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Infrastructure, the Supply Chain, and Economic Growth

Posted on the 04 February 2013 by Stephendeangelis @EnterraCEO

"Deficiency in transport and communications infrastructure is one of several supply chain barriers that act as obstacles for speeding up global economic growth." At least that is one of the conclusions of a report released by the World Economic Forum (WEF) at last month's meeting in Davos, Switzerland. ["Lack of Transport Infrastructure – Obstacle to Economic Growth (Switzerland)," Dredging Today, 24 January 2013] The report, which is entitled "Enabling Trade: Valuing Growth Opportunities," was prepared by the WEF "in collaboration with the World Bank, and Bain & Company, a Boston-based global management consulting firm."

To be frank, the report's assessment of the importance of infrastructure for a growing economy only confirms what supply chain professionals around the world have been saying for some time. Pundits in the U.S. normally make that point while lamenting the sad state of America's infrastructure. A year ago the editorial staff at SupplyChainBrain asked, "Can the impact of poor US logistics and other infrastructure be quantified?" ["Economic Impact of Poor Infrastructure," 18 January 2012] They call this "the multi-trillion question." To answer this question, the staff turned to the American Society of Civil Engineers (ASCE), which issues a quadrennial "report grading US infrastructure across a number of areas." Last January the staff noted that the ASCE was on tap to issue a new report this year (which it has done -- more on that below); but, "as a prelude to that [report], ... the ASCE ... developed a series of smaller reports under the headline of 'Failure to Act.' The latest one focused on the economic impact of US infrastructure problems, some of which is summarized in the infographic below."

Infrastructure_infographic

The infographic highlights the fact that there is an anticipated "$1.1 trillion gap in funding for infrastructure between what the ASCE believes is needed in investment against the projected funding levels on the current path through 2020." ASCE analysts believe that failure to close this gap "will have a number of dire economic consequences." Those consequences include: "a $3 trillion loss of GDP growth, average loss of $3000 in disposable income per family, etc." The conclusions of the most recent ASCE report (issued last month) are consistent with its earlier reports. "Increasing annual infrastructure spending in the U.S. by $157 billion over the next eight years would save $3.1 trillion in gross domestic product, $1.1 trillion in trade and 3.5 million jobs, according to [the] new report. Current U.S. policies will underfund surface transportation, aviation, waterways, the electrical grid and sewers by about $1.1 trillion through 2020." ["Road, Power Gaps May Cost U.S. GDP $3.1 Trillion, Group Says," by Jeff Plungis, Bloomberg, 15 January 2013]

At a press conference, Gregory E. DiLoreto, president of ASCE, stated, "Infrastructure is the lifeblood of our economy and provides the foundation for assuring a high quality of life for all Americans. If we don't invest now, all Americans will pay more in the long run." Plungis reports that the U.S. Chamber of Commerce agrees with both ASCE's assessment and conclusion. Janet Kavinoky, the Chamber's executive director for transportation and infrastructure, told Plungis, "Public and private investment and new, innovative strategies are needed to repair, rebuild and revitalize the nation’s transportation systems."

When most of us think about transportation infrastructure, what generally comes to mind are roads, bridges, railway systems, harbors & ports, and airfields. One transportation network that receives less attention involves America's coastal and inland waterways. Plungis reports that, due to last year's severe weather, the inland waterways are receiving more attention. He explains:

"Low Mississippi River water levels that have restricted barge traffic have put a spotlight on a fragile waterways system, said Rick Calhoun, president of Cargo Carriers, Minneapolis-based Cargill Inc.'s transportation subsidiary. About $2.8 billion of commodities was at risk when it looked like barge traffic was going to stop, according to American Waterways Operators, a trade group based in Arlington, Virginia. I fear the near closure of the river is simply a preview of what will happen when we have a catastrophic failure of a lock or dam' on the upper Mississippi, Calhoun said."

Transportation infrastructure is not the only infrastructure that plays a critical economic role. Utility and communication infrastructure must also be discussed. When Pacific Gas and Electric Company's CEO, Tony Earley, was asked to identify "the most serious issue facing the nation's giant utilities in the next 20 years," he stated that the answer to that question "was easy." The greatest challenge involves "the huge need for investment in basic infrastructure, from pipes and power lines to poles, transformers and more." ["Sandy highlights fragile infrastructure," San Francisco Chronicle, by Andrew S. Ross, 1 November 2012] In the aftermath of Superstorm Sandy, Edward Luce, wrote, "At some point in the next 12 months, we will discover whether the US has the will to bring its infrastructure into the 21st century." ["Washington must stop the creeping rust," Financial Times, 25 November 2012] He continues:

"The hope, as the Brookings Institution Metropolitan Center puts it, is that Congress will 'cut to invest' rather than doing so crudely across the board. There are three reasons to worry. First, there is remarkably little public outrage over the dilapidation in the power grid, public roads, domestic airports and waterways. This means that lawmakers will be feeling stronger pressures in other directions. ... Second, most Americans are unaware of how far behind the rest of the world their country has fallen. According to the World Economic Forum's competitiveness report, US infrastructure ranks below 20th in most of the nine categories, and below 30 for quality of air transport and electricity supply. The US gave birth to the internet – the kind of decentralised network that the US power grid desperately needs. Yet according to the OECD club of mostly rich nations, average US internet speeds are barely a 10th of those in countries such as South Korea and Germany. In an age where the global IT superhighway is no longer a slogan, this is no joke. The budding US entrepreneur can survive gridlocked traffic. But a slow internet can be crippling. Third, it may be asking too much of Washington in its present state of polarisation to give the green light to an ambitious infrastructure plan."

Luce reports that Asian countries are doing a much better job of upgrading their infrastructure than the United States. That's another reason that Asia is rising while America is falling on the global economic stage. Susan Crawford, a professor at the Benjamin N. Cardozo School of Law, notes that President Barack Obama gave a nod to infrastructure improvements during his second inaugural speech. "[He] said that during his second term, Americans would act together to 'build the roads and networks and research labs that will bring new jobs and businesses to our shores' and that 'we cannot cede to other nations the technology that will power new jobs and new industries — we must claim its promise.'" ["How to Get America Online," New York Times, 23 January 2013] She continues:

"The president is right that digital communication networks — especially high-capacity fiber networks reaching American homes and businesses — can be a powerful economic engine. But we are far away from being able to realize that vision, even as we cede the advantage such technology offers to other countries."

Crawford asserts that everyone seems to recognize the importance of highspeed communications networks but the leadership required to actually bring them about is lacking. She underscores the fact that America needs "the leadership necessary to enact pro-growth, pro-innovation and competition-enabling rules." She claims that "a few powerful companies" have strong economic reasons to maintain the status quo and that they have bullied policymakers into seeing things their way. As a result, she claims it is not surprising that "America lags behind almost every other industrialized country in high-speed access — even France, the bête noir of American free-marketeers, has better and cheaper Internet access." She offers a few recommendations that she believes will help get America better connected.

"First, it must remove barriers to investment in local fiber networks. Republican and Democratic mayors around the country are rightly jealous of the new, Google-built fiber network in Kansas City, Mo., which is luring start-ups from across the country. And yet in nearly 20 states, laws sponsored by incumbent network operators have raised barriers for cities wanting to foster competitive networks. ... Second, the F.C.C. must make reasonably priced high-speed access available to everyone. In the 20th century, we made a commitment to provide universal telephone service to every American and to subsidize that utility service for our poor and rural neighbors. High-speed Internet access is now undisputedly the dominant communications technology of our era. We need to make sure that subsidies are available for competitive companies willing to extend world-class service to more Americans. ... Finally, the F.C.C. must foster more competition by changing the rules that keep the status quo in place. "

She concludes, "With a truly pro-competition agenda at the F.C.C., we could discover great reservoirs of increased productivity and new forms of making a living. ... It unleashes human ingenuity." Unfortunately, Washington remains a quagmire of political party bickering and posturing. As a result, there is not much good news on the horizon concerning America's infrastructure. The only bright spot is the railway sector (see my post entitled U.S. Railroads on the Move) because the railroads have self-invested in their infrastructure. Until the average American gets excited about the topic, politicians aren't going to tackle this enormous challenge.


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