Infrastructure (Encyclopedia of Business)
Infrastructure refers to a wide variety of systems in place to support the prevailing industrial society, in both the public and private sectors. The public infrastructure encompasses a number of basic structures and services, including wastewater systems, power plants, dams, housing, and education. It includes the basic transportation system of mass transit, railroads, aviation (airports and air traffic control systems), highways, roads, and bridges. In addition, communication systems, computer networks, and information superhighways are also included in the definition of infrastructure. Similarly, corporations have their own physical infrastructures of basic structures and systems that support the firm's ongoing business activities.
In the United States, about 85 to 90 percent of public infrastructure activity is accounted for by state and local governments. To build, oversee, and maintain the full range of public works, state and local governments provide fiscal, governmental, and technological services. Additionally, these governments sometimes enter into arrangements with private companies to help them perform these tasks. State and local investments in the infrastructure can be divided into three groups: (1) the core infrastructure (water supply facilities, sewers, and utility and transit systems); (2) buildings (schools and hospitals); and (3) water resource projects (especially flood control).
The U.S. infrastructure is arguably the most extensive in the world and, after years of technological development and construction, has become a tangible asset improving the quality of life for the nation's population. Most facilities and structures comprising U.S. infrastructure were built as a series of separate and distinct projects by federal, state, and local agencies, as well as by independent authorities and private corporations. Because many of the investments were made in earlier decades and because there was little coordination between the agencies involved, the U.S. infrastructure is aging, inefficient, and inadequate.
From 1929 to 1969 investment in public infrastructure increased consistently. This increase can be attributed to rapid growth in the overall gross national product (GNP) as well as an increase in the percentage of GNP spent on infrastructure investments. The reason that a great deal of attention was given to infrastructure needs can be attributed to the demographic demands of the day. For example, during the 1950s and 1960s, U.S. investment in its infrastructure rose sharply, in part to meet the increased educational demands of the baby boom generation. Initiatives such as the interstate highway system and the space program as well as later federal programs that invested in education for the poor also accounted for consistent increases in infrastructure spending.
Since the 1970s there has been a drastic decline in funding that supports the infrastructure of the United States, as well as in funding for other countries' infrastructures. In constant dollars, federal grants that support state and local efforts have remained stable, representing a decline in the real amount of federal funding. Real federal spending peaked in 1980 with increased funding for mass transit, rail, wastewater treatment, and various educational and training programs. The decline in federal infrastructure funding continued during the 1980s as most of the wealth of the United States was devoted to consumption rather than to the enhancement of the nation's infrastructure (or any other form of future investment). Thus, the current infrastructure has not kept pace with the growing population.
Some of this decline in spending was in response to budget pressures felt in all levels of government, but much of it can be attributed to an inattention to the importance of top-quality public amenities and to a shortsighted perspective about the value of investing in the future. This perspective began to change somewhat during the 1990s, a decade marked by the end of the Cold War. During this time, officials in the federal government started to discuss alternative ways to spend the funds formerly spent on the military, although these discussions were waylaid somewhat by the Persian Gulf conflict. There seemed to be a growing realization, however, that additional money should be devoted to repairing the existing infrastructure and adding to it.
The state of the nation's economy plays a large role in infrastructure needs. Obviously, a very direct impact on the economy are the federal, state, and local tax bases available to pay for the needed infrastructure investments. Changes in the pace and areas of economic growth, however, are also very importantritical to both the demand for and the ability to support infrastructure investments. Economic growth has numerous effects on the demand for a nation's infrastructure. First, in a fast-growing economy, infrastructures are placed under great use, deteriorate quickly, and require replacement frequently. In slower economies, the opposite is true. Second, as the economy changes, modifications must be made to capital outlays. For example, as the U.S. economy changes from reliance on manufacturing to reliance on high-tech industries, the mix of infrastructure needs changes. Ensuring that an infrastructure is in place to facilitate communications has become as important as planning for highways. Third, changes in the economy cause shifts in the population that, in turn, require modified infrastructure investments. Thus, in some areas of the country, rapidly growing economies and populations strain existing infrastructures; at the same time, areas of the country experiencing minimal growth may have situations of overcapacity.
DECLINING INVESTMENTS: THE REAL IMPACT
In 1960 U.S. federal public spending on infrastructure was 5 percent of gross domestic product (GDP); by the mid-1990s, this figure was down to 2.5 percent. But when state and local government funding of infrastructure and educational institutions, plus private funding of research and development (R&D), is added to federal spending, the total was fairly stable from 1970 to 1994 as a percentage of the U.S. GDP. During that period total spending on infrastructure and R&D remained around 10 percent of the GDP, according to a 1998 study by the Congressional Budget Office.
Similarly, the capital spending on the building of infrastructures worldwide has declined. The reasons behind this decline in spending can be attributed to numerous factors. First of all, many countries have experienced large budget deficits in recent years and thus do not have the extra capital to spend on their infrastructures. Second, tax revenues in many countries have been stagnant since the oil crisis of the 1970s. Third, many countries have increased their spending on welfare, using money usually spent on the public sector, and have underestimated the increasing burden that population growth and other societal changes place on existing infrastructures. The long delays in the planning and implementation of major projects is a fourth significant problem. Delays are caused by the increasingly complex nature of many of these major projects as well as by the increased scrutiny and opposition by environmental advocacy groups and landowners.
The decline in government spending, however, may not be as significant as it first seems. For instance, the prices associated with some aspects of major infrastructure projects have declined due to better technology. Furthermore, in some areas of the nation's infrastructure, new investments have been made by the private sector, especially in the areas of telecommunications and the generation and distribution of electric power. Indeed, in some places, there is actually overcapacity of substructure services.
As one may expect, however, the spending decline of the last two and one-half decades is not without negative consequences. In the 1990s there was almost a certainty that the increasing population combined with other events, such as globalization and regional economic integration, would increase worldwide demand for transportation, telecommunications, waste disposal, energy, and other elements associated with infrastructure over the years to come. For example, in the United States, the increased use of automobiles led to congestion on public highways that was projected to cause traffic delays of four billion vehicle hours by the year 2005. In the European Union (EU), similar traffic delays were projected as European borders continued to come down; in fact, travel between the EU countries was projected to grow about 130 percent by 2015. Similarly, studies projected that the use of the railroad system in Europe was likely to triple by 2005.
When finances are short, most infrastructure needs have to be met by the public sector. Governments all over the world are in debt, averaging 40 percent of GDP in countries belonging to the Organisation for Economic Co-operation and Development. Although budget deficits were projected to decline in the latter part of the 1990s, there are other factors, such as the projected rising health costs associated with aging populations, that will require increased spending. Thus, governments in the United States and abroad are faced with the tasks of repairing existing infrastructures and building new ones to meet future needs, even though, economically, they will have a very difficult time meeting very basic needs.
OUTLOOK: THE STAGGERING BURDEN OF INFRASTRUCTURE INVESTMENT
The infrastructure investment necessary to meet projected demands is staggering. To meet the projected needs of the U.S. infrastructure until the year 2000, the U.S. Congressional Budget Office projected that it would cost taxpayers approximately $800 billion. And the United States was not alone in these cost projections. In Europe and Asia, countries face proportionately large costs.
According to Rebuild America, a coalition of organizations and agencies concerned about the U.S. infrastructure, the United States should increase its annual spending on the transportation system, including highways and mass transit, from $30 billion to $60 billion. Approximately $20 billion was spent on roads and bridges in 1997.
Wastewater infrastructure costs are expected to result in massive funding gaps at the local government level well into the 21st century. The Association of Metropolitan Sewerage Agencies and the Water Environment Federation projected that it would cost $330 billion over 20 years in wastewater treatment plants and collection systems to maintain water quality standards.
In 1998 the Rebuild America Coalition estimated U.S. infrastructure costs to be $850 billion to maintain and improve roads, bridges, transit systems, airports, ports, schools, water works, sewers, dams, solid waste disposal, and more. That included $358 billion to improve roads, highways, and bridges; $72 billion to improve mass transit systems; $33 billion to $60 billion to expand and modernize airports; $112 billion to bring school facilities up to good condition; $138 billion to improve the drinking water infrastructure; and $140 billion to improve wastewater systems.
updated by David P. Bianco]
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Gould, James P., and Andrew C. Lemer. Toward Infrastructure Improvement. Washington: National Academy Press, 1994.
Magid, Larry. The Economic Importance of Transportation Infrastructure Investment. Washington: National Governors' Association, 1997.
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. "Nationwide Poll Shows Strong Support for Infrastructure Investment." Rebuild America Coalition press release, 27 January 1999. Available from www.rebuildamerica.org/reports/jan27-99.htm.
. "Unless We Act Now Wastewater Infrastructure Costs Will Swamp America's Communities." Rebuild America Coalition press release, 31 March 1999. Available from .
Stein, Jay M., ed. Public Infrastructure Planning and Management. Thousand Oaks, CA: Sage Publications, 1988.