Class #6 - reform of infrastructure


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Class #6 - reform of infrastructure

  1. 1. Perspectives on “Infrastructure Crisis”<br />What was the crisis?<br />Fiscal crisis of governments and resulting decline in financing<br />Increasing concern with efficiency of operation as opposed to accumulation of infrastructure capital<br />Criticism of many infrastructure projects on grounds such as equity (large projects aid industry, not the poor) and environmental impacts<br />General ideological shift away from public ownership and management and toward privatization<br />Criticism of technocratic orientation of infrastructure planning & lack of public input/participation<br />Shifts in economics of infrastructure and new welfare economics <br />
  2. 2. Perspectives on “Infrastructure Crisis”<br />Case Study: Dam Building in the United States<br />A 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 generally<br />1936 Flood Control Act kicks of a massive wave of construction of dams and other flood works<br />1936 Act includes demand for “benefit-cost” analysis: Army Corps of Engineers establishes a benefit-cost ratio required for all projects<br />Steady 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”<br />
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  4. 4. Perspectives on “Infrastructure Crisis”<br />Case Study: Dam Building in the United States<br />After World War II, criticism that benefit-cost analysis is used to justify any project that a particular congressperson wants to get built<br />Bureau 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<br />
  5. 5. Perspectives on “Infrastructure Crisis”<br />Case Study: Dam Building in the United States<br />Two Positions on Benefit-Cost Analysis:<br />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 decide<br />Resources for the Future (DC think tank): define a single benefit-cost ratio so that all projects can be located on a single “scale” <br />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.<br />
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  7. 7. Perspectives on “Infrastructure Crisis”<br />Case Study: Dam Building in the United States<br />New Thinking about Infrastructure and Public Interest<br />Gilbert 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 &Protection<br />New 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.)<br />
  8. 8. Perspectives on “Infrastructure Crisis”<br />Case Study: Dam Building in the United States<br />The Answer: Insurance rather than Dams!<br />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)<br />This did not mean that the old questions of benefit-cost analysis disappeared; but a new set of questions (and possible solutions) were introduced<br />
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  10. 10. Perspectives on “Infrastructure Crisis”<br />Case Study: Dam Building in the United States<br />A couple takeaways:<br />The politics of “infrastructure crisis” and reform are complicated! Private interests, corporations, environmentalists and other activists show up on surprising sides of these debates<br />New 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<br />
  11. 11. Infrastructure Reform<br />Two perspectives on the “reform” agenda:<br />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.)<br />Reform means a “micro-economic” reassessment and reworking of infrastructure sectors that compliments rather than displaces the existing economics and politics of infrastructure<br />
  12. 12. Infrastructure Reform: Key Shifts in Thinking<br />1.Rethinking “natural monopoly”<br />Old assumption: many examples of natural monopoly; extensive “public” benefit from regulated monopoly or public ownership<br />Counter-claim: monopoly conditions limited, not as problematic as usually thought<br />Technological change<br />Intermodel competition<br />Competition “for the market”<br />Prescription: unbundling and selective privatization or commercialization<br />
  13. 13. Infrastructure Reform: Key Shifts in Thinking<br />2.From Market Failure to Government Failure<br />Old assumption: Markets will underprovide infrastructure, or provide infrastructure in an inefficient way<br />Counter-claim: Governments can “fail” just as markets can fail<br />Regulatory or management capture<br />Poor incentives for efficient operation<br />Conflicting imperatives<br />Lack of accountability<br />Prescription: reform of government management (through managerial and financial autonomy, eg) and through new kinds of “incentive” regulation<br />
  14. 14. Infrastructure Reform: Key Shifts in Thinking<br />3. Public v. Private Capital<br />Old assumption: Capital markets will fail to finance many infrastructure projects; infrastructure will be “under-provided”<br />Counter-claim: National and international capital markets are sufficiently well developed that they will provide financing for good projects<br />Prescription: Seek private capital when possible <br />
  15. 15. Infrastructure Reform: Key Shifts in Thinking<br />4. Inf. Services and “Merit Goods”<br />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)<br />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 narrow<br />Prescription: 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)<br />