Class #6 - reform of infrastructure
- 1. Perspectives on “Infrastructure Crisis”What was the crisis?Fiscal crisis of governments and resulting decline in financingIncreasing concern with efficiency of operation as opposed to accumulation of infrastructure capitalCriticism of many infrastructure projects on grounds such as equity (large projects aid industry, not the poor) and environmental impactsGeneral ideological shift away from public ownership and management and toward privatizationCriticism of technocratic orientation of infrastructure planning & lack of public input/participationShifts in economics of infrastructure and new welfare economics
- 2. Perspectives on “Infrastructure Crisis”Case Study: Dam Building in the United StatesA classic example of state-led infrastructure construction for development and public good; important for the development of thinking about these issues in the US and more generally1936 Flood Control Act kicks of a massive wave of construction of dams and other flood works1936 Act includes demand for “benefit-cost” analysis: Army Corps of Engineers establishes a benefit-cost ratio required for all projectsSteady expansion of the “benefits” that are claimed for dam construction (flood protection; irrigation; recreation; “intangible” benefits; water supply to cities; etc.); these are considered to be generally “public” benefits – they contribute to a “general welfare”
- 4. Perspectives on “Infrastructure Crisis”Case Study: Dam Building in the United StatesAfter World War II, criticism that benefit-cost analysis is used to justify any project that a particular congressperson wants to get builtBureau of the Budget (later OMB) requires more rigorous methods of benefit-cost analysis, in part because of a desire to reign in expenditures and to focus on more productive investments
- 5. Perspectives on “Infrastructure Crisis”Case Study: Dam Building in the United StatesTwo Positions on Benefit-Cost Analysis:Harvard Water Project: “multi-objective” cost-benefit analysis (first use of large-capacity digital computers to conduct infrastructure assessments): determine outputs for multiple values and let politicians decideResources for the Future (DC think tank): define a single benefit-cost ratio so that all projects can be located on a single “scale” Environmentalists align with the RFF position because it is more restrictive (in terms of what “benefits” can be counted) and because it takes matters out of the hands of politicians and bases decisions on “objective” decision rules.
- 7. Perspectives on “Infrastructure Crisis”Case Study: Dam Building in the United StatesNew Thinking about Infrastructure and Public InterestGilbert White (and others): Dam building incentivizes bad behavior by developers and people who choose to live in flood plains, leading to a cycle of Protection–Loss–Relief &ProtectionNew welfare economics (Howard Kunreuther and others): It is not the “public” that benefits from dam projects but particular interests (developers who build in flood plains and benefit from existing dams or hope for future protection; homeowners in flood plains; etc.)
- 8. Perspectives on “Infrastructure Crisis”Case Study: Dam Building in the United StatesThe Answer: Insurance rather than Dams!Home flood damage insurance as a mechanism to create a “price” for flood risk that must be assumed by individuals rather than “socialized” (in other words, that is paid for by everyone through dam construction and relief payments)This did not mean that the old questions of benefit-cost analysis disappeared; but a new set of questions (and possible solutions) were introduced
- 10. Perspectives on “Infrastructure Crisis”Case Study: Dam Building in the United StatesA couple takeaways:The politics of “infrastructure crisis” and reform are complicated! Private interests, corporations, environmentalists and other activists show up on surprising sides of these debatesNew questions about infrastructure may not displace old questions; the problem of benefit-cost analysis of public works has not gone away, but there are a range of other questions being asked as well
- 11. Infrastructure ReformTwo perspectives on the “reform” agenda:Reform means “marketization” or privatization – with all that entails (private rather than public values; efficiency rather than social protection; etc.); in this view, you displace the old questions about infrastructure (natural monopoly, merit goods, public benefits, etc.)Reform means a “micro-economic” reassessment and reworking of infrastructure sectors that compliments rather than displaces the existing economics and politics of infrastructure
- 12. Infrastructure Reform: Key Shifts in Thinking1.Rethinking “natural monopoly”Old assumption: many examples of natural monopoly; extensive “public” benefit from regulated monopoly or public ownershipCounter-claim: monopoly conditions limited, not as problematic as usually thoughtTechnological changeIntermodel competitionCompetition “for the market”Prescription: unbundling and selective privatization or commercialization
- 13. Infrastructure Reform: Key Shifts in Thinking2.From Market Failure to Government FailureOld assumption: Markets will underprovide infrastructure, or provide infrastructure in an inefficient wayCounter-claim: Governments can “fail” just as markets can failRegulatory or management capturePoor incentives for efficient operationConflicting imperativesLack of accountabilityPrescription: reform of government management (through managerial and financial autonomy, eg) and through new kinds of “incentive” regulation
- 14. Infrastructure Reform: Key Shifts in Thinking3. Public v. Private CapitalOld assumption: Capital markets will fail to finance many infrastructure projects; infrastructure will be “under-provided”Counter-claim: National and international capital markets are sufficiently well developed that they will provide financing for good projectsPrescription: Seek private capital when possible
- 15. Infrastructure Reform: Key Shifts in Thinking4. Inf. Services and “Merit Goods”Old assumption: Market provision will not be at the level that is socially or politically desirable; therefore “de-commodification” is the answer (through cross-subsidies, for example)Counter-claim: Infrastructure “ideal” is neither efficient nor effective as a mechanism of social protection (many left out, incentives adversely affected; cross-subsidies and blanket subsidies often regressive); assumptions about “public benefit” are unjustified – benefits are narrowPrescription: Social protection should be targeted; marginal cost of infrastructure provision should be market-price or other “real” economic cost, such as cost-recovery level; more tailoring of fit between infrastructure provision and “demand” (either through markets, participation, decentralization, or other mechanisms)