Should security concerns affect who’s awarded infrastructure projects?

Romesh Vaitilingam | Jun 21, 2019

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China’s worldwide investments have expanded dramatically over the past decade, particularly in infrastructure projects. In the European Union and elsewhere, this has raised some concerns about security and other geopolitical and economic matters. Chicago Booth’s Initiative on Global Markets invited its European panel of economic experts to express their views on whether Europe’s governments should consider favoring local firms for public infrastructure projects over potentially lower-cost bidders from elsewhere in the world.

The experts’ opinions were mixed: weighted by each panelist’s confidence in their response, 27 percent agreed, 24 percent were uncertain, 40 percent disagreed, and 9 percent strongly disagreed. 

Of those who agreed with the statement, Lubos Pastor of Chicago Booth replied succinctly: “Money isn’t everything.” Oxford’s Beata Javorcik said, “This answer holds only for projects related to critical infrastructure (electricity generation, ports, etc.) but not for roads, etc.” And Daniel Sturm at the London School of Economics noted that “[t]his is really a question about geopolitics rather than economics, but it seems unwise to become too dependent on a non-democratic regime.”

Several experts who said that they were uncertain were explicit about the trade-offs involved in such a policy. Francesco Giavazzi at Bocconi University wrote, “Security concerns could justify protectionism, but only if they are serious.” John Vickers at Oxford took the same view: “It depends on whether there are serious security issues in play. If not, don’t restrict bidders.”

Similarly, Christian Leuz of Chicago Booth noted, “Depends on reason; protectionism [is] clearly bad for consumers, but if a bid is skewed due to other motives, then costs [are] not [the] only consideration.” Peter Neary at Oxford concurred: “It depends; the trade-off is between security and buying from the best supplier; excluding all foreign bidders is just protectionism.”

Agnès Bénassy-Quéré of the Paris School of Economics drew a distinction between a short- and long-term policy focus: “Probably not in the short term. More uncertain in the longer term due to scale/lock-in effects, security issues; depends on the sector.” Olivier Blanchard of the Peterson Institute also foresaw reasons for such a policy: “I can see the case for it in some limited circumstances (major disruptions, economies of scale); I also can see the clear room for abuse.”

Of those who disagreed with the statement, Franklin Allen of Imperial College London said, “For 5G, high-speed trains, etc., Chinese technology is better than European, US, or Japanese; it would be a shame for Europe not to use it.” Per Krusell at Stockholm University also referred to product quality: “I take it that the comparison includes all components (quality, on-time delivery, etc.); helping inefficient companies doesn’t improve them.” And Pol Antras at Harvard commented, “If foreigners want to sell us goods/services at subsidized prices it’s generally good to let them do it. I’m not sure any caveats apply here.”

Focusing specifically on geopolitical concerns, Patrick Honohan of Trinity College Dublin, who also disagreed, said, “Geopolitical politics of [a] firm’s home government not per se the most relevant factor in awarding contracts.” And Jan Pieter Krahnen of Goethe University Frankfurt concluded, “The response to geopolitical interests is a wise, strong set of conditionalities if awarded, rather than exclusion from the bidding process.”