For most of the post-war period, government has been the principal provider of infrastructure (at least outside the United States). Over the last decade, that position has begun to change. Faced with budgetary stringencies and, at the same time, pressure to expand and improve public facilities and services, governments have turned to the private sector, in order to harness private finance and achieve better value for money. Private sector entities have entered into long-term contractual agreements to construct or manage public sector infrastructure facilities, or to provide services to the community (using the infrastructure facilities). The techniques have been developed at national level, used to promote investment in local government services and in infra- structure projects more generally elsewhere, and have been extended to joint ventures and infrastructure projects for regional regeneration.
When considering infrastructure projects, ‘infrastructure financing’ and
‘infrastructure investment’ need to be distinguished. The former can arise from the privatization of existing facilities, whereas infrastructure investment involves development, operation and ownership either by the private sector alone or in a joint venture between government and the private sector entity.
The distinction is analogous to buying an existing office block, already fully let, as opposed to developing a new site – the financing requirements and risks are obviously quite different in the two cases. Our interest is with infrastruc- ture investment, and in the case of a PPP contract it incorporates:
• the construction of a new infrastructure asset (or the refurbishment of an existing one) to be designed, built and financed by the private sector to the procuring agency’s services specification, within a particular dead- line and to a fixed price;
• long-term (25- to 35-year) contracts for the provision of infrastructure services associated with the asset; and
• collection of revenues by the operator or the payment by the public sector body to the private body of a fee or unitary charge, allowing the contractor to make a return on investment commensurate with the levels of risk assumed.
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But what is infrastructure? Obviously, we do not have PPPs for the production of coal or steel or motor vehicles. But why not? What is distinc- tive about infrastructure? Investment in infrastructure on some definitions is said is to provide ‘basic services to industry and households’,1‘key inputs into the economy’,2and ‘a crucial input to economic activity and growth’.3 However, what is ‘basic’, ‘key’ and ‘crucial’ varies from country to country and from one time to another. For example, steel production was once regarded as essential infrastructure in many countries. In early post-war Britain, coal, iron and steel were regarded as constituting parts of the
‘commanding heights of the economy’, but few would describe them in these terms today.
Public ownership is another suggested characteristic. For example, Gramlich (1994) in his survey article on infrastructure investment focuses on ownership and defines ‘infrastructure capital’ as ‘the tangible capital stock owned by the public sector’ (p. 1177). Highways, ports, bridges and other transport facilities, power generation and distribution, water and sewerage treatment, and telecommunications systems would be regarded by most commentators as part of a country’s infrastructure. Yet, in England today, only roads and motorways among these items remain publicly owned, and even then some motorways and bridges are privately operated, including in December 2003 the new 42 km M6 toll road, Britain’s first tolled motorway.
As we shall see in the next chapter, the private sector has a long history of being involved in providing such infrastructure facilities and services to the public (including toll roads). With the current shift toward a return to more involvement by the private sector in infrastructure services, ownership cannot in itself be a defining characteristic as to what should be seen as public infra- structure. In any case, the public ownership definition is not especially help- ful unless we can bring into the picture those factors that have led certain assets to be brought at some time within the ambit of government and thus become, by definition, infrastructure.
While there would be a general consensus that tangible capital assets such as bridges, roads, streets and tunnels are infrastructure, others would cast the net much wider. A distinction is often made between ‘economic’ and ‘social’
infrastructure and within each of these between ‘hard’ (physical) and ‘soft’
infrastructure (Argy et al., 1999). On this basis, there are four categories:
1. hard economic infrastructure 2. soft economic infrastructure 3. hard social infrastructure 4. soft social infrastructure.
These classifications are set out in Table 2.1.
Economic infrastructure is considered to provide key intermediate services to business and industry and its principal function is to enhance productivity and innovation initiatives. ‘Hard economic’ facilities include roads, highways, bridges, ports, railways, airports, public transport, telecommunications, elec- tricity and gas generation, transmission and distribution. ‘Soft economic’
infrastructure encompasses vocational training, financial facilities for business (payments, credit, equity, derivatives, venture capital, etc.), the facilitation of R & D and technology transfer, and organizations encouraging export orienta- tion and productive cooperation among individuals and entities. Notably, many of these are privately owned and operated, some provided by individual institutions (e.g. credit rating organizations) and others by groupings of private entities forming cooperative networks (e.g. payments systems).
Social infrastructure is seen as providing basic services to households. Its main role is to improve the quality of life and welfare in the community, espe- cially among those of limited means. ‘Hard social’ facilities embrace hospi- tals, education and training buildings, water storage and treatment facilities, housing, sewerage and drainage pipes, child care and aged care institutions and prisons. Again, some of these are provided by private sector bodies (e.g.
private hospitals and private schools). ‘Soft social’ infrastructure takes the form of the social security system, a range of community services, and en- vironmental protection agencies. Many of these services are viewed by the Table 2.1 Classification of infrastructure by type
Hard Soft
Economic roads vocational training
motorways financial institutions bridges R & D facilitation
ports technology transfer
railways export assistance
airports
telecommunications power
Social hospitals social security
schools community services
water supply environmental agencies (EPAs) housing
sewerage child care prisons
aged care homes
community as ‘essential’ and tend to have, in the description of Musgrave (1959), the characteristics of ‘merit goods’ in that they are regarded as socially desirable.
As to the importance of these categories, the OECD (1993) describes ‘hard economic’ structures such as road and rail networks, waterways and ports, airports, energy and water utilities, and telecommunications as ‘core’ physical infrastructure, as compared with ‘other’ infrastructure such as education and health, or intangible investments. In Australia, the services from economic infrastructure are estimated to account for more than 10 per cent of GDP (Productivity Commission, 2001). Also, economic infrastructure represents around 70 per cent of the stock of infrastructure in Australia by value.
However, to some degree this comparison may be misleading, since economic infrastructure contains items that are more easily priced and appreciated in narrow economic or financial terms, whereas social infrastructure contains many investments where the gains are less tangible or less easy to price or value in economic or financial terms (Allen Consulting Group, 2003).
While the distinction between ‘economic’ (hard or soft) and ‘social’ (hard or soft) may be a useful one for organizing thinking about infrastructure policy, the categories do overlap. Some forms of social infrastructure such as those that enhance the skills, health, productivity and morale of the work force and the quality of life may have as much bearing on the productivity of indus- try as economic structures. Economic infrastructure such as roads and trans- port networks can impact on the quality of life, even if this is not the intent.
Moreover, both types of infrastructure incur relatively high initial capital costs, have relatively long lives, and need to be managed and paid for on a long-term basis.
Others would cast the infrastructure net wider still. One such definition is
‘those physical and social structures that support the life and interactions of a society’.4Along these lines Jochimsen (1966), cited in von Hirshhausen (2002), defined infrastructure as ‘the sum of material, institutional and personal capac- ities available to economic agents’ (p. 100), identifying three categories:
1. Material infrastructure is that part of the physical capital stock of an econ- omy used as a fundamental input into other directly productive activities.
This type of infrastructure corresponds to what has been called social over- head capital in development economics (Hirschman, 1958). Examples are equipment and structures in telecommunication, transport, energy, water and sewerage.
2. Personal infrastructure comprises the entrepreneurial, mental and other skills of the people that contribute to economic production. Commercial skills can include accounting, banking and finance, procurement, manage- ment and marketing.
3. Institutional infrastructure corresponds to what new institutional economics5 calls the ‘institutional environment’. It includes internal and external norms (or formal and informal institutions) that shape economic behaviour and decision-making processes. These norms are governed by what Buchanan and Tullock (1962) would call the constitutional framework (choice of rules governing economic and social interactions), as well as unstated conventions and various forms of implicit behaviour, the ‘choice within rules’. Examples are the legal system, the economic constitution, banking and finance regula- tion, the bureaucracy, along with informal institutions such as trust, culture, business networks, and acceptance of social norms.
Jochimsen’s definition of infrastructure and his emphasis on institutional aspects recognize that the key foundations of a market economy are the markets themselves, institutions and policies that support and enhance markets and market-based behaviour, skills and enterprise, not just physical structures.
An infrastructure project can create a new market or alter the structure of a market, expand competition in other markets, widen market-oriented conduct and innovation and contribute to the reform of policies and government insti- tutions and practices that alter the investment climate in the country (Stern and Lankes, 1998). While in principle such impacts could be incorporated into cost–benefit analysis,6 in practice cost–benefit analysis seems unlikely to capture all of the effects of institutional change resulting from infrastructure investment.