300 -Should the EU go for “big infrastructure projects”?

Posted on October 19, 2014 by

0


(a jaundiced view)

EU countries are in the economic doldrums – no question about it. Unemployment, particularly among its youth has hit record levels. Politicians, forever in search of popularity, wring their hands in despair and call for “big infrastructure projects” to jump-start their economies. All governments are deep in debt: fiscal prudence would be wise. Some economists argue that it does not matter: spend your way out of the crisis. Others worry about saddling future generations with unbearable debt. What should be done?

I’ll leave the macro-discussion to the experts, and I would like to make some simple (nay, simple-minded) practical reflections on the issue.

First a bit of context. There is a whiff of nostalgia to the whole discussion. In the ‘50s governments went for jump-starting economic development. Five-Year plans and state investment in heavy industry was favored (Mahalanobis in India, following Rostow, etc., etc. are just an example). Well, it was not a great success (and I’m charitable). Among the Western countries, the French hung on to the system longest. The 7th plan by Minister Lionel STOLERU in the late ‘80s was affectionately/derisively called the “Plan cocorico” (but it might be bureaucratic lore). The private sector pushed state-led industrial development aside.

More recently, China’s government has gone single-mindedly for “big infrastructure projects” and thereby contributed to raising 400 million people out of poverty. “State-driven” development has become the rage in many “second tier” countries like India or Brazil. Even the West has been impressed by the transformation brought about by the Beijing Olympics or the Shanghai World Fair. The unspoken mental habit of politicians has subtly shifted from “heavy” industry of yore to “big infrastructure projects” of tomorrow. A distinct “band-wagon” effect seems to be gripping the EU.

With structural measures against a poor economic conjuncture?

What I am going to say sounds obvious, and it is. Economic difficulties are now; big projects are for the day after tomorrow.  They take time to plan, build, and their economic effects arise in the distant future. There is a mismatch. It is not a good start. When planning infrastructure, short-termism favors poor planning: urgency overrides carefulness. Pity impatient politicians for impatiently “cutting through” the red tape and making unwise choices, which will have to be corrected later (at great cost).

Can we manage “big infrastructure projects”?

Arguably the “mother of all big infrastructure projects” was Germany’s reunification. It has cost € 1’500 billion (net € 1’000 billion) and counting. Its eventual cost was grossly underestimated – but politically and culturally, it was worth it. The sheer complexity of bringing up to snuff the dilapidated infrastructure was among the prime reasons for the cost-overruns.. “Big” nowadays means technically and administratively “complex.” Neither states nor specialized firms seem to be very good at properly managing complex projects: huge cost overruns and delays are often the rule, despite best efforts.[1]

Political ineptness is an inherent risk. “Big projects” tend to be controversial. Faced with opposition, governments may back down, littering the countryside with infrastructure ruins.[2] While a CEO with such a track record would have to resign, politicians are able toroll over the cost of their errors on tax payers.

The very term of “big infrastructure project” is suspect. Let’s take the Italian high-speed rail system as an example. A recent study has shown that for no section of the system foreseeable demand[3] is sufficient to justify the investment (where the costs ballooned from originally 9 to € 32 billion). Meanwhile, balancing benefits among the country’s regions means that the system is in the process of being extended to peripheral areas where demand will in no case suffice. Looking at the EU as a whole, the approach is worrying: no Member country will want to forego implementing its own “big infrastructure project.”[4] “Me too” projects risk becoming white elephants stampeding the worthwhile ones.

“Big infrastructure projects,” furthermore, are saddled with systemic market failures. The first is asymmetry of information.[5] The state bureaucracy may not know enough about the costs of a project to judge the value of a bid or the quality of the bidder.

The threat of bankruptcy keeps private-sector projects on the straight and narrow: this barking dog is absent in the public sector. States are forever, so are their decisions, and unlike firms, they risk not going out of business. As a result, it is a poor or even inept bargainer, either over-paying or accepting unrealistically low bids, which it will have to top up later. The implicit knowledge on both sides of the bargain that they can easily collude and saddle the tax payer with any ensuing cost overrun undercuts the value of public tendering procedures. For, the tax payer is the third party payor. Political considerations, after the project is launched, are a strong inductive to roll over excess costs rather than either break off the endeavor or punish the contractor.

Germany’s hesitation to accept a “big infrastructure project strategy” is not surprising under such circumstances. Not only are they asked to bankroll the bash; they know they are asked to provide a blank check for projects which, given their inherent lumpiness, are unlikely to match demand or can be sensibly controlled.

“Big infrastructure projects” breed corruption

“Corruption” is in the eye of the beholder. The US Supreme Court has given a very narrow definition – the “tit-for-tat” or “brown bag” definition.[6] Italy’s State Accounting Office estimates that the corruption adds up to 40% to the cost of public works.[7] While the definition may not correspond in full to the US one, it is likely to be close. An incompetent bureaucracy is a fertile ground on which corruption thrives. Alas, incompetence is no criminal offence.

Corruption, however, may be seen as an exchange of favors serialized over time. Italy’s center-left premier Giovanni GIOLITTI made it possible, between 1907 and 1911, for workers’ cooperatives to have preferential treatment in bids for public procurement. Needless to say, he was handsomely re-elected. The political link between political power and cooperatives’ role in public procurement has survived until this day in Italy. In fact, in some regions it has become a system.

What about subsidies, rather than projects? Subsidies – be they for agricultural production or e.g. renewable energy – attract corruption as “Potemkin structures” are targeted not for output, but to attract public moneys. In many cases the state is neither equipped, trained nor willing to verify compliance with the terms of the subsidy. Collusion is rife particularly when the role of payor and supervisor are split, as it is the case with numerous EU programs.[8] Finally, corruption is endemic particularly at the “disposal end” of production or consumption – recycling,[9] which is the current high priority in infrastructure development.

Only a subtle and thorough sector by sector analysis could highlight differential fragilities in respect of corruption.[10] The EU should avoid launching a “big infrastructure project” policy without careful consideration of the real-existing issue of corruption. As the €-crisis has shown, the implicit confederal character of the EU makes the control of corruption and incompetence particularly weak among EU countries. At the high political table, they all affect unwarranted high standards of behavior, while bashfulness in highlighting misbehavior afflicts the EU Commission.

Path-dependent outcomes

Technological change is breath-taking, and its pace is likely to continue or even accelerate. Obsolescence is rapid. “Big infrastructure projects” tend to freeze current technologies for long periods of time, by which time they will be obsolete. Medical facilities are a good example: once in place, the pressure to keep them filled can lead to oversupply or inappropriate medical services. Highway and rail systems freeze industrial and residential settlement policies. Physical structures, once in place, by their very physicality, tend to impede reorganization of services in response to new knowledge.[11]

At the supply end, we can expect a “big infrastructure project” political-industrial complex to emerge, with vested interests in providing them even past their usefulness. The “asphalt” or “concrete” lobby is a real societal risk. Military spending in the US has successfully resisted all attempts to adapt realistically to evolving security threats.[12]

A mentality is likely to emerge favoring the policy approach. The answer to just about any problem will be: “think big and new.” It is likely to create a “dual” society of old and dilapidated structures on the one side and new ones on the other. In a subtle sense, such a policy is divisive of the social fabric.[13]

“Big infrastructure projects” freeze a state on a path dependent economic and social trajectory which it may regret later on as technologies and social relations change. Here we are all keen to protect future generations from all kinds of dangers, and yet we take away choices by imposing our “big structure projects” on them.

What is to be done?

For it matters not how small the beginning may seem to be:

what is once done well is done forever.”

Henry David THOREAU

Coming up with an alternative proposal is no prerequisite for criticism. I have, nevertheless, two modest proposals.

The first might be a relentless “revamping the state.” Instead of arguing categorically and divisively over “more” or “less” state it should be possible to concur on a “better” state in infinite small ways – adaptively. Citizens’ experience today is that the state has become distant, non-responsive, and exceedingly complicated. Bureaucracies are perceived as self-serving juggernauts. I’d tend to agree. Every time I have to deal with public authorities I can easily see possibilities for small but significant improvements. Many rules are obsolete; many are poorly designed, [14] for they are meant to serve the bureaucracy rather than the public. Scraping special interest barnacles off the body politic should make it move significantly faster. Does the tax code have to be hundreds of pages long? Can’t we write simpler and clearer laws? Small changes can create a virtuous and sustainable circle of responsiveness. I know, it sounds corny and trite, but the best recipe for sustainable development to me centers also on building trust between the political class (which is in charge of the state) and the citizens (which are consumers of state services). At the moment, we are at low ebb.

While the “big” economists in the ‘50s were all pushing for big plans and heavy industry, Albert O. HIRSCHMAN was advising just the opposite. He  wanted to push light industry with extended supply chains and “linkages,” so as many people as possible would benefit quickly, even if in small ways.[15] His advice turned out to be right. Small projects are easier to launch, can be supervised better; can address immediate citizens’ concerns.

A different future for Europe?

Continental Europe’s fate has been that its revolutions all eventually failed – contrary to the Anglo-Saxon worlds, where they came early and succeeded. Europe was a “top-down” construction (CAVOUR and BISMARCK are exemplary here). an implicit habit of resignation, or its converse, short-termist individualistic opportunism, are wide-spread among its people.[16] Central Europe’s long experience under communism has not improved matters in those areas. What people need is an experience of bringing about change, rather than it being imposed on them from above.

While musing on the silent impact of the “big infrastructure projects” policy, I came across the experience of breaking the white supremacist hold over the black population in the USA. “Over the years, local black leaders and private citizens, through the filing of lawsuits, bore the responsibility for the implementation of [Civil Rights] legislation […]. It was the kind of responsibility that changed the way black people felt about themselves because they were successfully taking on the system.[17]

It then occurred to me that part of the response to the current crisis might not be to loot the budget store in order to bring home the last big project. Rather, EU politicians might use the crisis to create experiences of citizens taking charge of themselves and their communities. A virtuous circle might ensue. Franklin D. ROOSEVELT famously proclaimed: “The only thing we have to fear is fear itself.” The best way to do so is by doing something together against fear. Collective action, leading to empowerment, is the best recipe against frozen fear.

There is more. As European construction will not be grounded in idealism and its rhetoric, but rather in sharing the experience of “doing things together.”[18] Comparing and pooling locally-centered experiences across the whole of Europe would allow its citizens, as if by stealth, to progress more sustainably toward a borderless community and slow fading of national borders. What is missing at the moment is a European “kinship” replacing the “national” ones. Anthropologists have come to the conclusion that the “specific quality of kinship is ‘mutuality of being’: kinfolk persons who participate intrinsically in each other’s existence; they are members of one another.”[19]  So fostering “mutuality of being” through comparable projects might help.

At this point, again, a concrete point of departure. An Italian school teacher has organized a “Zero Waste” initiative and won the Goldman Prize – the “Green Nobel” [20] – in the… US. Rossano ERCOLINI’s project was classically “grass-roots” and successful. Governments might encourage the adaptive replication of his approach across Europe by facilitating sharing of experiences. Sector by sector, prizes could be established for the most successful and innovative participatory projects and schemes for rapid sharing may be set up.

From an economic point of view, offering prizes is a clear winner. One pays for one result, not many efforts. The approach allows a variety of approaches developing in parallel. They can be tested for resilience under differing circumstances. “Best practice” is not designed top down; it emerges from the multitude of experiences. This approach, incidentally, was used by Den Xiaoping to kick-start the Chinese economy. He allowed “pilot experiments” in different parts of the country. This attitude permitted a variety of approaches to mature before committing the leadership to a full-throated strategy. “Learning from facts” begins small. It is political will, however, that allows it to move beyond the small scale.

The EU might then create a program of participatory projects with the two-fold objective of giving citizens the experience of empowerment and sharing these experiences throughout Europe. “Big infrastructure projects” and “participatory projects” do not compete budget-wise. The latter will always be a fraction of the other and easily accommodated – if there is a political will.

The difficulty is harnessing the political will first of all to nurture and then to scale up any success from participatory projects. Politicians do not much care for “bottom-up” or participatory approaches, for it puts them in the role of “coach” of the team, rather than that of a leader. For politicians, it is a change in paradigm.

[1]               Switzerland seems to have managed its new tunnels under the Alps within budget, but tunnels present mainly engineering, not social challenges. This does not mean, however, that the projects will show a positive benefit-cost ratio. The tunnels have been built to allow trucks to cross the Alps on rails, rather than over the country’s mountain passes. The infrastructure needed to load/unload trucks in Germany and Italy are way behind schedule, thus defeating or delaying the original purpose.

[2]           The French government has announced the indefinite suspension of it ecotax of transport, after the infrastructure had all been built. Backing down will cost the exchequer € 1.5 billion. http://bit.ly/1t2Mrk3

[3]           http://www.linkiesta.it/alta-velocita (a link to the pdf. of the study is available on this web page). The “Italian” outcome is no surprise. The privately funded Channel Tunnel failed precisely because of mismatch between lumpy supply and slowly rising demand.

[4]           Japan is a flagrant case of proliferation of infrastructure projects in order to satisfy local power structures. Given that the EU is a loose federation of 28 different countries which are themselves often organized federally, with large elements of devolution, cost control would be exceedingly difficult.

[5]           See e.g. the work of George AKERLOF and Joseph STIGLITZ.

[6]           For a discussion of the issue, see e.g. Dave COLE (2014): How corrupt are our politics? New York Review of Books, 25 September.

[7]           Duccio TRONCI (2013): Chi comanda Firenze? La metamorfosi dei poteri e i suoi retroscena attraverso la figura di Matteo Renzi. LIT, Roma. The same source indicates that the “big infrastructure project” of a high-speed link between Bologna and Florence went 5 times over budget. Corruption thus may have accounted for two times the original estimate of the cost.

[8]           The Italian authorities have impounded € 1.3 billion from a mafia-controlled firm receiving subsidies for wind farms. http://bit.ly/1vX1rSj

[9]           See e.g. Roberto SAVIANO (2006): Gomorra. Mondadori, Milano. Proper recycling is costly and difficult to monitor; wild disposal is easy. The matter is compounded when legislation precedes the completion of disposal facilities and there is no proper way to do away with the refuse.

[10]          The 2014 Nobel Prize in Economics has gone to Jean Tirole: “Before Tirole, researchers and policymakers sought general principles for all industries. They advocated simple policy rules (…). Tirole showed theoretically that such rules may work well in certain conditions, but do more harm than good in others. (…) The best regulation or competition policy should therefore be carefully adapted to every industry’s specific conditions. This is wise advice in fighting corruption as well – even though discernment (aka “common sense”) more than theoretical models may be needed.

[11]          The Hetch Hetchy Valley in the California Sierras was flooded to provide a “big water project for San Francisco. Lore has it that the valley was as beautiful as Yosemite. And the “big projects” on the Colorado River have essentially stopped water flow into the Pacific Ocean.

[12]             See e.g. Eric SCHLOSSER (2013): Command and control. Allen Lane, London; also: Andrew J. BACEVICH (2010): Washington rules. America’s path to permanent war. H. Holt, New York.

[13]          HAUSMANN’s heavy-handed restructuration of Paris in the 1850s has expelled the workers and artisans from the center to the periphery. Arguably, this approach has much aided class conflict by creating opposing camps.

[14]          For a concerted effort in this area, see Cass SUNSTEIN (2013): Simpler. The future of government. Simon & Schuster, New York.

[15]          Albert O. HIRSCHMAN (1967): Development projects observed. Brookings Institution Press.

[16]             For the subtle power of such mental habits see Arthur LOVEJOY (1936): The great chain of being. A study of the history of an idea. Harper Torchbooks, New York.

[17]          Darryl PINCKNEY (2014): Blackballed. The black vote and US democracy. New York Review of Books, New York, pg. 21-22.

[18]          In 1963, within the framework of their Treaty of Friendship, http://en.wikipedia.org/wiki/%C3%89lys%C3%A9e_Treaty France and Germany set up a huge program of cultural exchanges that allowed people to share ideas and personal exchanges. Cities and villages twinned, cultural institutes and universities joined in sharing ideas.

[19]             Marshall SAHLINS (2013): What kinship is… and what is not. University of Chicago Press, Chicago.

[20]          http://www.goldmanprize.org/recipient/rossano-ercolini; http://www.zerowasteeurope.eu/2013/04/rossano-ercolini-president-of-zero-waste-europe-2013-wins-the-green-nobel-award/

Posted in: Uncategorized