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30 July 2011

Infrastructure Investments in an Age of Austerity : The Pension and Sovereign Funds Perspective

An Era of Budgetary Hardships And Government Disengagement  In many ways, the 2008-2009 financial crisis and the ensuing “debt crises” currently afflicting the US and most European economies mark the end of an era soft statism started with the New Deal in 1933 (National Industrial Recovery Act, Public Works Administration…) that saw a massive deployment of government resources and the advancement of state ownership across (formerly private) industries and infrastructures throughout the Western world (“Folkhemmet” in Scandinavia, “Welfare State” in the UK…). That model worked relatively well for 75 years as Russia, China and Eastern Europe stagnated under the yoke of total statism and as the primary commodities of Latin America and the Middle East were sold off at suboptimal prices.   The budgetary profligacy of G7 countries on the domestic front (Social Security, Medicare, cheap water and electricity, subsidized housings, ‘bridges to nowhere’…) was only made possible through the continuous flow of cheap commodities from the Arabian Gulf and South America (a continent largely ruled until recently by subservient comprador bureaucracies) and cheap labor from the low-cost manufacturing platforms of Asia (“made in Taiwan” in the 1970s, then “made in China” in the 2000s), and, most importantly, cheap capital from their own central banks or from thrifty countries with current-account surpluses (China, Singapore, South Korea, Germany, Switzerland, Luxembourg, Abu Dhabi…). After decades of criticizing the macroeconomic choices of Asian and Latin American nations (and downgrading their bonds at the first sign of weakness), Western rating agencies are now increasingly chastising European governments themselves as well as the European Central Bank. Tellingly, the hastily drafted, unevenly transposed in national law, and poorly enforced EU rule on rating agencies (Règlement CE n° 1060/2009) has had little effect on the way financial analysts and economists interpret data (in itself not a bad thing) or on the potential for conflicts of interests created by the fuzzy contractual arrangements between credit rating agencies and their clients (a far more troubling issue)… As predicted by a handful of contrarian economists, the financial balance of power has clearly shifted further away from Western governments and central banks in favor of large private agents such as investment banks and pension funds as well as Asian and Middle-Eastern sovereign wealth funds, a shift marked by the decline of formal inter-national rules, which are being progressively “superseded by more informal norms (broad standards of behavior defined in terms of rights and obligations), in a manner not unlike that of English common law – unwritten law (lex non scripta) in lieu of written or statute law (lex scripta)”. (1)  The year 2011 clearly marks the beginning of a new era characterized by the de facto default of formerly “investment grade” countries such as Greece and Portugal (and the forced fire sale of vital infrastructure by those countries) despite the combined efforts of the ECB, the IMF and the EU Commission, the adoption of unprecedented austerity measures in the US (at federal and state levels) and across key European countries including Spain, Italy, Ireland and the UK (2), and the abrupt winding down of direct public spending on infrastructure across many Western economies- with the notable exceptions of a few cash-rich Canadian and Australian provinces such as Manitoba and Western Australia.  CLICK HERE TO CONTINUE READING --------------30-------------- This BLOG  looks at pensions and their impact on what are called Public Private Partnerships or P3’s these are not really about private funding at all but about two streams of public funding, pensions and government with private capital a third partner. We will also deal with other pension matters, such as Defined Contribution Plans (DC) vs Defined Benefit (DB) PLANS, the weakness in private plans, the need for pension reform in public pensions to have shareholder rights, directorships and ethical investment directives and policies.  Finally taking the long view we will show how these funds are forms of evolving social capital that is dominating private capital as we evolve into socialization of capital.  Click HERE to read more....