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WMATA's Search for a New General Manager / Chief Executive Officer Continues

posted Nov 2, 2015, 5:26 PM by Stuart M Whitaker   [ updated Nov 2, 2015, 5:28 PM ]

Earlier this year, The Board of Directors of the Washington Metropolitan Area Transportation Authority (WMATA) invited input from stakeholders regarding WMATA's search for a new General Manager (GM) / Chief Executive Officer (CEO). I offered my comments at a meeting of WMATA's Governance Committee on April, 9, 2015. Seven months have passed since that meeting, and eleven months have passed since the departure of its last GM, and the position remains unfilled.


Responding to numerous reports that Neal Cohen had been chosen as the new GM, WMATA Board Chairman Mort Downey today issued a statement that Mr. Cohen is no longer under consideration for the position. Here's a disclosure: Mr. Cohen and I have identical undergraduate and graduate degrees from the University of Chicago. Though I don't know Mr. Cohen, I am confident that his academic training prepared him well for this position, I believe he had significant and valuable experience, and I am disappointed to learn that he will not be fulfilling this role.


As I said in my comments in April, I believe we need a customer and marketing oriented transit advocate who can develop and implement strategies to lead Metro through the changes that are going to come.

Metro Needs a Sharing-Economy, Autonomous-Vehicle, Disruption-Ready CEO

posted Jun 26, 2015, 4:46 AM by Info@ Whitaker   [ updated Jun 26, 2015, 4:59 AM ]

Before the Governance Committee of the Board of Directors of the Washington Metropolitan Area Transportation Authority (WMATA)

Comments concerning WMATA's search for a new General Manager / CEO

April 9, 2015

My name is Stuart M Whitaker. I come here as a stakeholder. I am the founder of a transit users' group called Transiters.com. I am a transit rider living in Fairfax County who sold his last car over four years ago. I am also a member of the broader community that wants to see public transit fulfill its important role in our community. I am a financial economist by training, and spent decades working in the telecommunications industry.

I commend WMATA and this group for seeking public input on the next CEO.

I had the opportunity yesterday to hear a lecture by Lars Peter Hansen, a 2013 Nobel Prize Laureate in Economics, on “Risk and Uncertainty.” This is a topic of great relevance to WMATA. One of the historical observations that Hansen made was that French mathematician Bachelier used random probability to analyze stock options in 1900. This work became the basis for what is now known as the efficient markets theory, but economists didn't know about this work until fifty years later.

Fifty years!

As some of you know, the telecommunications industry and the transportation industry have a number of things in common: both of them are critical to our economy, both of them are capital intensive, and both of them experience the “network effect,” which means for instance that they are more valuable the more people they reach and the more people use them.

In some ways, development of the transit industry is decades behind the telecommunications industry. When I started working in the telecommunications industry in 1980, US daytime cross country calls cost over $1.00 per minute. Telecommunications services were often provided by government owned monopolies -- think for instance British Telecom. While AT&T wasn’t government owned, it was the monopoly provider, with holdings including Yellow Pages and equipment manufacturing, until it was broken up in 1984. Much of the credit for changes in this industry came from innovation and competition from a wide range of sources.

Hansen’s discussion of the contribution of mathematicians to economics is one example of how developments in one field may impact another field. Let me give another example of how developments in one industry affect another industry.

Ten years ago I was on a panel at a conference in Germany with representatives of Yellow Page publishers, who were touting how incredibly profitable their business was. Nine years ago Verizon spun off the Yellow Pages business that it had received when AT&T was broken up decades before. This newly independent Yellow Pages business had a total valuation of about $15 B and was highly leveraged, an indication of the fact that the market believed the business to be a very low risk cash cow. And yet, just three years later, this new business was bankrupt, wiping out all the equity and reducing its total debt from more than $9 B to less than $3 B.

What happened? Google happened. The iPhone happened. The Internet happened. Sometimes, change happens slowly, and sometimes it happens quickly.

Like many telecommunications firms of the past, WMATA is a government owned monopoly. If we have learned anything recently about economics, we should have learned that WMATA and other public transit agencies are not immune to competitive pressures. What happens next is not entirely clear.

While there has been extensive discussion about WMATA operations and safety issues, I want to raise a marketing concern and to do so by talking about work by another Nobel prize winning economist, Daniel McFadden. Forty years ago, McFadden conducted pioneering work in forecasting demand for the yet-to-be-opened Bay Area Rapid Transit (BART) system. A key contribution of his work was to something called “discrete choice,” an example of which involves consumers who choose to either drive or to take a bus or to take rail. They obviously can’t choose all three. Key also to McFadden’s work is understanding that two of the most important determinants of demand are the relative amount of time involved in travel and the relative cost of travel of the available transportation alternatives.

In my opinion, forty years later, McFadden’s work has yet to be well understood and incorporated in public transportation. I have looked for instance at the Metro Scorecard -- injuries, on-time performance, breakdowns, even customer satisfaction is shown -- but nowhere do I see adequate recognition of the fact that public transit is in competition with the automobile or an indication of whether the competitive position of Metro is getting better or worse relative to the automobile. Basically, forty years later, McFadden has yet to be understood.

How is Metro doing vis a vis the automobile? I have personally done work on that question. In Arlington, for instance, I can tell you that travel by rail takes 1.6 times as long as travel by automobile, and that travel by bus takes 2.6 times as long as travel by automobile. Those are not numbers that bode well for public transit in a competitive environment.

Given this, here are my thoughts about the new CEO.

First, we need someone who understands how the competitive world works. For instance, Bill Gates does not use an iPhone, the CEO of General Motors does not drive a Ford, and I don’t believe that Metro's new CEO should drive an automobile.

More generally, I am not saying that the new CEO should have specific industry experience or that the CEO be an economist.

I am saying that the new CEO should be a transit advocate who is customer and marketing oriented and who is able to develop and implement strategies to lead Metro through the changes that are going to come.

 

Virginia Transportation Authority’s Approach Will Incur Unnecessary $500 Million Cost

posted Sep 23, 2013, 5:10 AM by Info@ Whitaker   [ updated Sep 23, 2013, 5:26 AM ]

Whitaker Associates report shows that Northern Virginia Transportation Authority (NVTA) plan will reduce by close to half a billion dollars the present value of amount available for investment in transportation projects over the next twenty years.

The Northern Virginia Transportation Authority (NVTA) recently received and accepted advice from a financial advisor that, if followed as is currently planned, will reduce by close to half a billion dollars the present value of the amount available for investment in transportation projects over the next twenty years. According to Stuart M. Whitaker, president of Whitaker Associates, NVTA is following this advice despite being provided with a separate report detailing this cost and despite the sore need for improvement in the local transportation infrastructure.

After being hired to provide advice about the advantages and disadvantages of issuing bonds for northern Virginia transportation projects, the advisor reported that "debt leads to greater project funding capacity."

“This advice is simply wrong," according to Mr. Whitaker. "Anyone with basic financial literacy understands that one doesn't increase the amount of money available for spending by borrowing--to the contrary, transaction costs and interest payments from borrowing will reduce the amount available for investment.” A careful technical review of the advisor's report revealed two glaring mistakes--an apples to oranges comparison between unlevered versus levered scenarios, and a failure to include the full repayment cost of the bonds.

“It is difficult to understand how these errors could have occurred,” according to Mr. Whitaker.

When viewed in the context of the increased income and wealth disparity which has been underway in the US over the past thirty years, this financing plan is merely part of an ongoing trend. This economic disparity we have been witnessing is furthered in this instance by a regressive tax on sales--the source of 80 percent of NVTA’s funds--combined with the immediate enrichment of Wall Street from the bond issue. The corresponding reduction in transportation investment would be harmful to everyone in Virginia. Though the plans to issue these bonds are well underway, the bonds have not yet been issued. NVTA still has the opportunity to change course and must also overcome a legal challenge to its approach.

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Technology Startup Scene, Washington, DC

posted Jul 15, 2013, 1:31 PM by Info@ Whitaker

There is a lot going on the Washington, DC metropolitan area in terms of startups. We've had discussions with a number of people who have been looking to connect with the startup scene--incubators, innovators, disruptors, etc. Here's a quick list of groups and meetings that come to mind that are worth exploring. Note that this is not intended to be inclusive--it is only a very small fraction of activity in this area--and it is focused on technology markets. If you have any additions or corrections, please let us know.

1776: an incubator in downtown DC, they promise to provide mentorship, corporate connections, access to capital, media attention, and a pipeline of top talent. Founded in January 2013, startups are charged per seat. Hosts various evening events.

Affinity Lab: Affinity Lab calls itself an entrepreneurial launch pad serving a rich community of Washington DC businesses, non-profits and start-ups. The Lab manages the shared operational needs of its member organizations. Hosts various evening events.

AOL Fishbowl Labs: Owned by AOL, Fishbowl Labs offers startups the opportunity to work on the AOL campus (one of the biggest drawbacks is the site's isolation). There is no fee for participating, but startups must have raised $250,000 and may only stay for six months.

Chicago Booth DC Entrepreneurial Advisory Group: Organized by Matt Whitaker, this group typically meets in the evening of the third Wednesday of the month in downtown DC to listen and offer feedback to local entrepreneurs. No fee for attending.

Mason Center for Social Entrepreneurship: Part of george Mason University, the Center says that it identifies, prepares, and empowers the next generation of social entrepreneurs. In addition to offering degrees, the Center also runs various conferences. Located in Arlington.

Mobile Development DC (MoDev): MoDevDC originated as a MeetUp in suburban DC organized by Pete Erikson. MoDev hosts frequent events, targeted at the developer community, and has recently expanded overseas. Some events are free, some cost to attend.

Mobile Monday DC (MoMoDC): MoMoDC is one of over 100 MoMo chapters throughout the world.  MoMoDC says it is an open forum for mobile professionals and enthusiasts in the Washington, DC area. The group has frequent free events in downtown DC.

Hockey Sticks and Sanity Checks

posted Jul 3, 2013, 12:58 PM by Info@ Whitaker   [ updated Jul 3, 2013, 1:05 PM ]

Democrats and Republicans, liberals and conservatives, have some fundamental differences in philosophy, but one thing they usually agree on is that when government spends tax dollars, it should spend those tax dollars wisely. Investment in infrastructure projects such as transportation is one category of expenditure that often achieves bipartisan support. For example, in 2013 Democrats and Republicans in Virginia united to pass legislation that raises taxes in order to pay for new transportation investments.


I know some people who never never to have seen a rail project that they didn’t like, and other people who never seem to have seen a highway project that they didn’t like, though these people never seem to be the same. I believe there are good transportation investments and there are bad transportation investments. How can we tell the good from the bad?


The process of making private sector investments and public sector investments has much in common--identification of alternatives, identification of costs and benefits, application of an appropriate discount rate to calculate net present value, and sensitivity analysis. Significant differences in these two processes include the fact that when evaluating private investments, costs and benefits are considered from the private owner’s perspective, while public sector investments look at costs and benefits from a much wider public perspective.


“Rational” private sector investments are only made in projects whose net present value is positive at the appropriate discount rate. The simple economic reason for this decision rule is that investments in projects with a positive net present value yield returns that can then be reinvested, thereby increasing the value of the organization and the wealth of the owner. For instance, a private investment in an airline that generates sufficient revenue from passengers and freight to pay the airline’s capital and operating expenses can purchase additional airplanes, expand its fleet, and increase in value. An airline that doesn’t generate sufficient revenue will not be able to expand or even continue to operate. A free market is usually, eventually, self-correcting.


Many public sector investments don’t have the same connection between the benefits derived from the investment and the cost of that investment. “Freeways” are a perfect and aptly named example where the benefit from the investment isn’t the revenue--which comes in the form of taxes--that is generated, but rather the benefit is the ability of citizens to travel and for the economy to grow. The difficult part about public sector investment is that the disconnect between the ability to raise taxes for a project and the benefits that arise from such an investment tends to eliminate the self-correcting nature that we find in the private sector. Governments may be able to raise taxes because of their authority and spend those taxes on projects in which the population places no value.


One of the most important things to do when evaluating private and public investments is to perform a simple sanity check not only on the end result but on the underlying inputs and calculations. In transportation, we have learned a lot about elasticities of demand--the change in demand that results from a change in transportation price or the change in travel time--and other factors that affect consumer choice. One of the frequent complaints of business plans is that they often show “hockey stick” revenue and usage growth rate projections where the projected growth rate makes a sharp rise from the historical growth rate. We know that transportation demand will change based on factors such as price and travel time, and there is some evidence that we may have reached “the end of car culture,” but shifts in transportation demand are most likely to take place gradually over time. When evaluating transportation investments, always do the sanity check, and beware the hockey stick.


Deadline Approaching for $474 M in TIGER Grants Round 5; Competition Expected to be Fierce

posted May 28, 2013, 10:30 AM by Goog@ Whitaker   [ updated May 28, 2013, 10:30 AM ]

FOR IMMEDIATE RELEASE

(Press Release) - May 24, 2013 - WASHINGTON, D.C. -- Over $3 billion grants were awarded in the first four rounds of the Transportation Investment Generating Economic Recovery (TIGER) Discretionary Grants program. The next round of applications is due byJune 3, 2013 at 5 PM.

The 186 grants that have been awarded were won by 165 organizations; 150 organizations won 1 award, 11 organizations won 2 awards, 2 organizations won 3 awards, and 2 organizations  won 4 awards. Over 4,000 applications were received for the first four rounds.

Based on prior experience, the US Department of Transportation anticipates that it may receive 800 proposals for the $474 million to be awarded this round. Organizations that plan to submit applications for this round should beware of four common deficiencies in prior rounds: 1. funding amount requested; 2. applicant eligibility; 3. project eligibility; 4. urban / rural designation and project location clarity.

Because the TIGER program is intended to stimulate economic recovery, the Benefit-Cost Analysis (BCA) is a significant factor in the evaluation process. No projects will be funded for which costs exceed benefits. Proposals should include a comparison of the "no-build" base case against the proposed project. Benefits and costs should be detailed by year and discounted appropriately. Applicable benefits include livability, economic competitiveness, safety, state of good repair, and sustainability. Costs should include those from all sources, direct capital costs, and other costs.

Consultation on preparation of TIGER proposals is available.

Stuart M. Whitaker, principal of Whitaker Associates, has provided financial and economic analysis for investors and corporations, before regulatory commissions and in litigation, for domestic and international clients. He has an MBA in finance and international business from the University of Chicago.

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