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Marcelo Giugale

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How Tomorrow's Infrastructure Will Be Built

Posted: 11/30/11 04:38 PM ET

In the old times -- that's only ten years ago -- a federal minister of planning would sit in his office and single-handedly decide whether a road, port or power-plant would be built, as well as who would build it. Contracts would then be signed behind closed doors, bulldozers would roll in, and taxpayers would foot the bill -- the entire bill. Well, those days are all but gone, and a new way of building infrastructure is taking shape.

First, ideology is being replaced by standards. Never-ending arguments about privatization -- who should own the electricity company -- have given way to public discussions about performance -- who can avoid more black-outs. In fact, we now have standards of all kinds to compare the quality of infrastructure services across countries, and even across cities. Hours of uninterrupted water supply, days to get an electricity connection, cost of downloading a container, kilometers of maintained roads, you name it, it can all be measured. This makes it easy, politically and legally, to hire private companies to do the job -- and to fire them if they don't. These "public-private partnerships" take many forms. Professional managers can run a state-owned water utility (as in Colombia, Gabon and the Philippines). The government may guarantee a minimum income to a toll-road "concession" built by private investors (Chile, Mexico, India). Or a foreign firm can build and operate an airport (Greece, Jordan, Russia). The possibilities are virtually endless. In fact, if a standard of service can be articulated on a contract, the service can almost surely be delivered by a public-private partnership.

Second, as private investors join in, taxpayers are getting a break. The cost of roads, trains and airports can be shifted more towards the users -- whoever drives, rides or flies pays a "tariff" for it. This could not come at a better time. Governments around the word, especially in rich countries, are too entangled in fiscal austerity to even think about paying for new infrastructure by themselves. Yes, there is China, with its trademark appetite for big projects. But even there, questions about "fiscal sustainability" are being raised. And there is of course the matter of generational fairness: if we make today's users pay, we don't have to saddle our children -- that is, tomorrow's taxpayers -- with so much public debt.

Third, infrastructure is no longer seen as a good tool for social policy. The idea that the government can help the poor by forcing utility companies to provide service at prices that do not cover cost, has proven to be an aberration. It is not only that the companies soon need to be bailed out with taxpayers' money, or that their managers give up on quality and customer service. The real reason is that most of value of the subsidy is captured by the rich -- after all, who consumes the most electricity, water and gas? There are much better ways to assist people in need, directly and individually, without messing up the finances of your infrastructure suppliers.

Fourth, accountability is giving infrastructure a better brand. The image of the reckless multinational company bribing public officials, paving through rain-forest, dumping chemical waste, and razing villages is, fortunately, becoming a thing of the past -- not that it cannot still happen, but it is a lot less frequent. Today, no serious corporation wants to be caught on YouTube corrupting, destroying, polluting or usurping -- if you don't believe it, ask shareholders at British Petroleum. In fact, private investors are beginning to embrace "safeguards", that is, practices that keep them honest, green, and socially responsible -- Peru's mining industry has invested in some of the most environmentally-friendly technologies that exist. This is good for business. And the safeguards themselves are much better and clearer than they used to be -- right down to the number of trees you need to plant for every tree you cut down.

Fifth, states, municipalities, cities, and even communities, have a bigger say. As democracy spreads and urbanization speeds, local authorities are getting more responsibilities -- and more resources. They are receiving a larger share of national tax revenues, and of the rents coming from natural wealth like oil or minerals. That "fiscal decentralization" gives them power, including the power to borrow. So they don't just run the local schools; they are in charge of services like water, electricity, gas and transport. They can build infrastructure by themselves. And they can block or delay any project that the federal government may plan in their territories -- think of those angry neighbors opposing the expansion of Heathrow airport.

Finally, developing countries are linking infrastructure with extractive industries. With commodity prices sky-high, and likely to stay like that for a few more years, the appetite for exploration and exploitation of natural resources is strong. And the amounts at stake are truly transformative -- enough to turn places like Ghana, Guinea and Uganda into middle-income countries. So governments negotiate package deals that mix extraction rights with construction obligations -- "you get access to our bauxite, only if you build a port to ship it out that other industries can also use". Chinese companies are doing this all across Africa.

So, building tomorrow's infrastructure will be a collective effort: it will involve central governments, private investors, users, and local officials. Even extractive industries will be part of it. But will this mean more and better service? Not sure. What is sure, however, is that the previous top-down system is not coming back. And anyhow, it wasn't that perfect in the first place.

 

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