Spain's Infrastructure Spending: A Flight to Nowhere

Andrew Schiff
Posted Nov 4, 2011

Recently there's been much talk about how infrastructure spending can be a viable solution to our country's current economic woes. President Obama's proposed $447 billion dollar jobs bill contains, among other things, investment in infrastructure projects like road construction. Many progressive economists have called for much more, with some even saying that the utility of such programs is secondary to the short term economic stimulation that would result from hiring unemployed workers. In other words, it doesn't matter what is built, as long as the government creates jobs. But even if the projects are widely regarded as needed, will the benefits justify the costs? Oftentimes the answer is no, as the actions of the Spanish government over the last two decades suggest.

Spain covers an area about the size of Utah and Arizona combined, and is home to a little more than 46 million people. Although it is neither the largest, most populous, or most prosperous country in Europe, over the past two decades it has nevertheless built the largest high-speed rail network on the continent, covering 2000 kilometers. The same is true of its aggressive highway construction program which has added 5,000 kilometers of new roads over the same time frame. But the most ambitious element of its plan was the construction of 48 airports, 43 of which were international.

In June, the New York Times ran an article that quoted Spain's industry minister Jose Blanco accusing the government of "bad planning and excessive spending." This is nowhere more obvious than in its disastrous airport construction policies.

A perfect, and highly publicized, example is the Castellon airport, which cost the Spanish government nearly 150 million euros ($213 million). Although Castellon was finished in March of this year, it has yet to welcome a single flight. In fact, it doesn't even have an airport license. Originally, the airport was supposed to ride the wave of Spain's booming tourism industry and bring money and jobs into the local economy. But central economic planners in Madrid misread the market and failed to recognize a growing bubble. The airport now stands as one of many expensive white elephants that dot the Spanish landscape.

In Spain, the larger airports are run by regional governments and only 11 turn a profit. The government is currently considering selling concessions to run the two biggest - Madrid Barajas and El Prat in Barcelona. Even some of Spain's more successful regionals are in the red. A recent piece in Spain's El Pais newspaper revealed the practice of paying discount airlines to land in regional airports. For example, Girona airport, located about two hours outside of Barcelona, paid Ireland's Ryanair around seven million euros a year to continue operating (largely empty) flights to the airport.

While recent austerity measures have reduced this practice, subsidies to discount airlines is common among many of Spain's regional airports. These payments allow Ryanair and other discount airlines to play Spain's many regional airports against one another, demanding higher subsidies and lower fees. The existence of this market would evidence that Spain has built out these facilities well beyond the point of economic sense. But as with all politically motivated spending, economic necessity is never a high priority.

In the past few years, the country seems to have doubled down on its infrastructure investment in spite, or perhaps because of the global financial crisis. For example, a November 2008 stimulus initiative focused heavily on infrastructure projects. The stimulus cost eleven billion euros (1.1% of Spain's GDP), eight billion (73%) of which went to public works projects. An April 2010 report by the US Department of Labor called the program a relative success but acknowledged the difficulty in calculating the number of full-time jobs that resulted. It highlighted how some of the jobs lasted only a few hours.

After the dust settled from these projects, it has slowly become clear that the employment didn't last and all that remained were unneeded facilities and unsustainable debt. Meanwhile, according to the same report, despite the spending, Spain's GDP contracted an estimated 3.6% in 2009 and unemployment now stands at 21%.

There are of course, significant differences between infrastructure projects in Spain and in the United States that make it difficult to compare the two. We may not build airports but choose to focus on high speed rail. But, when it comes to the efficient allocation of scarce economic resources, why should we expect our government planners to be wiser than their Spanish counterparts?

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Andrew Schiff
Director of Communications and Marketing
Euro Pacific Capital, Inc.
email: aschiff@europac.net
website: www.europac.net

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