Back to Basics: Investing in and Improving Appalachia’s Infrastructure

by Fred D. Baldwin

"Sometimes we need to go back to the basics—the vision of the ARC founding fathers," West Virginia Governor Joe Manchin III told attendees at the Appalachian Regional Commission (ARC) conference "Back to Basics: Investing in and Improving Appalachia's Infrastructure," held October 24–25, 2007, in Charleston, West Virginia. Building the "basics"—modern, reliable physical infrastructure for clean drinking water and wastewater management, as well as telecommunications services—was the theme of the conference, which drew approximately 300 attendees from all 13 Appalachian states. After a welcome and introduction by Charleston Mayor Danny Jones, Manchin exhorted his audience to focus on producing a needed product, providing it at fair value, and maintaining a customer orientation. The governor emphasized the importance of renewing deteriorating infrastructure and budgeting for its long-term maintenance.

Anne B. Pope, ARC's federal co-chair, reinforced the back-to-basics message. "Physical infrastructure has to be our priority," she said. "There is little more basic to human life and economic development than water—clean, safe drinking water. As our economy expands, our water assets will only become more important."

After noting that water and wastewater treatment systems are the largest investments many communities make, Pope stressed the point that they have to be made as a precondition to expanding a local economy. "Having water, sewer, and telecommunications [services] does not guarantee economic development," she cautioned, "but not having those things almost guarantees that it won't happen."

Pope and Manchin, ARC's 2007 states' co-chair, made a joint announcement of the findings of an evaluation of ARC infrastructure investment projects conducted by the Economic Development Research Group in Boston, and the BizMiner/Brandow Company, based in Camp Hill, Pennsylvania. Based on analysis of a sample of 104 projects funded by ARC between 1999 and 2005, the investigators concluded that these projects created more than 17,600 new jobs and led to the retention of 9,580 existing jobs.

Among other study highlights: a net $1.3 billion expansion of annual personal income, representing a return of more than 9 to 1 on ARC investment dollars; $1.7 billion leveraged in the form of private investment, a 75:1 return on public dollars; and generation of about $44 million in tax revenues (income, sales, and property) to state and local governments.

The conference keynote speaker was Jeff Hughes, director of the Environmental Finance Center at the University of North Carolina at Chapel Hill, and a principal investigator on a recently completed study, Drinking Water and Wastewater Infrastructure in Appalachia: An Analysis of Capital Funding and Funding Gaps. After commenting on analysts' tendency to produce "big, scary numbers," he cited from his group's study a conservatively estimated $35–$40 billion price tag on meeting Appalachia's water and wastewater treatment needs.

Because of the fragmentation of public water/wastewater delivery systems in rural areas, Hughes pointed out, investments of this magnitude cannot be financed by small percentage rate increases—and homeowners cannot afford really large increases. "When I read a study," he said, "that says something like that would erase the [revenue] gap, I shake my head. That might be true as an average, but in some places you could double the rates and not have enough money. There are houses whose value is less than the cost of bringing in water."

To illustrate his point on fragmentation, Hughes displayed a map thickly covered with dots, each representing an independent water or water/sewer authority. Most such authorities, he explained, operate separately from each other. "Most of the innovation you read about in water finance," Hughes said, "involves pooling risks and resources together. A lot of the opportunities going forward will be in figuring out ways of working together."

Later, luncheon speaker Rodney Tart, president of the National Rural Water Association and director of public utilities in Harnett County, North Carolina, underscored Governor Manchin's emphasis on the importance of budgeting for maintenance and technical support. "There's a perfect storm brewing," he warned. "We've got an aging infrastructure, and our water associations have done an inadequate job of putting aside the money needed to do this." Warning that water is underpriced, he paraphrased a quote from Benjamin Franklin: "No one knows the value of water until the well goes dry."

Breakout Sessions

During conference breakout sessions, panelists focused on three infrastructure topics: water, wastewater, and broadband Internet access. The first two categories, which represent more than half of ARC's nonhighway funding investments, were integral elements in the ARC founders' vision for the Appalachian Region. The third has emerged as a twenty-first-century extension of the idea behind the Appalachian Development Highway System—ending the Region's isolation from the rest of the nation and the world. A sample of comments from the seven breakout sessions suggests the range of ideas offered.

The panel "The Economic Development Ripple Effect" opened with an explanation by Steven R. Landau, a director of strategic planning at the Economic Development Research Group, of methodological issues encountered during his firm's evaluation of ARC infrastructure projects. Landau called the study's estimates of benefits "conservative" because some of the projects evaluated had been in operation for little more than a year at the time of the evaluation. He also commented that although "quality of life" intangibles are crucial for sustainable, long-term growth, their value is almost impossible to quantify.

Ed Gardner Jr., executive director of the St. Clair County Economic Development Council in Pell City, Alabama, explained how one success often leads to another. For example, it may sometimes be possible to trade an asset like land for private-sector investments in infrastructure that will make adjacent areas more attractive to other new businesses. In one instance, the need to build a lagoon for temporary retention of wastewater led to the purchase of a parcel of land with enough additional acreage to attract an automotive supplier, resulting in 200 new jobs.

Jennifer Chandler, director of the Pike County Office of Community Development in Waverly, Ohio, drew a laugh with a photo of a backhoe mired axle-deep in mud. Her point: "It [developing water projects] can get pretty deep and a little overwhelming, but it is worth it." She offered tips on small nuts-and-bolts issues, such as getting property owners' easements for both water and sewer lines, even if current plans involve only water. "As soon as the faucet is turned on," Chandler said, "it'll generate a lot of wastewater."

Edward M. Silvetti, executive director of the Southern Alleghenies Planning and Development Commission in Altoona, Pennsylvania, made the case for setting the bar high in prioritizing projects. Silvetti pointed out that reliance on widely accepted quality standards reduces conflict and builds trust among partners. "It's nice," he said, "to see our board members supporting projects in adjacent counties ahead of projects in their own counties." As sources of useful standards, he cited the state's strategic plan and various Pennsylvania guidelines, such as the "Keystone Principles."

A session on "Ecoinfrastructure in Appalachia" outlined the benefits of adopting environmentally responsible practices when developing or upgrading water and sewer systems. For example, Becky Champion, assistant branch chief of the Watershed Protection Branch of the George Environmental Protection Division in Atlanta, described a Georgia water plan scheduled to be submitted to the legislature in January 2008. "We want to do as much planning as we can on a watershed basis," she said. "We need to assess the carrying capacity of our streams. We don't have any idea how much water we can take out without destroying their ecological structure."

Champion added that the lion's share of water quality protection dollars are spent on reducing pollution from point sources (e.g., the end of factories' wastewater pipes) that account for only 13 percent of water pollution in Georgia. The remaining 87 percent comes from non-point sources—mainly run-off from streets, other paved surfaces, and farms. Non-point sources are notoriously difficult to regulate, so pollution abatement depends on aggressive and continuing public education campaigns.

The panel "Financing Municipal Infrastructure in Appalachia" drew a substantial crowd. Panelists explained financing options ranging from grants and low-cost loans to borrowing at higher, market-based interest rates.

Katy Mallory, project finance manager for Steptoe and Johnson, a Charleston, West Virginia, consulting firm, discussed the advantages of re-financing old debt to take advantage of favorable interest rates. Pointing out that time is money, Mallory emphasized the importance of getting early commitments from potential customers in order to qualify for banks' bridge financing, which enables projects to begin during the waiting period for clearance of long-term loans.

Steve Gustafson, vice president and manager of the Water and Wastewater Division of CoBank, in Greenwood Village, Colorado, introduced the audience to CoBank, which was formed by Congress in 1989 to finance infrastructure projects in rural areas. CoBank is a cooperative owned by its U.S. borrowers. The 83 water and wastewater loans in its portfolio range in size from $1 million to $215 million. Most are 20-to-25-year loans, typically at 1.5–2 percent above municipal rates.

Dana A. Yealy, managing director and general counsel for the Federal Home Loan Bank (FHLB) of Pittsburgh, indicated that the FHLB is in the process of increasing its emphasis on infrastructure finance. The FHLB's mode of operation is to provide capital to member banks at 15–20 basis points (a basis point is equal to .01 percent) above prime rates, enabling those banks to make lower-cost loans.

Responding to audience questions, all panelists agreed that local leaders should view these options as points on a continuum whose pros and cons will vary with circumstances. Some projects will qualify only minimally, if at all, for free or cheap money. And even those organizations eligible for grants or low-cost loans may find it to be cost-effective to pay higher interest rates in exchange for making a faster start on needed projects.

A session on "Broadband Access for Rural Communities" also drew in a substantial audience. As Governor Manchin's earlier remarks suggested, the founders of ARC might not have been familiar with the vocabulary of telecommunications technology, but they would have immediately understood the policy issues raised by this session's panelists.

"Technology has completely outpaced the regulatory structure," asserted Sean A. Stokes, a principal in the Baller Herbst Law Group in Washington, D.C. "The regulatory structure dates from the 1930s and is based on a 'stovepipe mentality.' " As an example, he cited laws that discourage, or sometimes flatly prohibit, a business firm from competing in multiple venues—for example, a telephone company that wants to offer cable entertainment or a cable company that wants to compete for telephone customers.

Stokes, whose firm represents public entities seeking to provide open access to broadband services, denounced as "indefensible" attempts by incumbent service providers in rural and small-town areas to make their broadband coverage appear more widely available than it really is. Limits on competition, he said, have left the United States far behind other nations with respect to both the coverage of broadband access and its quality. "The problem," Stokes summed up, "is not that we're woefully behind, but that we don't recognize it. The debate increasingly isn't 'public versus private' but 'incumbents versus everybody else.' "

Kyle Schafer, chief technology officer for the West Virginia State Office of Technology, described his state's aggressive efforts to provide its citizens with universal broadband access. The obstacles are formidable. "West Virginians are hollow-dwellers," Schafer said. "We have issues with terrain, a dispersed population, and an elderly population. And we have one of the lowest per-capita incomes in the nation. We need a way to get computers in the home. If you have a single mother with two kids, paying for a computer and monthly charges for broadband is just not up on the priority list."

Nevertheless, Schafer continued, there is no acceptable alternative to connecting West Virginians to high-speed networks. Too many state initiatives—in health care, education, and basic government services—depend on public access to high-bandwidth transmissions. Accordingly, the state is pressing hard toward a goal of broadband access in 100 percent of its municipalities by 2010. For example, it is working with Verizon to map every connection in the state and with Cisco to put together a statewide engineering plan.

Andrew Michael Cohill, president and CEO of Design Nine, in Blacksburg, Virginia, closed this panel with a fervent pitch for aggressive public investments in infrastructure in order to promote competition among service suppliers. He emphasized that building a cable, wireless, or mixed-mode wireless network does not imply the public operation of services like voice communications, data transmission, or entertainment. "Telecommunication has become essential infrastructure," Cohill said. "Governments build roads. They do not own the businesses that use those roads."

In response to an audience question about what level of government should pay for broadband infrastructure development, Cohill stuck to the analogy of roads and highways. A mix of federal, state, and local responsibility for different aspects of road construction and maintenance "works pretty well," he said, so something like that division of labor should work equally well for providing and maintaining broadband access.

Cohill insisted that local agencies should not be intimidated by upfront cost estimates. Instead, they should focus on potential revenue streams from leasing the lines to service suppliers. "You can build a very capable broadband network and have money left over for other projects," he said. He cautioned, however, that this assumes careful attention to a business plan, including investments in marketing. Like Stokes, Cohill said that resistance by firms with a huge economic stake in the status quo is the principal obstacle to building world-class broadband networks across Appalachia and the nation. He asked rhetorically: "Why do we keep asking buggy-whip manufacturers to design highways?"

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

November 2007