NJ PIKES MFS finally nails down $500m e-toll contract

NJ PIKES

MFS finally nails down $500m e-toll contract

MFS Network Technologies after 18 months of litigation, political controversies, charges of improper influences, the resignation of one state transp chief, and internal dissidence at the NJ pike, plus great perserverence in negotiation, has finally nailed down a half billion dollar contract to convert the 4 toll systems of New Jersey (and Delaware) to electronics. The contract was signed by NJ tollsters (the Turnpike, the Garden State Parkway, the Atlantic City Exwy and the Port Authority of NY & NJ) and Delaware DOT and Bill Thompson, head of MFS, March 11, and it is by far the biggest toll conversion to electronics in history. Indeed its value must be not far short of the aggregate of all previous e-toll conversions in the US. It makes MFS, now part of the giant MCI/Worldcom telephone company, a leader in electronic tolling and the broader area of ITS.

The contract is a novel and innovative one, and perhaps a dicey one to manage, in that its revenue stream comes in large part from what they call in New Jersey “violation enforcement.” (see nearby “Atrocities against the English language”) Such violation revenues are estimated to be $450m over the 10 year period of the contract with MFS, which will provide mainteance and, through its partner Chase Manhattan Bank, customer service for the system. In addition the contract takes advantage of the state’s strategic position in trans-Atlantic and east coast communications by providing for the lease of spare fiberoptic conduit being laid along the lengths of the NJ pikes as part of the project.

V-Rev$ fund it: According to materials provided by the NJ state tollsters “Regional Consortium for the Implementation of an Electronic Toll Collection System” there are currently 10 to 12 million toll violations a year in NJ each year, and only about 12,000 violations are prosecuted. So at present a violator in NJ has a 99.9% chance of getting away with not paying, a one in a thousand chance of getting caught and forced to pay a penalty.

At a telephone press conference, Mar 11, Ed Gross of the NJ Turnpike told us there is “negligible” evasion on his facility because all booths are always manned, but that the bulk of the state problem is at the Garden State Parkway where many toll booths are unmanned (and have no gates). He mentioned 5% as the evasion rate there. The NJ Highway Authority which runs the Garden State Pwy told us later that they estimate their evasion rate is 2.28%, which on 550m tolls/year is 12.5m violations and on revenue of $180m is $4m of revenue. It is a system of multiple barrier plazas and supplemental ramp plazas with small coin tolls. It relies heavily on automatic coin machines in lanes without gates.

The handout materials provided by the Regional Consortium say that the “accepted industry standard” for toll violation is 2.5%. A standard! Did IBTTA set that one? It’s not the most felicitous term, given that a standard is usually something to be striven for, so let’s say the “commonly measured loss” from violations industry-wide is currently 2.5%.

The country’s largest tollster the NY City Triboro Auth has gates and says it’s violation rate is near-zero. (Is it those constantly waving toll gate arms that account for the hyper personality trait of Noo Yorkers?) The Port Authority, which like the NJ pike has fulltime manning of all open lanes, but no gates, at first told us their violation rate was “less than one percent” but then called back to say they “have no hard numbers.”

It is easy to find authorities that claim less than this 2.5% average but difficult to find ones that admit to being over the average. Great to have everyone below the industry average! Real good news that.

Hard to sound-bite: Heck, like any business with a lot of small transactions, and the need to keep customers moving, there is inevitably going to be a violation rate on turnpikes, some level of “shoplifting” that is a cost of doing business. The smaller the value of transactions the less it will be worth spending on enforcement, so it is quite rational for the dime and nickel pikes like the Garden to have greater loss rate than the buckshops of the PA and the Triborough. Good managers can hardly afford to be moralists perpetually spending dollars to collect stolen cents, though every now and then they will have to in order to draw lines.

They can’t seem completely cynical about evasion or those who do pay will get very angry, and the ineffectuality of the enforcement will encourage evasion to grow to rampant proportions. It is an unenviable set of dilemmas that are mighty hard to explain into a TV camera to a sound-bite seeking reporter, so some obfuscation in these matters is understandable. (Just come clean, off the record, guys!)

Violations modeling: MFS and the NJ toll agencies say that the combination of electronic tolling and video technology however will change the equation and allow them to both profit from a higher level of enforcement. As the “Violations Projection” chart produced by MFS shows they forecast a violations to do a kind of playground-slide like graph at first rising sharply from the current 1.5% average for the several NJ agencies up to 1.8% and then slithering down until it levels out around 0.5% — averaging 0.883% over the 10-year life of the project. The initial big jump up in volations is attributable to the installation of dedicated e-toll lanes at the NJ pike, which will initially tempt new violations because of the lack of a deterring human collector in those lanes. The subsequent decline is projected on the basis of a couple of near 50% score rates by the enforcers kicking in. Of the violators it is assumed 47% are successfully imaged and identified and their addressses found in the data base and sent citations. Then it assumed that 50% of those sent violations are actually collected from to the tune of their toll plus a $25 administrative fee.

These numbers all sound to this rough reporter a bit like various hokey computer modelings of global warming over the next century — a lot of tricky assumptions built on other tricky assumptions built on...But the NJ numbers were “validated in studies performed by financiers, agencies and their respective consultants” we are assured by the officials. A lot of smart people have been persuaded that the scheme adds up — that something of the order of a quarter of violators can be collected on, in place of about one in a thousand under the present NJ regime. And that the $25 admin fee/violation and the near 50% probability of being located, together with another 50% probability of being collected on, will sustain a violation rate averaging 0.883% over 10 years and a equilibrium violation rate of 0.5%. The agencies should benefit too in the form of extra tolls paid from the violations which are deterred. And they don’t have to front up any cash for the project.

MFS has to raise bond money on this modeling. The company will look for $300m of variable and fixed rate loans to install the equipment and sustain the operation. The loan and the fund will be “administered by the New Jersey Economic Development Authority,” according to officials.

The arrangements acknowledge a degree of uncertainty about the financial results of the operation. If revenues exceed the project cost, 85% of the surplus will be shared among the toll agencies and 15% will go to the operator MFS, providing MFS with an incentive to maximize the violation revenues. If the revenues fall short of the cost of the project, then the shortfall will be covered proportionately by the tollsters. They at the end of the 10-years will get title to the toll equipment installed by MFS.

Actual installation is to take 20 months.

Million more tags: One million transponders have been ordered by the agencies, but, said Ed Gross, this is just the first order and they expect to need to make further purchases.

MFS will be installing cameras in all 700 toll lanes of the NJ system to shoot the rear of suspected violating vehicles and will also do a broad video of the front of the toll plazas will be taken as a doublecheck. A project financing fact sheet says that the system will provide “100% auditability which eliminates shortages.” (missing $s) The contract provides a “project fund” into which the violations revenues and the fiber optic leasing earnings will go, and from which the loan money will be serviced. The violations revenues are expected to be $450 over ten years and the fiber optic conduit $205m over 20 years. The consortium and MFS are also interested in joint ventures making further use of the system, such as using the toll tags for parking payments and access control.

This will be only the third project in the US to apply electronic tolling to trip as well as point tolling. The NJ Turnpike has trip tolling, currently using tickets, while the other NJ agencies toll at each toll barrier. The New York State Thruway has implemented electronic conversion of trip-tolling and Florida’s Turnpike has it under contract.

MFS has already begun construction of a customer service center which will issue transponders and maintain toll accounts for the NJ agencies. Its bitter rival for the NJ contract, Lockheed has been so far doing customer service for the Port Authority which is already heavily into electronic tolling (see “New York passes 50% e-toll) and MFS will soon be taking over that operation. Actually MFS partner Chase Manhattan Bank will be staffing and running the customer service side — probably another first to have a bank actually running the accounts and dealing with the toll customers.

It was left a bit unclear at the telephone press conference whether the parties feel they have sufficient legal authority in place to operate the beefed up collection system that the financing of the project presupposes. The handout materials only mention use of municipal courts to collect the evaded tolls and the $25 fees. MFS president Thompson said at the press conference they will use the ultimate backing of the state refusing registration renewal on unpaid tolls.

NJ Gov Christie Whitman in a press release said the project “represents the largest, most innovative transportation procurement in the world” and that it is a “unique public-private partnership that advances our goal of a seamless regional electronic toll system that will unify the northeast.” She praised those involved for their “extraordinary effort.” (Contact MFS 609 235 5252, Chase Manhattan 718 242 5070, NJ Turnpike 908 247 0900, NJ Highway Auth 732 442 8600)