Infrastructure: Foundation for Development

by Fred D. Baldwin

About nine years ago, word reached the small community of Jasper, Tennessee, that a vinyl-siding manufacturer wanted to build a new plant just outside of town. The company, Variform, was ready to invest $3.9 million in the plant and hire 60 new workers. And it expected to expand in the future.

That news would have been welcome in any small Appalachian town hurting, as Jasper was, from job cuts in the coal and lumber industries. But Jasper could easily have lost those new jobs. The problem? There wasn't enough water for fire protection for the Variform plant.

"We could supply our residential needs," explains James Carter, Jasper's superintendent of public works. "But for industrial use, we just couldn't make it."

Fortunately, with help from various sources, including the Appalachian Regional Commission (ARC), Jasper was able to boost its water supply with a new 750,000-gallon storage tank. In 1993, Variform opened its new plant, which now employs 240 workers. Since then other plants have moved into the area, creating even more jobs.

Similar stories can be found across the Appalachian Region, according to a recent study of ARC-supported infrastructure projects. Sponsored by ARC and performed by a team from two firms—the Brandow Company in Camp Hill, Pennsylvania, and the Economic Development Research Group in Boston—the study concludes that relatively modest public investments in basic infrastructure leverage private investments at an impressive rate and help create jobs at bargain prices.

Foundation for the Future

Infrastructure can be hard to define, but you know it when you don't see it—that is, you may not notice its presence, but you can't help noticing its absence or inadequacy. A gush of clean water at the turn of a tap seems no big deal; a sluggish, rusty dribble is annoying—and a deterrent to a company thinking about locating in that community. When a plant is active and productive, who notices a freshly paved access road leading to its loading docks? But who fails to reflect that a bumpy, rutted access road warns of a business in trouble?

The fact is that infrastructure lays the foundation for economic development. It's not an end in itself, but the payoff from other investments often depends on it. Accordingly, the second of the five goals in the ARC strategic plan states: "Appalachian communities will have the physical infrastructure necessary for self-sustaining economic development and improved quality of life."

By far the most extensive ARC investment in Appalachia's infrastructure has been the regionwide Appalachian Development Highway System (ADHS). Infrastructure on a local scale, however, accounts for a substantial percentage of ARC's nonhighway grant money. These investments, many of them small, have helped communities install water and sewer lines, facilitate telecommunications use, and build access roads (primarily to industrial parks).

Can the results of these investments be measured? The infrastructure study attempted to do just that by analyzing job creation reported by the projects. Looking at ARC-supported infrastructure investments at 87 economic development projects around the Region, the analysts found that the investments had led to the direct creation of almost 23,400 jobs at project sites. They also found that almost as many jobs—20,954—were created indirectly at locations near the actual project sites. And another 16,387 jobs expected to be lost were reported saved by the ARC-funded projects.

The evaluators calculated the costs at $4,574 per job in total public funds (for directly created jobs) and, since ARC typically put up about 25 percent of the public dollars, only $1,222 per job in ARC funds. (Here, as elsewhere, cost estimates are based on a statistical adjustment that avoids double-counting.)

The study examined four kinds of economic development projects: access roads, industrial parks, business incubators, and water and sewer projects. The total sample consisted of 99 projects selected by ARC as generally representative of its infrastructure investments between 1990 and 1997. The final analysis focused on 87 projects designed to promote economic growth, excluding 12 water and sewer projects primarily serving residential users.

The projects covered all states of the Appalachian Region and counties in three of the four designations used by ARC to categorize counties' economic standing relative to national averages: distressed, transitional, and competitive. (Counties in the fourth category, attainment, were not represented.) The sample reflected a metropolitan/non-metropolitan county mix almost identical to that of the Region and included both small and large investments.

The evaluators based their conclusion on analysis of quantitative data and on interviews with local representatives at each site. Here are some of their findings.

Access Roads

Access roads may be the least glamorous class of infrastructure investment, but evaluators found that costs for jobs created by access road projects, measured in total public dollars, were relatively low. If the ADHS highways are the transportation arteries that bring traffic through underdeveloped areas, access roads are the capillaries necessary for the health and growth of communities along the highways.

Typically the roads supported by ARC and other public agencies provide access to industrial parks, rather than to single firms. The infrastructure study described a number of successful projects, including:

• An access road to an industrial park in Clermont County, Ohio, that led to other investments that created 300 jobs and retained 820 jobs at a cost of $1,408 per job.
• An access road in Lee County, Mississippi, that contributed to the creation of 600 jobs at an industrial park at a cost of $1,512 per job.

Industrial Parks

Industrial parks are a multifaceted form of infrastructure, providing as they do the sites on which many different kinds of businesses develop. ARC funds have been used for utility services, paving, construction of new buildings, and rehabilitation of old ones.

The evaluators found that the industrial parks in their sample had somewhat higher costs per new job than other kinds of investments, possibly because industrial parks typically involve several different kinds of infrastructure investment. In addition, several projects in the study sample were recently completed, so all impacts might not have materialized at the time of the study. Measured by private funds leveraged, however, this category suggested the most cost-effective use of ARC funds and the second-most cost-effective use of total public funds.

Most industrial park projects in the study produced results exceeding expectations. For example,

• In Lumpkin County, Georgia, an industrial park led to the creation of 600 new jobs, eight times the 75 jobs initially projected by project sponsors.
• An industrial park in Mercer County, West Virginia, has produced 220 jobs to date, exceeding projections by almost 50 percent.

Business Incubators

Business incubators are a more specialized form of infrastructure than industrial parks. They provide walls, utilities, network connections, and other services for fledgling firms that, after testing their wings, move to other facilities within a few years. Two of the incubators studied—the Hagerstown, Maryland, Technical Innovation Center and the Birmingham, Alabama, Entrepreneurial Center—specialize in providing technology-intensive support for firms.

Overall, evaluators found that business incubators were standouts in terms of exceeding initial projections for job creation. The projects in the sample created almost five new jobs for every one that their sponsors initially predicted. This suggests how hard it is to project the success of new enterprises. In other respects—cost per new job, for example—the incubator projects' scores were similar to the average for all categories.

ARC supported 25 percent of the public cost of the projects studied. Two examples suggest their potential:

• In Cortland, New York, an incubator has launched eight successful businesses that provide a total of 260 jobs.
• In Erie County, Pennsylvania, the Uniflow incubator, which focuses on workforce development, reported only 40 jobs created on-site but indicated that over 150 workers had been trained.

Water and Sewer Projects

Like roads, water and sewer projects are prototypical infrastructure investments. Grants for these kinds of projects were the most common type of ARC infrastructure investment during the period the evaluators studied. Thirty-nine nonresidential water and sewer projects were included in the study and were found to have the lowest cost per new job created of all the categories, both in ARC dollars and in total public dollars.

Total public funds spent on this class of project also leveraged the highest average private investment of any category, even after excluding from the analysis one exceptionally large sewer project. (That project's impact would have made already high averages appear misleadingly high.)

Even the more typical smaller projects led to many of the kinds of impacts already described for Marion County, Tennessee. For example,

• In Winston County, Alabama, three furniture makers were limited in their ability to expand because an inadequate water system limited their access to fire insurance. Improvements to the water system enabled these firms to grow from 175 to 600 employees.
• In Winston County, Mississippi, a manufacturer of white industrial gloves had planned to relocate because old iron pipes were bleeding rust into the local water supply, discoloring the company's product. Upgrading the water system resulted in a total of 70 jobs retained or added.

Good Neighbors

As impressive as the evaluators' snapshots are, they may have captured only some of the benefits of infrastructure investments, judging by a closer look at Jasper, Tennessee's water project.

"We were a county in a lot of trouble," says Howell Moss, Marion County executive. "This used to be a coal-mining community. We had the logging business and an agriculture community. [By the 1990s] most of those industries were going away."

In response to the prospect of attracting Variform's plant, town and county leaders, helped by the Southeast Tennessee Development District (a local economic development organization), put together a funding package sufficient to build a 500,000-gallon tank on a hill overlooking the proposed plant site, about a mile to the south of Jasper. The tank would be made of pre-stressed concrete.

A half-million gallons of water weighs well over 2,000 tons, and then there's the weight of the concrete that holds it. Much of the cost of any simple structure designed to support that kind of weight goes into its foundation. Aware of this, project developers calculated that adding extra capacity to the tank itself might add only modestly to the total project cost. So they asked for bids at two capacity levels: 500,000 gallons and 750,000 gallons.

Their calculations proved right. The low bidder came in at $238,000 for the 500,000-gallon tank and $37,000 for the tank expansion—a 50 percent increase in capacity for a 15 percent increase in price.

It looked like a bargain, but there was no extra money in the budget, and Jasper's resources were stretched thin. However, the town of Kimball, located a few miles to the south, had an appreciable amount of land near Interstate 24 that could be used as an industrial site if water were available. Jasper officials approached their Kimball counterparts, who quickly agreed to put up the extra $37,000 in return for access to the water in the new tank.

"Rock-Tenn [a manufacturer of packaging and paperboard products] wanted to build on the Kimball site," says Jere N. Davis, Kimball's mayor, "but I'd been told there wouldn't be enough water. Jasper, they're good neighbors to us. It [the tank] enabled us to get that plant."

The tank, 50 feet in diameter and almost that high, now sits on a hill on the edge of the two towns. The expected development has materialized, and more. In addition to the Variform plant, with its 240 workers, the Rock-Tenn plant employs 196.Another firm, Tennessee Galvanizing, had begun to move to the area even before the tank was built, banking on a commitment that adequate water would become available. It now employs 60 workers.

Other firms have since either moved into the area or are in the process of doing so. They include Orion Food Systems, a food packager and distributor, with 25 employees; and O'Neil Color and Compounding, a manufacturer of color concentrates, with 68 employees. According to Marion County officials, Valmont Industries, which makes metal utility structures and irrigation equipment, plans to open a $10 million facility in October of this year. It's expected to employ 150 workers at start-up. Grandview Medical Center, a 50-bed hospital employing 275 people, is also connected to the same water line.

"We couldn't have gotten any of those places without that tank," says Bobby Brad Carter, who served as Marion County trustee for 36 years and now is director of its chamber of commerce. "You've got to have sewer, water, gas, or electricity, or [firms evaluating the area] don't even waste the time of day with you."

Moss, the county executive, agrees: "Every bit of it goes back to the infrastructure," he says. "Without the water you don't get anything."

Michael E. McGuire, ARC state alternate for Tennessee Governor Don Sundquist, says that the Jasper water project illustrates two points on the value of infrastructure.

First, without infrastructure, other assets (a good location, a willing workforce, proximity to markets) are likely to remain underexploited or perhaps be lost altogether. By the same token, once you have infrastructure in place, you can capitalize on unexpected opportunities.

Second, the benefits of infrastructure typically go beyond the first few users. The "Variform tank" in fact serves a large number of firms (and some residences as well).

"In the Appalachian counties of our state," says McGuire, "as is true across the whole Region, we have many communities that still lack adequate water and sewer systems, access roads to potential industrial parks, and other basic facilities. Although different communities will have different needs at various times, these things are fundamental. They're the most logical point for public investments because they bring so much private investment in later."

Gene L. MacDonald, who for three decades served as president of the Ohio Mid-Eastern Governments Association (a local development district), agrees with McGuire and also urges taking the long look.

"It's like when you plant an oak tree," MacDonald says. "You may not see its maturity. It'll grow for maybe 50 or 70 years. You put things in the ground, and other things begin to happen."

Fred D. Baldwin is a freelance writer based in Carlisle, Pennsylvania.