Beware the 2-edged Infra Knife !
Ganga Prasad Rao
Energy, Environmental and Mineral Economist
Disclaimer: As always, the author absolves himself from the many reasons that might cause the proposed solution to fall short of intended outcomes. All errors, particularly language, grammar and diction, are indeed mine !
Not one election passes without reference to the ‘Development’ agenda espoused by political parties – no matter which leaning. Public Infrastructure is high on the agenda of political parties for obvious reasons: they are immediately GDP-and Employment positive; they stoke the Resources and Manufacturing sector, beyond opening aggrandizing opportunities in the Realty sector. Central Banks, and local banks are all too willing to sponsor, support and manage public infrastructure projects.... last, but not least, politicians, in the immediate precinct and beyond, reap political capital from such projects. With so many positives about it, why’d Public Infrastructure be a cause for concern?
Economists and Policy-makers, more truthfully, the conscientious, sagacious and far-sighted among them, realize that Public Infrastructure is just that – Infrastructure for the public that is funded publicly through politicians given a mandate by Voters at large. Politicians face strong political pressures and economic incentives to fast-forward grandiose public infrastructure projects that are immediately aggrandizing to businesses. Consequently, the Political Government – comprised of the Ruling party and the Opposition - finds it expedient to open the Public taps, and fast-forward approval of these projects with little regard for the environmental and social consequences of unbridled Real-reducing Nominal expansion1. If it were not for the fears of inflation that large Public Infrastructure projects stoke, or the delays and compensations associated with acquiring private land around project sites, Public Infrastructure would have gobbled a much larger share of the Nominal Liquidity pumped in by the Central Banks.
Public Infrastructure is a decidedly 2-edged animal when it comes to its environmental efficiency. Many public projects, in particular, mass transportation projects, are proposed expressly to contain the growth of private transportation and the consequent enlargement of environmentally-injurious fossil fuel consumption – whether from resources at home, or worse, imported. However, and in practice, these projects, whether implicitly, or explicitly, are tied to an FV-expansion of Private Lifestyle, such that when finally realized after years, even decades, the Public Infrastructure has arguably achieved its surreptitious goal of expanding the Private agenda – whether in Private Transportation, or land deals around compensations and appreciation. Worse, and whereas the raw materials procured for construction toward the public infrastructure project engender a substantial release of emissions, the promised reductions in emissions in post-construction years, turn evanescent in reality for reasons an expanding per-capital economy, thus bringing in to question a fundamental justification for such projects. Surely, Public Infrastructure is not a ‘Beggar the Public to Aggrandize the Private and Reduce the Commons’ joke for the Voters to suffer as the price for voting in a Political Government, and await the Nominal Private Aggrandization juggernaut to roll over them?
The natural question to ask, then, is whether policy-makers have a tool to sift the ‘environmentally good’ infra projects from those ‘bad’? And a mechanism to incentivize the former, and dissuade, even offer an alternative to the latter? Ask Academics, and they’d, perhaps, suggest internalizing project-associated externalities through Carbon taxes. One of strongest positive attributes of Public Infrastructure – that it is a GDP-multiplicative activity locally and regionally – is also a significant problem. Pecuniary emissions associated with incremental regional activity are not taken cognizance of in the accounting of project externalities. More insiduously, when Public coffers are open to Voter-endorsed Politicians to fund Public Infrastructure with, when accounting of Public Infrastructure projects span multiple Governments and turn it a veritable blind-man’s elephant, carbon taxes, even if paid on the immediate infrastructural activity, do little justice to the scale of externalities engendered by the project in its wake and aftermath. In such context, carbon taxes per se, could be environmentally limiting and ineffective; they offer, if purchased in bulk at discounted prices in recessions, a loophole large enough to pass a white elephant through; a white elephant that is swept under the carpet as Voters prepare to vote in a fresh cycle of public infrastructure projects with the next ballot. But all this begs the question, do we have a credible alternative?
There is......more correctly, there would be. Consider, an Environmental Cause Bond serving the role of a Super Regulator to the Political Government. On its Cause side, it has members who lien their Bond holdings toward the long-run goal of the Bond: Carbon Sustainability. Businesses that intend to conduct their activities within conformance of the long-run goals of the Cause Bond, are permitted or ‘licensed’ by the Cause Bond to operate as OC-Participants. Those businesses that reject environmental sustainability, or the concept of a Super Regulator issuing licences, and permits, would be categorized OB-Recalcitrants – whether physically a part of the Bond, or as represented by Deemed Proxies. The Cause Bond operates with a Gold PV-FV Collateral that covers the Bond from default for many reasons, including continued failure to achieve the intended path to final ETV. To cover Cause Long-liened members, whose goal it is to ensure the eventual success of the Bond, the Collateral-Administrator issues Long Gold Futures that cover significant decrements in Cause Bond ETV, extending to Bond Default. These Collateral Long Gold Futures would be available for trading between Cause members, OC-Participants, and members of the Bullion2. The Collateral Administrator permits trade in Collateral Gold Long Futures3 between Cause-focussed, Long-Cause members, OC-Participants-Volatility players, and short, Nominally-attuned Bullion Traders4. As would be expected, nominal activities, here sub-aural Public Infrastructure projects, that hasten emissions from the indeterminate future to the present and increment them in the short, intermediate, and long-run, would induce NAV and ETV of the Environmental Cause Bond to decrement. In turn, disadvantaged Long-liened Cause members would seek to their hedge their losses in Collateral Long Gold futures, which would increment to reflect enlarging environmental/nominal externalities associated with those specific sub-aural Public infrastructure projects. Such ‘irrational’ increments in Gold Long Futures (Shadow) prices would be shorted by OC-Participants, and traders at the Bullion, albeit for the price of triggering a ‘Collateral ZS De-monetize’, a key that expresses as M2dot PV contractions that must be paid as Penalty Lumpsums5 by the environmentally-subaural Project6, or, and equivalently, as ‘Collateral-ZS-Monetized’ in to ‘Aural Green K2dot-Nominal AO ZS’ liquidity and distributed in the regional socio-economic circle relevant to the project7. Conversely, a truly environment-friendly Public infrastructure project, that, albeit incrementing emissions in short-run, attenuates it in the longer run, would induce Cause Bond NAV and ETV to increment, and Long Gold Futures prices to abate. The Bond would process, or sponsor such compatible projects for conventional M2dot monetization, and possibly, issue a Lumpsum to kickstart them.
Between lumpsum strictures, and rewards issued Public Infrastructure Projects, and accompanying Bond-sponsored K2dot-M2dot expansions and contractions executed by the Central Banker, the Environmental Cause Bond obtains a critical separation of environmentally-friendly, and unfriendly public infrastructure projects. Such identification and differential treatment incentivizes the environmentally-friendly, and delays, denies, or metamorphoses the less-friendly among public infrastructure projects. The proposed mechanism offers the Political Government an invaluable tool to critically sift between genuine public-benefiting projects worthy of opening the public coffers for, and those that are publicly-injurious in the long, but nominally aggrandizing to various constituences and capital market investors in the immediate.
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Would we, as the Public aware of this critical issue, and a possible answer to it, yet be as lazy and careless as to continue with ‘Nominally-frothy’ laissez faire? Want to line-up for the Ballot box, and monetize a Burj-beating Tower to skydive from?
1Stretching the logic a bit, public infrastructure projects stimulate employment, family formation, and thus induce population migration and expansion in to the neighborhoods served or impacted by it.
2OB-Recalcitrants would be excluded from trading in Collateral Gold Long Futures for reasons obvious conflict of interest.
3Issued for the same period as Cause Bonds
4Whereas PV Gold prices must equalize ‘publicly’ across the Bullion and (Bond) Collaterals, ‘private’ FV Gold Futures prices would pertain to specific objectives hedged by specific Cause Bonds (or, their Collateral Administrators); that is, Cause Bond Collateral Administrators would issue unique ‘private’ Gold Long Futures specific to their Cause, OC, and the Bullion. Thus, and when participants buy or sell ‘private’ Long Gold Futures, they would, in effect, be operating in the limited context of a specific ‘private’ Futures price responding to changes in Cause Bond ETV brought about by activity that is in the immediate cognizance of the Bond. An increment in the price of these Long Gold futures would imply an expansion of the Nominal due activities sub-par and inimical to the Cause. Long-liened Cause members would prefer those inimical activities are excluded from the future, while Bullion traders, predictably, would be less averse to them.
5These Lumpsums would be nixed by the Bond in arrangements with the Central Banker. For example, the Lumpsum would be netted out and nixed in the next Liquidity issue of full face value (ie, a ‘penalty’ of $10 Million would be netted out of a fresh liquidity issue of face value a Billion dollars, but for which only $990 Million would actually be issued.
6in magnitudes proportional degree of deviation from the Aural environmental threshold adopted by the Cause Bond.
7This latter strategy is effectively a balancing distribution of ‘Nominal AO ZS’ monies in the neighborhood impacted by the project – whether pecuniary or non-pecuniary.