Roads are the Biggest Investment Opportunity in the World Today

How does a road get where it is? What does it cost? Who designs them? Who builds them? Who decides where they go? What are they made of? Can you explain the process? Why do we take for granted something we depend on so much?

Roads are something that every single person relies on every single day, yet the average person knows nothing about them.

A dense, interconnected amalgamation of roads is a defining characteristic of a city, and yet roads are not even a part of the Smart City conversation. Amazon is nothing if they can’t ship goods to your home. Uber is fundamentally dependent on roads. Every business depends on roads in some way, and roads underlie every other kind of system or network humanity builds.

Being a basic human need, roads are insanely valuable. In Missouri, where I live, roads cost $1 million per lane per mile to build. Roads have a life of 15–35 years (depending on many factors), and a total cost of ownership (TCO) of about $2.8 million. Missouri has a lower cost-of-living index, beating the national average $1.1m for building the road and $3.1m for the TCO. Roads aren’t a packaged good you can take off a shelf, so the costs vary wildly, but these averages are a place to start.

Looking at just the price tag doesn’t tell the whole story. That average road carries about 30k annual average daily traffic (AADT). If the TCO is $3.1m, with an average life of 25 years, carrying 30k AADT, that means the road costs about $0.01 per mile to use. I do not accept the idea that we can’t afford to keep roads in good condition with that kind of expense model, printer ink costs more per use yet we manage to afford printer ink.

If you trace the economy back far enough, three things underpin society: food, water, and transportation. We’ve spent a lot of time thinking about food and water in the last few decades. More recently we have spent a little time thinking about the devices that operate on the transportation infrastructure network. But we have spent little time thinking about the transportation infrastructure network itself, or what to do to fix it.

Wait… fix it? Who said there’s a problem with roads? Well, you probably did, earlier today while driving around. People complain about the quality of our roads all the time, but nobody really does anything about it. Go outside and take a look at the road in front of your home or business. How does it look? Is it in good shape? If so, you’re in the minority. Next time you’re driving around, take note of the condition of the roads you’re driving on. Potholes. Ruts. Giant cracks. Canal Street in New Orleans collapsed into a sinkhole, just hours after the Mayor was standing on the same spot. I could show you pictures of cars fallen into chasms and other giant sinkholes under the road for days on end and not begin to exhaust the material.

This isn’t just anecdata, the American Society of Civil Engineers publishes a report card on American infrastructure. Roads clocked in at a “D” in 2013, where they’ve sat since the mid-90s. Imagine if your child made a solid “D” average for their entire educational career — you may have serious doubts about that kid’s future. You should have the same doubts about the future of America’s economy if we don’t get our heads straight and invest in our second most important network (water distribution being first, roads may be prince but water is king). The American Society of Civil Engineers says that we need to spend $2.6 trillion by 2020 to fix our roads and bridges.

Forty-two percent of America’s major urban highways remain congested, costing the economy an estimated $101 billion in wasted time and fuel annually. While the conditions have improved in the near term, and Federal, state, and local capital investments increased to $91 billion annually, that level of investment is insufficient and still projected to result in a decline in conditions and performance in the long term. Currently, the Federal Highway Administration estimates that $170 billion in capital investment would be needed on an annual basis to significantly improve conditions and performance.

Nationwide, our transportation infrastructure authorities are seriously hamstrung. CalTrans says they need to spend about $60b on projects beyond their current budget. The Missouri Department of Transportation has seen its budget collapse from about $1.4b in 2007 to about $325m projected in 2017. “Pshaw, it’s Missouri, who cares?” You care, or you should. We’re not “flyover country”, we’re “food making country”. I-70 across Missouri is a major transportation and distribution link, and Kansas City at the west end is a major distribution hub. No matter where you live in the USA, at least some of your food comes from Missouri, or comes through Missouri. And yet I-70 across Missouri has languished — built in 1965 as the very first interstate in the Eisenhower system, but now 25 years past its rebuild life. I-70’s problems don’t reflect Missouri’s problems, I-70’s problems reflect America’s problems in a nutshell.

States have shifted to financing projects with tollways and public private partnerships (P3), to varying levels of success. Public private partnerships have two revenue options, an “availability payment” or tolls. Availability payments are payments from the DOT to the P3 concessionaire for making the asset available for traffic. This sounds nice, but it’s just a different way for the DOT to pay for the road, which means if the DOT doesn’t have any money, an availability payment won’t work, which leaves us with tolls.

The preeminent state to adopt tollways is Texas, which has made for very healthy budgets for TxDOT. However, recent legislation has threatened Texas’ widespread tollways, and estimates for the cost of removing tolls in Texas reach $38b. Back in Missouri, it’s actually illegal to charge a toll on an existing highway. The DOT can’t change that, only the Missouri Supreme Court or Missouri Legislature can, and neither have any reason to. There’s no private party to advocate for legalizing tolls either, because even if someone invested the funds in the attempt, there’d be no guarantee they’d win the public letting.

Even if tolls were the answer for interstates, what about cities? Cities can’t charge tolls, they have too many entry and exit points to control for, and monitoring ingress / egress wouldn’t generate revenue from internal travel. Congestion charges? Those work in congested areas, and the reality is most cities don’t have enough congestion to justify the cost of implementation.

Raising fuel taxes hasn’t got much traction either. They haven’t been raised nationwide since 1993, and the social equity of fuel taxes is very much in question. For one, poor people drive further for work, as they can’t afford to live as close to their employment as wealthier folk. Secondly, fuel expenditures make up a much larger percentage of a poor person’s expenditures than a wealthier person. Third, wealthier people tend to own newer vehicles that get better gas mileage, and finally, wealthier people can adopt alternative fuel vehicles that don’t experience fuel taxes. I’m not a fan of gas taxes, even removing the social equity issue, because the gas tax doesn’t vary with the fuel cost, advancements in fuel efficiency result in reduced tax revenues, and gas taxes don’t cover all types of vehicles.

What about Vehicle Miles Traveled (VMT)? Well, how comfortable are you with a state agency having a GPS monitoring device in your vehicle? Even if we shifted entirely to VMT, it’s not an enhancement to existing revenues, it’s a replacement to existing revenues — at best, VMT will generate exactly as much as current fuel taxes. That’s Oregon’s model, at least. I’ve yet to see someone at the state level seriously advocating VMT as revenue enhancement.

We can’t look to the USDOT for funding, as simple an answer as that might sound. The USDOT has presided over this slow motion catastrophe. I truly believe that the USDOT has done their absolute best possible job in funding our transportation infrastructure network, and yet here we are despite their best efforts. Until Dec 2015, we had 38 back-to-back temporary highway funding authorizations, the last long-term transportation bill was 1997. A lot has happened since 1997, as you may have noticed.

The USDOT is dependent on Congress to pass transportation funding authorization. How likely is it that Congress will provide an additional $80b in annual funding? The absolute best that would do is stop increasing the funding gap for a year or two, until the funding authorization expires, which is no actual solution, and besides, where’s the other couple trillion coming from? How likely is it that Congress will pass an “interstate bailout” for the $2.6t backlog? I think we can agree that calling it “unlikely” is putting a positive spin on it.

Moving beyond the state of roads today, what about the state of roads tomorrow? As I said earlier, we’ve spent some time recently thinking about the devices that operate on the road network — the vehicles. Whether it’s Uber, Lyft, and other Transportation Network Companies using today’s vehicles in innovative ways, or whether it’s Google, Mercedes, Ford, Apple, and everyone and their cousin developing autonomous cars, the device is receiving 99% of the attention when it comes to talking about the future of transportation.

The remaining 1% of attention reserved for thinking about the transportation infrastructure network basically comes down to, “we really need better lane markings in California.” Is that seriously the best we can do, Elon, better lane markings? Kind of a low bar, isn’t it? But if we can’t afford to maintain our roads in general, isn’t the paint that goes on top an afterthought? Then we have Volvo’s perspective, “let’s stick some magnets in there”. We’ll mark that down as “a good start”. However, neither of those even begin to address the fundamental problems in transportation infrastructure networks in the US.

The USDOT under Secretary Foxx is really trying their level best. They got the first long-term transportation bill in nearly 20 years, kudos. They established the Build America Transportation Innovation Center (BATIC) to act as ombudsman for the dizzying array of USDOT & FHWA programs and grant opportunities. (A magician’s rabbit is easier to find than the right Federal grant to apply for, so BATIC is well warranted.) They put together a $40m grant challenge for Smart Cities — again, kudos. But the reality is, these things are a drop in the bucket compared to the massive, almost unimaginably large, issue that confronts America's transportation infrastructure.

This brings us back to our core thesis, that despite all these issues, roads are the biggest opportunity in the world. Let’s review some data points:

• Literally everyone uses roads (and this time literally means literally)
• Society is fundamentally, and inextricably, dependent on roads
• An average road has 30k AADT
• Roads are very expensive in a TCO model, at $3.1m per lane per mile
• Roads are very inexpensive in a use-model, at a penny per use
• The road network in the USA represents 4m to 9m miles of roadway (depends on how you count)
• 40% — 60% of the road network needs rebuilt NOW
• 20% of roads get some kind of service annually
• The current market spend is $91b annually, Fed & State
• The current latent demand is $170b annually
• The aggregate latent demand is $2.6t

This is one of the biggest markets in the nation, and there’s not a single Silicon Valley investment in this space, tackling this market. Not one. I can’t decide which is crazier, the awful state of roadways, or the complete neglect that risk capital is paying to the largest opportunity on Earth. This issue is almost completely invisible to investors, and I think I know why.