Infrastructure
Infrastructure
To grow an economy you need ports, electricity, roads and transit. Government must direct the planning, though very rarely do the building.
Since the start of Trump’s trade war, many businesses have considered moving from China to Vietnam. They have been deterred because Vietnam lacks the necessary ports, electricity, and roads to service manufacturing. So how can a country get those built when time is of the essence?
Public-private partnerships are generally the way. Private companies pay for most of the construction costs upfront in exchange for long-term contracts (25 years or more) to collect the operating profits.
Toll roads can be contentious. But private contractors build roads far faster than government. In Ontario, I was involved with the controversial Highway 407. The province may not have made the best deal with the private contractor. More on that in a minute.
However, it took the private company about 4 years to build the 110 kilometer road.
The picture on the left shows how much got done at once.
Under the government built construction plan, the same road would have taken 20 years!
The private company also pays all the maintenance costs like repaving. In general, Hong Kong has done these kinds of projects well.
Ports and power generation can be done the same way. The key is government must carefully regulate the fees the private companies can charge. Companies must make a large enough profit to justify the investment (and future investment) but they can’t be allowed to use a monopoly position to gouge users with high fees.
In poorer countries, these companies will have to be foreign because of the large upfront amount of capital needed. That is politically sensitive, so it’s critical to attract the investment, but also make sure it’s on terms that ensure the companies profit more as the total economic pie grows more … not with fee hikes.
In general, the best way to do this is to agree to the profit mark-up percentage upfront. The privates like the freedom to make rates whatever they want tied to usage. If usage falls, they can be penalized. This was the problem with Highway 407. Dependence on the road was created, then the tolls were tripled. Usage fell some, but profits for the company were much higher.
Put another way: if there’s only one port, you have to pay the high price. If you can’t afford it, that deters economic activity. That should cost the operator.
Transit
Hong Kong’s MTR has a good model for building subways. MTR gets the air rights above the station and can develop malls and apartments that greatly offset the very expensive cost of train building.
MTR actually makes a profit: $1.5 billion in 2014. MTR fares are also relatively low compared with those of metro systems in other developed cities. The average fare for an MTR trip in 2014 was less than $1.00, well under base fares in Tokyo (about $1.50), New York ($2.75), and Stockholm (about $4.00)
Canada has the more typical model. The TTC subway in Toronto loses about 10 cents per rider. From a cost perspective, the system does better when fewer people use it. Vancouver has run train services that lose dollars per customer. That’s unsustainable.
The TTC’s most recent expansion, the Sheppard line, cost taxpayers $1 billion for just 8 stations. The TTC also had an insane formula where the socialist city of Toronto negotiated the contracts with the line’s unionized workforce and the Government of Ontario had to pick up 50% of those operating costs. These are unsustainable models that force non-users to subsidize other people’s rides at a high opportunity cost to education, health care, and other government services.
Maintenance
Government also needs to maximize the life, performance and value of existing infrastructure. From personal experience, this is critical.
When I was at the Ministry of Transportation, the two previous governments had allocated no money for routine maintenance of bridges. The effect after 10 years was many bridges were in danger of crumbling. And the fix cost about 200 percent more than the expense of doing routine repairs..
(Think about the extra crew needed to shut a bridge down during repairs. Then think about the economic losses caused by the shutdown.)
Chicago’s elevated train line is similarly crumbling. Trains must run at slower speeds because the track is in such bad shape. The city needs to spend $6 billion to bring its subways into good repair. But because politicians like to cut ribbons opening new things, Chicago continues to open new stations even though the existing line is in such disrepair, it could fall down.
Communications
In the modern era, nothing is more important than a fast Internet grid. But security issues abound. Look at China’s dominance of 5G through Huawei as an example of how important this is.