4,000 civic leaders from around the world exploring the fiscal turnaround (Montreal Economic Institute 1999). The intense interest results from the fact that privatization, strictly defined, was not the key goal, but competition. More importantly, the City developed a cooperative relationship with its unionized public employees to advance the fiscal reforms. At the heart of the initiative was the realization that public employees were often seen as the scapegoat for the City's financial difficulties, but that blame was misplaced. The real problem was the inflexible and monopolistic system that worked "top-down" and over-regulated and over-managed civic employees. Prior to every decision to open a service to competition, the City worked with its employees by providing private consultants to help them prepare bids as they competed against others for the right to continue providing services. The City was generous in accepting recommendations for leaner management and in agreeing to incentive pay and the sharing of savings when contracts were outperformed.

In the beginning of the reforms, municipal workers were quite successful in both lowering costs and winning competitions. Public workers won about 25% of the competitions and split responsibility with the private sector for another 20%. City workers tended to win most labour-intensive bids due to intimate knowledge of the service, while private contractors were more successful with services possessing higher technological or capital intensive components. As the process moved along, public workers increased their success rate to the point where they were winning almost 80% of the competitive municipal contracts while costs to the City were going down and wages and job satisfaction for municipal workers were increasing (Holle 1996). The City noticed drastic reductions in employee absenteeism, accidents, and formal grievances through union representatives.

Many of the reports on the Indianapolis experiment are laudatory. But, there is no such thing as a cost-free policy option. In other words, the trade-offs involved with following the Indianapolis example are not altogether clear. Further, the applicability of Indianapolis to Canadian cities is hampered by at least one important fact - Indianapolis has access to more tax revenue diversity through a local general sales tax that has arguably helped finance a portion of the infrastructure turn-around. At the same time, it is amply evident how that rare combination of political will, leadership, and forward-looking vision can merge to form new approaches to what are quickly becoming old problems.