ALERT

Investors Beware: Infrastructure Projects Are Collapsing 03/06/18 The astounding news that Malaysia has just canceled the massive high-speed railway from Kuala Lumpur to Singapore — one of the central elements in China’s $8 trillion Belt & Road Initiative — will send economic shock-waves around the globe. It’s a giant blow to China.  And it will be a stunning blow to the confidence of investors, many of which have been hoping to profit handsomely from the avalanche of infrastructure deals happening across the planet.  BAD GAMBLES The high-speed railway is far from an isolated example.  Many massive infrastructure projects are collapsing around the world. In some instances, billions of dollars are being lost both by the investors and host nations. In other cases, mega-projects that had initially appeared to be a great idea have turned out to be economic, environmental, and social calamities. NATURAL GAS NIGHTMARE In the Pacific-island nation of Papua New Guinea, a $19 billion liquid-natural-gas project, known as PNG-LNG, was widely heralded as an economic savior for the nation. But now it is regarded as an economic loser. Two recent reports have branded PNG-LNG a “development failure” — for delivering just a fraction of promised jobs, household incomes, national economic growth, and government revenues. Source: Jubilee Australia Research Centre (2018) As summarized on the leading website Mongabay, aggressive tax avoidance by ExxonMobil and other foreign investors are effectively defrauding the government of Papua New Guinea of hundreds of millions of dollars each year. And as local frustrations rise, social conflict and violence are spiking in territories around the 700-kilometer-long PNG-LNG project. The verdict: a sprawling, multi-billion-dollar mess for investors. It's a calamity for one of the world’s most environmentally and culturally diverse nations — a nation now teetering on the edge of economic chaos. AMAZON DAM BUST Earlier this year, investors were equally shocked when Brazil suddenly backed away from its decades-long policy of building giant hydro-power dams in the Amazon Basin. Such dams can have fearful environmental and social costs — flooding forests, displacing local peoples, and requiring networks of new roads that spur dramatic increases in deforestation, illegal mining, and wildlife poaching.  The government of Brazilian President Michel Temer had long favored Amazon mega-dams — but abruptly dropped them. Why?  Determined resistance from environmental and indigenous groups didn’t help.  Neither did a stuttering Brazilian economy. But the fatal blow was deep corruption, cost overruns, and illegal kickbacks that had riddled the dam projects. The bribery was so bad that one official was sentenced to more than forty years in prison. Shockingly, former Brazilian President Lula has been sentenced to prison too — for nine and a half years. The scale of financial crime is dizzying.  Project investors had no idea what they were getting themselves into. They are now taking a gigantic financial hit, damaging virtually every sector of the Brazilian economy. SMOKE AND MIRRORS These are but three examples.  One could list many hundreds more. For infrastructure financiers, the conclusion is inescapable. Smart investors rely on accurately understanding the trade-offs between risks and rewards. But the overwhelming majority of big infrastructure projects is occurring in developing nations. Sadly, these are often high-risk financial environments.  Corruption.  Poor transparency.  Hidden financial, social, and ecological perils. Avoid reddish tones: Pervasive corruption in many developing nations (Alamgir et al. 2018. Current Biology). And even in nations with good governance and public transparency, many infrastructure projects are struggling.  For example, a Chinese billionaire who holds a 99-year lease on Australia’s strategic Darwin Harbor is struggling just to make interest payments on the huge debt he’s accrued.  He’s now imploring China's state-controlled Export-Import Bank to bail him out with a half-billion-dollar loan.  That bank is directly controlled by president-for-life Xi Jinping. Investors shouldn’t be clamoring to spend their money on such projects. They should be running away from them.

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