V. I. Yakunin

The Role of Infrastructure Projects in Public Policy

Lecture Series

ebooks@prospekt.org

Информация о книге

УДК 321(075.8)

ББК 66.2я73

Y14

Author:

Yakunin V. I., Doctor of Political Science, Head of Public Policy Department, Political Science Faculty, Lomonosov Moscow State University.

This coursebook is designed for the students of the recently established English-taught MA program “Post-Soviet Public Policy” at the Political Science Faculty of the Lomonosov Moscow State University. The course provides a brief overview of Soviet and post-Soviet history in related areas, explaining core transitions that aff ect the current state of infrastructure policy in the region. In order to bring together regional specifi city and global trends, the coursebook presents the readers with a brief outline of future infrastructure development.

The aim of this coursebook is not to give a comprehensive review of all aspects of infrastructure policy, but to serve as an introduction to the fi eld, based on the author’s experience and vision. It is designed mainly for foreign students that wish to explore the background of post-Soviet public policy.

УДК 321(075.8)

ББК 66.2я73

© Yakunin V. I., 2021

© Prospekt LLC, 2021

FOREWORD

The purpose of this coursebook is to fill in the gap that exists in Russian science with respect to the study of infrastructure project policy in former Soviet countries at the turn of the 21st century.

It was created with the goal of overcoming the now widespread tendency to view former Soviet Union states as “secondary”, less significant actors (in terms of economy, politics and public administration) when it comes to planning and execution of infrastructure projects. According to the conventional point of view — which this material seeks to disprove — the countries of the region are noticeably lagging behind their more developed and successful counterparts. The author attempts to examine post-Soviet states not as “fragments” of a former empire, but as a collection of new and independent nations, united by a common political, economic and cultural heritage and facing similar obstacles due to their shared historical past — yet striving to make the best use of their economic and political potential. According to the author, this perspective allows us to view the countries of the post-Soviet space as an important element of the multipolar world order — an emerging global system that has not fully taken shape yet. Moreover, with sweeping globalization and the rise in international cooperation, there appears to be less and less practical sense in having a rigid classification of states as “more” or “less” significant.

Obviously, from this point forward, the “younger” nations that emerged after the collapse of the USSR will have an ever greater role to play in global political and economic affairs, and their influence on the way we address global infrastructure issues (related to projects such as China’s Belt and Road Initiative) will continue to increase.

Achieving the objectives set by the author of this coursebook requires us to identify the two main approaches to state policy as it relates to the execution of infrastructure projects in former Soviet Union countries.

The first is the conventional understanding of infrastructure as a kind of “megaproject”, which involves substantial investments of time, capital and manpower — and is impossible without active participation of the state.

The second approach to infrastructure projects as objects of public policy was formed under the influence of modern trends, which tend to look at infrastructure at the micro-level, wherein special emphasis is placed on creating a favorable and comfortable environment for the people, and the “human factor” — values, social needs, the “social effect” of infrastructure, and the view of infrastructure as, above all, the basis for social development — has come to the fore, sometimes deemed more important than economic expediency.

The author uses a systematic approach, under which infrastructure project policy in the post-Soviet space and Eurasia is studied in a holistic manner and treated as a multi-faceted, complex phenomenon. The author does not believe that this approach is in conflict with the existence of disputes and disagreements between some of the countries, on the one hand, and the regional integration blocs they are part of, on the other — after all, no holistic system is devoid of internal contradictions.

The limited size and scope of this coursebook precludes the author from providing an equally detailed analysis of public policy in the area of infrastructure projects across all fifteen post-Soviet countries. That said, the purposes of this course require a more in-depth examination of relevant issues in key countries of the region, such as Russia, Kazakhstan, Belarus, and Kyrgyzstan.

This coursebook provides detailed case studies related to the planning, implementation and operation of crucial infrastructure projects in Russia, Kazakhstan and a number of other countries, and describes the social effect these projects have had. This is the first time this material is presented in the form of textbook for a course offered as part of a master’s degree program with the Political Science Faculty at Lomonosov Moscow State University.

The coursebook offers a wide variety of visual aids (graphs, tables, infographics, illustrations) to facilitate comprehension and learning.

Lecture 1. INFRASTRUCTURE: MULTIPLE DIMENSIONS

Infrastructure. General Definition

According to the Oxford dictionary, infrastructure is a very broad and flexible term, as it embraces a variety of material assets that maintain our everyday life, economic activity and, more broadly, support the human civilization, with the word “civilization” defined as “advanced stage of development” that provides “comfort and convenience of everyday life”¹. The global institutions provide the following definitions for “infrastructure”:

— the World Bank definition of infrastructure includes utilities (gas and electricity, water supply, telecommunications, sewerage, waste collection and disposal), public works (roads and major dam and canal works irrigation and drainage), and transportation (railways, ports, waterways, airports);

— the OECD defines infrastructure as a system of public works in a country, state or region, including roads, utility lines, public buildings².

Notice the difference: the OECD definition includes public buildings (commonly used to provide public services), which makes its scope broader, compared with the World Bank definition.

McKinsey, a global consulting firm, uses an even broader approach: it divides infrastructure into three groups:

— Narrow (economic infrastructure)

— Broader (social infrastructure, oil and gas)

— Real estate³.

In Figure 1.1, you can see the share of each of the three types of infrastructure in terms of investment, with the total sum accounting for around 14 % of the global GDP.

Such variety of definitions produces an entire range of ways to address infrastructure policy on global, regional, national and local levels.

Figure 1.1. Infrastructure spending by asset class, nominal investment in infrastructure, 2015, $ billion

As a global financial institution, the World Bank focuses on the problems of developing countries. More specifically, its website reads:

“The World Bank Group helps developing countries build smart infrastructure that supports inclusive and sustainable growth, expands markets, creates job opportunities, promotes competition, and contributes to a cleaner future. We help countries address their unique infrastructure needs by working with the public and private sectors. Infrastructure improves lives by connecting people to opportunity. Access to basic infrastructure services is critical for creating economic opportunities and bringing social services to the poor. Globally, 840 million people live more than 2 kilometers from all-weather roads, 1 billion people lack electricity, and 4 billion people lack Internet access”⁴.

Meanwhile, developed countries have their own set of problems. While China continues to impress the rest of the planet by constructing the world’s longest motorway and high-speed rail networks⁵, the UK government has to make a hard decision — whether to go ahead with the HS2 high-speed rail project after the estimate for its cost soared to as much as £106bn ($140bn)⁶. At the moment, the UK has no high-speed rail lines, and neither does Pakistan (after failing to get Chinese help⁷) — something that the former metropole and its colony now have in common. This case raises the problem of ageing infrastructure and the necessity of its renovation — a real headache for the developed world. Thus, even developed countries are seeking to develop their infrastructure — as well as achieve economic development through infrastructure.

Infrastructure and development

When talking about infrastructure development, the World Bank refers to the UN Sustainable Development Goals, adopted by all United Nations Member States in 2015, that provide a shared blueprint for peace and prosperity for people and the planet, now and into the future. At its heart are the 17 Sustainable Development Goals (SDGs), which are an urgent call for action by all countries — developed and developing — in a global partnership. They recognize that ending poverty and other deprivations must go hand-in-hand with strategies that improve health and education, reduce inequality, and spur economic growth — all while tackling climate change and working to preserve our oceans and forests⁸.

The World Bank strategy is based on the assumption that “achieving the Sustainable Development Goals will only be possible if we close [existing] infrastructure gaps, by ensuring:

• rural roads and safe transport for access to health and education facilities;

• electrification of clinics, schools and households in rural areas to improve digital connectivity;

• improved road safety and clean cooking to reduce mortality and morbidity;

• digital and other skills needed for implementing infrastructure investments”⁹.

As you can see, some of these targets may seem irrelevant for developed nations, although they have their specific problems of infrastructure development. The common thing for all of them is that infrastructure development requires huge investments, and the lion’s share of them comes from the state budget.

According to McKinsey, infrastructure-related spending (using the broadest definition that includes real estate, oil and gas, and mining) totaled $9.5 trillion in 2015, or 14 percent of the global GDP. Real estate, social infrastructure, and transportation make up the bulk of the spending.

Looking at the contribution of “economic infrastructure”, “social infrastructure” and “real estate”, you may argue that most of it is related to civil engineering and construction. And this is one of the key reasons why the WB, McKinsey and national governments care so much about it. Infrastructure in the broad sense is a huge part of economy and an important driver for economic growth. The McKinsey Global Institute estimates that infrastructure has a socioeconomic rate of return of around 20 percent. In other words, $1 of infrastructure investment can raise the GDP by 20 cents in the long run¹⁰.

In fact, the interest in infrastructure projects has always stemmed from their ability to produce the “big push” effect on economic development (Paul Rodan-Rosenstein is usually credited with coining the term)¹¹. A host of studies has established a strong correlation between capital investment in transportation infrastructure and GDP — and also the Human Development Index¹² (an important indicator of the United Nations Sustainable Development Agenda). In other words, infrastructure development clearly has social and economic consequences.

The need to determine the impact of infrastructure on the level of economic development has motivated a great deal of economic research on the subject over the past three decades. The debate over the effectiveness of infrastructure projects continues at both the macro and micro levels.

David Aschauer produced one of the first and most fundamental works of research on the correlation between investment in macro-level infrastructure and labor productivity (Aschauer, 1989a, 1989b). He identified insufficient public investment in economic infrastructure as the cause of the slowdown in the growth of U.S. labor productivity in the 1970s and 1980s. He theorized that it was possible to increase labor productivity, profitability, and economic growth by increasing public and private investment in infrastructure. Other U.S. economists, such as Alicia Munnell, the soon-to-be Nobel laureate Paul Krugman, Blanca Sanchez-Robles, and Dave Donaldson developed and further buttressed Aschauer’s theory (Donaldson, 2010; Krugman, 1991; Munnell, 1990; Sanchez-Robles, 1998). However, empirical evidence that did not conform to Aschauer’s theory gave rise to criticisms and the search for alternative explanatory models. Robert Eisner, Edward Gramlich, Paul Evans and Georgios Karras, Douglas Holtz-Eakin and Amy Schwartz, and Lars-Hendrik Röller and Leonard Waverman were the most outspoken opponents of Aschauer’s theory (Eisner, 1991; Evans & Karras, 1994; Holtz-Eakin & Schwartz, 1995; Gramlich, 1994; Roller & Waverman, 2001). New approaches, while not detracting from the impact that infrastructure has on the national economy, focus more on the search for indirect and delayed effects.

Today, the debate remains virtually unchanged. McKinsey insists that “the world needs to invest an average of $3.7 trillion in these assets every year through 2035 in order to keep pace with projected GDP growth (Figure 1.2). This need could increase further by up to $1 trillion annually in order to meet the United Nations’ sustainable development goals”.

Figure 1.2. Average annual need, 2017 — $35 trillion, constant 2017 dollars

Not only developing countries require infrastructure investment. “The Economist” warns that housing (remember that real estate was included by McKinsey into a broad understanding of infrastructure), being “the world’s biggest investment class, is a root of many of the rich world’s social and economic problems”, including political populism and general dissatisfaction with the existing world economic (capitalist) model¹³. The reason, Callum Williams (the author) argues, is the “three big mistakes” that governments across the wealthier parts of the world have made after World War II:

— they have made it too difficult to engage in residential construction;

— they haven’t been able to come up with proper economic incentives for households to funnel more money into the housing market;

— they have failed to design a regulatory infrastructure that would prevent or limit housing bubbles.

All of these have contributed to the 2008 Global Financial Crisis (which started as a real estate financial bubble), have fueled the conflict between the youth in Hong-Kong and its political establishment, and have even affected the outcome of the Brexit vote.

Now you can see how interconnected infrastructure development and public policy really are, especially in the developed countries.

Infrastructure and public policy

In their recent article titled “Four ways governments can get the most out of their infrastructure projects”, Aaron Bielenberg, James Williams, and Jonathan Woetzel from McKinsey generally support the idea of a “big infrastructure push”. However, they point that “gains from infrastructure are fully realized only when projects generate tangible public benefits. Unfortun-ately, many governments find it difficult to select the right projects — those with the most benefit. Furthermore, infrastructure can provide social and economic advantages only when the capital and operating costs can be financed sustainably, either by the revenues a project generates or by the government sponsor. Too many projects become an economic burden and drain on finances when a government borrows money for an undertaking and neither its revenues nor its direct and indirect economic benefits adequately cover the cost”¹⁴.

The most important takeaway from this quote is that the keys for infrastructure investment efficiency lie in public policy. In fact, that is the main idea of this course.

Bielenberg & Co suggest a framework for making better infrastructure decisions, which consists of four elements — recommendations and principles for decision-making:

1. Develop projects with tangible, quantifiable benefits

Political considerations often guide governments when they select infrastructure projects. For example, a national government may prioritize capital investment in a new port because it would provide a convenient transshipment point for trade with a politically aligned country, even if the project has a weak economic rationale. Or a government may invest in a new road project to address congestion in a district that’s important in elections. However, in the current environment—where countries, states, and cities must compete for trade, corporate headquarters, jobs, and talent—government and citizens must ensure that investments generate clear economic and public benefits and build a competitive advantage.

2. Improve the coordination of infrastructure investments to account for network effects

For example, if a country has only one commercial airport, it has no beneficial network effects for domestic travelers; however, as successive airports are built, the benefit of each additional node increases. In developing countries, studies show that the marginal benefit of investing in infrastructure is highest when it adds to an existing but not fully mature network. In other words, coordinating investments to create additional linkages in an immature network can yield more benefits than adding to a mostly complete one.

3. Engage and align community stakeholders to promote inclusive economic and social benefits

Governments should consider the effects of infrastructure investments on social equity to ensure that the potential economic benefits are inclusive. It’s important to consider whether investments support a geographically and demographically diverse range of residents—for example, across income levels, urban and rural areas, and racial and ethnic lines. In fact, investments that advance the economic opportunities of the people most in need of them often receive greater consideration. Governments that articulate a comprehensive view of the impact of an investment are more apt to consider its full ramifications for all residents.

4. Unlock long-term capital

The socio-economic effects of infrastructure projects can take many years to materialize, since infrastructure projects frequently require multiyear planning and construction timelines, and uptake and full use of the assets can ramp up slowly. However, money for an infrastructure project must often be borrowed for the short or medium term, with provisions tailored to the market rather than the project’s economics. As a result of this mismatch, governments must repay creditors well before the economic benefits of large infrastructure projects are realized, even if they are completed on time and on budget.

Altogether, these four elements help establish a framework for policymaking in infrastructure, in general, and for decision-making, in particular. The main requirement is consistent and transparent assessments in order to determine whether a project offers robust public benefits, is compatible with other projects and appropriately aligned with the community’s objectives, and uses the best long-term financing available.

The authors provide us with examples of “best practices” from South Korea and Australia.

South Korea

In the 1990s, South Korea’s government introduced a system to manage infrastructure investments. Agencies or local governments propose infrastructure projects, and the appropriate line ministry then internally reviews their feasibility. The ministry requests a budget from the Ministry of Economy and Finance, which reviews the proposed projects by asking the government think tank, Korea Development Institute (KDI), to conduct a comprehensive prefeasibility study (PFS). This study includes an assessment of the project’s economic and fiscal feasibility and its benefits to society, as well as a balanced regional-development analysis. The KDI invites external experts, along with business and community leaders, to review midterm and final PFS reports, and their findings are published for the general public. Around 40 percent of projects are ultimately rejected as a result of the PFS.

Australia

New South Wales (NSW), in Australia, provides a more recent example. An independent statutory agency called Infrastructure NSW was founded in 2011 to help the state government identify, prioritize, and assure the completion of critical public infrastructure. One of Infrastructure NSW’s primary responsibilities is to prepare five- and 20-year plans underpinning an integrated, long-term, and statewide strategic program for infrastructure development. Projects are assessed and prioritized in a five-step process, including sophisticated fiscal and economic modeling and the quantification of triple-bottom-line impact, which measure social, environmental, and financial impact. The NSW Government Construction Leadership Group (CLG), which is led by Infrastructure NSW and includes representatives from all relevant NSW government agencies, prepares the state’s infrastructure pipeline. Once major projects move into the implementation phase, Infrastructure NSW reviews them through a series of gateways, raising red flags when needed, to reassure investors by confirming that projects are delivered on time and on budget.

As you can see, infrastructure development is a priority area for policymakers and society as a whole — and an attractive sector for businesses and experts (including political consultants). General recommendations, listed above, cannot work just by themselves and do not guarantee success, especially in such complex environments as the post-Soviet space. That is why we must rely on case-studies, make use of the experience of others, and avoid making the same mistakes.

Suggested reading:

1. Amador-Jimenez L., Willis C. J. Demonstrating a correlation between infrastructure and national development // International Journal of Sustainable Development & World Ecology. 2012. Vol. 19. Issue 3. P. 197–202. DOI: https://doi.org/10.1080/13504509.2011.644639.

2. Annez P. C., Buckley R. M. Urbanization and Growth: Setting the Context // Urbanization and Growth, Commission on Growth and Development / Eds.: M. Spence, P. C. Annez, R. M. Buckley. Washington, DC: The World Bank, 2009.

3. Bielenberg A., Williams J., Woetzel J. Four ways governments can get the most out of their infrastructure projects // McKinsey. January 2020. URL: https://www.mckinsey.com/industries/public-sector/our-insights/four-ways-governments-can-get-the-most-out-of-their-infrastructure-projects (12.07.2020).

4. Dobbs R., Pohl H., Lin D.-Y., Mischke J., Garemo N., Hexter J., Matzinger S., Palter R., Nanavatty R. Infrastructure productivity: How to save $1 trillion a year / McKinsey. January 2013. URL: https://www.mckinsey.com/industries/capital-projects-and-infrastructure/our-insights/infrastructure-productivity (12.07.2020).

5. Flyvbjerg B. MegaProjects and Risk: An Anatomy of Ambition. Cambridge: Cambridge University Press, 2003.

6. Vickerman R. W. Long Term Impacts of the Channel Tunnel : Methodology and Evidence // The Regional Development Impacts of the Oresund Bridge — Proceedings from an international research seminar / Eds.: A.K Andersen, A. Karlstrom. Stockholm: Royal Institute of Technology, 2001. P. 245–261. URL: https://kar.kent.ac.uk/10735/ (12.07.2020).

7. Urbanization and Growth, Commission on Growth and Development / Eds.: M. Spence, P. C. Annez, R. M. Buckley. Washington, DC: The World Bank, 2009. P. 1–45.

8. Urbanization and Structural Transformation Uploaded by United Nations Human Settlements Programme (UN-HABITAT). URL: www.unhabitat.org (12.07.2020).

9. Woetzel J., Garemo N., Mischke J., Kamra P., Palter R. Bridging infrastructure gaps: Has the world made progress? / McKinsey. October 2017. URL: https://www.mckinsey.com/industries/capital-projects-and-infrastructure/our-insights/bridging-infrastructure-gaps-has-the-world-made-progress (12.07.2020).

Test yourself:

1. What is infrastructure?

2. What levels of infrastructure are there?

3. Which infrastructure gaps prevent the global community from achieving the Sustainable Development Goals?

4. How does infrastructure affect economic development?

5. What are the principles and recommendations for making most optimal infrastructure decisions?

6. What role did infrastructure play with respect to the state in the early twentieth century and what is its role now?

7. What are the prospects for further development of infrastructure?

Lecture 2. THE AGENDA FOR A POST-SOVIET INFRASTRUCTURE POLICY

Introduction

In the previous section, we have discussed the general framework for better infrastructure decisions (proposed by McKinsey experts). Let’s go through them:

1. Develop projects with tangible, quantifiable benefits

2. Improve the coordination of infrastructure investments to account for network effects

3. Engage and align community stakeholders to promote inclusive economic and social benefits

4. Unlock long-term capital

Let’s see how these recommendations can be rendered into real-life infrastructure policy in the complicated environment of post-Soviet countries.

But before that, we should decide on a clear definition of infrastructure policy.

Infrastructure policy (IP) is a public policy that responds to the challenges of infrastructure utilization and development. IP doesn’t exist in a vacuum and is highly dependent on and interconnected with the socio-economic and political context (context dependence) and with other sectors of the economy (intersectoral balance).

Moreover, IP is not always just about the economy. Some studies show that infrastructure development can have a purely political background — to unite and integrate the country — like in the case of Spain or Australia (you can find the article by Germa Bel in your suggested reading)¹⁵. This is undoubtedly the case with the Russian Empire and the Soviet Union as well — just take a look at the maps (Figures 2.1–2.2).

Figures 2.1. Roads in the Russian Federation

Figures 2.2. Railways in the Russian Federation

So, what is the framework of IP? Does it lie only in economics or politics, or should there be a balanced approach? If so — in what way and how does it depend on the country’s level of development, its domestic political processes and international relations?

Another concern is the level of infrastructure policymaking. Dick Netzer¹⁶ and Andrew Lemer¹⁷ started a big debate in the United States in 1992 whether infrastructure policy should exist on the national (federal) or state (regional) level.

In this regard, the post-Soviet period provides an interesting case as it covers huge transformations of “context”, as well as changes in the approach to intersectoral and strategic governance and planning — and also a discussion about the level of centralization and the role of the state.

To provide a particular description of IP we have to identify:

— A) the actors

— B) the institutions

— C) the goals

— D) the tools

This approach will be used for description of specific IPs.

Post-Soviet Transformations

Changes of the general context

The collapse of the USSR had triggered significant transformations of the socio-economic context in three ways: the emergence of the New Independent States (NIS), the transformation of the entire post-Soviet region, and the new stage of the globalization (following the end of the Cold War).

On the national level, the major trends included:

— state- and nation-building, which were accompanied in some countries by growing nationalism, ethnic conflicts and civil wars; all of these processes were guided by the perceived need to strengthen national sovereignty;

— national policymaking was steered by rising nationalism, on the one hand, and influenced by market transformations (privatization, deregulation etc.), on the other.

All of these led to:

a) a great deal of diversity in national approaches towards IP,

b) controversial incentives for regional cooperation.

Because of this, regional cooperation after the collapse of the USSR and its central institutions went in a number of different directions:

— a ‘civilized divorce’ — systematic separation of the assets, production, finance, administrative and technological processes,

— growing bilateral and multilateral cooperation between the NIS.

The main platform for ‘civilized divorce’ was the institutions of the Commonwealth of Independent States (CIS) — however, there were varying degrees of value and efficiency, depending on the sector.

The global transformations that started after the end of the Cold War led to the rapid development of the new stage of globalization, where global value chains, as well as financial, trade and migration flows made the prospect of cooperation with countries outside the former Soviet Union sound more attractive and sensible. Besides, globalization dramatically increased the role of international trade and communications, with the skyrocketing telecom sector and transportation contributing to global trade and supply chains. All of this created new opportunities for aviation and seaports, which have become the main hubs of the global economy, providing benefits to countries with favorable geography and advanced infrastructure. Oil and gas pipelines became a crucial piece of infrastructure for post-Soviet countries that relied on energy exports. Altogether, this has led to changes in major transportation routes and introduced new requirements for infrastructure and infrastructure investment.

Changes in the sectors of infrastructure

National and regional transformations were closely connected with the state- and nation-building processes taking place in the NIS after the dissolution of the USSR. After the first few years of independence, when key economic processes still retained some of the old momentum, each nation started to form its own policy, initially based on one basic principle — preservation of national sovereignty. This led to a massive reconfiguration of the previously existing economic ties in almost all sectors of infrastructure. Some sectors (aviation and sea transportation) had re-oriented to reach international (global) level, while other sectors (electricity, roads) retained their focus on the national level. As for rail transportation, it had to maintain and develop regional cooperation within the Commonwealth of Independent States (CIS).

We will use the framework outlined above (actors-institutions-goals-tools) to describe main features of IP in different sectors.

Aviation

А) the actors

The aviation was always deeply involved in international cooperation through the participation in ICAO (International Civil Aviation Association)¹⁸ and IATA (International Air Transport Organization)¹⁹, although, under the Soviet “iron curtain”, all international contacts were monitored and controlled by the state, and monopolized by “Aeroflot”. Privatization brought new actors to the air transportation sector and to airport infrastructure.

B) the institutions

On the international level: ICAO, IATA, Airports Council International²⁰.

On the regional (CIS) level: the Interstate Aviation Committee²¹.

On the national level: national aviation authorities and associations.

C) the goals

Due to high level of integration into the global economy, the main goals of the sector (and the state) were:

— integrate into the global transportation system by joining international alliances and inviting strategic investors, among other things;

— ensure safety and security of air travel (especially after 9/11).

D) the tools

As the sector was highly privatized and decentralized, the state mainly relied on market tools for policy implementation and regulation. The state had almost no control over the tariffs, as the sector wasn’t considered a monopoly. The only exception in terms of privatization and regulation was made for the core infrastructure — runways in major airports. This has made the sector attractive for private investment and public-private partnerships. However, the “market” tools left no chances for domestic aircraft producers (neither in Russia nor in Ukraine), which led to a dramatic break-down of entire industrial sectors.

To understand how differently this industry developed in FSU countries, you may want to compare aviation sector statistic in the Eurasian Economic Union (Table 2.1).

Table 2.1

Aviation sector statistics in Eurasian Economic Union

Armenia
Belarus
Kazakh-
stan
Kyrgyzstan
Russia

Length of airways, thousand km
2,3
20
80,7
3,5
687,00

Number of airlines, units
7
23
60
5
108

Number of international airports, units
2
7
15
5
78

Cargo turnover, mln t-km
0,3
48,5
83,7
8,5
7593,3

Passenger turnover, billion passenger-km
0,29
5,96
16,9
1,7
322,9

Cargo transportation, thousand tons
20,7
28,2
26,6
0,3
1166,8

Passenger traffic, million people
3,6
4,1
8,6
1,1
128,1

Seaports

A) the actors

Like in the case of aviation, seaports have become the “gates” of global economy and the major hubs of international trade. The land-locked post-soviet countries (the majority of the NIS) found themselves dependent on their former “sister republics”. The more fortunate ones initiated privatization of the seaport infrastructure and shipping companies, which immediately integrated into the global economy by migrating to offshore jurisdictions.

B) the institutions

Like aviation, sea transportation is highly globalized. That is why even during the Soviet times the sector was highly involved in international cooperation, mostly through the International Maritime Organization²² and the system of international agreements, most of which had already been implemented into the Soviet legal system and were simply reproduced by the national NIS legislators. Most of the cooperation took form of bilateral agreements, as there was no need for special cooperation frameworks on the regional level.

What actually required change were issues of property rights and state regulation. Like in aviation, the bulk of seaport infrastructure, first of all terminals, were privatized — which, in turn, opened the floodgates for private investment. The state was keeping control through regulations and by preserving state ownership of the crucial assets (such as berth walls, dams, navigation systems, driveways) and functions (port administration).

C) the goals

Since the sector became immediately involved in the global economy and accepted market rules and regulations, for the first post-Soviet decade there was almost no clear state policy in the field. However, like we discussed in the previous lecture, geo-economics and geo-politics played their roles. In the 2000s, Russia developed its Maritime Doctrine — which mostly focused on geo-political aspects and national security. In 2015, the doctrine was changed — with the excuse that “the competition in the World Ocean had increased and affected Russian strategic interests in terms of security and economic development”. At the same time, Russia started to develop its own seaports in the Baltic region as a substitute to existing cooperation with former Soviet republics in the Baltics. Kazakhstan was promoting international projects in the Caspian and Caucasus regions — in cooperation with Azerbaijan, Georgia and Turkey — in order to gain access to the Black and Mediterranean seas (Port Kuryk, Port Aktau as the part of the Silk Road).

D) the tools

From the very start of the post-Soviet period, the sector was highly liberalized and operated in an international market environment. That meant tariff deregulation, inflow of private investments and little to no state regulation. However, the whole region was on the periphery of the quickly growing global economy, and the sector became dependent on the geo-economical aspect — a common weaknesses of FSU countries. In practice, the region became of the main hubs of international trade, with commodity exports and consumer goods imports taking the largest share. The seaports were not designed to handle international trade at this scale during the Soviet period, which led to issues with driveway limitations — this, in turn, forced intersectoral cooperation with roads and railways and increased the role of the state.

Active state intervention meant the growing power of public policy.

To understand the scale of the problem and the need for coordination, just have a look at the map of Russian seaports (Figure 2.3).

Figure 2.3. Russian seaports

As you can see, Russian seaports are located in the Arctic Basin. The meaning of the region is hard to overestimate. During the Soviet period, active reclamation of the Arctic was dictated by two important factors: natural resources and transportation potential.

More than 90 percent of nickel and cobalt, 60 percent of copper, over 96 percent of platinum metals is mined in the Arctic, about 80 percent of gas and 60 percent of oil of Russia is recovered in the Arctic, the estimated reserves of the resources listed above exceed 70—90 percent of Russia’s known reserves. The total carbon hydride reserves of the Arctic offshore, estimated by scientist E. S. Gramberg, is up to 110 bln. tons of oil equivalent. It exceeds the offshore reserves of any other ocean of the Earth.

When the crisis in the relations between Russia and the West first started, Russia scaled up its activities in the Arctic. Particular attention is now given to oil gas field projects, their infrastructure and relevant transportation. The liquefied natural gas project Yamal LNG, launched in 2017, is showing some good dynamics: in January-February 2019, the revenue from the export of LNG produced by this project and the Sakhalin Energy projects (launched in 2009) increased by 2.2 times compared with the figures from 2018 — up to $1.439 bln. At the same time volume of LNG export for the reported period grew by 1.8 times and reached 9.1 bln. cubic meters. It is important to highlight that both (Sakhalin and Yamal) are international projects: the shareholders of Sakhalin Energy are Gazprom (50 percent), Royal Dutch Shell (27.5 percent), Japanese Mitsui (12.5 percent) and Mitsubishi (10 percent); the shareholders of Yamal LNG are Novatec (50.1 percent), Total and CNPC (both 20 percent), the Silk Road Fund — 9.9 percent. Unexpectedly, Arctic ports are becoming a part of the Silk Road — there is growing infrastructure for energy cooperation between Russia and Asia.

As we have discussed, most of the post-Soviet countries are land-locked. The majority of these land-locked nations are members of the EAEU. During the “imperial” period, this problem didn’t exist due to the shared transportation system. But now even the EAEU countries have their own capabilities to develop seaports (see Table 2.2).

Table 2.2

Water transportation statistics

Armenia
Belarus
Kazakh-
stan
Kyrgyzstan
Russia

The length of operated inland waterways, thousand km
—
1,6
4,2
—
101,7

The number of river ports, units
—
8
2
—
117

Number of sea vessels
—
7
89
—
1394

Number of seaports, units
—
—
2
—
67

Cargo transportation, thousand tons²³
—
2,2
2,2
—
116,8

Cargo turnover, mln t-km
—
33,4
689,7
—
99341,9

Electricity

This sector is very diverse. For more information on electricity infrastructure, see Lecture 4.

A) the actors

The electricity sector was always crucial for the domestic industry and utilities. After mass privatization (either by companies or private households) the major part of the sector’s consumers turned to be private actors, while the electricity sector still remained under state control. There were two main reasons for that: 1) its critical importance, both economically and in terms of security 2) its characteristics as a “natural monopoly”. That presented a challenge in terms of privatization strategies and tariff regulation.

B) the institutions

Unlike the previous sectors, electricity infrastructure wasn’t directly involved in the global economy, so there were fewer roadblocks in terms of regional cooperation — any arising problems could be easily managed through bilateral agreements. Because of this, electricity policy was focused mainly on the national level and addressed domestic issues, and all the FSU countries implemented different strategies. Russia, for example, created a special state company — RAO UES, which was later privatized and subdivided into sectors depending on the level of monopolization. The Federal Anti-Monopoly Service and the Federal Tariff Service acted as major regulators.

C) the goals

The state faced a difficult dilemma. On the one hand, the sector was crucial for social and economic stability and required strict state control. On the other hand, it required investments for modernization and improvement of energy efficiency. The former required state ownership and tariff regulation, the latter — private investments and incentives, including flexible or even uncontrolled pricing.

D) the tools

In Russia, the main tools included step-by-step deregulation of the sector, and separation of RAO UES into different branches (production, supply and transportation of electricity — less, medium and highly monopolized, respectively), which were later privatized.

Roads

A) the actors

The roads have always been the responsibility of the state. They are the textbook “public good”, and any discussion about toll roads inevitably causes huge debates. This makes the state the main actor in the sector. However, the state’s counterparts — transportation companies and other car owners, including citizens, are highly decentralized and ready to be politicized any time an unpopular decision is made, which creates a very conservative environment for IP in this sphere.

B) `the institutions

Given the characteristics outlined above, the sector still lies in the sphere of state responsibility, which is distributed across different levels (central, regional and local). Despite the presence of private capital involved in public-private partnership, the sector highly depends on state financing and requires a special approach towards policymaking. Moreover, it is not that highly affected by globalization — in fact, road transportation is a rapidly developing sector, but roads are a free infrastructure, and the main players here are transportation companies, whose profits do not easily translate into the development of the roads they rely on. Since the use of roads is highly decentralized, it doesn’t require much international or regional cooperation — a handful of international agreements is more than enough.

C) the goals

The goals are more or less ambitious, given the relatively poor development of road networks across most Eurasian countries. Most countries consider their roads to be part of international trade routes that participate in international “transportation corridors”, and try to benefit from their location. The main concern is always about financing for development.

D) the tools

Therefore, key policy tools are financial in nature, as well — the state needs to mobilize public finance in order to provide maintenance of existing and development of future road infrastructure. A widely used tool involves the creation of special funds (Road Funds) in order to provide long-term financing.

As you can see, thanks to their flexibility, roads cover a significant share of cargo transportation today. However, the estimated quality of roads is rather poor (See Table 2.3).

Table 2.3

Roads in the Eurasian Economic Union

Armenia
Belarus
Kazakh-
stan
Kyrgyzstan
Russia

Rank in «Road connectivity index» (WEF)²⁴
114
—
56
110
41

Rank in «Quality of roads» (WEF)²⁵
91
—
93
113
99

Cargo turnover, mln t-km
1
28,5
182,7
1,8
274,2

Passenger turnover, billion passenger-km
2245,10
10881,7
260051,5
11242,3
113371,8

Passenger traffic, million people
164,8
1186,5
23716,4
718,8
10361

Freight (million tons)²⁶
9,7
161,7
3 550,3
31,7
5 726,6

Cargo transportation (share of the country in the EEU,%)
0,1
1,7
37,5
0,3
60,4

Cargo transportation (share in the total EEU transportation volume,%)
0,08
1,4
31,36
0,28
50,58

83,7

Railways

A) the actors

Ever since the times of the Russian Empire, railways have been associated with the state — moreover, they used to be considered one of its core and strongest elements. Russian railways never stopped operating (even during the Russian civil war), uniting the vast territory of the country. It was always a highly centralized (in some periods — para-militarized) hierarchical structure with an extensive material and social network that had a significant impact on various spheres of the economy and social life. All of this resulted in a huge social capital and a complex system of interconnections between political and economic actors both on national or international level. Another tricky thing was the factor of technology — the railways of the entire Soviet Union had different railway track gauge, compared to Europe and China, and operated a “single fleet of rolling stock”.

B) the institutions

Thus, the challenge was to bring this system in accordance with the changing context. Even though the Soviet Union disappeared,