Following forty years of stagnation, financial centers started to grow again in the wake of a long and hesitant process of deregulation. The movement began in earnest in the 1960s, was set back by the currency and monetary turmoil of the 1970s, and resumed its course in the 1980s. Deregulation opened up an era of thorough reorganization in all financial systems, marked by sectoral concentration, the acquisition of foreign banks and opening of branches abroad, the development of deep international money markets with the Euromarkets, and the displacement of bank loans by bonds, stocks, and market instruments of varying time lengths. Many banks took advantage of the new freedom to try their hand at new products, especially market-related ones. This initial shakeup was followed by the present period of consolidation, in which banks are now seeking to improve profitability by focusing on what they do best.

The present part reviews the deepening of core–periphery patterns in OECD countries by taking up in the following order the four issues of spatial concentration, internationalization, securitization, and specialization. Like the preceding one, the present part emphasizes the reluctance of decentralized countries to submit to global changes. In it, I argue that concentration has increased across countries, but that it has taken place only within banking sectors, not across sectors. Deregulation has merely restored the degree of competition that existed in the pre-Depression days (chapter 7).

Banks are in the course of redefining their product mix. Concentration allows banks to serve bigger accounts; internationalization opens up possibilities in currency trading and export finance; securitization calls for underwriting, brokerage, and the provision of mutual funds (asset management); and the removal of barriers between bank and insurance invites the development of bancassurance or Allfinanz. The availability of new options does not imply that all banks will pursue them all; it is not clear whether the trend is toward a broader or narrower product mix. Nor is it clear yet what universalism and specialization refer to in today's banking practice.

I survey the initial rush to diversify that greeted deregulation and then the more recent, gradual, and uneven movement toward a new form of specialization. I point to the logic that, I believe, is causing this realignment. I identify an emerging dichotomy between the two historical prototypes — Britain and Germany. I also examine two developments — bancassurance and banking via the internet — and their potential impact on the product mix.

Some time ago we were asked by the Danish Transport Council to undertake a review of plans to study the viability of fixed connections between Denmark and Germany across the Baltic Sea at Fehmarn Belt. The Danish Transport Council was set up by the Danish Parliament to improve the basis for Danish transport policy by funding research and by carrying out independent studies of current transport issues with policy recommendations to government, Parliament and the general public.

Fehmarn Belt is the strait between Denmark and Germany located in the western part of the Baltic Sea between the islands of Lolland and Fehmarn. The shortest distance across the Belt is the 18.6 km (approximately 11 miles) between Rødbyhavn in Denmark and Puttgarden in Germany. A fixed connection across the Baltic Sea at this location would be one of the largest and most costly cross-national infrastructure projects in the world. Estimates suggest a cost in the range of DKK 20 billion to 35 billion (US$3.3 billion to 5.8 billion) for the coast-to-coast facility, and an additional DKK 15 billion to 30 billion (US$2.5 billion to 5 billion) for connecting access links. As part of an agreement with the Swedish government regarding the Øresund fixed link, the Danish government has committed to building a fixed Fehmarn Belt link, provided such a link is ecologically and economically feasible. The position of the German government is less certain.

A new animal

Wherever we go in the world, we are confronted with a new political and physical animal: the multibillion-dollar mega infrastructure project. In Europe we have the Channel tunnel, the Øresund bridge between Denmark and Sweden, the Vasco da Gama bridge in Portugal, the German MAGLEV train between Berlin and Hamburg, the creation of an interconnected high-speed rail network for all of Europe, crossnational motorway systems, the Alp tunnels, the fixed link across the Baltic Sea between Germany and Denmark, plans for airports to become gateways to Europe, enormous investments in new freight container harbours, DM 200 billion worth of transport infrastructure projects related to German unification alone, links across the straits of Gibraltar and Messina, the world's longest road tunnel in Norway, not to speak of new and extended telecommunications networks, systems of cross-border pipelines for transport of oil and gas, and cross-national electrical power networks to meet the growing demand in an emerging European energy market. It seems as if every country, and pair of neighbouring countries, is in the business of promoting this new animal, the megaproject, on the European policy-making scene. And the European Union, with its grand scheme for creating so-called ‘Trans-European Networks’, is an ardent supporter and even initiator of such projects, just as it is the driving force in creating the regulatory, and de-regulatory, regimes that are meant to make the projects viable.

For the past eight years, I have been searching for what accounts for factor mobility or its opposite, factor specificity. It began with my 1995 Comparative Political Studies article, in which I advanced the idea that factor mobility is a sociopolitical construct, reflected in asset holders' membership in sociopolitical networks. In this book, I further probe this insight with respect to the capital factor, providing an institutional backbone for (or rather an explicit specification of) the generic and softer notion of network.

This book was written while I was at the European University Institute in Fiesole. The research was financed by the Institute and conducted in collaboration with Elisabeth Paulet. I also benefited from the tutoring of Benoit Friguet, Marcel Jansen, and Ludovic Renou, and from the advice of Giovanni Peri. Thimo de Nijs and Roland Ruittenbogaard contributed information on the Dutch case.

The book required the drudging compilation of a database, established in collaboration with Elisabeth Paulet. We thank Andrew Clayton from the Bank of England, Paolo Garofalo from the Banca d'Italia, Dr. Gabriele Jachmich from the Institut für Bankhistorische Forschung eV, Mr. Nougaret from the Crédit Lyonnais, Dr. Francesca Pino from the Banca Commerciale Italiana, Dr. Sbacchi from the Credito Italiano, and Petros Valamidas from the Bank of Greece for kindly and generously responding to our requests for documentation.

The importance of risk analysis

As mentioned in Chapter 1, in terms of risk, too many feasibility studies and appraisals of megaprojects assume projects to exist in a predictable Newtonian world of cause and effect where things go according to plan. In reality, the world of megaproject planning and implementation is a highly stochastic one where things happen only with a certain probability and rarely turn out as originally intended. The failure to reflect the probabilistic nature of project planning, implementation and operation is a central cause of the poor track record for megaproject performance documented above.

It is fairly common in feasibility studies and appraisals of major transport and other infrastructure projects to make a mechanical sensitivity analysis examining the effect on project viability of hypothetical changes in, for instance, construction costs, interest rates and revenues. The typical range for such sensitivity analysis is from ±10 per cent to ±20 per cent. It is, on the other hand, unfortunately rare that risk analysis is made by identifying alternative future states of costs, revenues and effects and a probability distribution estimated for the likelihood that these states would actually occur. This information is required in order to estimate the expected values of costs, revenues and effects, or, in other words, the most likely development, including the associated variances.

We live in a time when the ability for constant learning is considered crucial to the welfare of individuals, organisations and nations. This is the age of the ‘learning society’. However, in environmental impact assessment (EIA), which is the main methodology used by decision makers to predict environmental effects of megaprojects, surprisingly little learning is taking place. Or, to put the matter more positively, learning is only now beginning. This is true for megaprojects as well as for other types of project. The reason for the lack of learning is that projects and their environmental impacts are rarely audited ex post, and without post-auditing learning is impossible.

A recent study describes this situation as an unfortunate ‘stalemate’ and concludes: ‘there is much scope for raising the profile of post-auditing in EIA world-wide’. One consequence of the current state of affairs is a lack of knowledge about the actual environmental risks involved in infrastructure and other development. Although many studies on environmental impact analysis have been elaborated, and many environmental impact statements made, there is still a general sense among professionals and decision makers that the state of the art is not satisfactory. In what follows we will elaborate on three reasons for the presumed deficiencies of environmental impact assessment:

1. (i) a lack of accuracy in impact predictions;

2. (ii) the narrow scope of impacts and their time horizon; and

3. (iii) an inadequate organisation, scheduling and institutional integration of the environmental impact assessment process in the overall decision-making process.

The point of departure for this book was a paradox. Recent years have witnessed a steep increase around the world in the magnitude, frequency and geographical spread of megaprojects, namely multibillion-dollar infrastructure projects such as airports, high-speed rail, urban rail, tunnels, bridges, ports, motorways, dams, power plants, water projects, oil and gas extraction projects, information and telecommunications technology systems, and so on. Never in the history of humankind have we built more, or more expensive, infrastructure projects. And never have such projects been more central to establishing what sociologist Zygmunt Bauman calls ‘independence from space’ and Microsoft chair Bill Gates ‘frictionless capitalism’. Yet when actual versus predicted performance of megaprojects are compared, the picture is often dismal. We have documented in this book that:

1. • Cost overruns of 50 per cent to 100 per cent in real terms are common in megaprojects; overruns above 100 per cent are not uncommon;

2. • Demand forecasts that are wrong by 20 per cent to 70 per cent compared with actual developments are common;

3. • The extent and magnitude of actual environmental impacts of projects are often very different from forecast impacts. Post-auditing is neglected;

4. • The substantial regional, national and sometimes international development effects commonly claimed by project promoters typically do not materialise, or they are so diffuse that researchers cannot detect them;

5. • Actual project viability typically does not correspond with forecast viability, the latter often being brazenly over-optimistic.

In this chapter we focus on regional and economic growth effects of megaprojects. As in the previous chapter, our main purpose is to identify past problems that may prove useful in understanding and improving the decision-making process for such projects.

Recent years have seen a resurgence of interest in the impact of infrastructure on regional development and economic growth. Indeed, one of the arguments often advanced for committing public funds to infrastructure investments is that it will generate economic growth in general, in a region or a country, and/or in a particular local area. There are good theoretical and empirical reasons for approaching such claims with caution, we will argue. A hard-nosed approach to this subject is often warranted since much of the interest in various circles for infrastructure investments reflects rent-seeking behaviour. Such behaviour is explained by the circumstance that infrastructure investments may generate benefits to specific construction and user groups while the major part of costs is often borne by the taxpayers.

Transport infrastructure and economic development

Both business and private persons use transport infrastructure. In general, infrastructure must be seen as an input into the production of a transport service, which in turn is used as an input into a final product or service demanded by consumers, such as a visit to a relative or the availability of a certain commodity in the local store.

The second industrial revolution, based upon electricity, chemicals, and the internal combustion engine, and characterized by capital intensity and large initial investments, was made possible by the emergence of corporate securities markets. Markets allowed banks to transform long-term loans to industry into securities, recoup their liquidity, and lend anew. The development of securities markets in general was made possible by the agglomeration of savings in the core. Secondary securities markets needed a lot of liquid assets to function well. Yet, most securities markets did not find the cash they needed to grow and, as a result, stagnated. Securities markets were starved of cash in countries where local credit sectors carved up a sizable portion of the deposit market. Stock markets in the second half of the nineteenth century constituted, along with large commercial banks, a new “corporate finance,” geared to the financial needs of the new industrial sectors. Land and other traditional sectors, in contrast, had no use for “corporate finance,” but, instead, were banking with the non-profit sector (savings banks, credit cooperatives, and mortgage banks). The two financial sectors were in competition for resources, mainly deposits. The competition was adjudicated politically, through regulation. Since the size of the local non-profit sector was a negative function of the degree of centralization of the state, the development of corporate securities markets conversely was a positive function of state centralization.

Securities markets are growing again. From 1980 to 1996, listed stock capitalization doubled in the United States, quadrupled in France, Germany, and the UK, and increased by a multiple of twenty-six in Portugal, though, in this case, the initial value was very low. Although most of this increase was spent recovering from two poor decades – US market capitalization, for instance, did not regain its 1961 GDP-weighted value until 1993 – the surge is sufficiently pronounced and ubiquitous enough to be considered a qualitative change.

Market growth implies a relative decline in the role of banks, with predictable redistributional effects. Disintermediation reduces the twofold capacity that the financial system has to overcome information asymmetry and insure firms against cyclical financial vicissitudes. Although there is no evidence of a “Macmillan gap” yet, the trend toward securitization has the potential to hurt firms that are small or engaged in traditional sectors. We should not be surprised, therefore, to observe that disintermediation and securitization are not pursued to the same length in all countries, but, instead, that the largest stock markets, today as prior to the Great Depression, are found in financial systems that exhibit a low degree of segmentation and in countries with centralized state structures.

Still, we should not expect the 1913 patterns to reemerge intact.