The Mother of All Interest Conflicts

Best industry practice for cutting transportation capital costs, found in Madrid, is to separate design from construction and keep the project management in-house. The FTA’s practice is different:

Parsons Brinckerhoff said Wednesday it has been awarded a contract by the Federal Transit Administration (FTA) to develop and document a transit asset management framework and implementation guide that will support the FTA’s State of Good Repair and Asset Management Programs.

The FTA estimates there is a nationwide backlog of $50 billion to $80 billion in deferred maintenance and replacement needs, the vast majority of which are rail-related.

PB is going to decide what projects are necessary and how to build them, and will also be able to bid on design and construction. Naturally, the numbers it will come up with are going to be favorable to its private interest; the common interest is not profitable for the company.

This is especially egregious in state of good repair (SOGR) money, which is often a series of rent-seeking scams. Agencies do not impartially judge how much money they need for maintenance and then ask for it. Instead, they massage the numbers based on whether the political mood is such that they could get more or less money. In 2005, the Amtrak board fired President David Gunn for insisting on competing SOGR before attempting to move to profitability; by 2009, when the stimulus provided plenty of money, Amtrak suddenly remembered it had deferred maintenance and came up with the $10 billion NEC Master Plan, essentially SOGR plus a few small upgrades.

A few agencies, such as New York City Transit, treat SOGR seriously (this was thanks to Richard Ravitch and David Gunn) and push for it even when the politicians want something different; most just use it as an excuse to justify high capital costs without anything to show for it. Look again at Amtrak, which even as it cries poverty about SOGR is trying to portray its finances as very good, for example listing a farebox recovery ratio that, unlike the practice at peer national railroads, excludes depreciation and interest. Heads Amtrak is profitable and competent and should get what it wants, tails it has a backlog of deferred maintenance and needs more money.

This is more a political than technical problem, but normal political advocacy is not going to help. Politicians can get credit for massive overhauls or new infrastructure involving ribbon cuttings; they won’t get credit for adding to the design and management budget, no matter how much money it will save in the long run.

Therefore, politicians who care more about being seen as fiscally conservative than about saving money force agencies to cut their in-house expertise. Instead, agencies outsource everything to consultants; this can work sometimes, but the people who would oversee them have been cut, so that there’s nobody in charge who’s loyal to the interests of the agency or the public. As a result, nobody in the US knows anything about good practices for rail infrastructure construction except people with the mother of all conflicts of interest, and nobody knows anything about rolling stock except New York City Transit, which designs rolling stock in-house or buys designs and prototypes separately from revenue equipment.

The agencies have bought into this system, since they share in the overly expensive designs and must defend them. Madrid doesn’t separate design from construction just because of interest conflict issues; the reason stated by Madrid Metro CEO Manuel Melis Maynar is that changes are unavoidable, and a construction crew uninvolved with the original design would be less stubborn about sticking to the blueprint. Since such separation does not exist in the US, and on the contrary the people currently in charge are used to the system so much that they bring up design/build contracts as an improvement, agency inertia is directed toward making the agency even less competent.

California HSR is perhaps the worst example of this. The HSR Authority consists of nine politicians, overseeing a skeletal crew of professionals (I believe there are only six engineers/planners). Unsurprisingly, the Legislative Analyst’s Office (LAO) Peer Review Group wrote a peer-review report accusing the HSRA of having no expertise in project management or even in negotiating a good PPP so that the private sector could do it. Even more unsurprisingly, hiring more staff to bolster an agency that’s currently incompetent is risky and nobody wants to be responsible for either potential delays or spending good money after bad, despite the possibility of large cost savings in the medium and long runs.

10 comments

  1. Kyle

    I think one of the most confusing aspects of transportation planning is the ability to determine the requirements and timelines (for non-planners) for different aspects of the planning process. How long does design take? What are the phases, how long do they take and what order are they in? Design, Project Development (is NEPA included), Engineering, Construction? etc…

    I think non-planners generally don’t understand the entire process, the different phases, the titles of these phases and how long each phase generally takes.

    • Alon Levy

      Oh, definitely. Much of it is standard agency turf, i.e. different federal regulators all wanting to take time reviewing a project, often in sequence rather than in parallel. It would be great if there was an easily retrievable set of best practices for this, but I don’t know of any, and I doubt PB is going to do anything about it.

      • Kyle

        Wow, that’s really helpful.

        As a finance guy I am always trying to finds ways to eek out some efficiencies. Obviously the environmental review process is extremely time consuming, in addition to the alternative analysis. I think one of the major problems with all projects is the time involved to just get to the construction phase and the costs involved, especially when the projects are outsourced.

        I think a major efficiency that can be created is to do as much as possible in house and fund the additional personnel needed through the savings gained by the need to no longer add a profit margin on the top of outside consultant work. Also, in house planning etc.. can be a continual process that doesn’t stop, considering it will be done by salaried staff.

  2. EngineerScotty

    TriMet does do quite a bit of planning in-house….

    …a portion of the budget which it seems is constantly under attack, often with the suggestion that the agency ought to not be in the planning business, and instead should stick to driving busses. This sort of suggestion both comes from transit activists as well as from the anti-transit right (the latter whom are more concerned with blocking capital projects than they are with expanding or improving bus service).

    One TriMet critic (a generally pro-transit one, but one of the more-bus-service-less-capital-projects variety) who posts to Portland Transport is fond of suggesting that having in-house planning staff leads to more boondoggles, as the planners need to have something to do to justify their jobs. My general response to that observation is that there are plenty of quality projects and other service improvements that planners could be working on–so if they’re being directed to work on boondoggles, its not a problem with in-house planning, but bad management.

  3. Pingback: Streetsblog Capitol Hill » Today’s Headlines
  4. Nathanael

    There’s an issue with SOGR which, so far, I’ve only seen honestly addressed abroad. Transport for London called it “grey assets”.

    These are things where nobody really knows what state they’re in or how much is needed to repair them. Unfortunately, the real truth is that much of Amtrak’s infrastructure consists of “grey assets” — which means that it makes no sense to figure depreciation, because depreciation is meaningless when you don’t really know the state of what you’ve got. Amtrak’s rolling stock and locomotives are all understood — except the “Heritage” ones — but its stations are very, very far from being understood, and are basically “grey assets”.

  5. Bruce McFarling

    You write, “the LAO wrote a peer review report”, when the peer review report that was linked to was responding to the LAO report, and adopted a position quite distinct from either what seems to be the CHSRA position and from what is the position stated in the LAO report, in that they support refraining from committing to construction until after the Business Model has been selected and the Business Plan has received approval, but where the LAO advocated a near to complete halt in CHSRA activity, the peer review argued for ongoing design work, planning, environmental study and continued hiring of staff for the CHSRA to build up its operational capabilities.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s