Last night at 10pm I finished my last MBA exam, ever.
I’ve spent the past 2.5 years completing my MBA part-time at the Rotman School (at the University of Toronto). Since I had already done a 3-year masters (I know, it’s a lot of school), I had decided that my opportunity costs were simply too high and I wanted to remain working.
But in order to do that, it meant I had classes from 7-9am and then went to work for the day. This past semester I had those morning classes 3 times a week. It’s made for an intense 2.5 years, especially when you add in group meetings, tutorials and other commitments.
But as much as I’m happy to be finished the program (I fast tracked to finish a semester early), there’s always something bittersweet about closing one chapter and moving onto another.
Since 2011, being a “MBA student” has been part of my personal brand. I would talk about the classes I was taking, and I would try and apply what I was learning to what I was doing in real life—both professional and personal. Believe it or not, I once had a debate with a Baptist Minister over the discount rate I used in one my calculations for a lease agreement.
And while I have learned a lot through almost 6 years of graduate education in both Canada and the US, this is in many ways only the beginning. When I was younger I used to tell myself that my 20s should be about formal education, exploring, and crafting my identity, and that my 30s should be about execution.
Well now it’s time to execute. In the words of the Steve Jobs: “Real artists ship.”
I just finished reading an HBS business case on road pricing in Hong Kong for a class I’m taking as part of my MBA. Since it’s a topic that’s integral to cities, I thought I would post my case prep here. Below are the questions I was asked to my prepare, with my answers below.
The case is essentially about traffic congestion in Hong Kong and a decision to either build more road (a bypass route running adjacent to the harbour: The Central-Wan Chai Bypass) or implement an Electronic Road Pricing (ERP) system, similar to what was implemented in Singapore in the 70s and in London in 2003.
If you’re a reader of this blog, you can probably guess which side I’m going to lean towards. I believe fundamentally that the only way to construct a large well functioning urban region is on the shoulders of mass transit.
Q: For a typical commuter, what are the costs and benefits involved in using a car over using public transportation? Why would a commuter choose to drive? Who are the most likely to drive?
However, the big question with these sorts of events is always whether or not they create a lasting economic boon for the host city. History is littered with examples of economic disasters and lingering Olympic debts. I’d love to see a full analysis of what it costs to bid for a game, how much public money has to go up, how much private investment it spurs, and so on.
At the same time, I suspect that some of the positive externalities might be hard to measure. How do you attach a value to the brand equity you get from hosting a major international sporting event? It’s hard, but for many people around the world the 2015 Pan Am Games could be the event that embeds Toronto into their psyche.
But there is another big benefit to playing host. It creates a real deadline. When cities bid for games they make all sorts of promises about the kinds of things they’re going to build and provide. In the case of Toronto, it
A: In my view it’s a trade off between cost, time and, to some extent convenience, although convenience and time are somewhat linked.
From a cost standpoint, your typical driver has the fixed cost of owning a car (payments, insurance, maintenance, etc.) and the variable costs of driving (gas, parking, applicable road prices, etc.). For those who have already committed to purchasing a car, probably as a result of where they’ve decided to live, it then becomes largely a question of variable costs. In most cases, these costs are higher for driving than they are for public transportation.
But then comes the question of time and convenience. Residents of global cities, such as Hong Kong, are becoming increasingly cash rich and time poor. There’s a real value to time. And driving often offers speed, as well as the convenience of a personalized and “comfortable” ride (personally, I find gridlock highly uncomfortable). So if the value of the time you’re going to save by driving exceeds the variable cost of driving, you’re likely going to drive. In other words, higher income individuals should choose to drive.
Q: What are the costs of traffic and congestion for society?
A: The costs of traffic and congestion to society are huge. You have the lost productivity as a result of people and goods sitting idle. You have the strain on family life caused by working parents struggling to find enough time outside of work. And you have the environmental impact of idling cars.
"In fact, if Canadian motorists avoided idling for just three minutes every day of the year, CO2 emissions could be reduced by 1.4 million tonnes annually. This would be equal to saving 630 million litres of fuel and equivalent to taking 320,000 cars off of the road for the entire year. Eliminating unnecessary idling is one easy action that Canadians can take to reduce their GHG emissions that are contributing to climate change.”
Q: Discuss the effect of electronic road pricing (ERP) on: (a) urban re-development and town planning, as well as residential property prices; (b) fare faced by public transport.
A:
(a) Based on London’s experience, their property market “recorded no impact, positive or negative, in or around the charging zone.” (Case) However, intuitively, I would expect development pressures and pricing to increase within the boundary of any charging zone and for prices to fall outside, along the periphery. The reason for this is that urban real estate models, such as the Monocentric City Model, argue that as you move out from the center of a city, land prices fall, but transportation costs increase. It ties into the whole “drive to affordability” notion. In the case of ERP, transportation costs have now increased for the periphery, so it could drive down land/property prices.
(b) Relatively speaking, an ERP system should make pubic transportation fares appear cheaper since the marginal cost of driving has now increased. Therefore, in the longer term, it may create an opportunity to raise fares.
Q: Why is the use of road usually free of charge?
A: Roads are thought of as a public good. And so they’ve been typically priced as such. However, roads, and in particular highways, are also thought of as an economic development engine. They’re a heavily subsidized form of infrastructure that have been used as a tool to spur suburban and exurban growth. By driving down the cost of transportation (without factoring in the environmental costs, of course), extensive highway networks have been used to unlock the value of previously under utilized outlying land. However, I disagree with the notion that all roads should be “free.”
Q: Why roads are often provided and managed by the government and not by profit- maximizing firms?
A: Because typically profit-maximizing firms require paying customers. Also, since they’re viewed as a public good, governments typically want to control them.
Q: What are the differences between ERP and a classic toll?
A: A classic toll is typically based on a fixed price that is paid regardless of the time of day. ERP is variable. Pricing fluctuates based on the time of day and/or the traffic and congestion levels. It’s the idea that as demand for the public good in question rises, so does the price of using it.
Q: What are the advantages of implementing ERP?
A: There are number of advantages. The first is that you get an immediate drop in traffic/congestion. This has been clearly shown through previous case studies in Singapore, London and Scandinavia. As a result of this, the city is then able to offer an improved user experience for those who are willing to pay the increased transportation costs. At the same time, the city now has a new revenue source that it can dedicate towards other infrastructure improvements, such as public transportation. Indirectly, the city will also benefit from increased productivity levels and a smaller environmental footprint.
Q: Why are there such few cities that have successfully adopted ERP despite the fact that the idea is praised by many economists? Singapore is one of the few successful examples, why?
A: It’s politically unfavourable. Nobody likes any sort of new “tax”. When Livingston first proposed a congestion charge in London residents called it “Carmageddon.” Few leaders have the guts to push something like this through.
Singapore, on the other hand, had no choice. Geographically they couldn’t afford not to discourage car use and so the political will was there. I think that Hong Kong is in a similar boat.
Q: Imagine that you were the government official responsible for the introduction of ERP. What would be your strategy to persuade the public to support your implementation?
A: I would focus on two main ideas: (1) the value proposition being offered and (2) the future use of the funds being collected through ERP.
The main value proposition is reduced congestion for a segment of the population that I suspect would be willing to pay for the convenience. Again, I return to the idea of being cash rich and time poor.
For those with absolutely no willingness to pay for this convenience, the value proposition becomes increased investment in public transportation (as a result of the ERP funds). This is how I believe the funds should be allocated.
I also think it’s critical to be open and transparent to the public about how exactly the funds will be used. You don’t want the public to think of ERP as a tax. You want them to think about it as investment in infrastructure in the region.
However, it’ll take a change in mindset. People are accustomed to roads being “free.” But to paraphrase Harvard economist Edward Glaeser, from his recent book the Triumph of the City, if you offer a hugely valuable good—such as a road or highway—and make it free, you’ll never be able to keep up with demand. It’s for this reason that building new and more roads is rarely the answer. Traffic patterns simply adjust to take advantage of the increased supply.
If you want to control usage, you need to slap a price tag on it.
accelerated
the creation of a new mixed-income neighbourhood called the
(which will be used to house the athletes during the games).
"Originally, build out of the 32 hectare (80 acres) West Don Lands was planned to unfold in three strategic phases and take between 10 and 12 years, subject to market conditions. With the Pan Am Games, more than half of the community will be in place for the Games in 2015." -Waterfront Toronto
So in effect, we’ve leveraged the games in order to expedite capital projects that were already in the pipeline. I like this, because without a hard and fast deadline, I can almost assure you that these publicly run projects would have fallen behind schedule. Deadlines and goals are good.
Here’s an example why:
When I first started my MBA program at Rotman, we did an interesting organizational behaviour exercise involving origami cranes. The class was split into groups and each group was asked to go away and build paper cranes. If you’ve ever built one of these, you’ll know that they can be tough at first.
But what each group wasn’t aware of was that they were all given different instructions in terms of the number of cranes they were expected to build. Their goals were different. At the end of the exercise, all of the cranes were counted and each group wrote their “production” levels on the board.
What was discovered was that each group more or less built the exact number of cranes that they were asked to build. This is interesting, because presumably every group had the raw ability to produce the same number of paper cranes. All that changed was the motivation.
Returning to the case of the Pan Am Games, the mandate is clear: We need to house 10,000 athletes and officials by the summer of 2015, or else we’ll look utterly incapable in front of the world. We have a deadline. And that’s a good thing.
