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Infrastructure Investment: The Bridge to Economic Growth

Although conditions vary, much of the nation’s infrastructure is in dire need of repair and/or replacement, affecting business in general and some companies — as well as their location decisions — in particular.

Q1 2015
Residents of Michigan are obsessed with crumbling roads, and it’s not just because spring reveals acres of nasty potholes and fractures in the state’s winter-ravaged 120,256 miles of paved thoroughfares. Business executives, policymakers, and even taxpayers in the resurgent state also recognize the economic damage caused by the long-term, unaddressed deterioration of Michigan’s highway infrastructure.

That’s why Michigan legislative leaders kept lawmakers in session nearly through Christmas last year to hammer out a new road-funding proposal, and why they’re confident that voters in May will approve a one-percentage-point increase in the state sales tax to activate the plan. It’s also why 97 percent of respondents in the latest survey of the state’s CEOs by the Detroit Economic Club called for fixes to the state’s roads and bridges.

“People are pissed off, and they’re tired of waiting for us,” Michigan Senate Majority Leader Randy Richardville, a Republican from Monroe, Michigan, told The Detroit News, in an assessment that was typical of Michigan legislators as they felt constituent heat on the issue leading up to the passing of legislation in December.
Differences in infrastructure will continue to grow in importance as we become even more of an economy where just-in-time manufacturing and distribution of goods are more critical. Larry Gigerich, Managing Director, Ginovus
Lobbyist David Waymire added the specter of frustrated businesses losing interest in Michigan. “Everyone is fed up with our roads and we’ve been disinvesting [in them] in this state for about 20 years now,” the partner at Martin Waymire Advocacy Communications in Lansing, Michigan, told Crain’s Detroit Business. Without addressing highway-infrastructure needs quickly and robustly, he said, “We’ll increasingly take our example from poorer Southern States with high unemployment.”

An Economic Development Issue
The availability and condition of roads to, from, around, and away from America’s factories, distribution centers, industrial parks, and office complexes has become a more important economic development issue for the nation as a whole and for many states and localities.

“Differences in infrastructure will continue to grow in importance as we become even more of an economy where just-in-time manufacturing and distribution of goods are more critical,” says Larry Gigerich, managing director of Ginovus, an Indianapolis-based consulting firm. “States and communities that make the investments in increasing road infrastructure, and in existing infrastructure, will be in better shape for economic development.”

But while Michigan is an example of how road-infrastructure adequacy can play out politically and popularly, this issue is seen in two facets by economic developers, company site selectors, and the consulting community: (1) the importance of highway accessibility per se to a site decision; and (2) separate concerns about the poor condition of highways and other roads and bridges affecting business in general and some companies in particular.

In 2014, “highway accessibility” ranked as the most important factor to U.S. corporate site selectors in a comprehensive survey by Area Development magazine, up from its second place ranking in the previous year’s study. That reflected the crucial role of transportation and logistical efficiencies in a U.S. and global market with less and less margin for error.

Certainly a sine qua non in Reno, Nevada’s ability to land the Tesla-Panasonic “gigafactory” for electric-vehicle batteries, for instance, was a huge concession by the Nevada legislature for ensuring the quickest and easiest possible access for the plant from nearby Interstate 80. The total of $1.3 billion in Nevada’s incentives included $100 million just for roads to and from the diamond-shaped plant site. Among other things, the state decided to purchase the right-of-way needed to link Interstate 80 and U.S. Highway 50 through the Tahoe-Reno Industrial Park where Tesla already has broken ground.

And in the Dallas-Fort Worth area, the recent opening of a fully rebuilt, 13-mile highway through one of the state’s most congested corridors is a boon to one of the most successful economic development stories in the country. The North Tarrant Express traverses six cities, has more than 250,000 daily drivers, and helps commuters reach businesses, including huge distribution facilities for Coors, the brewer, and Dillard’s, the Southern department store chain.

The North Tarrant Express also will facilitate movement to and from the new Toyota Motor USA headquarters in Plano, Texas, that is gradually filling up with 4,000 people in jobs that used to be located in Southern California. The speed of construction was a lure that factored into the success of the Toyota project.

“The North Tarrant Express was on the area’s master development plan for a long time, and because people talked about it for so long, new businesses were leery of moving into an area they knew was going to be under construction — and for how long?” says Robert Hinkle, head of corporate affairs for NTE Mobility Partners, in North Richland Hills, Texas. “But instead of traditional construction, which is very linear and very sequential, and which can take literally decades, we used a design-build methodology that means everything happens simultaneously. So we condensed a 15- to 18-year project into four and a half years.”

And in metro Chicago, one of Dean Uminski’s current projects is an industrial park for which transportation officials authorized the construction of a new interstate-highway interchange, which is saving as much as 45 minutes in travel time for hundreds of new, highly paid workers in facilities at the park. “That is cutting transportation costs and giving people a much easier commute,” says Uminski, partner at Crowe Horwath in South Bend, Indiana.

“As more industrial parks are being developed with infrastructure in place — and with bigger buildings, such as central distribution facilities — states and communities are recognizing the need to have highway accessibility and interchanges and are using them as marketing tools,” Uminski adds. “Many places have let highway infrastructure go. Now everyone wants on-time delivery, so it had to be addressed sooner or later.”

Government Spending on Infrastructure
To be sure, there are huge regional and local disparities in deterioration of the road infrastructure. The problem, of course, generally is bigger in areas of the country that are more subject to weather variations and where the transportation infrastructure is oldest. That would be the North, East, and Midwest. In Sunbelt states, by contrast, “more growth has put more pressure on infrastructure, but there are more taxes available to fix the roads because of the growth,” Gigerich explains.

Overall, however, despite many years of jawboning about the issue, governments’ advance in infrastructure spending “still isn’t large enough to get ahead of where it was as a share of GDP,” says Howard Sosoff, national practice leader for manufacturing and distribution in the Milwaukee office of BDO USA. “It still is declining.” In fact, for the last decade, there has been a 3.5-percent-a-year drop in the volume of highway, road, and bridge investments, according to a new report by the National Association of Manufacturers (NAM).

Add to that the inexorable decline of roads and bridges because of the elements, and The American Society of Civil Engineers estimates that one third of the country’s roadways are in need of repairs. In the most recent World Economic Forum rankings, the United States had fallen from 7th to 18th overall in the quality of its roads. And now, renewed U.S. economic growth promises to generate more wear from more vehicles on the roads.
The I-35W bridge collapse in Minneapolis in August 2007 exemplifies the state of the nation’s deteriorating infrastructure.
The I-35W bridge collapse in Minneapolis in August 2007 exemplifies the state of the nation’s deteriorating infrastructure.
Particularly acute is the danger of precarious bridges. Nearly 10 percent of America’s 70,000 bridges are considered “structurally deficient” — in effect, accidents waiting to happen. Some already have, of course, most notably the August 2007 bridge collapse in Minneapolis that killed 13 people and injured 145. And there are plenty of warnings about the potential for similar calamities around the country.

“The United States is stuck in a decade-long period of decline [in infrastructure investment] that will eventually harm job creation, future productivity, and our ability to compete head-to-head with companies all over the globe,” said NAM President Jay Timmons, commenting on a study commissioned by NAM that offers a view into the economic benefits the U.S. economy would reap with a more concerted effort to address the nation’s infrastructure needs. “As we sit idle, our competitors are churning out investments in their infrastructure,” Timmons added.

Reversing the Trend
When it comes to deals, these general concerns about highway infrastructure don’t translate into fatal flaws for particular sites. Even in Minneapolis, the bridge collapse didn’t become a major economic development drawback “because the city and the state have some other things going for them and can absorb some infrastructure blows because there are positive developments overshadowing them over time,” notes Scott Kupperman, head of Kupperman Location Solutions in Lake Forest, Illinois. “But I guarantee companies are asking about the care for bridges in that area.”

In general, says Brad Lindquist, senior managing director of Newmark Grubb Knight Frank Global Corporate Services, in Chicago, “It’s not like our clients are saying, ‘I’m not going to build in Michigan because the roads are too rough.’ It’s more a question of what is available in that last mile to the facility.”

Still, NAM says the federal and state governments could get great results from reversing the trend in spending on roads and other transportation platforms. Its report noted that “a targeted and long-term increase in public infrastructure investments” over the next 15 years would grow real GDP by 1.3 percent by 2020 and 2.9 percent by 2030. And there are growing reasons for optimism that the nation will see more initiatives to do just that. The Obama administration in 2014 introduced the GROW AMERICA Act, a four-year, billion proposal to invest in the nation’s transportation system. It got waylaid in mid-term-election politics, and the future of that specific legislation was uncertain as Republicans took over the U.S. Senate as well as extended their control of the House in January.

“But I do sense, whether it’s local chambers of commerce or [metropolitan planning organizations], that there’s a growing recognition that the accumulation of short-term measures are doing damage to our system,” Transportation Secretary Anthony Foxx said in late 2014.

And with a building U.S. economic recovery and improving fiscal situations in many states, more areas of the country finally are beginning to gain ground on the problem. Beginning with the Great Recession in 2008, of course, many states faced yawning budget deficits, and highway projects were among the first casualties of efforts to close budget gaps. States cut their budgets for spending on infrastructure by an overall total of 3.8 percent in 2009 and by an accelerated 5.7 percent in 2010.

Another, new reason for optimism about America’s road infrastructure is the rising likelihood of increases in gasoline taxes on the state and federal levels that could help fund infrastructure improvements. The roughly 50 percent decline in U.S. gasoline prices between last summer and the end of 2014 may be helping soften public opinion toward some fuel-tax increases. It also might boost the chances for creation or expansion of more toll roads in various states.

“Fuel taxes at the federal level haven’t been increased, basically, for a couple of decades now,” Gigerich says. “That has created a real deficit in road infrastructure funding as you look at the country as a whole, and there is a growing appetite among taxpayers and the business community to see some increases in gas taxes that would provide more funding for more of these projects.”

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