p.345
CAPITAL PROJECTS AND INFRASTRUCTURE IN URBAN AND ECONOMIC DEVELOPMENT
Phillip O’Neill
Introduction
One of the most discussed public campaigns in urban affairs is the battle between New York urbanist Jane Jacobs and New York infrastructure tsar Robert Moses. In her book Death and Life of Great American Cities (1961) Jacobs holds up the road transportation projects of Robert Moses as the enemy of a loveable city, and her argument makes much sense. Yet at the same time, the book is blind to the extraordinary vehicle created by Moses and his colleagues, namely the Port Authority of New York and New Jersey (PANYNJ) (Doig, 2001). No explanation of the longstanding success of the New York city-state economy is possible without understanding the role of this authority in building the vital internal connections and flows which underpin the city. Unfortunately, we know little about these processes of city building. This is what this chapter is mainly about.
Central to our understanding of the delivery of urban infrastructure is the role of the state in infrastructure commissioning, financing and operation. Perhaps Robert Moses’ greatest achievement was his assembly of a giant public sector utility responsible for multi-disciplinary transport provision for the urban economies of northeast America. Similar utilities were constructed across the developed world in the post-war period, and I suspect the PANYNJ was a model. Yet few of these utilities remain. Indeed, their dismantling is so advanced that once-noisy claims about the merits of holding large-scale infrastructure assets in state hands have become muted. There is a level of acceptance about the condition of the infrastructure sector as having become a mix of private and public capital and operators. That said, longstanding debates continue about the choice of infrastructure to be built, its design characteristics, and how it intersects with the urban fabric of a city. This chapter explores the parameters of these debates. This first section sketches the issues which seem to defy resolution in the infrastructure debate. The second section presents a brief history of the take-up of responsibility for major capital works in our cities, which is followed by an overview of a theoretical settlement in economics about what infrastructure has become. In the third section, however, we explore the absence of the urban circumstances of infrastructure in this theory and point to the vital economic role capital works perform. The fourth section explains the politics of funding and financing that pervade the infrastructure sector – largely because of its socio-spatial (rather than its stylised economic) qualities. The fifth section then reflects on the range of historical settlements to these politics with a view to identifying opportunities for constructive development of better infrastructure provisioning. Then the final section suggests an integrating framework for ongoing research and policy development.
p.346
A technical note needs to be made at this point. The focus of this chapter is on those capital works and infrastructure which are directly involved in enabling the physical and energy flows of a city. So the chapter discusses urban infrastructures that enable the transportation of people and freight, the supply of water and energy and the operation of telecommunications. Other vital urban infrastructures including health and education (sometimes called ‘soft infrastructure’) and green infrastructure are beyond the scope of the chapter.
History
The provision of infrastructure and capital works has never been an agreed-on field of activity with systematic, historically recorded debate over selection and design, finance and funding, and operation and governance. In the late 18th century in The Wealth of Nations, the father of classical economics Adam Smith assigned responsibility for infrastructure to ‘the sovereign’, which was a very privileged assignment given Smith had only two other duties for the sovereign on his list: the defence of the realm and the protection of private property (Smith, 1976, pp. 687–688). There is an interesting literature which seeks to understand why Smith saw infrastructure as different from other economic goods. A consensus (see West, 1977; Petkantchin, 2006) sees Smith wrestling with the rise of modernisation in Western Europe and the need for new types of political, institutional and spatial order. Accommodating these new demands involved ‘constitution making’, especially around joint ventures and activities such as banks and corporations. Important to these ventures was the determination of property titles, capital rights and liability protections, and these were also central features in the operation of public works. Smith’s thinking, then, was not simply about who should undertake the construction of roads, railways and bridges, but who should have responsibility for the creation and preservation of the passageways and thoroughfares, and then for their capitalisation and maintenance through time. Smith was recognising the central role of legal frameworks and property rights in building larger-scale economies as capitalism sought new ways of securing physical passage to more distant territories to access labour and resources, distribute product, secure profits, and limit what might be devastating liabilities should there be physical failure of assets involving major land works, water storage and the like.
Smith’s thinking, therefore, was very much a political economy of infrastructure provision. It is somewhat surprising, then, that classical economics has by-and-large stripped Smith’s political economy explanation from its exposition of a theory of infrastructure and capital works. Let’s begin with the foundational category for infrastructure in economics: the public good. In economics a public good is something that is consumed collectively. The idea is most often sourced to economist Paul A. Samuelson who explained that when anyone consumes a public good, say by driving on a road, this ‘leads to no subtractions from any other individual’s consumption of that good’ (1954, p. 387). In our example, the road is still there for the next motorist to drive on it. Economists call this the non-rivalry characteristic of a public good. A second important characteristic is seen to be that of non-excludability, although this condition is not as clear as non-rivalry. Non-excludability refers to the difficulty of limiting the benefits of a public good to an exclusive group. Most of our infrastructure system uses road and street corridors for their rollout (water pipes, electricity wires, telecommunications cables, sewerage), meaning every householder has access to them, and that an additional user can be added to the system at minimal cost. Nevertheless, there are ways of limiting access to a public good, especially by user charges, making the non-excludability characteristic less than clear cut.
p.347
In economic theory, non-excludability comes very much from the scale of operation. Spring water from a deep well on a private property can be sold readily as an exclusive private good, while a catchment-wide storage and treatment system becomes by definition a public good. It is easily understood that this type of system also has natural monopoly characteristics such that an additional rival producer would undermine the benefits of there being only one catchment-wide operator. Moreover, the large scale which comes from the monopoly supply of a public good across a city throws up enormous cost advantages, the most important of which is that once operational the cost of servicing each extra consumer is virtually zero.
One more feature from economics concerning public goods is the presence of positive externalities. Because public goods are more or less non-excludable and, as monopolies, they deliver services across wider areas, they also generate additional material benefits unable to be captured easily by commodification. Some examples are the public health benefits shared widely as a result of a quality sewerage system, the reduced surface road congestion and improved air quality in inner city neighbourhoods arising from the establishment of a light rail train service, and the economic activity generated in the vicinity of an airport. Of course, large-scale infrastructure items are also capable of generating negative externalities such as the noise from a railway line, motorway or airport, and the loss of natural wetlands and river habitats that usually accompany large water storage facilities.
Clearly, economics has spawned both a useful language for talking about infrastructure and a way of analysing its efficiencies, with important differences identified between public infrastructure and privately bought and consumed goods and services. What economics has lacked, however, is a worthwhile contribution to understanding the processes of infrastructure assembly, including its financing and funding, and its intersection with the socio-spatial nature of urban economy and urban life more generally. This deficiency should be surprising given the substance of Adam Smith’s original observations about public works, and of the nagging reminders over seven decades of the 20th century from Ronald H. Coase, the Nobel laureate, of the need for close consideration of the politics of infrastructure provision. Coase had a particular interest in the nature of public and monopoly goods, writing observations about the rise of a broadcasting service (1947) and a national electricity grid (1950), the tense relationships between national regulators and utility operators (1939), the justifications for monopoly provision of national postal services (1961), the rationale for price setting in public utilities (1970) and, famously, the complexities of assigning costs and apportioning benefits in the provision of lighthouse services to coastal shipping and ports operators (1974). On the other hand, the deficiency is to be expected given the persistent absence of geography in economic thought. The frustrating element here is that urban infrastructure is so blatantly a geographic event. Throughout its life course it is impossible to separate an infrastructure asset from its urban location and context. We look at this presence next.
The role of infrastructure in urban and economic development
It is important to separate the use of the term ‘public good’ from the popular expression ‘the public good’. As we have seen, a public good is a particular category of economic transaction distinguishable, say, from a private consumption good; while the public good refers to a normative image of a state of collective betterment, and not necessarily in a monetised sense. The language and politics of infrastructure gets mixed messily between these two meanings. In this section we set out the ways infrastructure produces benefits of many types. Hopefully this dissection helps define both the word infrastructure and the categories where its meaning is played out (see Lakoff, 1987).
p.348
The first benefit of infrastructure comes from the city’s primary role as an economic entity, indeed as the cornerstone of contemporary capitalism (Harvey, 1985). As discussed earlier, infrastructure is the central device for the assembly of labour and raw materials at production sites and then for the dissemination of finished products. Infrastructure provision generates all sorts of efficiencies for producers such that virtuous economic cycles are installed: the city as a drawing card for production and consumption → the city as a place which generates infrastructure investment → the infrastructure-enabled city where the aspiration for growth is realised → and so it goes on.
Benefits for the reproduction of labour follow accordingly. In many ways the reproduction of labour is an old-fashioned expression common in Marxist studies to refer to the social processes unfunded by producers but nonetheless necessary for the replenishment of labour, be it for work the next day or for the production of a newly skilled cohort of workers a generation later. It is immediately obvious that the transport, energy, water and telecommunications systems that enable successful capitalist processes at sites of production and consumption also contribute enormously to the daily health and longer-term stabilisation of a city’s resident labour force. Here the marginal cost efficiencies of monopoly infrastructure suppliers come to the fore, as householders can be added as consumers of infrastructure services at very low cost, the high sunk costs of infrastructure investment having already been justified if not amortised by the presence of major infrastructure consumers in the production and commercial sectors.
But there is much more to infrastructure’s fomenting power than the generation of scale and process events in firms (micro-economies) and in market relations (externalities), although these are major matters. Infrastructure plays the major role in the processes that give a city its structure and shape and then its daily flows and rhythms. Thereafter, infrastructure is directly responsible for the material networks that link the transacting city to outside spatial entities, especially to other cities but also to nations and other forms of economic territories. Here we attempt to give substance to what Brenner and Schmid (2015) describe as ‘a territorial conceptualization [of a city] that includes the large scale operational landscapes of extended urbanization’ (http://urbantheorylab.net/); and foreground the socio-technical equipment of a city as a key determinant of its social, economic and environmental conditions. Note, though, that we seek not so much a bland account of a city as wired materially by its physical infrastructure assets, but an exposition of the interplay between a city’s material assets and its non-material plays. Intriguingly, such interplay is investigated at larger scales through concepts like ‘infrastructural Europeanism’ (Schipper & Schot, 2011) which exposes the role played by trans-European infrastructure networks, especially in telecommunications (Laborie, 2011) and electricity (Lagendijk, 2011; see also Hughes, 1983), in the rollout of a continental political grid that overlays Europe’s, enabling inventions and innovations in infrastructure sectors.
For the scale of the city, such interplay should be readily evident, yet the links are not well made in the literature to date. Certainly, there is awareness of the importance of systematic, repeated movements of a city. Prominent here is the discussion by Amin and Thrift (2002, pp. 17ff ) of a city’s ‘repetition and regularities’, although Amin and Thrift look to soft technologies like public transport timetables and the rhythms of more-than-human habitations of a city across its daylight and night time hours rather than the obvious role played by large-scale infrastructure as a rhythm-generating device. More recently, however, Scott and Storper (2015) advance a view of the city wherein infrastructure as a generative space – alongside production spaces and special spaces – is named as one of three essential sources for the generation of a city’s urban-land relations and its agglomeration processes. Importantly, Scott and Storper have a broad conceptualisation of the city as a vehicle for holding together the otherwise ‘complex congeries of human activities’ (2015, p. 6). Hence, rather than being dismissed as a piece of socio-technical equipment, or sidelined by an overconcentration on the soft technologies of a city (see Amin & Thrift, 2002, especially chapter 4), Scott and Storper (2015, p. 7) give first-order importance to infrastructure because of its ordering and agglomeration-assisting functions, seeing the city:
p.349
[a]s a concrete, localized, scalar articulation within the space economy as a whole, identifiable by reason of its polarization, its specialized land uses, its relatively dense networks of interaction (including its daily and weekly rhythms of life), and the ways in which it shapes not just economic processes (such as the formation of land, housing and labour prices) but also socialization dynamics, mentalities and cultures.
Some simple theoretical claims can be made at this point. The first is that there is a socio-technical and spatial process involving the grouping of common urban living needs into manageable entities so that infrastructure services can be delivered efficiently. Buildings are aligned to streets, for example, so that they intersect with transport, energy, water and sewerage services, and their owners are compelled to pay for the operation of these services. Commuters who live along these streets are effectively ‘assigned’ each morning to train carriages by spacing themselves roughly equally along on a local railway platform. Motorways ‘organise’ the movement of cars in common directions over many kilometres having intervened at specific junctions to redirect them after their very disordered first few kilometres of local travel from their drivers’ places of residence. And so on.
A second insight is that infrastructure, through its organisational functions, inserts persistent rhythms into urban movements via the thick sets of hard and soft regulatory devices that always accompany infrastructure services provision. This means that urban flows are patterned and sequenced into hourly, daily, weekly even seasonal time slots. As a consequence, a city takes on a readable logic giving order to the daily activities of a household – imagine the coordinated schedules, for example, of a family comprising a construction worker, an office worker, a toddler in child care, a school-aged child and an older person in care – to be undertaken without too much angst.
A third claim is that because infrastructure, once built, narrows the options available for urban functioning by shutting down some flows and investing heavily in others, it determines a city’s structured and sequenced flows through time and across space. So the timetables of local buses, for example, are dictated by the timetables and direction of higher order flows, especially commuter journeys, to ensure the efficient movement of passengers within the constraint of a fixed set of capital stock. So bus operators are forced to focus on morning and evening peak flows with other flows, such as the journey-to-school, relegated to next-available time slots. School operating times are very much pre-determined as a consequence.
A fourth is that infrastructure propagates the flows that forge and order the spatial networks that connect cities; for example, through the prioritisation of signalling along major roads, the rationalisation of air traffic through hub and spoke operations, the speeds available for digital information movements according to capital qualities of a telecommunications network, the degree of access to an electricity grid according to generation source, and so on.
Put together, we can see the power of infrastructure as a planning force in our cities, creating in the first instance the social and economic spaces for urban life, especially for the flows of people, materials, energy, information and waste, and thereafter defining what is possible in the future. In effect, it is the entity of the city that takes on the classic characteristic of the monopoly infrastructure asset: that it is forced to bear huge sunk costs in infrastructure’s establishment phases but thereafter is able to operate at astonishing levels of efficiency so long as there is little or no change in substance.
p.350
Explanation of the politics of infrastructure
Our discussion so far shows the impossibility of urban life without the city being infrastructure-equipped. Aspirations for economic prosperity, urban liveability and environmental sustainability depend on the presence of infrastructure. Yet this presence is not easily achieved. Infrastructure assets are usually massive material entities requiring careful planning and siting even though they carry considerable social legitimacy, at least at a general level. At the neighbourhood level there is reluctance to host major transport, energy, and water and waste corridors. Because corridors usually transverse discrete and unitised allotments of privately owned property, their assembly requires exceptional powers of land acquisition and zoning, and then expensive and time-consuming transactional processes to enable the corridors’ capitalisation such as by laying railway tracks, constructing road surfaces or installing power or telecommunications cables. Then there are the major costs of acquisitions and investments and the need for large amounts of finance. Even though returns on investment are usually modest, they are typically stable over very long time periods, as we discuss later.
As Adam Smith anticipated, only the state has the legal and organisational powers to successfully transact major infrastructure investments. Yet wielding these powers on a recurring basis requires that the state has legitimacy – with both capital and labour – to impose the conditions for substantial flows of people, materials and energy across an urban landscape and to fund, either through taxation or user fees, the capital and operational costs involved. Claus Offe’s insights (see, for example, Offe, 1985; for a review see O’Neill, 1996) into the role of the state in mediating the tensions between a post-war capitalism hungry for rapid growth and the political demands of the citizenry for better distributional outcomes might be usefully applied to the analysis of urban infrastructure provision. Important in assembling legitimacy as an infrastructure builder and operator is the way the state re-asserts its autonomy by never acting exclusively on behalf of vested interests be they commercial or community. In effect the state becomes as much the site for dispute, negotiation and settlement over infrastructure as it is the decision maker, for rarely do commercial and community groups agree on the selection of infrastructure projects, their design and their funding. Capital will seek to minimise its contribution to the costs of infrastructure provision and the minimisation of negative externalities while acting to maximise investment in infrastructure which raises factor productivity and enlarges markets. On the other hand, communities will lobby for infrastructure which improves liveability, local amenity and environmental sustainability. Thus the state inevitably holds contradictory positions (which, according to Offe, have no pure resolution) as it seeks to advance economic growth and profitability while pursing legitimisation and urban amenity goals. The tensions that arise in infrastructure decision making are thus impossible to resolve consistently, such is the heaviness of the politics in play (drawing on Offe, 1985).
The intensity of these politics is played out in three major ways. One is through the determination of which projects will be undertaken. So fraught is the selection process, with the presence of limited resources within the state apparatus to expend on the time and cost involved, governments have always had a tendency to delegate the commissioning process to quasi-external agencies. In the post-war 20th-century period, these were state-owned enterprises and utilities which acted at arm’s length from governments. With growing privatisation of the sector it is increasingly common for governments to establish seemingly independent infrastructure management entities such as Infrastructure UK, Infrastructure Australia, Infrastructure Canada, and France’s Commission Nationale du Débat.
p.351
A second political terrain is formed around funding. Here we need to distinguish between infrastructure financing and infrastructure funding (see Kim, 2016). Financing refers to the process of supplying capital to build and initiate an infrastructure asset. Financing might be delivered as equity (with the rewards of ownership and control over the asset) or as debt (with repayment and interest benefits), with each class of finance generating significant contractual obligations. Funding is different from financing and refers to the revenue stream available to meet the cost of financing; a distinction that has become increasingly important with finance now rarely provided by governments as direct non-repayable grants. Funding usually takes one of two forms: taxation or user charges. Obviously, then, how to fund infrastructure is a vexed question requiring complex political negotiations. At times of prolonged economic growth, such as occurred in the decades following the Second World War, the politics of funding infrastructure via taxation might be relatively inert given the costs of infrastructure construction might be easily covered by rising revenues from the taxpaying public. During stagnant economic periods, however, increased taxes are not popular even though the reason they are levied might be sound. User charges require different though no less fractious political negotiations. Infrastructure users – commuters, energy and water consumers, and business operators – are usually hostile to the high infrastructure user charges needed to generate the revenues to fund expensive construction and operation. In conjunction, user fees invariably have undesirable distributive consequences with poorer households denied the level of access to essential urban services compared to better-off households. Graham and Marvin (2001) capture the consequences of this inequity through the vivid metaphor ‘splintering urbanism’.
Graham and Marvin’s work extends our analysis to the third political contention of infrastructure, which is that of design, with all its complexities. The design of an infrastructure asset needs to consider its basic engineering precepts, its location and field of operation, how it connects with other infrastructure assets and networks, and the positive and negative externalities that are designed in and designed out. Clearly some will benefit more than others from these design outcomes, and there may well be net losers. Design of infrastructure, then, becomes a major political concern.
Historical resolutions to the politics of infrastructure
As we have seen, infrastructure was not magically invented in the 20th century by governments deploying Keynesian fiscal strategies. The need for an infrastructure base proceeded hand-in-glove with 18th and 19th century-industrialisation and economic modernisation with roads, railways, bridges and canals delivered by both state and private means. Infrastructure assets and their transformative passages and corridors through urban and rural territories were essential to early capitalism, as we have seen, for the assembly of labour and other factors of production and for the distribution of products to markets. Infrastructure enabled larger numbers of people to live in towns and cities. Supply chains could reach further into the countryside, and the growth of markets enabled the specialisations and divisions of labour that fuelled the growth of profits and the accumulation of capital.
Yet there was something intrinsically Keynesian about infrastructure investments in the decades following the Great Depression and the Second World War. Keynesian policies legitimised the commitment of government spending to infrastructure. The support of private enterprise flowed because of the commercial benefits, as did the backing of a wider electorate keen to see urban and suburban amenity enhanced as cities grew upwards and outwards. In addition, the Keynesian model readily embraced technological advancements and the need for investment in electricity grids, urban transit systems, telecommunications and broadcasting systems, and air routes. Infrastructure’s very large economic multiplier benefits were a bonus.
p.352
Importantly, just as we have seen in the case of ‘infrastructural Europeanism’ earlier, infrastructure investment in the post-war period also created and expanded nation-state capacities. These included the development of urban planning, a government ministry essential to the rollout of post-war suburbanisation with infrastructure spending delivering value uplift to land subdivisions and related property developments. Also important was the creation of a new entity, the utility, an ownership and organisational vehicle that became the commonsense way that infrastructure was delivered. Here civic society, such as through its representation on the boards of utilities, gained a direct say in infrastructure design and rollout. This presence boosted public acceptance of the utilities’ claim on monopoly power and their independence from formal politics, even though they relied heavily on finance flows funded from public balance sheets (Beasley, 1988).
By the late 1960s, there was near enough to universal acceptance of the importance of public investment in the passageways and conduits that enabled efficient flows of people, goods, water, energy and information in cities. Two things were important here (see O’Neill, 2014). First, infrastructure became a subsumed political process. Infrastructure was funded off the public sector balance sheet without political contestation. Then its procurement and provisioning were handled by state utilities with a corps of planners and engineers who, by and large, operated autonomously in evaluating urban infrastructure needs and finding technical and financial solutions. Importantly, within this apparatus of infrastructural venture, the risk of failure was accepted within the wider ambit of the state.
Second, infrastructure became a subsumed socio-spatial process as each new infrastructure item was bundled, synchronised and sequenced with pre-existing items. Sometimes this integration was planned for; but it also occurred as a matter of course, embedded in the daily work practices of the state apparatus: its utilities, government departments and ministries. Crucially, political endorsement flowed, reinforced by the norm of universal access; by the complementarities and externalities generated by the infrastructure rollout; by income and employment multiplier effects from construction; and from productivity improvements across the economy. In turn, enhanced economic growth rates yielded restorative public revenues.
It is a paradox that so effective was the state’s design of the utility as a creator and distributor of infrastructure value that the task of infrastructure privatisation was a relatively easy one in later decades. From around the 1980s, forces in favour of infrastructure privatisation coalesced around issues of declining sovereignty in the face of globalisation, slowing economic growth rates, constraints on states’ fiscal capacities, and a loss of confidence in the effectiveness of the state apparatus to supply essential public services. A common response was to source resuscitation programmes from the handbooks of neoliberalism based around the deployment of private capital in market-controlled systems of production and distribution. Agreement about infrastructure’s commissioning, design, funding, ownership and operation, and about its use as a device in planning and building cities, and in aiding commerce, became confused at first and then vigorously contested. The shift to private procurement, financing and operation took about three decades in most advanced nations, such was the deeply entrenched nature of the utilities and state-owned enterprises in the urban infrastructure sector. In these decades there were many failed experiments in the commissioning and operation of private infrastructure assets alongside numerous instances when the transfer of public assets to private hands occurred without the state maximising commercial value or devising appropriate regulatory structures to minimise practices such as price gouging in circumstances where little or no supply choice existed. There were also bold experiments in heavily geared investment structures and synthetic financial products, many of which collapsed during the financial crisis, as did similar experiments in other investment classes. Yet despite market failure, and the recklessness and dishonesty that exaggerated the intensity of the financial crisis in the infrastructure sector, there is now an established presence in urban infrastructure of private financing, procurement, construction, operation, perhaps even regulation. A discussion of the nature of this maturing presence follows in the next section.
p.353
New modes of infrastructure financing
Within the general argument about the (potentially conflicting) roles and responsibilities of the public and private sectors in a modern economy, there is an ongoing public consternation about private ownership and private investment practices in urban infrastructure. On the one hand, as we have seen, the development and operation of infrastructure creates an integrated urban platform for collective use by a city’s businesses and householders. This ensemble of activity enhances urban infrastructure’s public good characteristics. On the other hand, infrastructure assets are being plucked from bundled utilities to operate as discrete private assets with their own revenue streams and independent managers that seek to maximise returns on private investment (O’Neill, 2009). Not surprisingly, these new arrangements come with new political tensions. There is a continuing project within a city’s polity and its technocracy that sees infrastructure as needing to be planned and operated such that the functions and parts of a city are integrated, efficient and sustainable. At the same time, however, interest among private asset managers in wider urban management questions elevates attention to those matters bearing on the profitability of the asset for which they are responsible. We return to this issue later.
As we have seen, infrastructure has a number of characteristics which have enabled its transformation from entities designed to enable the flows of things in and around cities to entities capable of extracting private earnings from the monetisation of these flows. That said, it should be understood that infrastructure as an investment class has expanded beyond the textbook definition of infrastructure as a public good or natural monopoly. Infrastructure as an investment class includes more market-sensitive (and potentially competitive) assets like ports, airports and telecommunications installations; organisational entities that own infrastructure operating rights like an infrastructure services corporation; packages of urban services and amenities – quasi-infrastructure assets – that are demand-inelastic like parking meters and funeral service providers; and debt contracts and securities with rights over revenue streams from infrastructure user tolls. As investment items within their own asset class, then, the value of infrastructure assets to their owners involves a new set of qualities, ones related as much to financial measures like liquidity, risk and yield than to contributions to urban efficiency and amenity. Similarly, the performance of an infrastructure asset under for-profit arrangements is maximised by having exclusive rights over the urban thoroughfares where the flows of people, materials, energy and information are assigned and therefore to the revenues collected from users of these flows. Finally, there is a concomitant search for ways to privatise infrastructure’s positive externalities, such as by securing property rights and value uplift in an area to be serviced, say, by a new metro line.
The general direction, then, is for a transformation of infrastructure assets from publicly provided entities that enable a city’s economic and social functioning into the hands of commercial providers of services to markets where consumption is pretty much inelastic, meaning cash returns are generated on a regular, predictable basis over a very long time period. Certainly, exotic financial products and ownership structures were wrapped around these flows in the 1990s and early-mid 2000s. But the global financial crisis stripped much of these away leaving an asset class backed by genuine and observable value to a private investor. Moreover, infrastructure assets as investment products come with fairly simple metrics – traffic counts, usage rates, daily toll earnings – capable of being understood and verified through desktop checks by remote fund managers. The visibility of stable, long-term yields has made infrastructure products a natural fit for financing from superannuation and pension funds that carry the long-term responsibility to protect and moderately enhance the value of members’ retirement savings or employers’ paid-up obligations thereof.
p.354
The rise of the infrastructure investment sector has also generated a new set of institutional players in infrastructure provision and operation. First there are those companies spawned by the privatisation of major utilities in the 1980s and 1990s, chiefly in the electricity and telecommunications sectors in the UK and Western Europe. Many of these companies have subsequently grown through mergers and acquisitions into truly global corporations. The next group are the major banks, especially the large banks from North America, Europe and East Asia. These banks take multiple positions in infrastructure investing. In their role as capital aggregators, they contribute both debt and equity capital in major infrastructure deals. They are also key advisers to both investors and governments in transacting new and brownfield infrastructure investments, and they also operate independent investment funds. Major competitors to the banks are the savings aggregators, including the major pension funds, insurance companies and trusts, and some of the larger sovereign wealth funds. A key recent feature of investment practices among this group is a desire for direct investment, control and management of infrastructure assets in order to avoid the substantial fees that are payable to other agencies when these roles are outsourced, say to managed funds (Clark & Monk, 2013). There are also the multidisciplinary corporations, typically large, listed, former construction companies which have witnessed the gains available from taking equity positions in large infrastructure projects, alongside direct roles in construction contracts and project finance initiation. There are the specialist funds as well, in many ways a legacy group from the first wave of private infrastructure investing; but because of their control over many key assets sold in early wave privatisations, they maintain a major market presence often due to the strategic nature of their asset portfolios. And, finally, there is China which is keenly exploring a global role in infrastructure financing and provision, using a mix of the modes listed above. At times China operates as a direct investor, such as in resources infrastructure in Africa. It also operates as a direct lender and as a contributor to open and closed specialist funds, some based in Hong Kong, that undertake their own direct investment infrastructure projects. China also takes offshore infrastructure investment positions through its state-owned enterprises where it has powerful entities operating across all infrastructure platforms including energy, water, ports, airports and transport.
The replacement of the vertically integrated public utilities by portfolios of commercial, tradeable assets also requires the full kit of soft technologies, stabilised practices and industry service providers. At initiation, there is intense activity by professional services firms bringing public utilities and assets to market. Engineering firms conduct detailed appraisals of public infrastructure assets to ascertain the competence and life span of the material assets. Legal firms design new organisational structures, many with complex trustee, general partner and limited partner roles, to provide vehicles capable of controlling and dispersing revenues over long time periods. Financial services firms and merchant banks construct capital and refinancing structures to match the peculiar financing requirements of infrastructure assets over the investment life-cycle to appetites of infrastructure investors. A consequence of the intense participation of the finance sector’s professional firms has been the inculcation of the infrastructure sector with established sets of calculative practices (see, for example, Mackenzie, 2006; Mitchell, 2007), and reasonably well-proven organisational and capital structures which enable, simultaneously, operation by professional managers, monitoring by government agencies (especially treasury officials) and investment activity by funds and savings aggregators. Moreover, because infrastructure investing post-dates the refinement of modern debt-driven financial practices, the monetisation of infrastructure assets and the sector’s acceptance as a discrete class of investment assets (alongside, say, equities, property and private wealth) has reached maturity very quickly with infrastructure investors now concerned at the limited number of proven brownfield assets coming to market. This speed of acceptance has generated a mature investment landscape where the aspirations of 1990s policy makers for public gains from competitive practices and private sector operational efficiencies appear largely to have been disappointed.
p.355
Finally, a new regulatory regime for the infrastructure sector has been generated, although one characterised by opportunism and narrow, privately negotiated obligations and constraints rather than by transparent, institutionalised rules. Certainly there are various state experiments in the formal regulation of private infrastructure investing involving, for example, templated public-private partnership initiatives in Canada (Siemiatycki, n.d.), and across the UK more generally. Yet these practices have progressed little beyond their domestic territories with evidence of only modest international learning and no moves as yet towards transnational standardisation. Yet, as we have seen, infrastructure investing is so instilled with legal rights and protections that the prescription of powers and duties cannot be avoided. Here we can use the insights of Helm and Tindall (2009) who demonstrate the role of legal contracts as proxy regulatory devices with each side of an investment relationship (in this case in the infrastructure sector) having a substantial interest in the strength of these contracts. For the state, there is the need to ensure an asset delivers expected infrastructure services over its life course and that charges to consumers are fair and acceptable given the prevalence of monopoly positions for the new infrastructure owners and operators. For the investor, there is the need for adequate returns to cover operating costs and to ensure fixed costs are recoverable at a reasonable rate over the life of the asset. There is also the need for ownership assurance, seen by the investor as a primary way of managing risk given the high level of uncertainty surrounding a large urban infrastructure asset through lengthy time periods (see also Stern, 2012). Yet given the peculiar nature of the infrastructure sector, and therefore the unlikelihood of being able to import pre-existing regulatory devices and processes from other sectors or jurisdictions, infrastructure contracts between governments and investors have invariably been constructed on an ad hoc basis. Typically, the content of such contracts includes the functions of monitoring and control as well as prescriptions as to ownership rights, including property rights, market conditions, protection from competition, and so on and so forth. Helm and Tindall (2009, p. 149) conclude that, ‘Because of this complex interplay of political and economic factors, each privatisation [has] had its own unique characteristics and, not surprisingly, the outcome of the privatisation programme as a whole [has been] a messy one’. Clearly, analysis of the role of privatised regulation in the infrastructure sector is a topic needing major research. Guidance as to its direction comes specifically from Cutler (2010) but also from the regulatory capitalism literature including Braithwaite (2008), Braithwaite and Drahos (2000) and David Levi-Faur (e.g. 2012; Levi-Faur & Gilad, 2004). Application of this literature to the development of the privatised and financialised infrastructure sector is urgently needed.
Conclusion
The infrastructure sector is too important to the quality of life in our cities to be free to evolve as a relatively unregulated new economic venture. The privatisation and financialisation of the sector introduces a conundrum: how is it possible in infrastructure management to prioritise actions to generate long-term financial returns from infrastructure investment and at the same time generate the raft of services and their externalities expected by a city’s economic community and the wider public. The direction beckoned by privatised and financialised infrastructure now seems likely to be dominated by assets which are owned and managed privately; organised into discrete functional and organisational entities; have monetised costs and returns; have known and apportioned financial and operational risks; and to be controlled by bespoke regulatory arrangements where the financial viability of the asset could well be prioritised ahead of the functioning efficiency of its host city.
p.356
The problem with this direction, however, is that the absence of collective interest in the general condition of a city – economically, socially and environmentally – invariably undermines its economic and social health and thereby the profitability of any infrastructure asset. So a broader public interest must always take priority over the interests of the operators of any individual asset, which means there is a need for principles to guide infrastructure platforms for 21st-century cities that are just, prosperous and sustainable. The principles of universality, bundling, accessibility and being generative of positive externalities are four worthy of retention.
Yet adopting these principles in today’s diverse, continually changing cities requires new approaches. A return to vertically integrated utility structures is impossible, and probably undesirable in a 21st-century hybrid economic setting. The point is that contributing to the public good by the urban infrastructure platform is essential, but it is not necessary that this be done by the public sector. Of course, only the public sector can provide the regulatory power to ensure infrastructure provision in cities; and surely the public sector is the organisational place for insistence on wider benefits beyond financial returns both for infrastructure assets and for infrastructure-in-aggregate. The state has the primary role to play as regulator and organiser. Then, in such a context, the dynamic efficiencies of private for-profit ventures might best drive successful 21st-century cities.
References
Amin, A. & Thrift, N. (2002) Cities: Reimagining the Urban. Cambridge, UK: Polity Press.
Beasley, M. (1988) The Sweat of their Brows. Sydney: Sydney Water Board.
Braithwaite, J. (2008) Regulatory Capitalism: How It Works, Ideas for Making It Work Better. Cheltenham, UK: Edward Elgar Publishing.
Braithwaite, J. & Drahos, P. (2000) Global Business Regulation. Melbourne: Cambridge University Press.
Brenner, N. & Schmid, C. (2015) ‘Towards a new epistemology of the urban?’ City, 19, pp. 151–182.
Clark, G.L. & Monk, A.H.B. (2013) ‘The scope of financial institutions: In-sourcing, outsourcing and off-shoring’, Journal of Economic Geography, 13, pp. 279–298.
Coase, R.H. (1939) ‘Review’, The Economic Journal, 49, pp. 757–758.
Coase, R.H. (1947) ‘The origin of the monopoly of broadcasting in Great Britain’, Economica, New Series, 14, pp. 189–210.
Coase, R.H. (1950) ‘The nationalization of electricity supply in Great Britain’, Land Economics, 26, pp. 1–16.
Coase, R.H. (1961) ‘The British Post Office and the messenger companies’, The Journal of Law & Economics, 4, pp. 12–65.
Coase, R.H. (1970) ‘The theory of public utility pricing and its application’, The Bell Journal of Economics and Management Science, 1, pp. 113–128.
Coase, R.H. (1974) ‘The lighthouse in economics’, Journal of Law and Economics, 17, pp. 357–376.
Cutler, A.C. (2010) ‘The legitimacy of private transnational governance: Experts and the transnational market for force’, Socio-Economic Review, 8, pp. 157–185.
Doig, J.W. (2001) Empire on the Hudson: Entrepreneurial Vision and Political Power at the Port of New York Authority. New York: Columbia University Press.
p.357
Graham, S. & Marvin, S. (2001) Splintering Urbanism: Networked Infrastructures, Technological Mobilities, and the Urban Condition. London: Routledge.
Harvey, D. (1985) The Urbanization of Capital: Studies in the History and Theory of Capitalist Urbanization. Baltimore, MD: Johns Hopkins University Press.
Helm, D. & Tindall, T. (2009) ‘The evolution of infrastructure and utility ownership and its implications’, Oxford Review of Economic Policy, 25, pp. 411–434.
Hughes, T.P. (1983) Networks of Power: Electrification in Western Society, 1880–1930. Baltimore, MD: Johns Hopkins Press.
Jacobs, J. (1961) The Death and Life of Great American Cities. New York: Random House.
Kim, J. (2016) Handbook on Urban Infrastructure Finance. New Cities Foundation, online at www.newcitiesfoundation.org.
Laborie, L. (2011) ‘Fragile links, frozen identities: The governance of telecommunications networks and Europe’, History and Technology, 27, pp. 311–330.
Lagendijk, V. (2011) ‘“An experience forgotten today”: Examining two rounds of electricity liberalization’, History and Technology, 27, pp. 291–310.
Lakoff, G. (1987) Women, Fire and Dangerous Things: What Categories Reveal about the Mind. Chicago, IL: University of Chicago Press.
Levi-Faur, D. (Ed.) (2012) The Oxford Handbook of Governance. Oxford, UK: Oxford University Press.
Levi-Faur, D. & Gilad, S. (2004) ‘Review: The rise of the British regulatory state – Transcending the privatization debate’, Comparative Politics, 37, pp. 105–124.
MacKenzie, D. (2006) An Engine, Not a Camera: How Financial Models Shape Markets. Cambridge MA: MIT Press.
Mitchell, T. (2007) ‘The properties of markets’, in MacKenzie, D.A., Muniesa, F. & Siu, L. (Eds.), Do Economists Make Markets? On the Performativity of Economics. Princeton, NJ: Princeton University Press, pp. 244–275.
Offe, C. (1985) Contradictions of the Welfare State. Cambridge, MA: MIT Press.
O’Neill, P.M. (1996) ‘In what sense a region’s problem? The place of redistribution in Australia’s internationalisation strategy’, Regional Studies, 30, pp. 405–415.
O’Neill, P.M. (2009) ‘Infrastructure investment and the management of risk’, in Clark, G.L., Dixon A.D. and Monk A.H.B. (Eds.), Managing Financial Risks: From Global to Local. Oxford, UK: Oxford University Press, pp. 163–188.
O’Neill, P.M. (2014) ‘How infrastructure became a structured investment vehicle’, in Roche, M., Mansvelt, J., Prince, R. & Gallagher, A. (Eds.), Engaging Geographies: Landscapes Life Courses, and Mobilities. Newcastle, UK: Cambridge Scholars Press, pp. 29–44.
Petkantchin, V. (2006) ‘Is The Wealth of Nations’ third duty of the sovereign compatible with laissez faire?’ Journal of Libertarian Studies, 20, pp. 3–15.
Samuelson, P.A. (1954) ‘The pure theory of public expenditure’, Review of Economics and Statistics, 36, pp. 387–389.
Schipper, F. & Schot, J. (2011) ‘Infrastructural Europeanism, or the project of building Europe on infrastructures: An introduction’, History and Technology, 27, pp. 245–265.
Scott, A.J. & Storper, M. (2015) ‘The nature of cities: The scope and limits of urban theory’, International Journal of Urban and Regional Research, 39, pp. 1–15.
Siemiatycki, M. (n.d.) Is There a Distinctive Canadian PPP Model? Reflections on Twenty Years of Practice, mimeo. Department of Geography and Program in Planning, University of Toronto
Smith, A. (1976 [1776]) An Inquiry into the Nature and Causes of the Wealth of Nations. 2 volumes. Campbell, R.H. Skinner A.S. & Todd W.B. (Eds.). Oxford, UK: Oxford University Press.
Stern, J. (2012) ‘The relationship between regulation and contracts in infrastructure industries: Regulation as ordered renegotiation’, Regulation & Governance, 6, pp. 474–498.
West, E.G. (1977) ‘Adam Smith’s public economics: A re-evaluation’, Canadian Journal of Economics, 10, pp. 1–18.