Innovative Thinking: Meeting Arizona's Infrastructure Needs

November 19, 2008

"Can we learn to understand the true nature of global competition? Can we learn that Grade-A infrastructure is in fact not an expense but the basis from which we will be able to have economic competitiveness? Can we find a way to de-stigmatize terms like planning, user fees, tolls and market-driven solutions?"

Those were all questions ASU President Michael Crow posed to the audience at this week's "Arizona 2030," a forum for discussion about the infrastructure challenges that will come with a state population of 10 million.

"To answer yes to those questions," Crow said, "we need to do something which I think Arizona can do like no other state -- innovate. That means rethinking everything."

The forum, which included participants from business, government and academic sectors, was designed in part to unveil the W. P. Carey School's report, "Preparing for an Arizona of 10 Million People: Meeting the Infrastructure Challenges of Growth."

In nearly every case, America's global competitors "don't debate infrastructure," Crow said. "They just build it and move on from there, whereas we struggle -- as we have for decades -- with this question of 'How are we going to do it?'"

Tim James, a research professor in economics at the W. P. Carey School and one of the principal researchers behind the report, echoed Crow's call to better understand how the country's global competitors approach their infrastructure decisions.

In China, James said, the government has built freeway systems even in areas where few people have driver's licenses -- and fewer have access to vehicles. China's philosophy, which James said is posted on signs alongside the country's new roads, is: "Build it and they will come."

Building the key to economic competitiveness

Building necessary infrastructure is key to Arizona's economic competitiveness, yet realizing that fact may take a change of thinking. "Can we learn that Grade-A infrastructure is in fact not an expense but the basis from which we will be able to have economic competitiveness?" Crow asked.

According to James, infrastructure spending is among the most important kinds of investment. "The central difference between third-world countries and first-world countries is infrastructure. Infrastructure like clean water and sewerage. Infrastructure like effective transportation systems that mean you can grow private-sector industry. That's the essential difference that makes one economy more competitive than another," he said.

Arizona Investment Council President Gary Yaquinto said that it's critical for Arizona to be in a position to compete to attract the kind of capital that's necessary to finance infrastructure projects. "We need to think very hard and long about how we go about doing this. Our policymakers need to be focused not only on the here and now but also on the future." The Arizona Investment Council represents the interests of investors of public utility companies operating in Arizona.

Pointing to below-average stock performance and poor bond ratings among Arizona's major public energy utilities, Yaquinto said that over the last couple of years Arizona's climate has not been especially conducive to attracting the kind of capital that the state's utility companies need to fund infrastructure projects for Arizona's current and future populations.

APS Chairman Bill Post said that the reason Arizona's major energy utilities haven't been able to attract the kind of capital that they'll need is really about "the fundamental driver in our state -- that's growth -- and our ability as companies to be able to manage that growth in an effective way."

Investors "don't think Arizona is an investment state," Post said. "They don't think Arizona is going to be able to deal with this huge challenge" of growth. "And that's why it's so critical that we build a vision" for Arizona's future that deals effectively with projected growth.

One way to position Arizona as an investment state -- and to begin looking at infrastructure spending as the basis of economic competitiveness rather than as an expense -- is to demand returns on public infrastructure investments, just as a private investor would. Arizonans must ask, Crow said, "If we're going to make public sector investments, what is the return that we can realize from those investments?"

"Some manager or group of managers along the way need to be held accountable to those returns," Crow said. "If that manager can't deliver those returns, replace the manager, change the structure, innovate, adapt, move things forward in different ways."

Part of seeing infrastructure spending as a true investment, W. P. Carey Associate Dean for Research and report co-author Dennis Hoffman said, is thinking about debt financing. "Infrastructure yields long-run benefits. You have to match long-run benefits with the cost of providing that infrastructure. The alternative? You either do without the infrastructure or you put the entire burden on the backs of the current taxpayers."

De-stigmatizing "dirty" words

Beyond looking at infrastructure spending through a different lens, Arizonans must consider new and different ways of funding that spending.

"Can we find a way to de-stigmatize terms like planning, user fees, tolls and market-driven solutions?" Crow asked. Those words all have negative associations, he said. If public and private leaders can't de-stigmatize them, then Arizona will "be a part of this movement to this moment in time where America is having difficulty sorting out its future."

As negative as associations may be with the kinds of words Crow mentioned, James said that looking to new funding mechanisms like user fees, tolls and public-private partnerships (also called P3s) will be absolutely necessary.

"Whenever you mention toll roads in Arizona, people immediately say, 'Oh, no we don't want those here, thank you very much,'" James said. "In terms of funding, we've got to have a debate from this point forward because the state funding mechanisms -- whether taxation, bonding, whatever existing form -- are just inadequate to deal with the problems we've actually got."

In the transportation sector -- which carries some of the biggest infrastructure costs of all the sectors analyzed -- the funding mechanisms that have been used in Arizona for years (like the gas tax, for example), aren't sufficient to fund the projects required to support an Arizona of 10 million people, said Matthew Croucher, economist at the W. P. Carey School and one of the report's principal researchers.

The key, Croucher said, is action. "Action needs to be taken. We need to do something. This train -- this gap between funding and costs -- has been around for awhile. We need to get ahead of that train. We can mention dirty words like toll roads and raising taxes and P3s but they are the future -- the way forward."

As the first action step, forum participants agreed, it's not necessary to decide which innovative funding mechanisms -- or which combination of mechanisms -- will solve the state's infrastructure problems, but instead to agree to meet at the table with open minds.

"Arizonans should be prepared to engage in a totally open debate where nothing is ruled out and nothing is ruled in," James said.

Arizona Corporation Commissioner Gary Pierce agreed, saying decision makers should never disqualify any option. Mesa Mayor Scott Smith added that "there's no such thing as a hare-brained idea."

"I'm sure there was somebody, somewhere sitting around territorial Arizona who thought, 'If we could just get some of that water from the Colorado River … If we could get water in the off-season from the Salt River.' And those were probably dismissed as completely ridiculous ideas. Dreams, by definition are absurd. But the fact of the matter is that we need to dream a little bit like our predecessors did. If you look at what's been accomplished so far in this desert, it all started with some hare-brained idea. That's what we're going to need here in Arizona to make this happen," Smith said.

Answering Crow's questions will clearly require innovative thinking. That's something, all forum participants seemed to agree, that Arizona is uniquely able to accomplish.

Bottom Line:

  • ASU President Michael Crow posed three questions: "Can we learn to understand the true nature of global competition? Can we learn that Grade-A infrastructure is in fact not an expense but the basis from which we will be able to have economic competitiveness? Can we find a way to de-stigmatize terms like planning, user fees, tolls and market-driven solutions?"
  • America's global competitors don't debate infrastructure -- they just build it and move on. Arizonans, in contrast, struggle to answer the question of "How are we going to do it?"
  •  Infrastructure is the essential difference that makes one economy more competitive than another.
  •  It's critical for Arizona to be in a position to compete to attract the kind of capital that's necessary to finance infrastructure projects.
  • One way to position Arizona as an investment state -- and to begin looking at infrastructure spending as the basis of economic competitiveness rather than as an expense -- is to demand returns on public infrastructure investments, just as a private investor would.
  • As negative as associations with terms like user fees, tolls, public-private partnerships and market-driven solutions may be, looking to those kinds of new funding mechanisms will be absolutely necessary.
  • As the first action step, it's not necessary to decide which innovative funding mechanisms -- or which combination of mechanisms -- will solve the state's infrastructure problems, but instead to agree to meet at the table with open minds.