Stop CANAMEX, Stop the Intermountain West Corridor and I-11! Stop the Sun Corridor! Stop the 202!

Thursday, February 5, 2015

South Mountain Freeway Justified by Controversial Traffic Projections?

For an updated exploration on the topics herein and on the public-private partnership for the South Mountain Freeway, see "Freeway Could Take a Toll on Arizona" posted February 2016.

A consultant listed on the Environmental Impact Statement for the Loop 202 South Mountain Freeway, Wilbur Smith Associates (now CDM Smith), is now known for their controversial socioeconomic and traffic projections across the country, which have in some cases led to toll road bankruptcies. These types of forecasts, and in particular their use to justify the Loop 202 extension, are questionable, as you'll see. The inaccuracy of traffic projections in general is a problem across the world, but Wilbur Smith's relationship to this road, including the fact that they did traffic projections for a company that wanted to make it a toll road, needs to be examined.

To be clear, while others may call for more transparency, the position of this blog is that, for a whole range of reasons, the South Mountain Freeway should not be built whether or not one can conclude that justification for the road is based on intentionally inflated projections. Even if overestimation is unintentional, the details of the Wilbur Smith issues are compelling enough to examine.

While a lot of the problems with traffic projections revolve around toll roads, these concerns are not irrelevant despite the fact that the Loop 202 is not currently being proposed as a concession project. A toll road has been considered a possibility for much of the life of the concept and its studies (1994, 1995, 2010). The relationship between Wilbur Smith (and HDR Engineering) to toll road projects for Loop 202, and the timing with which they got involved with ADOT on this project may still be relevant. Also worthy of examination is the position of ADOT's consultant, Nossaman, and their involvement in and promotion of public-private partnerships, including several of these toll roads involving Wilbur Smith.

Big Numbers

The Loop 202 South Mountain Freeway is being justified by the need to address future traffic congestion but we know at the very least that the inputs used are inaccurate. Various organizations/experts pointed out that traffic and socioeconomic projections in the Draft Environmental Impact Statement (DEIS) for the Loop 202 South Mountain Freeway were based on old data (Census 2005), as well as aggressive estimates, rather than a range of data acknowledging a margin of error and limits to predicting the future. In response to comments, one of ADOT's repeated responses is that they incorporated the new data (Census 2010) for socioeconomic projections in the Final Environmental Impact Statement (FEIS) and they determined, without explanation, that the updated data validated the conclusions about purpose and need in the DEIS. This despite the fact that updated numbers showed that population figures were significantly lower than predicted. Socioeconomic data, such as population, employment, and vehicle miles traveled (VMT) are studied to come up with traffic forecasts.

Wilbur Smith Associates (CDM Smith), while not the only consultant for the socioeconomic portion of the DEIS and FEIS for the South Mountain Freeway, likely contributed to the Maricopa Association of Government's traffic projections cited in the DEIS and FEIS. It is not simply the use of inputs such as older census data that is the issue, but likely also the method by which traffic projections are arrived at.

Wilbur Smith's exact relationship to the traffic and socioeconomic forecasts presented in the DEIS (and FEIS) are not known to this author. It may not be irrelevant that HDR Engineering Inc., a primary consultant in the traffic portion of the DEIS and FEIS, had also been involved in an attempt at building Loop 202 as a toll road. Whatever the exact relationships and intentions are, traffic projection overestimates seem to be a systemic problem.

A report that investigated Wilbur Smith and the broader problem of traffic projections stated, "'Optimism bias,' the overestimating of toll road traffic and revenue in forecasts, is endemic in the industry. One industry expert estimated the mean forecast error at 25%-30% above actual traffic based on data from 104 toll roads worldwide. A major national study and industry and media research indicate sponsor political bias and profits are key drivers of 'optimism bias' in addition to a variety of methodological issues." No matter what the cause, there may not be any real reason to build the South Mountain Freeway. However, this would not be the first time Wilbur Smith Associates' figures have been found to misrepresent reality for new roads across the country, especially for toll roads.

The recent article, "The Great Traffic Projection Swindle" scrutinizes Wilbur Smith Associates' credibility. The article describes how a Virginia-based group "collected data from 26 toll road projects on which Wilbur Smith had produced the traffic projections. During the first five years that were forecast, traffic projections overshot actual traffic every single year, and by an average of 109 percent, according to the report."

The article continues,
Phineas Baxandall, a senior researcher with the U.S. Public Interest Research Group... says the engineering firms that provide the figures know how things work. “Companies seeking investment for privatized toll roads shop for the forecasting they want,” he said. “[There's] no incentive to tell bad news. And if the deal appears promising, then the forecasting company gets other opportunities to sell further analysis, legal advice, raising debt, selling equity, etc." 
Examples are given in this article of companies, including Wilbur Smith Associates, who were promised or granted future business by toll roads after their projections were sold to investors. One example was of a "traffic forecast for the $200 million Southern Connector in Greenville, South Carolina. In that case, Wilbur Smith was offered $12 million in contracts if the bonds to finance the project were sold. Toll Roads News reports the road only saw one-third to one-half of the traffic predicted by Wilbur Smith, and declared bankruptcy in 2010." (They did collect that $12 million.) The primary company involved in the consortium that built the Southern Connector tried to build South Mountain Freeway as a toll road, as discussed below.

Another project led to bankruptcy. "Wilbur Smith Associates had predicted that traffic volumes on the Indiana Toll Road would increase at a rate of 22 percent over the first seven years. Instead, traffic volumes shrank 11 percent in the first eight. The result was financial disaster for the concession company, owned jointly by Australian firm Macquarie and Spanish firm Ferrovial. By the time they filed for Chapter 11, debt on the road had ballooned to $5.8 billion."

In the case of this Indiana Toll Road, Streets Blog USA reported in another article titled, "How Macquarie Makes Money By Losing Money on Toll Roads" that Wilbur Smith "blamed the bankruptcy on the fallout from the recession." The banks were bailed out and the companies involved, including Ferrovial--one of the companies interested in the P3 for the Loop 202--continue to make money off other projects.

The article details the complicated financial methods used to continue to profit despite bankruptcies. Chuck Plunkett with the Denver Post reported that Ed Regan, a Wilbur Smith forecaster specifically blamed "a downturn in the local manufacturing economy," for the failure of the Southern Connector. Yet as Plunkett wrote, "federal Bureau of Labor Statistics records shows that manufacturing jobs were falling in Greenville long before Regan started on the projections for the Southern Connector." Regan claimed that the forecasts were actually conservative.

The problem revolves around these financial schemes and the ways the projects are sold to the investors. "The Great Traffic Projection Swindle" article states, "UK-based consultant Robert Bain literally wrote the book on traffic projections, warning in 2009 against forecasters who blamed faulty predictions on the economy. Commenting on the flurry of global toll highway bankruptcies that was just starting then, Bain said they had 'less to do with the present economic climate, and more to do with a market readiness to be seduced by hopelessly optimistic traffic and revenue projections.'" Nonetheless, a recession is going to impact projections, but this possibility should've been and should be taken into consideration. Aside from that, what does it mean that the projections for the South Mountain Freeway initially incorporated pre-recession numbers, yet even still the FEIS basically denied that the updated and very different numbers from 2010 altered the purpose and need justification for the project?

Controversy of the Past
There's an intriguing tale about a 1995 proposal for a toll road for the South Mountain Freeway and its connection to Wilbur Smith Associates published by the New Times in 1997. Arizona's proud public-private partnership history--highlighting a variety of controversial projects taken on by Richard Lloyd Carr and his company Interwest Management--is largely explored in the article. Included are some shady dealings such as one in Apache Junction for which Carr was sued by Allstate for fraudulent revenue forecasts. Interwest later planned to build what would've been Arizona's first toll road and none other than Wilbur Smith Associates was brought in to do the traffic projections.

The consortium responsible for building the toll road was Interwest Carolina Transportation Group, LLC, which with SCDOT formed Connector 2000 Association for a project in South Carolina, which recently filed for bankruptcy due to lack of revenue, as mentioned above. Had the traffic projections by Wilbur Smith Associates been accurate, the creation of the toll road and/or the bankruptcy could've been avoided.

The New Times article details issues with Wilbur Smith and another construction company that joined the consortium for the Southern Connector, involving two South Carolina highway engineers who, after receiving bribes from the construction company and were no longer employed by the state, became employees of Wilbur Smith Associates. This all points to a suspicious relationship among transportation officials and these private entities. The article also states that Wilbur Smith "signed on with Interwest to conduct traffic studies for the South Mountain Toll Road."

Adding to this complicated mess are some other details from an article by Forbes about the Southern Connector, "When the toll road came up for bid, two experienced highway construction management companies, Flour Daniel and Perini, Harbert-Yeargin, using Smith’s figures from a 1994 study to formulate their bids, lost out to Carr’s group, which has never built a toll road. How did Carr’s Interwest win the contract? By projecting traffic and toll revenues 50% higher than in the original study made by Smith, now on Carr’s project team." This would seem to imply that Wilbur Smith increased its own traffic and revenue projections to a significant degree for the Interwest bid, or they joined the team knowing the that the projections had been inflated that much.

Supposedly because the project would not be financially feasible, the Interwest consortium decided at some point against continuing their efforts to build the Loop 202 extension. More likely it was the controversy stirred up by the media, which also caused Carr to be removed as manager and CEO of the company he essentially started under a former employer, DLR Group, and led him to sue Forbes for critical media coverage. Interwest remained involved in the Southern Connector, however. Additionally, it is no secret that toll roads would be unpopular in Arizona. If the reason for dropping it was really because the lack of financial feasibility, this might not necessarily indicate that Wilbur Smith's traffic projections weren't financially favorable. At the time, public-private partnership laws were not as conducive to profit-making as they are now. The consortium had to be set up as a 63-20 non-profit, a situation which many were skeptical of, well, except for Nossaman, the firm that acts as a consultant for various partners involved in public-private partnerships, including Interwest (at least as of 2007).

"Purpose and Need" 

Wilbur Smith's relationship to the Interwest toll project for the South Mountain Freeway might have something to do with the justification of the project. Just a few years after Wilbur Smith's job was over with Interwest, the firm was working on the road project for ADOT. In or before January 2001, HDR Engineering was chosen by ADOT to be the consultant for the "South Mountain Highway Project," specifically for the EIS, with Wilbur Smith Associates as one of the subconsultants (recall that HDR had also been interested in building it as a toll road). There was a meeting of the South Mountain Community Advisory Team in early 2002 that included someone from Wilbur Smith Associates as a staff member (and two from HDR). It seems it was this same team and around this same time that determined that the EIS process was worth continuing. It is reasonable to suspect that Wilbur Smith's projections for the Interwest toll road would not be much different from those that, just a few years later, justified the beginning of the EIS process which is the main federal legal obstacle to such a project.

Howard Shanker, attorney for Protecting Arizona Resources and Children (PARC), points out that ADOT has been purchasing land in the right of way areas of the "preferred route" for the South Mountain Freeway for over a decade. It is likely that Wilbur Smith Associates had some influence in this decision back when it started. If Wilbur Smith was ever motivated to inflate traffic numbers to justify the road as a toll road, would they ever have corrected this after Interwest was out of the picture and especially since a toll road was a consideration almost this whole time since? And is ADOT equally invested in making the road project happen even if it's not truly justified?

Even as the Loop 202 is not being planned as a toll road, there might be similar motivations to increase the numbers. The Maricopa Association of Government's incorporation of the high traffic projections to justify the building of the road would also attract companies and their financiers to a promising revenue source whether it is a toll road or not, considering that a public-private partnership has been a likelihood for a while, and tolls are not the only possible revenue stream available. At this point, many companies understand how risky toll roads are, although there are still complicated financial methods that allow for companies to lose money on individual tollways yet still profit on a larger scale. Not much discourages the consultants from projecting too high because there is no accountability.

Due to the risk of bankruptcy for toll roads, other forms of public-private partnerships (P3s) have become more pervasive and there are newer ways to profit. The particular model of P3 in the works for the South Mountain Freeway is unusual, and seems to put a lot of risk on the state and therefore the tax-payer, especially considering that the road is to be paid for largely using funds that rely on certain socioeconomic projections made by Wilbur Smith Associates (as will be discussed in Part Two).

In or before 2010, ADOT hired Nossaman as P3 Legal Advisor with Frederic Kessler as the lead attorney. Nossaman and Wilbur Smith have both been involved in a number of controversial projects across the country. Yes, they all have a lot of clients, but it may be significant that so many have had major problems.

One problem-filled project involving Wilbur Smith Associates, Frederic Kessler of Nossaman, as well as HDR Engineering, is the Knik Arm Bridge in Alaska. Although still meant to be a toll road, the bridge is transitioning to a similar P3 arrangement as the P3 for the Loop 202, no longer to be financed by the private partner due to earlier traffic projections proving overly optimistic. In this case, Wilbur Smith did the traffic projections, later also hiring HDR and another consultant to "massage" a university research institute's forecasts to make them more favorable, according to a report. The resulting forecasts were significantly higher.

The report listed yet another iffy project involving Wilbur Smith and Nossaman.
In the worst case, it took less than three years for the new South Bay Expressway to declare bankruptcy from its late 2007 opening, a situation complicated by a law suit from the road’s developers seeking additional compensation. In the end, South Bay’s equity investors were wiped out, bondholders took a major loss, San Diego had to take over the previously public-private partnership, and the value of the endeavor sunk by nearly half.
Additionally, Kessler advised on the original Pocahontas Parkway plan (as a non-profit) and continued to advise them during the 2006 transition to a different arrangement with an Australian private partner. TOLLROADSnews estimated by 2004 that the "traffic shortfall is about a third" for Wilbur Smith's projections made in 1996. The project was larger and more expensive due to the forecasted need. "[The Pocahontas Parkway Association] officials began looking for a private investor to buy out the toll road as revenues continued to lag forecasts and a default was foreseen" says the report about Wilbur Smith.

It is possible that the width for the South Mountain Freeway--eight lanes (an earlier proposal was 10 lanes)--was chosen due to traffic projection modeling for tolling. As HDR explained to ADOT more recently, the less congested the road, the more likely someone is to be willing to pay a toll rather than take a different route. So since it is not to be a toll road, and the traffic projections might be too high, does it need so many lanes, if the road is to even be built in the first place?

To get more specific on the issues with the Loop 202 traffic projections, PARC summarizes the various problems on their website,
MAG’s modeling, which is relied upon in the DEIS to establish the purpose and need for the Freeway expansion, fails to accurately identify short-range growth and uses outdated (2005 census) data to estimate long-range growth. It reports its projections in a manner that indicates that they are certain to happen, which is not supported by the data and modeling techniques used. Estimates of vehicle miles travelled [sic], which are built into the models, are also based on faulty assumptions about future driving habits.
There is much valuable information and insight contained within the comments to the DEIS, but some will be highlighted here. Kevin Kane, of the School of Geographical Sciences and Urban Planning at ASU concluded,
"...the model relied on by the DEIS to justify purpose and need based on socioeconomic factors extends aggressive, pre-recession growth rates decades into the future while ignoring recent data that reflects deep-seated regional and national structural changes that have become apparent in the last several years. MAG's modeling, which is relied upon in the DEIS to establish purpose and need for the freeway expansion fails to accurately identify short-range growth and uses outdated data to estimate long-range growth." (Comments from Special Interest Groups on FEIS, Kevin Kane submitted by Howard Shanker/PARC, B369, page 243 of PDF).
Comments from Special Interest Groups on FEIS, Kevin Kane submitted by Howard Shanker/PARC, B356, page 239 of PDF.
Considering the above information, it is relevant what information came from the consultants, particularly Wilbur Smith Associates, and how and by whom the information was interpreted. Wilbur Smith Associates are listed as a consultant in these documents, but the numbers are vaguely attributed to MAG. The documents have no authors' names. Although information about consultants or other sources of information is not specifically requested, the comments from PARC's expert Herman Basmaciyan, P.E. notes that the DEIS inadequately provides information about the data from which MAG extrapolated their findings. The response in the FEIS does not adequately address this. (Comments from Special Interest Groups on FEIS, Herman Basmaciyan submitted by Howard Shanker/PARC, B467, page 341 of PDF).

We know that ADOT is part of MAG and that Wilbur Smith has also been a consultant for various projects for ADOT over the years. We can also gather that Wilbur Smith as been involved with this project since before the EIS was even begun so they had done a lot of the groundwork. Nonetheless we don't need one single culprit to question the motivations of the parties involved and therefore the justification of the entire project. The fact that the updated census figures do not change the conclusions made in the EIS (in addition to the lack of explanation) signifies that other changes in data may not alter the assessment of MAG, ADOT, and its consultants, indicating a desire to justify it no matter what. Whether or not Wilbur Smith Associates in particular are to blame for the numbers in the DEIS and FEIS for the South Mountain Freeway, there's still a problem.

Trade and Growth

"If you build it, they will come" is clearly not always the case as the bankrupt toll road projects have seen. However, wishful thinking, rather than deceit might more likely describe the Wilbur Smith Associates' high traffic projections, although this doesn't make it acceptable. Wilbur Smith happened to have had access to insider information about plans for trade-based economic growth in Arizona which may have led to optimism bias. For example, they were involved in various studies ranging from 1997-2003 related to CANAMEX, the NAFTA trade corridor connecting Mexico with Canada, running through five US states including Arizona.

MAG, ADOT, their consultants and other organizations such as the Arizona-Mexico Commission all have an interest in selling the region as a place for investment. International trade, specifically with Mexico, is central to plans for Arizona's economic growth. Trade would supposedly bring growth and therefore, demands for new transportation infrastructure. Wilbur Smith (CDM) relies on new infrastructure projects to continue to be able to make money.

With the interests in creating the "Sun Corridor" as a trade hub, a "megapolitan" along the CANAMEX Corridor, various private parties, including consultants for ADOT, have been optimistic (with recession-based interruption) because of the moves towards encouraging increased truck traffic.

Wilbur Smith was listed as being part of the CANAMEX Consultant team. Linda Carpenter, who was involved with the CANAMEX Coalition study was also a revenue consultant as part of Wilbur Smith Associates for the Transportation Vision 21 Task Force final report to the Governor in 2001.

The Arizona Republic reported, "The CANAMEX Corridor Task Force has contracted with Wilbur Smith Associates of Columbia, S.C., to study what opportunities Arizona could get. A lot of the impact will depend on where any roads and railroads built from the port would lead."

It may seem contradictory that PARC's experts claimed both that the traffic projections were too high and that the road is meant to deal with increased truck/freight traffic. Despite the fact that it seems that Wilbur Smith's optimism bias has to do with their expectation that there will be an increase in truck traffic as part of this trade, ADOT has denied that the road is intended as a truck bypass. If the purpose and need for the road were to be justified as a truck bypass, there would be much more opposition and little support. If it is justified as addressing future commuter traffic, then it can more easily be sold to the public. And if trade increases, then Wilbur Smith's projections will not be questioned.

In other cases, Wilbur Smith Associates may choose the high end of the range of possibility regarding traffic forecasts, assuming that with increased infrastructure will come more growth. The question is how decisions about infrastructure are being made, such as with CANAMEX (of which the most recent development is the completion of the Interstate 11 study), for example, or with the way it was decided that the South Mountain Freeway should be a public-private partnership (P3). Note too that Wilbur Smith was hired as a consultant for the Office of P3 Initiatives and International Affairs, ADOT in 2010. They have been proponents of P3s for quite a while.

The extent of Wilbur Smith's relationship with ADOT and MAG may bring even more problems. While the risk of bankrupting a toll road is no longer part of the picture, the funds with which the Loop 202 extension would be paid for (to whichever private consortium wins the intended public-private partnership bid) rely on similar socioeconomic and traffic projections due to the funds coming from gas taxes, vehicle registration fees, and state sales taxes. Wilbur Smith Associates contributed to these projections as a consultant for the Arizona Department of Transportation (ADOT). If these numbers were inflated, how will that affect the state of Arizona? How many tax-payer dollars have been put into this project already, which may not even be justified? See the upcoming Part Two.