Australia gets poor value for infrastructure dollars

ScreenHunter_06 Jun. 06 09.33

Cross-posted from The Conversation

The Productivity Commission has slammed the assessment and development processes for Australia’s public infrastructure projects, finding “numerous examples of poor value-for-money” because of bad selection.

In a damning report, the commission warns that “without reform, more spending will simply increase the cost to users, taxpayers, the community generally, and the provision of wasteful infrastructure”.

It targets Labor’s decision to proceed with the NBN without a full cost benefit study as a federal example of bad processes leading to costly outcomes for some users and taxpayers generally. “Detailed analysis of the project was focused … on how best to implement the government’s policy objectives, rather than considering the merits of different options.”

Electricity networks and desalination plants are also criticised as instances of bad processes at state level.

Governance and institutional arrangements for public infrastructure must be reformed to get better decisions on selection, funding, financing and delivery, the commission says in its draft report on public infrastructure.

Early reforms would deliver large benefits. A 10% reduction in the cost of delivering infrastructure would save an annual $3.5 billion. “A goal to achieve just a portion of this, say $1 billion per annum, would be quite feasible.”

Advocating a suite of reforms that should be set in motion at once, the commission says even election commitments to build and/or fund projects should be subject post election to rigorous assessment and selection. “White elephants should become an endangered species, or at least a rare sort not to be protected.”

The commission stresses that the key message of its report is the “need for a comprehensive overhaul of poor processes in the development and assessment” of investments.

Selecting the right projects is the most important aspect of getting good outcomes, with proper cost benefit analysis a important starting point.

The commission argues for “well designed user charges” to be deployed to the fullest extent that can be justified, but says this is not a panacea for all needs and there will continue to be a funding role for government.

Private sector involvement will deliver efficiency gains only if if it is implemented well, the report says. Private sector financing is not a magic pudding – ultimately users and/or taxpayers must foot the bill.

The commission presents a mixed picture on construction costs. Prices for engineering construction projects rose steeply from 2000 and at an accelerating rate. But the trend has recently abated.

There is “no single culprit” for the increases. Labour costs have risen steeply but so has the price of materials. “For the construction industry as a whole, the labour share of total costs has not changed appreciably over the past two decades.”

It is not evident that Australia is a more costly location for infrastructure than other comparable countries, the commission finds.

Labour productivity growth over the past two decades has been “sluggish” compared with the rest of the economy. But multifactor productivity, which combines capital and labour, has kept pace with other industries.

The commission says the industrial relations environment in construction has long been seen as problematic but in its consultations ‘’most parties did not raise IR as a major source of cost pressures, particularly in relation to civil, rather than building, construction’‘. It also noted that an important aspect of the outcome in IR was not regulatory but the parties’ ability to negotiate.

But there are considerable concerns, including widespread unlawful conduct, adverse IR cultures and problems with enterprise agreements.

Evidence that the Australian Building and Construction Commission – which Labor scrapped and the Abbott government wants to restore – improved productivity or reduced costs is relatively weak, it says.

“It may be that the ABCC has had more impacts on unlawful conduct and on productivity and costs at particular sites than in achieving substantial productivity growth rates across the industry as a whole.”

“However, IR reform in the construction industry should not rely on an overoptimistic aspiration that it will produce large industry wide productivity increases. The hurdle for action is much lower. There is enough evidence of site disruption, coercion and excessive enterprise bargaining arrangements to make changes.” Penalties for unlawful conduct should increase.

The commission urges that a sensible starting point for all governments would be to adopt the Victorian guidelines for their building codes.This would be likely to significantly improve the IR environment and avoid disputes and over-generous enterprise agreements.

It says governments have the capacity to fund more projects than under current fiscal and debt management practices provided reforms are implemented.

Assistant Minister for Infrastructure Jamie Briggs said the ALP “should take note of this detailed report and immediately act by allowing the Australian government’s reforms to Infrastructure Australia to pass the Senate to begin the job of fixing the mess”.

The commission will hold hearings in April and present a final report in May.

Article by Michelle Grattan, Professorial Fellow at University of Canberra

3 Responses to “ “Australia gets poor value for infrastructure dollars”

  1. emess says:

    Sounds like the Productivity Commission is sucking up to the Coalition with that one. For example, while citing the NBN, did they happen to mention how such an analysis would accurately quantify the scheme benefits? Without such an analysis, it comes down to a rigorous guess.

  2. Mik says:

    Not even a mention of MYKey, seriously, just a few things to say, bribes, backhander and favours.

  3. PhilBest says:

    There are some very interesting points made in THIS article on the USA:

    Why is it so expensive to build a bridge in America?

    By Ryan Cooper | March 10, 2014

    http://theweek.com/article/index/257684/why-is-it-so-expensive-to-build-a-bridge-in-america

    I wonder if Aussie shares some of the USA’s problems?

    “…..Let’s quickly go through the major factors researchers have identified, in no particular order:

    1. Expensive labor. From the top brass at New York’s Metropolitan Transportation Authority: “The MTA is required to overstaff projects so that the same [tunnel boring machine] work, for instance, that can be done in Spain with nine workers must be done in [New York City] with 25 workers.”

    2. Out-of-control private contractors. From Stephen Smith at Bloomberg: “Agencies can’t keep their private contractors in check. Starved of funds and expertise for in-house planning, officials contract out the project management and early design concepts to private companies that have little incentive to keep costs down and quality up.”

    3. A crap procurement process. The classic American way to pay for a big project is to round up about half of the funding (or even less), start construction, and then use a sunk-cost-fallacy to get the rest. This, obviously, is not conducive to efficient or speedy projects. (Looking at you, California high-speed rail.)

    There are probably a lot more, but as Alon Levy points out, it would be a mistake to focus too much on particular techniques or failures. The reality is that when it comes to cost and quality, America is doing basically everything wrong. Again, we’re not just a bit behind the curve — we’re ridiculously, embarrassingly behind the curve.

    The fact that both left- and right-aligned institutions (public employee unions and private contractors, respectively) are implicated here is evidence that this isn’t a typical left-right situation. And if we look internationally, both Singapore (very free-markety) and Sweden (unembarrassedly socialist) manage much cheaper building costs than America.

    This is basically about our greedy and opaque political culture.

    Every American infrastructure project features a scramble on the part of all parties to skim as much for themselves as possible. This leads to a self-defeating cycle in which voters are reluctant to pay for new stuff, so elites try to fund new projects in a duplicitous way, which only leads to more cost overruns…….”