In July last year, the Productivity Commission (PC) released a report into the provision of public infrastructure, which presented a scathing assessment of the governance, selection and execution processes by Australia’s governments:
There are many examples of inadequate project selection that have led to costly outcomes for users and taxpayers.
…poorly chosen infrastructure projects can reduce productivity and financially burden the community for decades with infrastructure that is unnecessary and expensive to maintain…
A key message of this report is that there is a fundamental need for a comprehensive overhaul of the poor processes currently used in the development and assessment of infrastructure investments particularly, but not exclusively, by governments. The costs of poor project selection and delivery will be exacerbated if governments decide to increase their infrastructure investment programs without reforming their governance regimes…
The PC argued that it is critical that governments build a “credible and efficient governance and institutional framework for project selection”, since “selecting the right projects is the most important aspect of achieving good outcomes for the community”. “Properly conducted cost–benefit studies of large projects, and their disclosure to the public” is seen as key to guide project selection and improve the transparency of decision making.
It also cautioned against the Abbott Government’s “capital recycling” agenda, whereby it will provide financial incentives to states that sell-off assets and invest in new infrastructure:
[Capital recycling] could act to encourage privatisation in circumstances that are not fully justified and encourage the selection of new projects that do not have demonstrable net benefits. Already, examples of promises to reinvest have emerged in regions where assets are being sold. Tying funds to particular regions is no assurance that the highest net benefit investments are being considered.
Yesterday, the ACT Government became the first jurisdiction to sign up to the Abbott Government’s $5 billion Asset Recycling Initiative, selling-off assets worth up to $390m in exchange for a $60 million bonus from the federal government. Among the assets to be sold by the ACT Government are a swathe of government buildings and public housing, along with bookmaker ACTTAB.
The ACT Government has earmarked the funds to build it controversial $800 million ACT Light Rail Project – a 12-kilometre line connecting Gungahlin in the north and Civic. The project has been slammed by both Infrastructure Australia and the PC as being an overly expensive substitute for a bus service. Here’s what the PC said about the project last year:
The ACT Government’s decision to proceed with a light rail project appears to be an example of where the results of cost–benefit analysis have been ignored without a valid explanation…
In a submission to Infrastructure Australia in 2012, the ACT Government analysed a number of options including bus rapid transit (BRT) and light rail rapid transit (LRT). The analysis estimated that the upfront capital costs for the BRT and LRT would be $276 million and $614 million respectively (on an undiscounted basis) (ACT Government 2012).
In its economic appraisal (which is essentially a cost–benefit analysis), the ACT Government found net present values of $243.3 million for BRT and $10.8 million for LRT. The benefit–cost ratio for BRT was estimated at 1.98, with 1.02 for LRT. In the assessment, the benefits of BRT and LRT were similar ($491.8 million against $534.9 million respectively), but the cost of BRT was less than half that of LRT ($248.5 million against $524.1 million, when discounted by 7 per cent). The cost–benefit analysis took into account a range of factors including journey times, and avoided environmental impacts and accidents (ACT Government 2012)…
In summary, a cost–benefit analysis showed BRT to be a greatly superior option than LRT…
So here we have a classic example of how the Abbott Government’s asset recycling agenda is likely to facilitate bad outcomes for taxpayers. Just as the PC warned, it has encouraged assets to be sold in the ACT for reasons that may not be “fully justified”. It has also facilitated a project – ACT Light Rail – that does not have “demonstrable net benefits”, at least when considered against BRT.
Readers should also recognise that the ACT Light Rail Project only came to fruition because Labor lacked the numbers to form government and needed to gain support from the Greens sole MLA, Shane Rattenbury, who held the balance of power. It was effectively an $800 million bribe in order to gain office.
That the Abbott Government can effectively encourage such an infrastructure investment, which comes after it pledged financial support to Victoria’s now doomed East-West Link Project (which failed a basic cost-benefit analysis), shows that it is failing on infrastructure by not implementing a “credible and efficient governance and institutional framework for project selection” backed by “properly conducted cost–benefit studies”.
The end result is, therefore, likely to be a continuation of infrastructure malinvestment and waste, and poor outcomes for taxpayers.