Heads up, Arizona, part five: The huge cost of transportation infrastructure to 2032

The amount of money necessary to build adequate transportation infrastructure in Arizona in the next 25 years — between $253 billion and $311 billion — is larger than the bill to build water and wastewater, energy, and telecommunications infrastructure combined, according to a recent report commissioned by the Arizona Investment Council (AIC) and prepared by the L. William Seidman Research Institute at the W. P. Carey School of Business. In the final story of our five-part series, Knowledge@W. P. Carey examines Arizona's growing demand for passenger travel and freight transportation — and some of the funding mechanisms the state might use to meet that demand.

The amount of money necessary to build adequate transportation infrastructure in Arizona in the next 25 years is larger than the bill to build water and wastewater, energy, and telecommunications infrastructure combined, according to a recent report commissioned by the Arizona Investment Council (AIC) and prepared by the L. William Seidman Research Institute at the W. P. Carey School of Business.

"The costs for securing adequate transportation infrastructure to serve Arizona's increasing passenger and freight demand, which will grow dramatically in the next 25 years, are unprecedented — certainly far greater than the costs Arizonans have become accustomed to," write the report's authors. Between $253 billion and $311 billion.

"That sounds like a huge number, and you know what — it is. It's huge," said Tim James, Seidman's director of research and consulting and the project's lead researcher.

Burgeoning demand

The principal factor behind the massive infrastructure bill is demand. "We think passenger demand will continue rising in an unabated fashion. Every kind of passenger demand is going up, more than doubling in most cases," James said. According to the report, private automobile travel, air travel, and rural and urban bus ridership will all more than double in the next 25 years.

"There will also be dramatic increases in the amount of freight movement on the railways and on the road system," said James. The report predicts that the amount of air freight transported in Arizona will rise by 276 percent and the number of truck miles traveled will more than double.

Yet the state is woefully unprepared to cope with rising traffic. There are limited plans in place to upgrade the transportation infrastructure within the state, but even with those planned improvements, "burgeoning demand will cause performance levels to decrease on the state's roads write the report's authors.

Performance levels measure factors like congestion, trip delays, and accidents. According to the report, "without significant infrastructure investment, the percent of road passenger travel at an acceptable performance level will fall from 77 percent statewide in 2002 to 38 percent in 2025. Average delay per trip will increase nearly six-fold over the same period."

Yet if Arizonans think that a quarter of a trillion dollars will buy long stretches of newly paved open road, they're mistaken, caution the authors. Even with that kind of massive infrastructure investment, Arizona travelers in 2032 will face the same kind of traffic congestion, delays, and accidents that they do today.

"This is a controversial statement," James warned, "but our $253-311 billion transportation infrastructure investment isn't going to make travel better in Arizona; it will only keep it from deteriorating. " What's more, James said, the report's estimate is a "conservative" one. The low end of the estimate — the $253 billion figure — comes from applying a general 2.2 percent consumer price inflation figure to costs over the next 25 years. The high end — $311 billion — comes from applying a 4 percent rate of inflation, which is approximately equal to the average road construction inflation over the last 20 years or so. Yet in reality, over the last 5 or 10 years, road construction costs have been rising at an average rate of 8.6 percent. Using that rate of inflation, the bill balloons to more than half a trillion dollars.

"There is an expectation that the high levels of road construction-cost inflation — the 8.6 percent range — will dissipate over the next several decades," James said. "But it's possible that they won't and we'll face costs in the order of $500 billion to fix our transportation system."

Paying the bill

Whether the bill to construct Arizona's transportation infrastructure is $253 billion, $311 billion, or half a trillion, there's "no way" that current funding mechanisms can support it, say the report's authors. "We have a massive transportation infrastructure problem," said Dennis Hoffman, Seidman's director and one of the report's authors. "I don't think this is a choice between, say, some general form of funding dedicated to transportation or tolling. Given the magnitude of the problem, we need both options."

James agreed. "The problem is so big that we need a mix — we need to get some people using the transit system, we need more roads, we need a mixture of things. And we need a mixture of funding mechanisms to plug the gap because it is so large."

Funding mechanisms already in place to pay for transportation infrastructure include "a mixture of usage fees, taxes, federal funding and indirect taxation that are used for transportation infrastructure and services," the authors write. "There may be some possibility for the extension and manipulation of these to squeeze out a little more money for enhancements, but this is probably somewhat limited."

So the state will need to create alternative funding mechanisms that can bridge the gap between what's currently available and what's needed. "What we've got the opportunity to do here is choose the best examples from the United States and elsewhere," James said.

Some of those examples include:

• Local options to levy fuel taxes, allowing municipalities to set their own gas taxes (currently the only gas taxes are at the federal and state levels);
• Additional regional sales taxes, like the current Maricopa County sales tax or the 1-cent statewide sales tax that may be on the November ballot;
• Regional or state impact fees, charged to developers to support area transportation projects;
• Public-private partnerships (P3s), whereby the private sector builds, maintains, and operates transportation infrastructure; and
• Charges based on roadway usage, including congestion pricing, mileage-based fees, and/or tolls.

As gas prices in the U.S. rise above $4 per gallon, most drivers likely feel that gas is plenty expensive, but James put the country's gas prices — or gas taxes, at least — in perspective. "The current level of gas tax in the U.S. is 40 cents," he said. In the United Kingdom, where James is from, the gas tax alone is $5.50. Other options include impact fees, which James recognized are "slightly controversial."

"There's a reasonable case that the people involved in the residential and commercial development of the state should have to pay something for the extra infrastructure needed," said James. "Why shouldn't they pay something for the extra road system required to serve their developments?"

One option that James said will undeniably be a part of the financing mix in Arizona is the public-private partnership (also known as P3), or what James called "an increasing role of the private sector in providing transportation services."

"Elsewhere, apart from in the U.S. it seems, P3s are common practice, James said. "The private sector builds the roads, operates and maintains them, and sometimes even tolls them."

James' mention of tolls created quite a stir in the room of utility executives and policymakers where he spoke to unveil the AIC report. James didn't suggest that tolls would be a panacea for the state's transportation woes, but he did say that "it's an area we should be debating." Toll roads, which base infrastructure charges on actual road usage, "are a good way of actually building a road without asking people to dig deep into their own pockets for bits of infrastructure that they may never, ever use," James said.

Toll roads address the concern that some have about the distribution of infrastructure costs. "Citizens in Greenlee County have to be deeply unhappy about paying a 1 cent sales tax to build roads in Maricopa County," suggested James. Toll roads would charge only those citizens actually using the roads.

One tolling mechanism that James thinks has worked well is shadow tolling — it's a system that's common in the UK. "There are no toll booths or anything of that nature and there's nothing inside your car that tells the government where you're going from and to — Big Brother hasn't quite arrived yet," James said.

Instead, the private-sector owner and operator of the road system conducts a survey once a month or so about how many people use the road system, and then bills the government based on the number of users. That way the government doesn't have to front huge capital costs, instead repaying the private sector over the long term. After the capital costs have been repaid, the infrastructure transfers back into public ownership.

"Tolling isn't just about what people imagine: booths in the middle of the road or a gadget behind your mirror in the center of the car that allows everybody to know where you're going from and to — it's not necessarily quite as cumbersome a system as that. There are lots and lots of options out there. You see it in other areas of the U.S. We seem to be the only state that's not actively thinking about it," James said.

The stakes are high

Building transportation infrastructure that will at least maintain the current levels of performance on Arizona's roadways, railways and in the air is not only a matter of creating a system for moving people and goods to and fro. It's a quality of life issue, said James.

"In the transportation sector, we really need to do something here in order to cure some of the ills that are going to be foisted upon us in 25 years if we're not really careful," James warned. "Who wants to live in congested areas?" he asked. "Nobody does."

Bottom Line:

• The 25-year cost for Arizona's transportation infrastructure is on the order of $253-311 billion — more than the infrastructure costs in the water and wastewater, energy, and telecommunications sectors combined.
• The huge transportation infrastructure bill is due in large part to burgeoning demand for passenger travel and freight transportation.
• The cost of doing nothing is high: the percent of road passenger travel at an acceptable performance level would fall from 77 percent statewide in 2002 to 38 percent in 2025. Average delay per trip would increase nearly six-fold.
• The $253-311 billion transportation infrastructure investment isn't going to make travel better in Arizona; it will only keep transportation from getting worse, in terms of travel time and what our journeys are like generally.
• The state will have to come up with a variety of innovative mechanisms to bridge the gap between the money that's currently available and the money that's required to fund necessary infrastructure projects. Some innovative funding alternatives include raising the gas tax, imposing impact fees, public-private partnerships, and shadow tolling.
• The stakes are high. Dealing with the state's transportation infrastructure is a quality of life issue. No one wants to live with chronic congestion.

This is the fifth of five stories on Arizona's infrastructure needs over the next 25 years, based on a recent report commissioned by the Arizona Investment Council (AIC) and prepared by the L. William Seidman Research Institute at the W. P. Carey School of Business.