Infrastructure Issues and Economic Development

free essayThe connection between infrastructure and economic development should be studied at a local level as infrastructure investment decisions are predominantly approved locally. Local economic development and activity are stimulated by community groups that divide their resources and conduct partnership arrangements with the private sector and with each other.

A valuable challenge is support of the creation of new workplaces that rule local income, taxes, and general wealth of people, which means economical increase. It is a complex process that can be successful with involvement of modern technologies and improvement of the worker’s skills. Rives and Heaney (1995) define two kinds of infrastructure: point infrastructure and network infrastructure (p. 60). The point infrastructure is defined by public buildings, water systems, and local roads. It contains core amenities of the defined community that conducts main processes of economic and social systems within this place. Contrary to the point infrastructure, the network type is not necessarily located in a particular community. It covers the work of canals, highways, and railroads and includes systems that are designed for facilitation of linkages between different economic units within a defined territory.

Analysis of the connection between private economic representatives and the infrastructure prompts a conclusion that is similar to the one offered by the majority of scientists: public capital is a beneficial input into private companies and their production. According to Rives and Heaney (1995), formation of public investment precedes formation of private investment (p. 60). Some important decisions about co-operation are formulated in the “Governing for Growth” state program. This program may be a map for economic growth for the next decade. While the private sector will establish a proper economic infrastructure, the government will put more efforts into the development of social establishments within community’s educational and social spheres. An agreeable opinion has been given by Department of State Development, Infrastructure and Planning in (2013) the “Governing for Growth” strategy that “will recognize that the private sector is the main driver of economic growth” (p. 3).

Another important issue is the price of infrastructure as even small inefficiencies can make multimillion losses. Selection of projects and partners must be conducted with participation and approval of the government. Economic infrastructure allows implementation of the proper functioning of the most important business supply and vehicle chains (power and water infrastructure and freight corridors: rail, ports, airports, and roads). Nowadays, economic infrastructure is financed, managed, planned, and prioritized, but reforms are continuing.

A lot of states have faced serious challenges and a pressing need with respect to reformation of some governmental strategies, as well as focusing on infrastructure projects that can improve productivity, reduce unemployment, and increase quality and quantity of business services in the long run. In addition, support of the most progressive projects can open new markets abroad due to increased demand for some services, products, and resources (base metals, niche manufacturing, gas and uranium, aviation and avionics, defense weapon, coal, and agribusiness).

Detailed study of infrastructure projects support and management has provided a logic solution within a global practice, which consists in creation of independent submitting agencies that evaluate individual projects and consult the government, investors, and operators about the audit, forecasts, and needs of the community (Henckel & McKibbin, 2010, p. 8). There is no unique and perfect system, but for now there are two possible tools of management. The computable general equilibrium (CGE) evaluates large projects (and linkages between economical sectors) and the cost-benefit analysis is more flexible and is used both for large and small projects (the local level). At the same time, co-use of both systems is good for defining social, ecological, financial, and timing peculiarities.

A large expense of the infrastructure and high demands of the population influence formulation of three basic tools used to decrease negative challenges. The first one is low monopolization and bureaucracy. High prices do not guarantee good quality. The second issue is the rate-of-return regulation of companies. Finally, reformed competition conditions of the market can bring new investments in the infrastructure.

One of the priority issues is dedicated to price regulation, which can attract or discourage infrastructure investments. Henckel and McKibbin (2010) mention two types of the price regulation: the cost-of-service (COS) and the price-cap (PC) (p. 9). The main aim of both is an effective regulatory policy that takes into account the moral hazard and the increase of the capital result cost. Besides, the government’s intervention and the companies’ price must be regulated by the rational cost with the perspective for further common profit. The regulatory stability can reduce uncertainty in the business investment decisions and expand their areas. The problem lies in the informational misbalance because the government cannot get clear information about demands and cost conditions. That is why, the government must be more involved in the process of effective dialogue and solutions.

There are four economic development indicators that concern the infrastructure level. They are: percent of the labor force employed (EMPLOY), population change (POPCG), assessed valuation per capita (VALUE), and median household income (INCOME). The most socialized criteria, the VALUE, indicates the level of the citizens’ wealth and satisfaction. An appropriate condition of the local economy is measured by the property values. For example, if a community has conditions for ample expansion of industry and employment, then businesspeople will bid up the land price for taking personal advantages. However, in case such opportunities are not present or not effective enough, prices will be decreased because of a lower market demand. The formula of the economy development (DEVELOP) includes summarized index of the EMPLOY, INCOME, VALUE, and POPCG.

The level of physical infrastructure within the community can be monitored by the next measurements: the number of highways (USHWY), low highways (LAWHY), water plant capacity (WATER), and average sewer capacity (SEWER) (the last two indexes are measured by thousands of gallons per day). The sum of these results offers necessary conclusions about INFAS and show a misbalance. Additionally, other two indicators should be included as well: the ability of people to use network infrastructure services (distance to the interstate or DSINT) and proximity of the community to larger markets (distance to the nearest regional center or DSCITY). For now, these methods are rather experimental and not compulsory in every country.

Location of the community is an important factor for planning of main infrastructure components and it can define local economic conditions in the future. Central or close to big megalopolis communities have a more intensive trade regime, which is why marginal places should have good transportation services to attract businesses or tourists when the place has a beautiful landscape (agglomeration or mountain highways, ferry, etc.). The coefficient of the business interest in small communities is low and a good plan must include climate and distance peculiarities and define the proper amount of the physical infrastructure with a high level of safety. A good image must be supported with trade points of the national and international transportation (it means that a clean ecological system and various services (especially hotel and restaurant businesses) will represent the largest part of the budget income, which requires more investments).

Besides cooperation with the government, an important role is played by political standards and interests. From this perspective, an objective decision would consist in division of choices of the government (investment issues of what to fund should not be united with financing decisions of how to fund). Moreover, it would be interesting to implement a reform of the possible lifecycle system, which would consist of delivering, operating, maintaining, and recycling. The general model of the infrastructure development could contain the following components.

The state infrastructure plan (hypothetically, for the decade) would consist of the assessment of project priorities and financial capacity. This could comprise a total asset management report and be supported by the GOCs, government departments, and local authorities. The total activity could be provided in the maintenance programs, business cases (feasibility study), and review of future service needs. In addition, some green infrastructure projects must be funded for the following 20-25 years because growth of the population demands growth of services and energy savings. The ecology defense can be made cheaper and less risky. An example can be the program of Japan where communities with the support of the government have gotten investments into highly technological projects after the catastrophe in Fukushima. Nowadays, the focus is on total moderation and creation of more comfortable sizes. Indeed, an interesting idea is to make 2-3 floors of highways or railways (it is already within some projects) and cover less green area.

Linkages between the state policy, local infrastructure, and economic development are close and depend on peculiarities of every community. The purpose of all efforts directed at improvement of the infrastructure is to create perfect conditions to the people’s and business benefit. Thus, this process cannot be constant and unchangeable as local demands, conditions, and global tendencies always change. That is why, there must be fewer omissions in the point and network infrastructure projects for involving the private sector and attracting new investments.