Inflation Depleting Infrastructure Funding; P3s Are The Answer
Inflation Depleting Infrastructure Funding; P3s Are The Answer
By Ron Simmons, Florence Shapiro and Cindy Burkett
It has been widely reported how general inflationary pressure is impacting the price of consumer goods and eroding recent wage gains. Inflation has hit a 40-year high[1]. Less well known is the impact of inflation on the cost of infrastructure, which is critical to economic development. Two very recent news reports underscore the challenge of inflation to all states which also undermines a central objective of President Biden’s infrastructure package.
As reported by AP, “prices paid to U.S. manufacturers of asphalt paving and tar mixtures were up 14% in May compared to last year, according to data from the Federal Reserve Bank of St. Louis. Prices for fabricated steel plate, used in bridges, were up 23%, and ductile iron pipes and fittings — used by water systems — were nearly 25% higher.”[2]
Consequently, as one CEO stated: “We’re going to spend a lot more money for fewer projects. … The buying power of [the infrastructure law] is absolutely being diluted.”[3] Inflation for key materials and labor costs are causing projects to be canceled, delayed or reconsidered. According to Federal Highway Statistics reports from 2010-2018, 239 miles of new freeways and 1,424 miles of new freeway lanes were built in Texas, expanding total freeway miles by 5% and lane miles by 6%. This is around 60% less than Texas needs to keep pace with population growth.
Rising costs will have an impact on how Texas coordinates and finances transportation and other infrastructure projects to keep pace with growth. While revenues to the state are up, costs are way up and going higher. President Biden’s proposed federal gas tax holiday could further complicate the financing picture.[4] Thus, at a time when Texas continues to see population growth and corporate relocations (the latest being Catepillar coming to Las Colinas[5]), the enhancement of transportation and other infrastructure projects through private investment is pressing.
Private sector leaders agree. Predating the run up in costs, during the 87th legislative session, the Metro 8 (an umbrella organization for the state’s largest chambers of commerce including the Dallas Regional Chamber) pointed out that “by partnering with the private sector for large-scale infrastructure projects, more public dollars are freed up for projects across the state.” Support for public-private partnerships (P3s) is also strong among notable policy organizations.
A public-private-partnership, or P3, is an agreement between a public entity (city, county, state) and the private sector to construct and deliver a needed public project. The private entity assumes construction risk and is under an obligation to deliver the project on-time and on-budget. Under a P3 agreement, the private sector bears financial responsibility for delays and cost overruns. In exchange, the private entity operates the facility and recovers its investment via predictable service rates, or receives an agreed upon payment from the public entity. In transportation, managed lanes are oftentimes the funding mechanism.
Managed lanes (ML) reduce congestion by adding capacity to an existing highway. These optional tolled lanes control traffic flows through a process known as dynamic pricing. Toll rates can be adjusted every 5 minutes, to ensure vehicles in the managed lanes travel at agreed upon speeds. In Texas, managed lanes keep traffic moving above 50 mph at all times, even during rush hour and no matter the traffic conditions on the free general-purpose lanes (GPLs).
The DFW metroplex is home to a 120-mile connected system of TEXpress Lanes built to better manage mobility and congestion relief. These projects have been tremendously successful. Success is defined by demand: More than 1.2 million trips are taken on NTE, LBJ and NTE 35W highways every day, according to a summary of North Texas Texpress Lanes issued in May 2022. And there is the prospect of expansion of NTE, including managed lanes, which has the support of the North Texas Commission and DFW Airport among others representing industry and local, state, and federal government.
P3 road projects have repeatedly demonstrated increased operational efficiency and provide an avenue to decrease state tax liability. This is vital as costs have and will continue to rise in areas such as construction, fuel, and supplies in our current economy. The utilization of private financing, with public partnership, is the most cost-effective solution to these issues facing the state.
Shapiro, Burkett and Simmons are former members of the Texas Legislature having served North Texas Senate and House Districts. They serve on the Advisory Board of the Invest Texas Council, a policy-oriented organization founded to champion public-private partnerships (or “P3s”) across economic sectors, including water, power, transportation and cybersecurity.
[1] https://www.politico.com/news/2022/06/10/inflation-new-high-may-00038786
[2] https://apnews.com/article/inflation-us-infrastructure-projects-e89dcd5f3e623e532353f087265f9a63
[3] https://www.politico.com/news/2022/06/17/democrats-shrinking-infrastructure-plan-00039588
[4] https://www.dallasnews.com/news/politics/2022/06/20/president-biden-says-hes-considering-a-federal-gasoline-tax-holiday/
[5] https://www.dallasnews.com/business/real-estate/2021/04/29/industrial-giant-caterpillar-picks-north-texas-for-division-office-move/