V. I. Yakunin

The Role of Infrastructure Projects in Public Policy

Lecture Series

---

ebooks@prospekt.org

Информация о книге

УДК 321(075.8)

ББК 66.2я73

Y14

Author:

Yakunin V. I., Doctor of Political Science, Head of Public Policy Department, Political Science Faculty, Lomonosov Moscow State University.

This coursebook is designed for the students of the recently established English-taught MA program “Post-Soviet Public Policy” at the Political Science Faculty of the Lomonosov Moscow State University. The course provides a brief overview of Soviet and post-Soviet history in related areas, explaining core transitions that aff ect the current state of infrastructure policy in the region. In order to bring together regional specifi city and global trends, the coursebook presents the readers with a brief outline of future infrastructure development.

The aim of this coursebook is not to give a comprehensive review of all aspects of infrastructure policy, but to serve as an introduction to the fi eld, based on the author’s experience and vision. It is designed mainly for foreign students that wish to explore the background of post-Soviet public policy.

УДК 321(075.8)

ББК 66.2я73

© Yakunin V. I., 2021

© Prospekt LLC, 2021

FOREWORD

The purpose of this coursebook is to fill in the gap that exists in Russian science with respect to the study of infrastructure project policy in former Soviet countries at the turn of the 21st century.

It was created with the goal of overcoming the now widespread tendency to view former Soviet Union states as “secondary”, less significant actors (in terms of economy, politics and public administration) when it comes to planning and execution of infrastructure projects. According to the conventional point of view — which this material seeks to disprove — the countries of the region are noticeably lagging behind their more developed and successful counterparts. The author attempts to examine post-­Soviet states not as “fragments” of a former empire, but as a collection of new and independent nations, united by a common political, economic and cultural heritage and facing similar obstacles due to their shared historical past — yet striving to make the best use of their economic and political potential. According to the author, this perspective allows us to view the countries of the post-­Soviet space as an important element of the multipolar world order — an emerging global system that has not fully taken shape yet. Moreover, with sweeping globalization and the rise in international cooperation, there appears to be less and less practical sense in having a rigid classification of states as “more” or “less” significant.

Obviously, from this point forward, the “younger” nations that emerged after the collapse of the USSR will have an ever greater role to play in global political and economic affairs, and their influence on the way we address global infrastructure issues (related to projects such as China’s Belt and Road Initiative) will continue to increase.

Achieving the objectives set by the author of this coursebook requires us to identify the two main approaches to state policy as it relates to the execution of infrastructure projects in former Soviet Union countries.

The first is the conventional understanding of infrastructure as a kind of “megaproject”, which involves substantial investments of time, capital and manpower — and is impossible without active participation of the state.

The second approach to infrastructure projects as objects of public policy was formed under the influence of modern trends, which tend to look at infrastructure at the micro-­level, wherein special emphasis is placed on creating a favorable and comfortable environment for the people, and the “human factor” — values, social needs, the “social effect” of infrastructure, and the view of infrastructure as, above all, the basis for social development — has come to the fore, sometimes deemed more important than economic expediency.

The author uses a systematic approach, under which infrastructure project policy in the post-­Soviet space and Eurasia is studied in a holistic manner and treated as a multi-­faceted, complex phenomenon. The author does not believe that this approach is in conflict with the existence of disputes and disagreements between some of the countries, on the one hand, and the regional integration blocs they are part of, on the other — after all, no holistic system is devoid of internal contradictions.

The limited size and scope of this coursebook precludes the author from providing an equally detailed analysis of public policy in the area of infrastructure projects across all fifteen post-­Soviet countries. That said, the purposes of this course require a more in-­depth examination of relevant issues in key countries of the region, such as Russia, Kazakhstan, Belarus, and Kyrgyzstan.

This coursebook provides detailed case studies related to the planning, implementation and operation of crucial infrastructure projects in Russia, Kazakhstan and a number of other countries, and describes the social effect these projects have had. This is the first time this material is presented in the form of textbook for a course offered as part of a master’s degree program with the Political Science Faculty at Lomonosov Moscow State University.

The coursebook offers a wide variety of visual aids (graphs, tables, infographics, illustrations) to facilitate comprehension and learning.

Lecture 1. INFRASTRUCTURE: MULTIPLE DIMENSIONS

Infrastructure. General Definition

According to the Oxford dictionary, infrastructure is a very broad and flexible term, as it embraces a variety of material assets that maintain our everyday life, economic activity and, more broadly, support the human civilization, with the word “civilization” defined as “advanced stage of development” that provides “comfort and convenience of everyday life”1. The global institutions provide the following definitions for “infrastructure”:

— the World Bank definition of infrastructure includes utilities (gas and electricity, water supply, telecommunications, sewerage, waste collection and disposal), public works (roads and major dam and canal works irrigation and drainage), and transportation (railways, ports, waterways, airports);

— the OECD defines infrastructure as a system of public works in a country, state or region, including roads, utility lines, public buildings2.

Notice the difference: the OECD definition includes public buildings (commonly used to provide public services), which makes its scope broader, compared with the World Bank definition.

McKinsey, a global consulting firm, uses an even broader approach: it divides infrastructure into three groups:

— Narrow (economic infrastructure)

— Broader (social infrastructure, oil and gas)

— Real estate3.

In Figure 1.1, you can see the share of each of the three types of infrastructure in terms of investment, with the total sum accounting for around 14 % of the global GDP.

Such variety of definitions produces an entire range of ways to address infrastructure policy on global, regional, national and local levels.

Figure 1.1. Infrastructure spending by asset class, nominal investment in infrastructure, 2015, $ billion

As a global financial institution, the World Bank focuses on the problems of developing countries. More specifically, its website reads:

“The World Bank Group helps developing countries build smart infrastructure that supports inclusive and sustainable growth, expands markets, creates job opportunities, promotes competition, and contributes to a cleaner future. We help countries address their unique infrastructure needs by working with the public and private sectors. Infrastructure improves lives by connecting people to opportunity. Access to basic infrastructure services is critical for creating economic opportunities and bringing social services to the poor. Globally, 840 million people live more than 2 kilometers from all-­weather roads, 1 billion people lack electricity, and 4 billion people lack Internet access”4.

Meanwhile, developed countries have their own set of problems. While China continues to impress the rest of the planet by constructing the world’s longest motorway and high-­speed rail networks5, the UK government has to make a hard decision — whether to go ahead with the HS2 high-­speed rail project after the estimate for its cost soared to as much as £106bn ($140bn)6. At the moment, the UK has no high-­speed rail lines, and neither does Pakistan (after failing to get Chinese help7) — something that the former metropole and its colony now have in common. This case raises the problem of ageing infrastructure and the necessity of its renovation — a real headache for the developed world. Thus, even developed countries are seeking to develop their infrastructure — as well as achieve economic development through infrastructure.

Infrastructure and development

When talking about infrastructure development, the World Bank refers to the UN Sustainable Development Goals, adopted by all United Nations Member States in 2015, that provide a shared blueprint for peace and prosperity for people and the planet, now and into the future. At its heart are the 17 Sustainable Development Goals (SDGs), which are an urgent call for action by all countries — developed and developing — in a global partnership. They recognize that ending poverty and other deprivations must go hand-­in-­hand with strategies that improve health and education, reduce inequality, and spur economic growth — all while tackling climate change and working to preserve our oceans and forests8.

The World Bank strategy is based on the assumption that “achieving the Sustainable Development Goals will only be possible if we close [existing] infrastructure gaps, by ensuring:

• rural roads and safe transport for access to health and education facilities;

• electrification of clinics, schools and households in rural areas to improve digital connectivity;

• improved road safety and clean cooking to reduce mortality and morbidity;

• digital and other skills needed for implementing infrastructure investments”9.

As you can see, some of these targets may seem irrelevant for developed nations, although they have their specific problems of infrastructure development. The common thing for all of them is that infrastructure development requires huge investments, and the lion’s share of them comes from the state budget.

According to McKinsey, infrastructure-­related spending (using the broadest definition that includes real estate, oil and gas, and mining) totaled $9.5 trillion in 2015, or 14 percent of the global GDP. Real estate, social infrastructure, and transportation make up the bulk of the spending.

Looking at the contribution of “economic infrastructure”, “social infrastructure” and “real estate”, you may argue that most of it is related to civil engineering and construction. And this is one of the key reasons why the WB, McKinsey and national governments care so much about it. Infrastructure in the broad sense is a huge part of economy and an important driver for economic growth. The McKinsey Global Institute estimates that infrastructure has a socioeconomic rate of return of around 20 percent. In other words, $1 of infrastructure investment can raise the GDP by 20 cents in the long run10.

In fact, the interest in infrastructure projects has always stemmed from their ability to produce the “big push” effect on economic development (Paul Rodan-­Rosenstein is usually credited with coining the term)11. A host of studies has established a strong correlation between capital investment in transportation infrastructure and GDP — and also the Human Development Index12 (an important indicator of the United Nations Sustainable Development Agenda). In other words, infrastructure development clearly has social and economic consequences.

The need to determine the impact of infrastructure on the level of economic development has motivated a great deal of economic research on the subject over the past three decades. The debate over the effectiveness of infrastructure projects continues at both the macro and micro levels.

David Aschauer produced one of the first and most fundamental works of research on the correlation between investment in macro-­level infrastructure and labor productivity (Aschauer, 1989a, 1989b). He identified insufficient public investment in economic infrastructure as the cause of the slowdown in the growth of U.S. labor productivity in the 1970s and 1980s. He theorized that it was possible to increase labor productivity, profitability, and economic growth by increasing public and private investment in infrastructure. Other U.S. economists, such as Alicia Munnell, the soon-­to-­be Nobel laureate Paul Krugman, Blanca Sanchez-­Robles, and Dave Donaldson developed and further buttressed Aschauer’s theory (Donaldson, 2010; Krugman, 1991; Munnell, 1990; Sanchez-­Robles, 1998). However, empirical evidence that did not conform to Aschauer’s theory gave rise to criticisms and the search for alternative explanatory models. Robert Eisner, Edward Gramlich, Paul Evans and Georgios Karras, Douglas Holtz-­Eakin and Amy Schwartz, and Lars-­Hendrik Röller and Leonard Waverman were the most outspoken opponents of Aschauer’s theory (Eisner, 1991; Evans & Karras, 1994; Holtz-­Eakin & Schwartz, 1995; Gramlich, 1994; Roller & Waverman, 2001). New approaches, while not detracting from the impact that infrastructure has on the national economy, focus more on the search for indirect and delayed effects.

Today, the debate remains virtually unchanged. McKinsey insists that “the world needs to invest an average of $3.7 trillion in these assets every year through 2035 in order to keep pace with projected GDP growth (Figure 1.2). This need could increase further by up to $1 trillion annually in order to meet the United Nations’ sustainable development goals”.

Figure 1.2. Average annual need, 2017 — $35 trillion, constant 2017 dollars

Not only developing countries require infrastructure investment. “The Economist” warns that housing (remember that real estate was included by McKinsey into a broad understanding of infrastructure), being “the world’s biggest investment class, is a root of many of the rich world’s social and economic problems”, including political populism and general dissatisfaction with the existing world economic (capitalist) model13. The reason, Callum Williams (the author) argues, is the “three big mistakes” that governments across the wealthier parts of the world have made after World War II:

— they have made it too difficult to engage in residential construction;

— they haven’t been able to come up with proper economic incentives for households to funnel more money into the housing market;

— they have failed to design a regulatory infrastructure that would prevent or limit housing bubbles.

All of these have contributed to the 2008 Global Financial Crisis (which started as a real estate financial bubble), have fueled the conflict between the youth in Hong-­Kong and its political establishment, and have even affected the outcome of the Brexit vote.

Now you can see how interconnected infrastructure development and public policy really are, especially in the developed countries.

Infrastructure and public policy

In their recent article titled “Four ways governments can get the most out of their infrastructure projects”, Aaron Bielenberg, James Williams, and Jonathan Woetzel from McKinsey generally support the idea of a “big infrastructure push”. However, they point that “gains from infrastructure are fully realized only when projects generate tangible public benefits. Unfortun-ately, many governments find it difficult to select the right projects — those with the most benefit. Furthermore, infrastructure can provide social and economic advantages only when the capital and operating costs can be financed sustainably, either by the revenues a project generates or by the government sponsor. Too many projects become an economic burden and drain on finances when a government borrows money for an undertaking and neither its revenues nor its direct and indirect economic benefits adequately cover the cost”14.

The most important takeaway from this quote is that the keys for infrastructure investment efficiency lie in public policy. In fact, that is the main idea of this course.

Bielenberg & Co suggest a framework for making better infrastructure decisions, which consists of four elements — recommendations and principles for decision-­making:

1. Develop projects with tangible, quantifiable benefits

Political considerations often guide governments when they select infrastructure projects. For example, a national government may prioritize capital investment in a new port because it would provide a convenient transshipment point for trade with a politically aligned country, even if the project has a weak economic rationale. Or a government may invest in a new road project to address congestion in a district that’s important in elections. However, in th

...