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Infrastructure and Entrepreneurship

Jonathan Ortmans, President, Public Forum Institute

Cost-effective “infrastructures” – both physical and legal – provide the essential platforms for the activities of all economies. In the physical realm, for example, it is hard to imagine life without roads, communications networks, airports, ports, sewer systems and electricity grids. Because of their “public good” nature, government plays a central role in financing, if not operating, such infrastructure facilities. In turn, because so much infrastructure is local, the planning and construction of many projects historically has been delegated to the states (although aided by federal financing).

As federal policymakers increase resources devoted to infrastructure projects in the coming years, it is important that they not overlook the important advantages that entrepreneurs can, and indeed must, provide.1 Modern infrastructure increasingly will be “smart,” incorporating the latest information technologies to manage traffic and scarce resources, such as energy and water, used on each network. To realize these goals policy makers must find ways of harnessing the experience, talent and innovation of private sector entrepreneurs in improving public infrastructure.

U.S. Infrastructure and Economic Growth and Productivity

  • Lost Investment: There has been a decline in net investment in physical infra¬structure from an average of nearly 2.5 percent of GDP in the 1970s and 1980s to around 1 percent in the 1990s.2 Infrastructure spending is 20 percent below what would be required to simply stay in place.3 
  • Power Grid: Inefficiency of the nation’s electrical grid significantly hinders growth, with 3 major blackouts in the last decade, and losses of $100 billion per year for U.S. businesses. Growth in peak demand has outstripped grid capacity by 25 percent per year for over 25 years.4 Upgrading the nation’s electrical power distribution offers the highest returns on public investment.
  • Air and Road Jam: Hours lost to air travel delays increased from 2006 to 2007 by 29 percent.5 While the number of vehicle miles traveled has doubled since 1980, the total road capacity has only increased by 6 percent.6 Freight delays cost approximately $8 billion annually.7 It is estimated that traffic congestion caused roughly 700 million person hours of delay per year in the 80s and nearly 3.5 billion hours by 2000. The costs of congestion are nearly $50 billion a year and rising as the population grows.8 For every $1 billion in federal highway investment, 47,500 jobs and more than $6.2 billion in economic activity would be generated.9 
  • Trade Chokepoint at the Dock: Increasing port congestion is a threat to exports. The port of Shanghai has almost as much container capacity as all U.S. ports combined.10 Improving our port system to be as efficient as those in China or Singapore would increase our exports by over $10 billion a year and support almost 60,000 jobs.11 
  • Spectrum Noise: Wireless innovation is hamstrung by access to spectrum.12 Many problems arise from a policy fail¬ure to hold licensees accountable for inefficient use of licensed spectrum.13  Furthermore, large carriers are allowed to overbid in FCC auctions,14 yielding a distorted allocation.15 

 Entrepreneurial Contributions

  • The Internet represents perhaps the most significant infrastructure project of modern times. Its growth has been fueled largely by competing cable and telecom providers seeking to demand for faster computational power and transmission speeds. The public role has largely been to efficiently regulate the space rather than directly funding projects. As a result, the average price of service (adjusted for speed) has fallen significantly since 2001.16 
  • The vast majority of investment in telecommunications infrastructure has been from private firms competing to meet the demands of consumers.17 
  • Private sources contribute with 90 percent of new capital spending on energy,18  which results in new technologies that help fulfill the promise of a smart grid and create “green-collar” jobs. To advance the modernization of our electric grid, the Department of Energy has entered into public/private partnerships with leading champions of the Smart Grid.19 
  • Public-private partnerships are an increasingly successful framework for infrastructure provision using public finances (or loans) to support private provision of infrastructure and services.20 

 Pro-Growth Policy Action

  • Support the smart grid by creating a  better regulatory climate for startup firms and reduce unnecessary barriers to adoption of smart grid technologies, practices, and services.
  • Utilize congestion pricing to improve the efficiency of existing infrastructure, especially transportation bottlenecks.21 Road pricing reduces inefficient sprawl and public expenditures.22 Similarly, pricing for airport landing fees should be auctioned on a per aircraft basis to distribute them more efficiently to the highest value aircraft (often with the most passengers).23
  • Free up underutilized spectrum. The FCC should establish an accessible database that profiles all spectrum licensees. Allow spectrum licensees to sell their restricted spectrum licenses at an auction that put this spectrum to poten¬tially far more valuable uses.24 

 

1  Glaeser, Ed. From Chasing Smokestacks to Embracing Entrepreneurship. Regional Growth Through Economic Policy. The Kauffman Foundation. 2008.

2  Ibid.

3  Brainard, Lael and Bernard L. Schwartz. Infrastructure: Time to Compete to Win. The Brookings Institution. 2008.

4  U.S. Department of Energy. The Smart Grid: An Introduction. 2008.

5  Deshpande, Manasi and Douglas W. Elmendorf. An Economic Strategy for Investing in America's Infrastructure. The Brookings Institution. 2008.

6  Hanke, Steve H.  In Praise of Private Infrastructure. Cato Institute. 2008.

7  U.S. Department of Transportation. An Initial Assessment of Freight Bottlenecks on Highways. Prepared by Cambridge Systematics. 2005, and  Deshpande, Manasi and Douglas W. Elmendorf. An Economic Strategy for Investing in America's Infrastructure. The Brookings Institution. 2008.

9 Schwartz, Bernard L. Redressing America's Public Infrastructure Deficit. Testimony Before the House Committee on Transportation and Infrastructure. New America Foundation. 2008.

8  Winston, Clifford and Ashley Langer. The Effect of Government Highway Spending on Road Users' Congestion Costs. AEI- Brookings. 2006.

10  Brainard, Lael and Bernard L. Schwartz. Infrastructure: Time to Compete to Win. The Brookings Institution. 2008.

11  Ibid.

12  Weiser, Philip J. The Untapped Promise of Wireless Spectrum. The Brookings Institution. 2008.

13  Weiser, Philip J. The Untapped Promise of Wireless Spectrum. The Brookings Institution. 2008.

14  Litan, Robert E. and Roger G. Noll. The Uncertain Future of the Telecommunications Industry. The Brookings Institution. 2004.

15  Cramton, Peter, Andrzej Skrzypacz and Robert Wilson. Economic Comments on the Design of the 700 MHz Spectrum Auction. Submitted with testimony of James L. Barksdale to the U.S. Senate Committee on Commerce, Science, and Transportation. 14 June 2007.

16  Hahn, Robert W. Regulating Our Way to Freedom? AEI. 2008.

17  Deshpande, Manasi and Douglas W. Elmendorf. An Economic Strategy for Investing in America's Infrastructure. The Brookings Institution. 2008.

18  Ibid.

19  U.S. Department of Energy. The Smart Grid: An Introduction. 2008.

20  U.S. Government Accountability Office.  Highway Public-Private Partnerships: More Rigorous Up-front Analysis Could Better Secure Potential Benefits and Protect the Public Interest. 2008.

21  The Kauffman Foundation. Entrepreneurship and Urban Success: Toward a Policy Consensus. 2007.

22  Winston, Clifford and Ashley Langer. Toward a Comprehensive Assessment of Road Pricing Accounting for Land Use. The Brookings Institution. 2008.

23  Weber, Harry R. FAA advances NYC-area airport slot auctions plan. Business Week, 12/04/2008. 

24  Weiser, Philip J. The Untapped Promise of Wireless Spectrum. The Brookings Institution. 2008.

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