Not welcome here: The rising threat of protectionism

The rising threat of protectionism

Two trends are at odds in the world today. The first is that infrastructure is globalizing. The second is that governments are becoming more protectionist.

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The continued globalization of infrastructure is a good thing. Let’s not let populist sentiment get in the way. Over the past few years, two clear trends have emerged. The first is that infrastructure is globalizing. The second is that governments are becoming more protectionist. The collision of these two trends could have huge implications for the sector.

The good, the bad and the ugly

Regular readers of this publication will likely agree that the globalization of the infrastructure sector is a good thing. Increased global competition with international expertise and capabilities leads to improved standards and better quality, and helps reduce the delivery and operational risk of public infrastructure. International finance and investment enables the development of projects and drives cost efficiency. International operators and owners bring global best practices and often innovative technology. 

The rising sentiment of infrastructure protectionism, on the other hand, is a worrying counter trend. All infrastructure projects and services create local jobs and protectionism claims to offer more. But what’s missing is the cost to users and society when going local becomes more expensive, or provides sub-optimal quality, than going global. In the long term, it is more likely that isolationism and protectionism will do more to degrade a market’s economic growth than to enhance it. 

Protectionism could potentially impede the flow of new ideas, technology and — critically — capital across borders. It can lead to increased costs and even lower-quality infrastructure. It strains national resources and capabilities. And, most importantly, it creates massive political risk for investors which, in turn, damages the long-term competitiveness of markets. As China’s President Xi Jinping told the World Economic Forum audience at Davos this year, “Pursuing protectionism is just like locking one’s self in a dark room: wind and rain might be kept outside, but so are light and air.”1 In fact, protectionism is largely a developed world phenomena. Most emerging markets clearly recognize the vital importance of foreign capital, resources and technology. They may suffer from other political risks, but they are unlikely to turn away foreign capital and assistance based purely on nationality.

Sending mixed messages

Where these protectionist trends are already starting to play out is under the guise of ‘national security concerns’. Take, for example, Australia’s last-minute decision in 2016 to block Chinese companies from purchasing AusGrid — one of the country’s larger electricity distributors. While a deal was struck just 2 months later with a national superannuation fund and a national infrastructure manager, reports suggest that the government lost around AUD5 billion — 20 percent of the initial sale price — in immediate revenue by blocking the deal.

For many, the decision came out of the blue. The two blocked Chinese companies already owned majority stakes in many of Australia’s power distribution and transmission grids across the country, including 51 percent of the sole power distributor in South Australia, and 50 percent of the grid in the Australian Capital Territory. And only a year before, a consortium made up of Canadian and Middle Eastern investors (supported by some local investors) had been awarded a 99-year lease for TransGrid, another large Australian state electricity transmitter. This type of political interference — even in a mature market — can only have a negative impact on market confidence. 

Australia is not the only country to have allowed ‘national security’ concerns to potentially compromise the best interests of its economy. Ten years ago, the US House of Representatives blocked the purchase of P&O’s US ports by DP World (Dubai), citing national security concerns (and defying appeals by then-President George W Bush to let the deal pass). Since then, there have been a series of similar events that seem to suggest that governments are prioritizing short-term political agendas over longer-term economic growth and benefit. 

Turn back the tide

I believe that the better option to protectionism is to embrace globalization. Rather than barring certain developers, operators and investors of different nationalities from participating in their markets, governments should instead be focused on improving their controls and security protocols. In today’s technology environment, the onus is on government to proactively ‘lead from the front’ to protect national security, no matter who owns or controls the asset; after all, hackers care little about the ownership structures of their targets. 

Governments and politicians will also need to strive to better educate their populations about the actual risks of foreign ownership. There is often a big difference between the rhetoric politicians use at home and the smooth messages they deliver while on trade missions. More must be done to bring the two discussions into harmony.

Setting clear rules

However, it would be foolish to believe that we could rid the world of protectionist sentiment. Indeed, some protectionism may be justified in certain sectors or markets. But governments must decide where and how to strike the balance between populism and the economy. They may not always be in conflict but, similarly, they may not always align. The lines must be clearly drawn and the logic easily understood. Transparency is key. 

In an earlier wave of protectionist fervor in the 1930s, the US created the Buy American Act (1933) — which was revitalized in 2009 as part of former-President Barack Obama’s stimulus package. It clearly laid out the rules for foreign procurement by government entities in a very non-discriminatory and transparent way. Everybody knew the rules of the game and everyone was treated equally, for better or for worse. 

More recently, South Africa’s massive rolling stock procurement initiative also managed to combine clarity, transparency, competition and localization together in a way that encouraged global participation but also drove local benefits. Having faced significant flak for their AusGrid decision last year, Australia has also now moved to deliver greater clarity on ownership requirements for assets in certain ‘high-risk’ sectors (currently limited to electricity and communications networks, water and ports).4 More of that is required around the world. 

What is clear is that globalization — not protectionism — will drive the delivery, operations and investments into the highquality infrastructure that people deserve. Invoking some nationalistic or protectionist sentiment is perfectly understandable, but it must be clear and transparent. And it certainly cannot come at the expense of your country’s economic growth and prosperity 

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