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Infrastructure Lessons for Economic Growth and Business Success

The quality of a state's/community's infrastructure has a profound effect on its ability to attract development and the success of companies that choose to locate there.

Summer 2012
Infrastructure is an important variable for judging a county's, region's, or state's development. Formally defined, infrastructure is "the basic physical and organizational structures needed for the operation of society or enterprise or the services and facilities necessary for an economy to function." It can generally be defined as the set of interconnected structural elements that provide framework supporting an entire structure of development.

A sound infrastructure plays a vital role in encouraging a more productive and competitive national economy. When problems exist with the performance of infrastructure, the effects can be widespread. It is estimated that traffic congestion in the nation's 50 most populous areas costs over $7 billion a year in wasted time and fuel, yet infrastructure spending has declined to 2.4 percent of GDP in 2011, as compared to 3.1 percent in the early 1960s.

Given this continued reduction in infrastructure spending, the United States is now faced with critical issues relating to aging infrastructure. Many experts have weighed in on how best to solve the nation's infrastructure crisis, including the Urban Land Institute, which developed Infrastructure 2011, A Strategic Priority, offering a number of recommendations to help the nation get out of its infrastructure decline:

  • Prioritize repairs and maintenance over big-ticket (more exciting) capital projects.

  • Develop a national strategy and prioritize investments that make sense from a national standpoint.

  • Remember to think urban, understanding that the United States is increasingly a metropolitan country and, therefore, that is where the bulk of infrastructure investment should be focused.

  • Ensure long-term public funding which, in turn, will peak further private investment interest.

  • Develop new funding models including user fees for people actually using infrastructure systems and local taxes.

  • Plan ahead for maintenance - meaning that all new projects should include not only the cost to construct, but also costs associated with ongoing maintenance of the asset.

Infrastructure and Economic Development

The United States is the third-most-populous country globally. In the last 30 years, the population has increased by 58.6 million people to 311.6 million and is projected to increase to 392 million by the year 2050. High population growth creates pressure on infrastructure, particularly natural resources. Therefore, the states and regions that are highly focused on preserving, maintaining, and investing in infrastructure are those likely to prevail in sustaining positive economic development efforts.

This is because corporate clients seeking expansion, relocation, or consolidation generally place review of infrastructure assets at the top of the list of site selection priorities as potential sites are being evaluated. Whether the project being considered is an advanced manufacturing facility, logistics/distribution warehouse, a data center, life sciences campus, or a corporate headquarters, state, regional, and local infrastructure assets are fundamental to the decision-making process. When considering infrastructure, site selectors most often consider hard infrastructure assets such as:

  • Number and quality of the roadways

  • Airport capacity

  • Rail line connections

  • Availability and reliability of electricity, natural gas, and water and sewer utilities

However, it would be remiss not to mention that in addition to hard infrastructure considerations, companies today are taking a closer look at soft infrastructure strengths. These include educational assets, networking associations to support industry-specific goals, public-private partnerships, and the specific abilities of regions to maintain, grow, and invest in their infrastructure in order to ensure that the assets keep pace with a company's growth trajectory planning.

Economic volatility has amplified the importance of states'/regions' resilience and their abilities to adapt. Those that have positioned themselves as a focal point for economic activity must continue to think about how to maintain a competitive position and secure job creation and prosperity in an environment characterized by change. In essence, communities will need to become smarter in leveraging new technology and intelligence to optimize their natural, physical, human, and cultural infrastructure resources in order to ensure sustainable prosperity. The next step for those communities, then, is to effectively tell corporate real estate decision-makers how they plan on doing so.

Just as communities need to adjust and keep pace with economic volatility, so too must a company. Cost containment, reduction, adaptability, and resiliency have become the buzzwords pertaining not only to maneuverability through the economic downturn, but also to navigating through an economic turnaround. Part of this effort is to reduce costs and consolidate operations. This involves an overall level of investment and widening of the scope of a company's search to encompass more cost-efficient locations.

In the United States, companies have many options of where to locate and invest. Therefore, states are becoming increasingly competitive for similar types of investment. Given this fact, the performance of states and communities, as it relates to infrastructure, is critical to their future success. Growing pressure on America's aging infrastructure, coupled with a steady decrease in public funding, fuels the critical challenge of keeping pace with competing communities.

State Perspective on Keeping Pace
Indiana has done it, so have Virginia and Illinois.that is, opted for creative private solutions to shore up scant public funds and address the challenges of aging infrastructure.

Chesapeake, Virginia, faced the dilemma of closing and tearing down an 80-year-old bridge in terrible condition that would have cost the state millions to repair. Instead, the community sold the bridge for $10 to American Bridge Partners, which agreed to remove the old bridge and build a new one with private dollars. Tolls of $2.00 replaced those of $0.75, which will pay back the private investment of $130 million. In Illinois, the state raised $1.8 billion by leasing its Skyway Bridge; and, in Indiana, $3.8 billion was raised by leasing the Indiana Toll Road to a private company.

In each of these instances, the goal was not to raise cash by selling or leasing public infrastructure, but rather to tap into private-sector money to re-invest in new roads, bridges, and tunnels. An additional benefit of the private-sector solution is that the improvements may be made more quickly and at a lower cost than what the government may be able to otherwise accomplish. Thirty-one states now have laws in place authorizing private investment in infrastructure, which may serve as a differentiator for a company choosing to invest in one particular state over another.

According to a list compiled by the law firm Allen & Overy in 2011, there are at least 70 privately funded and managed infrastructure projects across the United States in various stages of development. These projects are part of the vast network of roads, bridges, tunnels, subways, ports, airports, and water systems.

The number of projects in process is a testament to the fact that infrastructure investments in the United States are targeted by investors because they are considered to be stable investments producing steady and predictable income. There will always be the basic need for commuting and utilities and, therefore, a toll road, electric utility, or water utility will tend to deliver cash, regardless of what transpires in other financial markets.

Access to all modes of transportation is key to a business getting its products to market and keeping its people on the move. Infrastructure is paramount to these objectives. A 2011 CNBC special report on "America's Top States for Doing Business" measured the vitality of the states' transportation systems by the value of goods shipped by air, land, and water; availability of air travel; and quality of roads. According to these measurements, the top 10 states in the category of "Infrastructure and Transportation" are:

  • 1. Texas

  • 2. Georgia

  • 3. North Carolina

  • 4. Ohio

  • 5. Tennessee

  • 6. Illinois

  • 7. California

  • 8. Florida

  • 9. Missouri

  • 10. Arizona/Virginia/Michigan

Infrastructure Readiness
In addition to state infrastructure assets and strengths, corporate executives making site location decisions typically are doing so with speed-to-market as a prime consideration. Therefore, they may look to specific real estate sites that are infrastructure-ready to avoid time delays and increased project costs. Any delay in completing a project represents a loss of business revenue, therefore pre-certifying/permitting sites as "shovel ready" is a common-sense approach to attracting new business and industry. Most real estate decision-makers understand that site certification - which includes collection and authentication of infrastructure elements including utilities and transportation along with environmental site studies - will translate to a mitigation of project risk from both a timing and budget perspective.

Infrastructure readiness across industry sectors differs, and as a company reviews the infrastructure of potential sites, it should do so with an understanding of whether the site was readied with a particular industry focus in mind. For instance, regions that are known for low power costs may invest more heavily to ensure electricity redundancy is in place, understanding that reliability is fundamental to users that will be attracted to low power costs, e.g., data centers. To an industrial user, road and/or rail infrastructure will likely be the primary criteria for site selection in terms of access, quality, and ability to negotiate rail agreements with main or short line providers.

In addition to infrastructure issues driven by industry sectors, there are infrastructure issues that may vary by geographic region. For example, continued population growth in the Southwest and Mountain states may cause concern for businesses that rely heavily on limited natural resources such as water. While adequate infrastructure and/or capacity may exist today, the prudent corporate decision-maker will seek to understand what the availability outlook is 10 years from now, and what the long-term impact on operational costs will be. Will there be ample water and electricity to continue to support company growth and operations? Fundamental to understanding these questions is tapping into the local, regional, and state infrastructure planning and investment strategies because, as has been demonstrated at the national level, non-commitment of ongoing maintenance, planning, and investment may have a negative impact on business operations.

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