The Role of Infrastructure in Innovation

California Needs World Class Infrastructure to Compete.

World class infrastructure plays a key role in business attraction, as multinational companies consistently rank the quality of infrastructure among their top four criteria in making investment decisions.  Research shows that as U.S. infrastructure has been in decline, infrastructure in other countries is rapidly increasing.  The 2010-11 Global Competitiveness Report by the World Economic Forum places U.S. infrastructure 23rd in the world, a drop from its rank of 7th in 2000.  

California's infrastructure is in a similar state, according to the American Society of Civil Engineers, California Infrastructure Report Card 2012, with an estimated $65 billion a year investment gap.  The impact of this lack of investment is compounded by the substantial new investments made in other states and nations, including the expansion of the Panama Canal. 

Traditionally, innovation infrastructure has been based around the idea of “Industry Clusters,” areas where multiple firms and organizations working in the same, or similar, fields can draw on each other’s discoveries, products, and in some cases workforces leading to a highly focused and productive innovation center with prodigious output. Silicon Valley and Hollywood are archetypical examples, specializing in electronics and cinema, respectively.

However, as the world has globalized, transportation and communication times and costs have shrunk.  A new global business paradigm is emerging in which location is less relevant - competitive advantage is, instead based on the quality and efficiency of the technologies that link the location with other areas of the world.

California's Infrastructure is Lagging

It is estimated that California's infrastructure investment gap is estimated at $65 billion a year. According to the California Infrastructure Report Card, the state's overall infrastructure scored a "C" in 2010, up from a "C-" in 2006. At a more granular level, California scored:

  • C+ in Aviation
  • D in Levees/Flood Control
  • B+ in Ports
  • B- in Solid Waste
  • C- in Transportation
  • D+ In Urban Runoff
  • C+ in Wastewater
  • C in Water 

Goods Movement Means Jobs

Goods movement supports employment, business profit, and state and local tax revenue.  California businesses rely heavily on the state's air/sea ports and their related transportation systems to move manufactured goods. 

Firms rely on fast, flexible, and reliable shipping to link national and global supply chains and bring products to the retail market.  Transportation breakdowns and congestion can idle entire global production networks.  As a result, the capacity and efficiency of seaports, airports, and multimodal linkages have become critical factors in global trade.

Changes in U.S. and global trade patterns in the past 20 years have also placed increasing challenges on California's good movement system.   Between 1970 and 2002, for example, imports from Asia as a share of U.S. trade increased from 8% to 40%, thereby increasing the flow of imports through California’s gateways. Over the same period, U.S. trade shifted toward lighter goods, which are more likely to be shipped by air. While the state may have limited ability to affect these larger patterns, there are actions that the state can take to help California’s global gateways keep pace with the growing demand for shipping services.    

Nationally, the Port of Los Angeles continued to hold the top rank in terms of two-way trade in 2010 (valued at $237 billion). It is followed by JFK International Airport ($162 billion) and the port of Chicago ($135 billion). Data on California’s other major ports are as follows: Long Beach ($89 billion, ranked 9th); LAX ($77 billion, ranked 12th); San Francisco International Airport ($50 billion, ranked 18th); Port of Oakland ($40 billion, ranked 25th); Otay Mesa Station ($31 billion); and Calexico-East ($10 billion).

In terms of container activity the Los Angeles-Long Beach container port ranked 6th globally, behind Shanghai, Singapore, Hong Kong, Shenzhen and Busan.  Dollar value is just one way to look at goods movement in assessing trends; it is also important to look at growth.  Here is a Chart – Growth at Largest North American Container Ports, 2006-2010, which shows that California ports are actually losing market share.

For California, expanded supply chains for manufacturing and product distribution have resulted in congested seaports, where cargo ships are often delayed for extended periods of time waiting to unload.  Truck access is often cited for the delays. At international airports, truck access is also a problem, and expansion of major airports is severely limited by urbanization, ground access, air quality impacts, and local opposition.

Another congestion challenge exists at the land-based border crossing between California and Mexico.  There are six land crossings referred to as Points of Entry (POEs).  The San Diego County-Tijuana/Tecate region is home to the San Ysidro-Puerta México, the Otay Mesa-Mesa de Otay, and the Tecate-Tecate POEs while the Imperial County-Mexicali region hosts the Calexico-Mexicali, Calexico East-Mexicali II, and Andrade-Los Algodones. 

U.S. firms with significant business passing through the three Imperial Valley ports of entry report that theirlogistics-supply chain is highly time sensitive and these long wait times delay access to intermediary goods and ultimately lead to problems in the manufacturing chain.  Long wait times between Mexico and the U.S along the Imperial County – Baja California border accounted for an estimated output loss of $1.4 billion and 11,600 lost jobs nationally in 2007.  In California losses were estimated at $436 million and 5,639 jobs.

Financing Infrastructure through Cash and Bonds

Between 2000-2010, California spent $102 billion from state funds on infrastructure. The state uses two methods for paying for infrastructure development:  Direct "pay-as-you-go" spending, where the state funds infrastructure upfront through appropriations from the General Fund or Special Funds accounts, and leverage, where the state finances infrastructure through the use of bonds.

Between 2000-2010, the state appropriated $35.7 billion in pay-as-you-go financing, including $1.9 billion from the General Fund (2% of all infrastructure spending) and $33.8 billion from Special Funds (35% of all infrastructure spending).  During the same period the state spent $66.6 billion in bond financing, including $59.1 billion from general obligation bonds (representing 58% of total infrastructure spending), $5.5 billion from lease-revenue bonds (representing 5% of total infrastructure spending), and $2 billion from traditional revenue bonds (representing 2% of infrastructure spending). The Legislative Analyst Office estimates General Fund costs for debt service on infrastructure bonds will be $5.5 billion in 2011-12

Almost three-fifths of the state's total infrastructure spending over the last decade was distributed to and administered by local agencies.  Transportation represented the largest infrastructure spending category at $81 billion over the last decade, 56 billion of which went to highway infrastructure.

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