How to stop infrastructure fails

The government should stop tying essential infrastructure projects to job creation. Essential infrastructure is that which is necessary to enable other development. Examples include water, electricity, transport and sewage.

Here’s an example to illustrate the point.

A city’s water supply is crumbling and needs to be renovated and expanded before any new opportunities can be opened up. You can’t build new houses, your local education institutions are under threat of closing, businesses are closing and not being replaced.

The government supplies funds and stipulates that at least 30% of the budget must be spent on local contractors to help stimulate the local economy and create skills.

The trouble with this policy is it creates a perverse incentive to fail. By requiring local contracting, it encourages awarding of the contract to a contractor who is open to corrupt awarding of local contracts to patronage networks. That becomes the goal, rather than awarding the contract to the contractor most able to deliver.

Short-term, a lot of jobs are created and everyone is happy. But this is where the perverse incentive comes in. Because the infrastructure is essential, if the project fails, it has to restart, creating more opportunity for bribes, kickbacks and rewarding patronage networks. Worse, with the failure of the project, there is no other economic game in town so the incentive to get on the next-round gravy train of the restarted project is even bigger.

Taken to the extreme, you kill your entire local economy – even future repeats of the failed project, as there becomes no point to the repeatedly failed project once there is no local economy to serve. Job creation? Short term. Then you go into decline and have a massive net job loss.

If this is done country-wide, the end result is an economic death spiral as the tax base contracts and new investment dries up.

Much better: remove the requirement for local investment from essential infrastructure, the kind that cannot be allowed to fail. Use the money you save by not having multiple disastrous repeats to create jobs in areas where failure will not have a knock-on effect. And allow the improved infrastructure to do its thing: stimulate new housing, new business, growth in public institutions.