The age of Megapro­jects

Financial Mirror (Cyprus) - - FRONT PAGE -

We seem to be en­ter­ing a new age of megapro­jects, as coun­tries, in par­tic­u­lar those of the G-20, mo­bilise the pri­vate sec­tor to in­vest heav­ily in multi-mil­lion (if not multi­bil­lion or multi-tril­lion) dol­lar in­fra­struc­ture ini­tia­tives, such as pipe­lines, dams, wa­ter and elec­tric­ity sys­tems, and road net­works.

Al­ready, spend­ing on megapro­jects amounts to some $69 trln a year, roughly 8% of global GDP, mak­ing this the “big­gest in­vest­ment boom in hu­man history.” And geopol­i­tics, the pur­suit of eco­nomic growth, the quest for new mar­kets, and the search for nat­u­ral re­sources is driv­ing even more fund­ing into large-scale in­fra­struc­ture projects. On the cusp of this po­ten­tially un­prece­dented ex­plo­sion in such projects, world lead­ers and lenders ap­pear rel­a­tively obliv­i­ous to the costly lessons of the past.

To be sure, in­vest­ments in in­fra­struc­ture can serve real needs, help­ing meet an ex­pected surge in the de­mand for food, wa­ter, and energy. But, un­less the ex­plo­sion in megapro­jects is care­fully redi­rected and man­aged, the ef­fort is likely to be coun­ter­pro­duc­tive and un­sus­tain­able. With­out demo­cratic con­trols, in­vestors may pri­va­tise gains and so­cialise losses, while lock­ing in car­bon-in­ten­sive and other en­vi­ron­men­tally and so­cially dam­ag­ing ap­proaches.

To be­gin with, there is the is­sue of cost ef­fec­tive­ness. Rather than adopt­ing a “small is beau­ti­ful” or a “big­ger is bet­ter” phi­los­o­phy, coun­tries must build “ap­pro­pri­ate scale” in­fra­struc­ture suited to its pur­poses.

Bent Flyvb­jerg, a pro­fes­sor at the Univer­sity of Ox­ford spe­cialised in pro­gramme man­age­ment and plan­ning, stud­ied 70 years of data to con­clude that there is an “iron law of megapro­jects”: they are al­most in­vari­ably “over bud­get, over time, over and over again.” They are also, he adds, sub­ject to the “sur­vival of the un­fittest,” with the worst projects get­ting built, in­stead of the best.

This risk is aug­mented by the fact that these megapro­jects are driven largely by geopol­i­tics – not care­ful eco­nom­ics. From 2000 to 2014, as global GDP more than dou­bled to $75 trln, the G-7 coun­tries’ share of the world econ­omy dropped from 65% to 45%. As the in­ter­na­tional arena ad­justs to this re­bal­anc­ing, the United States has be­gun to worry that its hege­mony will be chal­lenged by new play­ers and in­sti­tu­tions, such as the China-led Asian In­fra­struc­ture In­vest­ment Bank. In re­ac­tion, the Western-led in­sti­tu­tions, such as the World Bank and the Asian De­vel­op­ment Bank, are ag­gres­sively ex­pand­ing their in­fra­struc­ture in­vest­ment oper­a­tions, and are openly call­ing for a par­a­digm shift.

The G-20, too, is ac­cel­er­at­ing the launch of megapro­jects, in the hope of boost­ing global growth rates by at least 2% by 2018. The OECD es­ti­mates that an ad­di­tional $70 trln in in­fra­struc­ture will be needed by 2030 – an av­er­age ex­pen­di­ture of a lit­tle more than $4.5 trln per year. By com­par­i­son, it would take an es­ti­mated $2-3 trln per year to meet the Sus­tain­able De­vel­op­ment Goals. Clearly, with megapro­jects, the po­ten­tial for waste, cor­rup­tion, and the buildup of un­sus­tain­able public debts is high.

The sec­ond is­sue that must be con­sid­ered

is plan­e­tary bound­aries. In a March 2015 let­ter to the G-20, a group of sci­en­tists, en­vi­ron­men­tal­ists, and opin­ion lead­ers warned that ramp­ing up in­vest­ment in megapro­jects risks ir­re­versible and cat­a­strophic dam­age to the en­vi­ron­ment. “Each year, we are al­ready con­sum­ing about one-and-a-half plan­ets’ worth of re­sources,” the au­thors ex­plained. “In­fra­struc­ture choices need to be made to al­le­vi­ate rather than ex­ac­er­bate this sit­u­a­tion.”

Sim­i­larly, the In­ter­gov­ern­men­tal Panel on Cli­mate Change cau­tions that “in­fra­struc­ture de­vel­op­ments and long-lived prod­ucts that lock so­ci­eties into green­house-gas­in­ten­sive emis­sions path­ways may be dif­fi­cult or very costly to change.” And, in­deed, the G-20 has put in place few so­cial, en­vi­ron­men­tal, or cli­mate-re­lated cri­te­ria for the “wish list” of mega-projects that each mem­ber coun­try will sub­mit to its sum­mit in Tur­key in Novem­ber.

The third po­ten­tial prob­lem with megapro­jects is their re­liance on public-pri­vate part­ner­ships. As part of the re­newed fo­cus on large-scale in­vest­ments, the World Bank, the In­ter­na­tional Mon­e­tary Fund, and other mul­ti­lat­eral lenders have launched an ef­fort to reengi­neer de­vel­op­ment fi­nance by, among other things, cre­at­ing new as­set classes of so­cial and eco­nomic in­fra­struc­ture to at­tract pri­vate in­vest­ment. “We need to tap into the tril­lions of dol­lars held by in­sti­tu­tional in­vestors… and di­rect those as­sets into projects,” said World Bank Group Pres­i­dent Jim Yong Kim.

By us­ing public money to off­set risk, the in­sti­tu­tions hope to at­tract long-term in­sti­tu­tional in­vestors – in­clud­ing mu­tual funds, in­sur­ance com­pa­nies, pen­sion funds, and sov­er­eign-wealth funds – who to­gether con­trol an es­ti­mated $93 trln in as­sets. Their hope is that tap­ping this huge pool of cap­i­tal will en­able them to scale-up in­fra­struc­ture and trans­form de­vel­op­ment fi­nance in ways that would have been pre­vi­ously unimag­in­able.

The trou­ble is that public-pri­vate part­ner­ships are re­quired to pro­vide a com­pet­i­tive re­turn on in­vest­ment. As re­sult, ac­cord­ing to re­searchers at the Lon­don School of Eco­nom­ics, they “are not re­garded as an ap­pro­pri­ate in­stru­ment for [in­for­ma­tion tech­nol­ogy] projects, or where so­cial con­cerns place a con­straint on the user charges that might make a pro­ject in­ter­est­ing for the pri­vate sec­tor.” Pri­vate in­vestors seek to sus­tain the rate of re­turn on their in­vest­ments through guar­an­teed rev­enue streams and by en­sur­ing that laws and reg­u­la­tions (in­clud­ing en­vi­ron­men­tal and so­cial re­quire­ments) do not cut into their prof­its. The risk is that the quest for profit will un­der­mine the public good.

Fi­nally, the rules gov­ern­ing long-term in­vest­ment do not ef­fec­tively in­cor­po­rate long-term en­vi­ron­men­tal and so­cial re­lated risks, as em­pha­sised by trade unions and the United Na­tions En­vi­ron­ment Pro­gramme. Pool­ing in­fra­struc­ture in­vest­ments in port­fo­lios or turn­ing de­vel­op­ment sec­tors into as­set classes could pri­va­tise gains and so­cialise losses on a mas­sive scale. This dy­namic can in­crease lev­els of in­equal­ity and un­der­mine democ­racy, ow­ing to the lack of lever­age that gov­ern­ments – much less cit­i­zens – may have over in­sti­tu­tional in­vestors. In gen­eral, trade rules and agree­ments com­pound these prob­lems by putting the in­ter­ests of in­vestors over those of or­di­nary cit­i­zens.

Left un­ex­am­ined, the push to­ward megapro­jects risks – in the words of the au­thors of the let­ter to the G-20 – “dou­bling down on a dan­ger­ous vi­sion.” It is crit­i­cal that we en­sure that any trans­for­ma­tion of de­vel­op­ment fi­nance be crafted in a way that up­holds hu­man rights and pro­tects the earth.

Newspapers in English

Newspapers from Cyprus

© PressReader. All rights reserved.