Mega-infrastructure as “structural adjustment 2.0”

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Antonio Tricarico, Re:Common, Italy and Xavier Sol, Counter Balance, Brussels

The revived love for mega-infrastructure at the time of the crisis

The Group of 20 (G20) is promoting a new global programme for mega-infrastructure as one of the key antidotes for sluggish growth. Encouraged by the G20, which comprises the major shareholders of most large Development Finance Institutions (DFIs), these DFIs are renewing the love between global capital markets and governments from all over the world. Indeed, many regions have preparing pipelines of “bankable mega-projects” to implement “master plans” for infrastructure.

Infrastructure development is desperately needed in most parts of the world and there are public debates in many countries about the kind of infrastructure projects that should be prioritised.  For instance, should there be a few  large-scale interventions or alternatively, many small scale ones?  The current emphasis is on four sectors: transport, energy, water and information and communication technology (ICT), but are other types equally important, e.g., social and urban infrastructure or knowledge infrastructure?  How important is low-carbon, renewable infrastructure to curb global warming?

Many advanced countries built the types of mega-infrastructure which are now envisioned for the rest of the world.  However, it is important that advanced countries accelerate the decarbonisation of their economies and that developing countries do the same.  For developing countries, this entails “leapfrogging” past the stage of building carbon-intensive infrastructure which could lock-in technology for generations. 

In the developing world, there is also a desire to move away from the colonial model of infrastructure (which provides access natural resources and markets) to a model of infrastructure for “structural transformation”, which could create jobs, green economies and increase “value added” in production chains by facilitating secondary and tertiary processing of raw materials, among other things.

This article describes our critical view of the  infrastructure investment model, including “master plans” (e.g., the Silk Road; Europe’s Juncker Plan) for countries and continents which identify megaprojects in the aforementioned four sectors.  In the name of “development,” many of these massive projects may not meet the needs or may actually harm  local communities  in the global North and the global South.  We also challenge the undemocratic way in which the purposes of mega-infrastructure are being established as well as the apparent disregard of the environmental, social, and economic consequences of the prevailing model of public-private partnerships (PPPs). In many countries and sectors, PPPs have not been economically viable and the proposal to bundle PPPs in investment portfolios for global traders is premature, at best, and foolhardy, at worst.

Governments have been under fiscal pressure due to public budget constraints for decades, a trend only enforced by the recent financial and economic crises.  They often face a dilemma: on the one hand, they want to spend public resources during downturns (a “counter-cyclical” measure) to boost economic recovery; on the other hand, this strategy is opposed by the logic of harsh austerity and neoliberal and monetarist dogmas to which they often submit.  Witness the case of  Europe over the last few years where in some countries austerity kills the potential for growth.

At the same time actors in the global capital markets, which helped accumulate unprecedented private wealth by the few, have been chasing too few investment opportunities in new assets.  In other words, there is too much money chasing too few projects in order to generate the sought-after profits. The decline in investment is even more evident in the aftermath of the global financial crisis of 2007-2009.

A revamped infrastructure agenda at the global level could match both needs: governments could tap the massive private liquidity available in today’s markets for financing their mega-infrastructure projects as long as they are willing to guarantee sufficient profits for private investors. Therefore, since its conception, the new infrastructure agenda is engineering a new investment consensus for the financialisation era we currently live in. Below are the main characteristics of this consensus:

First, there is a bias toward mega works. On the one hand, governments need to attract large amounts of capital for a decades and, on the other hand, they need to layer the financial risk in ways that can be managed, mitigated and made tradable on global capital markets. Forget about local off-grid solar plants for rural communities in sub-Saharan Africa. What would be the return on that investment? How much capital would be mobilised for it? Can small  investments be tradable on global capital markets?

Second, the investment consensus primarily assesses infrastructure as pure “revenue streams,” and only secondarily as physical assets such as hospitals, schools, bridges, power plants or wind mills. This is necessary because new financial assets have to be created in association with the physical infrastructure. Those assets will generate the actual profits when traded on financial markets that are more relevant to investor calculations than the outputs of physical infrastructure projects.

Third, a financial infrastructure is being built – or “deepened” - in order to create, manage and trade the new volumes and types of financial assets: by, for instance, dismantling “onerous restrictions on investments” for pension funds and insurance companies, increasing derivative-based financial products, developing debt markets, and opening up to foreign banks. Still in numerous developing countries the structuring of capital markets directly linked to global markets is an unfinished job, despite the economic conditionalities attached to the structural adjustment of the '80s and the '90s.  These structural adjustment processes led to draconian cutbacks in public investment (including in infrastructure) throughout the world while simultaneously promoting privatization.

Fourth, a new model for bridging public and private interests is being advanced, in order to ensure that this revived love for mega-infrastructure matures. The third wave of privatisation is via a new form of PPPs operating through a financialised model. Its goal is to allow investors to buy into “tradable PPPs” through financial assets which will be associated with a bundle of new mega-infrastructure. This could reflect the same “logic” of financial engineering, potentially through the kind of “Ponzi scheme” of securitisation and financial derivatives, which led us into the last financial crisis.

Private investors are being guaranteed that revenue streams associated with mega-infrastructure will produce profits; changes in laws are locking-in the rights of investors and the mechanisms for raising user fees paid by citizens for water, energy, and other infrastructure services. This system will be complemented with inevitable public guarantees and offers by governments to purchase some of the assets even as junior financial partners  vis a vis other private investors. Such “generosity” by states can turn economically and financially non-viable projects into interesting investments for private investors.

However the unique dimension of this new form of PPP will be the different and more pro-active role that the state will play: that is, the state will help create and shape investment rules, private capital markets, and  projects in order to accelerate the creation of “pipelines” of PPPs for eventual bundling and trading. Such a financial infrastructure – and associated political infrastructure – is giving the private sector a more and more prominent role in society along the lines of “perennial privatisation” which, it can be argued, represents a new stage of capitalism. Among other things, this stage can give companies greater access to government procurement and fiscal support, including guarantees, while attracting significant sums of long-term institutional investment. 

This new form of PPP  guarantees “financial extraction” of wealth from local communities, ordinary citizens and territories at the benefit of few domestic and global investors seeking secure double-digit returns, according to a logic of “accumulation by dispossession” which has characterised the recent financialisation era of capitalism.

A highly dangerous lock-in

To date, civil society groups have paid too little attention to the structural implications of the renewed promotion of mega-infrastructure as a key tool for development and economic recovery.

Historically, they have focused on the issue of impacts on the environment and local communities, which are serious issues deserving attention, solidarity and support.  Yet, the financialisation of infrastructure goes beyond these traditional and important concerns. For the foreseeable future, the revamped paradigm will dominate the development agenda with long-term and profound implications, such as the four main lock-in effects:

  1. The gigantic scale of the proposed infrastructure will profoundly transform and redesign entire territories, regions and economies, and consequently the lives of billions of people. Such transformation could help integrate regions (e.g., East and West Africa) or provide incentives for countries to add value to their raw materials through secondary or tertiary processing.  However, the emphasis of the mega transportation corridors is primarily aimed at enhancing imports and exports of raw materials and goods, while integrating economies into global markets. The model will also streamline transportation routes globally and enhance access to a limited number of hubs where demand will be centralised in advanced and emerging economies. In short this agenda aims at accelerating the consumption and production processes globally and thus revamping economic globalisation, which experienced setbacks in the last decade. This transformation would scale up an already failing development model – and its associated global division of labour - which could be locked in for decades to come. Not to mention the devastating climate impact associated with this model.
  2. New financing schemes and related PPPs are generating a new wave of foreign and domestic debt. The approach to “infrastructure as an asset class” uses revenue streams related to infrastructure for extraction of profits – with the balance of risks on the public side. If something goes wrong, host governments (and to some limited degree International Financial Institutions) – will ultimately pick the bill up. The scale of these financial flows might be compared to the recycling of petro-dollars in the global South during the late ‘70s and '80s which led to the first debt crises in the '90s. Again, this long-term financing will have a lock-in effect in the future with unpredictable negative impacts.
  3. Implementing the new model is not just a matter of financing, but of creatingnew institutions and changing laws.  In every region, new Infrastructure Project Preparation Facilities (IPPFs) are being established to fill the “pipelines” of nations and regions with “bankable projects.”  At the same time, more than 70 countries have established “PPP units” which are introducing new PPP laws and relaxing laws that prevent domestic pension funds from investing in risky infrastructure markets.. The World Bank and other IFIs are avidly promoting  new “economic conditionalities” which revamp investment laws in order to ensure the “ease of doing business” for investors. These legislative changes will have a lock-in impact in the future which will be difficult to reverse.
  4. Finally the new approach will divert financial resources from growing domestic pension funds into global infrastructure development. This will undermine domestic resources mobilisation (and the income of pensioners) because ultimately it will shift those resources into global and highly speculative financial markets. Furthermore, financing and construction companies will often benefit from tax cuts or incorporation in tax havens, thus expanding capital flight from developing countries hosting mega-projects.

What's new in this round?

The structural features of this new trend (listed above) are deeply transforming developing countries' economies by making them heavily dependent on global markets, thus further reducing space for domestic policies. Given the scale of proposed infrastructure development, this trend can be regarded as a new wave of structural adjustment for the global South.

However, there are significant differences between the new wave and the structural adjustment imposed by International Financial Institutions (IFIs) in the '80s and the '90s – under the political direction of the G7.

First of all, some key emerging economies are financing and promoting the new wave of structural adjustment together with traditional donor countries. Promoting mega-infrastructure for growth and jobs is probably one of the very few issues on which all G20 countries actively agree upon so far. Therefore the issue can't be simply regarded as a Northern agenda imposed on the global South.

Secondly, the proposed financing schemes are mechanisms to extract wealth from various territories into global capital markets, since most of the financing will come from private capital markets, including domestic ones. In a nutshell, “infrastructure as an asset class” is a key instrument within the financialisation process to address the global decline of demand for goods and services and an accumulation of financial profits and excess liquidity – that is, too much money chasing too few investment opportunities.

Thirdly, the same approach to adjustment and financialisation of infrastructure is avidly pursued in advanced economies – for instance with the Juncker Investment Plan in the EU. This means that advanced economies will also be “reorganised” or “adjusted” by this paradigm.

Fourthly, there is an unprecedented competition between IFIs (old and new) around the involvement and promotion of large-infrastructure. The geopolitical competition between old and new IFIs specialised in infrastructure development – reflecting interests of key countries - has never been so intense. It is worth recalling the New Development Bank of the BRICS countries, which will be launched soon, has a strong focus on infrastructure financing as does the gigantic Brazilian BNDES in Latin America, and the newly established and Chinese-sponsored Asian Investment Infrastructure Bank. Regarding the latter it is still an open question whether this new institution will follow the above-described market-driven model, or a more public finance-centred business model.

“What is to be done”, then?

There is no single “winter palace to conquer” to change the current economic and political landscape; too many banks, funds, companies, and governments are backing this agenda at the same time.  Therefore, it is crucial to build the capacity of civil society to grasp the overall picture of the mega infrastructure model and the investment consensus – and the scale of change proposed.  This will enable civil society to identify relevant strategies of intervention to resist and eventually transform the adjustment and financialization model.

The infrastructure and investment agenda is not just about bricks and mortars, but primarily deals with structural and systematic wealth extraction from local communities by reshaping their territories for decades in order to further boost capital accumulation for the few in the era of financialisation. In fact, private infrastructure financing – and infrastructure as the new asset class - is regarded by elites and economic actors as an engine of financial innovation and deeper capital markets. What is at stake then is the continued facilitation of a massive transfer of wealth from the public to the private sector.  In other words, new laws, rules and mechanisms shape and expand capital markets in ways that facilitate further accumulation of private wealth and socialization of eventual losses. This renewed “public-private combo” further transforms the role of the state. Such a bonanza is happening in the name of “sustainable development and climate goals.”

At the same time the mega infrastructure and investment agenda and its threat of structural adjustment is a unique opportunity to establish new links and alliances through different constituencies, actors and movements. The multi-faceted impacts and dimensions of infrastructure projects relate to transparency, corruption, tax, debt, poverty eradication, human rights or environmental impacts, which means that a great diversity of local communities and social movements will inevitably face the challenges raised in this paper in the coming years and decades.

For people directly affected – either physically or financially – by mega-infrastructure, such projects are one of the most visible manifestations of financialisation. Public services are being privatized.  And, the promotion of mega-corridors could represent a chance to link struggles across the globe and cross-fertilise different constituencies and citizens in different countries.  A strong focus against some key corporate actors behind the promotion of specific corridors could be built in order to delegitimise their role.  Similarly, efforts to promote low-carbon infrastructure that creates decent jobs and sustainable ways could be promoted and uplifted.

At policy level, more than focusing on the trillions of dollars needed in infrastructure investment to presumably meet the needs of the poor, more attention should be paid by civil society and progressive decision-makers to the crucial role played by IFIs and key governments in promoting new “financial and investment conditionalities” needed to facilitate mega-infrastructure development. Exposing this agenda is an important step to advance a public critique of infrastructure financing as a structural adjustment process.

Keeping in mind the features outlined above it is vital to move beyond traditional North-South divides and share a truly global strategy opposing this approach and promoting alternatives which are needed and wanted by local communities for their own emancipation and prosperity.  It is a matter of reshaping power relations around the infrastructure and investment agenda rather than gaining power within existing institutions as they promote a failing development model.

The mega-infrastructure and investment agenda is here to stay, whether we like it or not. It is a powerful consensus, hard to tackle in an effective way. For the first time, seven, mostly Western-led multilateral development banks (MDBs) are acting in concert with the IMF and client governments. They expect to both collaborate and compete with the infrastructure initiatives led by the BRICS, especially China.  The key question for civil society remains how to build its own social infrastructure, brick by brick, territory by territory, without short-cuts or easy solutions, in order to  build structural power and present positive alternatives to key actors, especially democratic governments.    At the same time, it is crucial that an increasingly suppressed and repressed civil society  succeeds in expanding the political space in which to act.

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