Traffic camera return on investment, and controversy

Earlier today, I posted an item in my Empoprise-IE Inland Empire blog entitled "If you thought traffic cameras always made money for a city, you're wrong." It linked to an Inland Valley Daily Bulletin article (no longer available, although the underlying blog post is here) that detailed how the city of Upland, California is canceling its contract with Redflex Traffic Systems, Inc. for three red-light cameras.

So who is Redflex?

Redflex Traffic Systems, Inc. is the longest consistently-operating company in the photo enforcement industry. The company, with U.S. operations based in Arizona, has more than 20 years experience partnering with cities on public safety programs.

As the industry leader, Redflex has more contracts in more states than any other vendor. Public safety programs range from those in smaller cities with only a few camera installations to larger cities where red light or speed-enforcement cameras are employed at dozens of intersections.

The REDFLEXred® and REDFLEXspeed® photo enforcement technology innovated at Redflex provide unsurpassed accuracy in reducing red light- and speed- related traffic collisions. Statistics in most Redflex-protected cities show significant reductions in most collisions, injuries and costs associated with unlawful driving.

However, Redflex doesn't provide these cameras out of the goodness of their heart. For the city of Upland, it ended up being a money-losing proposition, since the cost of the cameras outweighed the revenue from traffic enforcement.

And if it isn't a problem with the revenue itself, there are people that object to automated ticketing on principle. Check out the Twitter account camerafraudaz, which is linked to the website CameraFRAUD.com. While they seem to have missed the Upland story, they certainly have enough stories of their own to report. Case in point:

CameraFRAUD can confirm that photo enforcement equipment located at Alma School and Guadalupe was left unlocked and open to tampering for at least five days, from at least 2/28 through 3/4/2009. Complaints regarding this intersection were received over a week earlier by CameraFRAUD, relating to mystery flashes when no vehicles appeared to be in the intersection or were otherwise obeying traffic laws.

One official close to the arrangement between the Mesa and ATS said that they were “never made aware of the breach,” which has now been quietly fixed by the vendor.

But let's return to revenue. If cities like Upland aren't making money, are the companies themselves making money? Redflex Holdings Limited is an Australian corporation, and if you go to their annual reports page, you can find their 2008 annual report. Page 2 presents earnings - well, earnings before interest, tax, depreciation, and amortization. That's an immediate warning sign.

When you get to page 25, you can find "[P]ro forma results of continuing operations, excluding the effect of non-recurring impairment charge and write-offs attributable to decommissioned camera systems within the USA."

It turns out (page 26) that Redflex IS profitable (despite, as they noted, adverse currency fluctuations between the Australian and US dollars), but you have to wade through a lot to get there. The basic theme of the annual report is that the company is growing - and if that's your theme, stories like the one in Upland, California don't reflect on your business model all that well.

Obviously, this is not unique to the red light traffic camera business. A common challenge in business is the need to set your price high enough to make a profit, but to keep it low enough so that people don't abandon your product. This has been a continuing struggle for NTN Buzztime, as I have noted.

But I've certainly learned from this experience. I've always assumed that the automated traffic lights were always profitable for a city. The experience of Upland, California shows that this is not always the case.