Corruption’s impact on infrastructure

A new article on South African infrastructure issues highlights an ongoing, and historic, problem with centralized, government-sponsored infrastructure spending: corruption.

infrastructure fundingSouth African politician Helen Zille, in critical comments to the Independent Online, reviewed some of the specific problems her country faces in renovating and extending infrastructural systems. But her comments could be extended to many countries and the often problematic relationship between political organizations, with tax-funded budget authority, and the many vendors and contractors who are seeking contracts. This environment is a breeding ground for backdoor deals, ‘no bid’ contracts, collusion, and outright theft.

Infrastructure spending by government agencies often promotes corruption because contracts go to the most politically well-connected contractors. In closed, authoritarian countries this can be a direct “you scratch my back, I’ll scratch yours” sort of arrangement, while in more open, democratic countries the process is one focused on election campaign funding. In the United States this sort of indirect bribery is referred to as “pay to play.”  By providing funding for projects the politician expects vendors, unions, or contractors to funnel some portion of the money back to supporting that politician or party.

There are recent and age-old examples of this sort of corruption in every part of the globe. It affects infrastructure projects directly by driving up costs, misdirecting revenue into less useful, sometimes completely useless, projects, and poisoning the political process. Reform efforts usually involve public scrutiny of bidding and contracting, open accounting practices, and a variety of information reforms like ‘sunshine laws’ and ‘ethics commissions.’ The effectiveness of these efforts obviously varies and the need for these efforts has never waned.

Susan Rose Ackerman covers these issues in her classic 1999 book Corruption and Government: Causes, Consequences, and Reform. She reviewed decades of research and offers examples where high levels of corruption limit investment and growth in any economy and lead to weak infrastructure systems, including ineffective government. Corruption creates huge economic inefficiencies and inequities that spread through other aspects of public and even private life.

Robert Rotberg picks up these ideas and expands on the issues of corrosive corruption in Corruption, Global Security, and World Order (2009). This is a collection of articles from around the world that examines many different, and depressing, examples of the impact of gaming the public funding system. The varied approaches to combating this problem are the most valuable part of these articles.

In the US this issue continues to eat at the fringes of massive expenditure plans. Last year the American Society of Civil Engineershas identified $2.2 trillion worth of repairs needed on bridges, roads, schools, and water and sewage systems. And that’s just the repair and  maintenance, without additional construction or replacement of aging systems. With that much money on the line serious efforts must be put in place to make the funding process as clean as possible.

2012 the year of infrastructure

There is a strong and growing concern for infrastructure development, repair, and change in the United States and abroad. News media and political campaigns have joined professional engineering societies and regional development groups to call for renovation and renewed focus on energy, transportation, water and other infrastructures.

Internationally there are major efforts in China, South Korea, Malaysia, Indian and several African countries to expand and rebuild infrastructure systems. Pipeline projects connecting Canada and the US are also gaining wider notice as changes in gas development technologies makes more resources available but access remains limited without adequate transportation conduits. Government and industry leaders in the UK and EU are wrestling with a lack of comprehensive and scalable approaches to maintaining what exists or building new capacity.

The global recession hampered public-private funding efforts for large projects and long deferred maintenance has become a critical problem in every corner of the world. Global project development firms like Booz Allen are making more public, more widely promoted statements about moving forward in key infrastructure projects like transportation and energy.

In a new online and traditional media push leaders at Booz Allen are pressing for change. “Much of America’s critical infrastructure is failing—threatening our economic growth, national competitiveness and even our national security. In the past, we excelled at imagining infrastructure—witness the Erie Canal and the national highway system—and now we need to re-imagine America’s infrastructure with new ways of approaching the issues.”

Groups like the American Society for Civil Engineers now routinely make headlines with their evaluations of transportation and water infrastructure systems with “report cards” filled with bad and failing grades. Political posturing in the US, not something new, stopped different proposals for funding from moving through the legislature.

But the coming year may see changes in public and political stances on infrastructure systems. Elections in the US and elsewhere may force these often neglected systems into a spotlight.

More taxes, better infrastructure?

Infrastructure moneyThe United States’ transportation and water infrastructure—its highways, airports, water supply systems, wastewater treatment plants, and other facilities play a pivotal role in the economy.

But how should they be paid for?

In a recent MarketWatch opinion article Christopher Hinton suggests higher taxes as the way to pay for the crumbling infrastructure in the United States. The article’s key economic summary paragraph: “Today U.S. infrastructure investments amount to 2.4% of the nation’s GDP, versus 5% in Europe and 9% in China…” Falling revenue from federal taxes, including those on gasoline sales, are restricting the budgets that would otherwise be used to shore up systems.

He cites a widely discussed 2007 report from the US Department of Transportation that found declining highway expenditure budgets led to lower employment across many sectors of the economy. For every $1 billion lost from the national highway budget, an estimated 30,000 jobs are lost in steel, construction, concrete and paving firms. Even those who found fault with that report’s details agreed with the overall picture presented there. It is clear that spending less on infrastructure means fewer jobs, and not just for paving contractors.

The newest report on infrastructure spending in the US is from the Congressional Budget Office (CBO). It suggests increased spending on transportation and water infrastructure through tax increases and a mix of anti-fraud and cost-savings measures on spending programs already in place.

The recent CBO report is being used by the Obama administration to push for the establishment of an infrastructure bank. This is a special funding organization that would serve as a clearinghouse for public funding, bond ventures and other debt instruments that could be used to increase funds available for projects.

These solutions are attempts to solve a brutally basic three-sided problem. The infrastructure in the United States is crumbling and in need of repair (and expansion) while the costs of infrastructural systems and materials are rising and funds available to support the work are shrinking. Public funding, from tax revenues, is restricted as the economy languishes and credit remains tight.

But is public funding the only way to solve this problem?

Today the public funding model is so widespread, from massive Chinese state-funded mega-projects to small town local street repairs that it seems to be the only solution. But that doesn’t tell the whole story. Infrastructure funding in the US, and many Western countries, began with primarily private funds. Bond funding, stock companies and even lotteries were used to build canals, turnpikes and other infrastructure projects in the previous two centuries.

Recent examples of private investment replacing public funding can be found in public-private partnerships where cities and states have sold off infrastructural systems. In 2005 Chicago sold the southern tollroad into the city, the Chicago Skyway, to Skyway Concession Company, LLC for $1.83 billion, Skyway Concession has a 99 year lease to operated and maintain the road. In nearby Indiana the state sold lease rights to a tollroad that runs across the northern tier of the state.

In October 2008, in a similar deal, Chicago tried to lease the rights to Midway Airport for $2.5 billion but funding for the deal fell through. The recession has stopped the rollout of more deals but the benefits are obvious. Selling off large infrastructural systems  provides cities and states with revenue and frees them from having to maintain a budget for upkeep and repair. The investors hope to make a profit from fees and rents they will charge users rather than taxes.

This solution, suggested by many in and outside of government, is promoted by the National Association of Public and Private Partnerships, among others.  These types of partnerships make up almost 7 percent of funding for infrastructure projects in the UK and Australia.

So what stands in the way of the expansion of private funding for infrastructure projects? Infrastructures, by their very nature, require large ‘footprints’ in terms of land, access to other services and infrastructure and require large scale investments. Building a road, railroad, dam or airport in the United States also requires permits and regulatory agreements at every level of government in an often byzantine pattern of overlapping authority. Federal and state agencies have regulatory control over large aspects of the economy that smaller ventures do not require. In some cases it is easier to start an international company, even a bank, than it would be to build a road from one town to the next.

Another key aspect difficulty with private infrastructure funding are the incentive structures currently in place. Firms led by even the most ardent anti-government libertarian will still feel compelled to engage in bidding and lobbying for contracts when huge amounts of federal funding can provide lucrative long-term contracts. Many cities have put local regulations in place that require or reward regional political preferences in the form of artificially higher wages, contracting services and hiring practices.

Oversight in federal infrastructure planning and spending is also a problem. Even when doing something as simple as preferential contracting– like granting contracts to US companies, or “small businesses” the Obama administration, like others before it, has changed the definition to suit their needs. Some of the firms the Obama Administration has allowed to be included as small businesses are: Lockheed Martin, Boeing, Raytheon, L-3 Communications, British Aerospace (BAE), Northrop Grumman, Dell Computer, French firm Thales Communications, Ssangyong Corporation headquartered in Seoul, South Korea.

Raising taxes on gasoline to pay for roads sounds like a logical idea. But federal government funding is never a single line from source to receiver. While fraud is a common problem in contracts measured in the millions of dollars, there are also simpler problems with building and repairing these systems that create waste and delay.

Adding more tax money cannot be the only solution.

Infrastructure money moving out of the US?

Global accounting and consulting firm Ernst & Young are predicting a weakening US economy if infrastructure maintenance and development spending does not increase.  While E & Y do make money from bond issues and lending associated with such projects the information they gathered in a survey over the past year is above the typical “the bridges are failing” rhetoric often heard about infrastructure spending.  The warning comes from a report to urban planners, real estate developers, investors and architects at the Urban Land Institute in Phoenix, AZ. The ULI and Ernst & Young released the latest results of their global infrastructure survey on Monday of this week. Click here for the report.

One key finding was that US funding is losing out to overseas capital projects.  Information gathered by E & Y indicates institutional investors will be increasing their allocations to infrastructure funding five-fold over the next 15 years.  The majority of this money come from US investors but it is being used in Asia, Europe and Latin America where planning for large projects is moving forward at a faster pace.

Essentially, money if moving to the projects, and the larger, investment-grade, infrastructure projects are happening in other countries.