CDM Smith defends forecasting record and refutes Dulles Toll Road forecast critique
Jonathan Pagan of CDM Smith defends the company's forecasting record in a letter to operators of the Dulles Toll Road, saying critic Terry Maynard and the Reston Citizens Association had "significant factual inaccuracies" in their critique of traffic and revenue forecasts for the Dulles Rail project. (CDM Smith is the new name of the company that recently acquired Wilbur Smith Associates in whose name the forecasts were published, so maybe it's less confusing to refer to both as Smith.)
The five page letter by Pagan - Smith's senior officer in northern Virginia - is addressed to Andrew Rountree, chief financial officer of the Metropolitan Washington Airports Authority and dated February 6 2012. The letter denies any 'optimism bias' in their forecasts citing 22 new start-up toll facilities opened since 1995 saying 10 had revenues above those Smith forecast to 12 below forecast, with 19 of the 22 coming within 75% and only 3 more than 25% low.
Over 100 projects forecast
The letter says that the company has conducted over 200 comprehensive traffic and revenue studies of more than 100 projects globally.
Pagan writes: "We want to assure you that as a leader in traffic and revenue analyses for infrastructure projects, CDM Smith (formerly Wilbur Smith Associates) applies industry best practices and takes the utmost care in contributing our expertise in the planning and forecasting process."
Traffic and revenue forecasts, he writes, are based on a series of assumptions known at the time of the study such as existing demographic and economic forecasts, policies on tolls, and planned capital improvements.
"Rigorous sensitivity testing is always undertaken as part of the investment grade study process to capture the key influential variables that may be subject to change in the future. The traffic and revenue results are therefore best considered as a range of possible outcomes."
Not a financial adviser
CDM Smith is not a 'financial advisor,' Pagan writes and so does not provide financial justifications, analyze debt servicing or provide any other financial advice in toll road finance, as the critics implied.
The letter says that the company has always encouraged independent reviews of their traffic and revenue forecasting work by other industry professionals:
"We welcome peer reviews of key assumptions and trends influencing the toll revenue potential of proposed projects, particularly in this period of unprecedented economic uncertainty. All forward-looking statements and parameters are vetted through a wide range of experts to determine the suitable and reasonable range of possible outcomes."
On the Maynard/Reston association critique Pagan writes that it was regrettable that they didn't seek clarification prior to publishing.
Faults charged in crit
On specifics the letter claims of the critique by Maynard/RCA that it:
- misidentifies the county employment forecast used by the forecaster in one study
- that adjusting some base forecasts upward is valid for the earlier study because the authors admit they underestimate self-employment
On the huge discrepancy between a 2005 study or Virginia DOT in 2005 when they operated the Dulles Toll Road and the forecasts for MWAA in 2009 - a discrepancy we drew attention to earlier - Pagan writes:
"The two CDM Smith studies do differ fundamentally in that the 2005 study examined a one-time increase in 2005, while the 2009 study estimated the impacts of a number of future toll increases designed to finance the Dulles Corridor improvements. The sensitivity to tolls is dependent on a number of factors, such as incomes, travelers’ willingness-to-pay, journey purpose, journey time savings compared to alternative routes, and behavioral preferences. Numerous factors and assumptions related to the markets’ toll sensitivity change over time and between studies as toll policies change."
Good record of forecasting for the DTR
Pagan's letter then claims success by Smith in previous forecasting of Dulles Toll Road (DTR) traffic and revenues:
"The previous traffic and revenue studies undertaken for the DTR highlight our continued success and reliability in effectively forecasting its traffic and revenue potential. Comparison of CDM Smith’s 15yr forecast for the DTR in 1989 with the actual performance indicates that actual 2003 transactions were 98.2% of forecast (the 2004 toll increase was not assumed in 1989).
"The 2009 study forecasts also compare favorably to the actual revenues following the 2010 and
2011 toll adjustments:
- 2009 Study 2 yr forecast: Actual 2010 revenue was 100.7% of forecast
- 2009 Study 3 yr forecast: Actual 2011 revenue is expected to be 97.5% of forecast
"The 2005 DTR Study cannot be tested against actual performance as none of the toll scenarios in that study were implemented."
COMMENT: We noticed that the 2005 Smith study for VDOT reported revenue maximizing toll rates that put a clear ceiling on what tolls would finance, while the 2009 study for MWAA suggests that very much higher tolls continue to yield higher revenues - a discrepancy that is not addressed here by Pagan.
The record of 22 Smith forecasts mentioned initially is way superior to that attributed to the company by independent analysts Bent Flyvbjerg and Robert Bain and completely at odds with Terry Maynard's counts. We are likely to hear more about that.
copy of CDM Smith reponse to Maynard/RCA criticism:
copy of Maynard/RCA crit: