Thursday, March 8th, 2012

Creative Transportation Financing in Indiana

I’ve been pounding the Indiana Department of Transportation lately, rightly so I think. But fairly I should also highlight things they do well that are also of relevance to the country.

One of them is an announcement yesterday of a plan to accelerate construction of a major project on US 31 in Carmel and Westfield, northern suburbs of Indianapolis. The project is an upgrade of 12 miles of that route to a full freeway. Work had finally started – after about 20 years of study – and was projected to dribble out over the course of nearly a decade, being completed in 2018.

With this announcement, the project will be accelerated and completed by 2015. All remaining work will be bundled into a single $475 million contract. This will be funded with some type of financing mechanism – the details aren’t yet clear as to whether this is GARVEE bonds, vendor financing, bank loans, etc – then repaid over a decade with allocations from the state’s regular highway funding.

Spending future money now can sometimes be a bad thing. Some states are in trouble because they’ve bonded out too much of their future highway funds. But in this case it seems like a good move. The state projects it will save $50 million in construction costs by doing it this way – not a small amount. One benefit of pulling forward projects right now is to take advantage of the weak economy to get better pricing. Prior to the recession, construction cost inflation was running at 11%, well above any reasonable financing costs for borrowing money by a state. So doing projects sooner avoids that future inflation as well.

But the state is only part of the equation. Motorists will save significantly both by having to endure fewer construction seasons, and by pulling forward the benefits. Given the congestion in the area, this should be significant.

But financing and contract bundling aren’t the only things pulling the project forward. The state is also looking at temporarily closing the road to get things done faster. This technique is known as a “hyperfix” locally after the name of the original project where it was done. This approach has been pushed by Carmel Mayor Jim Brainard, who upgraded Keystone Ave as an alternate route and built collector/distributor roads parallel to US 31 to provide access even if the highway were closed. Brainard wants to do the segment through his city in just one construction season. The Indianapolis region has a been a leader in using the hyperfix technique, which saves money and reduces the amount of time motorists experience the pain of construction.

Beyond the savings, this also greatly reduces the risk around the project just not getting done. This project barely survived getting axed due to budget problems a couple previous times, despite its huge benefit/cost ratio. As the Toll Road lease money runs out and federal funding seems sure to decline, Indiana faces the prospect of a plunge in its funds available for construction in the not too distant future. This announcement brings much greater certainty to the project.

Some don’t like highway projects, but this is clearly needed. The Major Moves upgrades on US 31 segments will cut travel times between Indianapolis and South Bend by 30 minutes in addition to serving key growth areas in the region. The suburbs in the region are in parallel pursuing new urbanist policies around densification and walkability, and mayors like Jim Brainard are strong supporters of building out a regional transit system.

This should only be considered a preliminary analysis since full details aren’t available yet. But it’s an example of how states can use techniques like shorter term financing and hyperfixes to save money and get projects done sooner. This is definitely something we need to see more of in America.

I should also note that Gov. Daniels decided to do this despite what I believe is the probability of considerable opposition from the state’s powerful highway lobby. Indiana’s contractors are often smallish and not able to handle large projects like this. Traditionally they’ve opposed large design/builds and such for this reason. That’s why Indiana usually breaks up its major projects into a seemingly endless parade of one to two mile segments. This combined bidding is much better for Hoosier taxpayers and motorists, however. Kudos to the governor for looking out for them first.

Topics: Transportation
Cities: Indianapolis

5 Responses to “Creative Transportation Financing in Indiana”

  1. Bruce says:

    I don’t think this will be the last out of box and creative financing used by Governor Daniels to ensure his road projects are completed even after he leaves office.

  2. Danny Handelman says:

    Expanding roads and highways may alleviate congestion in the short-term, but in the long-term, it will result in increased congestion, as due to induced demand, the previous level of congestion will return, while the unmodified road and highway infrastructure is accepting a greater number of vehicles. It also increases the operational and maintenance costs, and undermines the more efficient means of transportation (walking, cycling, rail and public transit). For the above reasons, in addition to the air and noise pollution, sedentary lifestyle, collisions of automobiles, roads and highways have a negative rate of return on the investment (i.e., benefits are outweighed by costs).

  3. Rod Stevens says:

    When I go to “buy” an Amtrak ticket on line, I have to be very careful to type in the station name correctly, even though there’s essentially only one “Seattle” that trains leave from. The website doesn’t come close to comparing with Southwest Airline’s in terms of ease of use. Then, when I get to the station, I have to stand in line at a machine to print it out, and then in another line to get a seat assignment.

    For many public services, there seems to be an internal propensity to replace rather than improve. The “replace” mentality says to plan and build an expensive light rail system when BRT might work. Or to simply wait and do nothing when a few ticket machines (that take Visa!) might save the driver from doing this function.

    The Japanese call this “kaizen”, or continuous improvement. It’s an attitude that seems lacking in so many public services. It’s lacking in many private companies too, but they tend not to survive or have monopoly status.

  4. Wad says:

    @Rod, the attitude doesn’t seem lacking in public service, it is lacking and deliberately, too.

    It’s not mendacity, but it’s all the workers and the institutions themselves that have become captives of their working conventions.

    The last time government services underwent a major reform was the Progressive Era, and the driving force was to eliminate patronage-based employment to a professional civil service corps that was independent of politics. Then, reforms just stopped.

    A government worker is expected to be excellent at following processes and staying within guidelines. That means things like “kaizen” are undesirable character traits that need to be bred out like a dog’s.

  5. Nathanael says:

    This is pretty much a wasteful highway.

    Perhaps Indianapolis should try actually having some form of rail service to South Bend before deciding that they need more expressways. Oh no, they couldn’t possibly try that — they’re Hoosiers!

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