Private infrastructure finance and secular stagnation (crosspost from Crooked Timber)

For most of my academic career, I’ve been working on (more precisely, trying to demolish) the idea of private investment in public infrastructure, exemplified by the Private Finance Initiative in the UK and the Public Private Partnerships program in Australia. Here’s my first published article on the subject, from 1996. I conclude that

The current enthusiasm for private infrastructure, like the enthusiasm for public ownership which it replaced, has been based more on ideological beliefs in the virtues of one sector and the vices of the other than on any systematic economic analysis …Analysis of the relative performance of the private and public sector in different phases of infrastructure provision suggests that, in most cases, the private sector will be most efficient in the construction phase but the public sector will be best equipped to handle the risks associated with ownership.

Twenty years later, this analysis seems finally to have been validated. The UK Auditor-General recently reported that

Analysis of the 2012-13 Whole of Government Accounts (WGA) implies that the effective interest rate of all private finance deals (7%–8%) is double that of all government borrowing (3%–4%)

As a result of the excess costs, and some spectacular failures, bipartisan enthusiasm for the PFI has finally turned to disillusionment. Here’s the Telegraph, correctly putting much of the blame on New Labour. And, for balance, here’s the Guardian. There hasn’t been a similar admission of failure in Australia, but the flow of PPP projects has greatly diminished, and most new ones rely on a substantial component of public capital.

Unfortunately, the failure of private finance hasn’t led governments to resume the high levels of public investment that prevailed in the Keynesian era of the 1950s and 1960s. So, even with central bank lending rates at zero, there has been no real recovery in infrastructure investment. Apart from the direct effect of lower investment, there’s a strong case that infrastructure investment increases the returns from private investment in general and therefore stimulates growth.

I think this analysis applies more broadly. The financialization of the global economy has produced a hugely costly financial sector, extracting returns that must, in the end, be taken out of the returns to investment of all kinds. The costs were hidden during the pre-crisis bubble era, but are now evident to everyone, including potential investors. So, even massively expansionary monetary policy doesn’t produce much in the way of new private investment.

This raises the question of how the hypertrophied financial sector we observe has succeeded in displacing less costly alternatives. I plan another post on this but my short answer rests on regulatory and tax arbitrage. These, and not the efficient allocation of capital, are the key functions of Wall Street, the City of London and their various counterparts around the world.

36 thoughts on “Private infrastructure finance and secular stagnation (crosspost from Crooked Timber)

  1. I don’t see the moves towards corporatism continuing forever. Right now it’s not that democratically elected governments can’t stamp out corporatism, it’s that democratically elected governments are /pushing/ corporatism, mostly because they’ve been bought by the corporations, or they’ve been captured by neoliberal ideology that’s owned by the corporations. The problem for the 0.01% (who are the real beneficiaries) is that a change in government can completely change the willingness of a nation state to go along with the corporatist movement – any democratic country is an election away from collectively saying “nope” to the whole thing, tossing the whole corporate friendly legal framework out the window and telling the corporations to go jump.

    A decisive win by Bernie Sanders would result in the whole TPP agreement going out the window; a win by Sanders that included control of congress and the senate would result in a /massive/ shift away from corporate friendly government in the US. A win by Jeremy Corbyn in the next UK elections might be as big an earthquake there. And that’s all /without/ any actual revolt, just the normal democratic processes. I don’t see a way for that to happen in Australia without some significant shifts in voting patterns, or a big shift in the core ideology of the Labor party, but even here half a dozen lower house seats going to the Greens and coinciding with a hung parliament might mark a major shift away from corporate power.

    For all it faults, democracy /does/ allow for revolutions in a country’s way of thinking and acting without needing bloodshed. Given the right impetus a majority can vote for real change, and even create real change if the ‘traditional’ political systems aren’t offering it (I recommend looking at some of the grassroots movements in the US to introduce constitutional change, particularly the ones targeting the Citizen’s United rulings –, for example)

    If it ever /does/ comes down to a real revolution, the military in most western democracies aren’t likely to participate in forcefully putting down a widespread push to (peacefully) overthrow the government, not even in the US. People are (barring a small number of idiots) invested in the /nation/, not the government of the day. But I just don’t see it coming to that.

  2. @Simon Fowler

    I wonder if any near-absolute monarch said, “I don’t see this move to democracy continuing.”

    It’s hard to say at this point if the move to corporate control of our society will continue or not. It is certainly still progressing in that direction. I don’t see enough hopeful signs to convince me it will stop worsening any time soon. In any case, capitalism naturally tends to oligarchic dictatorship. This is going to take more than a change in government(s). It’s going to take a change in economic system. This too could happen peacefully if it is handled correctly. I haven’t given up in a peaceful domestic evolution towards worker-managed democratic socialism.

  3. PPP are supposed to work by transferring risk from gov’t to the private sector – who are supposed to be more efficient. The problem is that the logic requires gov’ts (i.e. politicians) to have the strength of will to enforce this transfer when things go bad. Any expectation of weakness in enforcement leads to adverse behaviour and opportunism by the private sector. Hence with PPPs, the private sector always wins no matter which side of the coin comes up.

  4. @Sean Leaver
    Indeed. The “opportunism” starts at the political level. If things turn bad and a government goes in hard to protect their exposure to liabilities, all sorts of vested interests (including at the political level) start crying foul about this and that and how the government is ruining the incentive for private investment in large future capital intensive projects.
    Classic example was the scrapping of the East-West link in Melbourne which has now blown out by >$600M. Most of these back-downs are probably legally unavoidable which doesn’t help mitigate the pain for others chasing a slice of the government expenditure pie.

  5. @Ikonoclast
    Totally agree and although he is reviled by neo liberals, I saw Yanis Varoufakis, on Q&A tonight, who said Australia’s politicians had underperformed for many years. Hard to disagree when you realise how our elected have sold us out on every publicly owned entity.

  6. I have never understood the ratiionale for PPPs. It is a bit like private companies shelving assets/liabilities off balance sheet through put and sell deals so as to give the appearance of a stronger balance sheet and better performnce than they really have. British Leyland used to do this by selling inventory to the banks, taking it off balance sheet and then buying the inventory back later. It is slight of hand accounting.

    As fo private companies being better at building things, I am not convinced. On this view, I guess the Desalination Plant at Wonthaggi was an aberration.

  7. @Kel Young

    If he said they have ‘underperformed’, I wonder whether he meant they have performed less well than they could have, or less well than they should have, or less well than politicians in other countries have done; and if it was the last of those, I wonder which other countries’ politicians he was comparing them with.

  8. @J-D

    Invoking Tu quoque is perfectly good way to excuse our politicians’ performance.

    By the way, working conditions and wage in developing countries are bad so why should Australian workers be provided with good working conditions and high wages?

  9. @Tom

    I’m not excusing anything. The statement has more than one possible interpretation; I wondered which one Yanis Varoufakis had in mind, and I still do. Maybe you don’t care what he meant; that’s no reason why I shouldn’t.

    If he was making a criterion-referenced evaluation, meaning that Australian politicians have performed less well than they could have, or less well than they should have, then comparisons with politicians in other countries would have no value as excuses.

    If he was making a norm-referenced evaluation, meaning that Australian politicians have performed less well than politicians in other countries, that would have no value as an excuse either for politicians in Australia or for politicians in other countries; neither the better (if that’s what he meant) norm-referenced performance of politicians in other countries nor the worse (if that’s what he meant) norm-referenced performance of Australian politicians tells us anything about their criterion-referenced performance.

    However, if he was making a norm-referenced evaluation, it would be useful to know which other countries’ politicians he was using as comparators, since there might possibly be some ideas there for how Australian politicians’ performance could be improved; whereas if he was making a criterion-referenced evaluation it’s the criteria which contain the ideas for improvement.

  10. @J-D

    I don’t care who made statements that Australian politicians have been underperforming for quite some time and I would agree to such statement without the need to invoke whataboutery. This is because when someone says politicians of x country have been underperforming, I would only think of how the politicians could have done better on the issues which I would rate them to be underperforming, and not invoke “look over there, their politicians done worse on the same issue and therefore ours is ok”.

    It is false to assume that trying to invoke such comparison have no meaning of excuse for politicians of either country/ies in comparison, as there was no mention of agreement in the statement beforehand. Had your comment to be something like “I agree our politicians were and have been underperforming, but I wonder how does he (or other country’s politicans) compare to those he rate as underperforming“; then it would not give the false sense of invoking Tu quoque as an excuse for our politicians.

    Giving no agreement whilst invoking Tu quoque gives the sense of “I don’t agree with what he said because look how bad he (or other country’s politicans) performs!“; therefore gives a sense of trying to excuse our politician. Then again, it could just be that I’m bad at English.

  11. @Tom

    Maybe you are bad at English. Maybe I’m bad at English. Maybe we’re both bad at English.

    The meaning you derived from my statement was not a meaning I intended. I don’t know whether that’s your fault, or my fault, or both, or neither.

    I shall reflect on what lessons I may be able to learn about how to express myself more clearly in future.

    I hope the meaning I originally intended is clearer to you now.

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