Tackling the $700 billion infrastructure backlog

By Leith van Onselen

Last night, ABC’s The Business screened the below segment examining how to tackle Australia’s infrastructure backlog, which is estimated to be around $700 billion currently – almost half of Australia’s annual GDP. On top of a neat report by the ABC’s Neil Woolrich, the segment includes an interesting interview with the head of Infrastructure Partnerships Australia, Brendan Lyon.

Key points from the segment include:

  • Australia is facing a difficult situation in replacing private mining investment projects with infrastructure projects.
  • There’s a lack of funding to get projects off the ground. Governments, in particular the states, don’t have the funding capacity.
  • The Federal Government needs to create markets and conditions where the private sector can get involved.
  • Australia needs leadership to get the public on board and explain why borrowing is okay as long as it is used to fund productive infrastructure.
  • Australia needs to use the low interest rate environment and Australia’s strong credit rating to leverage the Government’s balance sheet for the purposes of infrastructure investment.

As I have argued repeatedly recently, well targeted infrastructure investment offers the double dividend of supporting growth and jobs as the mining investment boom fades, whilst also expanding Australia’s longer-term productive base and improving living standards.

Going into debt to fund investment, or leveraging the Government’s balance sheet, is not a problem provided that the expenditure expands the productive potential of the economy, allowing the debt to be self-liquidating.

The most important thing is to set up institutions that require prospective projects to be rigorously examined and ranked according to strict cost-benefit criteria, rather than investment being politically motivated, as is often the case currently. One idea is to set-up an independent agency, on par with the RBA, with the power to decide infrastructure priorities.

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Comments

  1. So let’s get this straight.
    1. We have no funding because we have been spending and not saving. So now we are going to drive interest rates to even more extreme RAT negative. Just exactly where do we borrow from to build the infrastructure you are talking about? The funds shortage you wrote about a few days ago becomes very relevant. We are driving rates down to maintain our consumption based economy while, at the same time, expanding expenditure. In a nation of already impossibly high debt what could possibly go wrong?

    2. Cost/Benefit
    ” The most important thing is to set up institutions that require prospective projects to be rigorously examined and ranked according to strict cost-benefit criteria”

    Now how do you set such criteria?
    Do we base it on a Cost/Benefit analysis according to returns in A$. In that case, given the distorted nature of our economy,we will create an even worse funding problem as per your blog of recent days.

    If we base it on a cost/benefit to the external account, on the face of it, in A$ it would be likely very difficult to justify.
    e.g. You can build a rail line in Sydney which, given the population, will pay in A$ but will simply add to the problems in the external account. Alternately one might propose rail lines through regional Australia which, given the sparsity of population caused by policy over 50 years, we could not justify on an A$ cost basis. on the other hand if we are to have export industries such projects must be built.

    It’s something of a conundrum.

    3. Can we build any infrastructure economically any more?
    a) If we are aiming infrastructure at the regions to improve the external account situation we no longer have the workers in the regions to build the projects (as a result of past deliberate policy)
    b) Our industrial landscape has been so hijacked by the Lawyer/WHS/Union Perogative brigade that, without major reform in all these areas, we are screwed.

    • What’s the alternative though flawse? You’re always very negative on trying to ‘borrow our way out of this mess’, but seriously what is the alternative?

      Why is borrowing to target productive infrastructure so bad? How else do we increase productivity? Lower wages?

      • Jason

        All I am trying to do is try to get things framed correctly. I believe we should (have been)be building infrastructure Currently nobody is really thinking seriously about the issues involved. Everyone just says borrow and build infrastructure and everything will be fine. There is no need for reform. There is no need for saving. We deserve to just go on living on more and more debt while we now fund the rebuilding process.
        Then I see the sorts of infrastructure proposed and I have yet to see a proposal that addresses the issues properly. I note in your reply you did not address the conundrum raised in respect of evaluation of any projects. If we assess projects on the basis of what appears profitable in our current distorted economy it is likely we will exacerbate the external funding problems that are already looming on our horizon. If we build projects that are designed to facilitate a repair of the external account it is likely that they would not be deemed economical according from a cash flow perspective in the domestic economy.
        Nobody is even thinking about this serious problem and it is that lack of serious thinking about our nation that has brought us to the mess we are in.

        Given that I’ve not heard a single one of esteemed national economic experts really address the problems of the external account it seems that none have even heard of it let alone consider it in their thinking. There maybe one or two exceptions here eg Garnaut’s address of a month or two ago. However the difficulties towards which he pointed are so quickly forgotten even by him.
        So who will assess the projects and determine whether they are in the long term interests of the nation and its people? If it all follows the thinking in here we’ll build new freeways and train tracks all over cities and we will just screw the regions over yet again.

        Given that we, as a nation, are heavily indebted already, if we don’t fund the infrastructure either from taxation or saving, then it’s likely finally that any expenditure that ends up in the external account will need to be financed through further sales of either mining of Agricultural assets. I’m not too sure we have much manufacturing left to sell. If that is the case what has been gained?

        If we do fund from Govt borrowings from foreign sources then the damage that could occur by borrowing externally and stimulating the domestic economy is immense. If, with the borrowed funds, we build infrastructure that only services the domestic interests of the economy then we are just creating a debt sink for ourselves.

        Why does nobody think about these difficult issues? They don’t go away just because we refuse to talk about them.

    • Actually, some good points. A cost benefit analysis is a good starting point, but many costs and benefits are simply not able to be quantified. Or even agreed upon. To me, that is where the crowd sourcing of the political process is useful. IF (huge big if) the actual quantifiable costs and benefits are put up front AND (huge big and) people are prepared to pay for it. That is, give people the information, and let them vote to decide if the difference to be paid is worth it to them.

      So, perhaps the process ought to be this independent agency, fair enough, which quantifies that which can be quantified, and then screams out headlines of the net costs and who might be the beneficiaries to pay for the project…AND that politicians make it clear that it is not ‘free’.

      Pigs are oiled up and ready to fly. Still, why not aim for the moon?

      The other thing is that if we wanted to have a bunch of projects ready to go for the end of this mining boom, we should have started planning ten years ago. Even detailed design takes a year or more for a major project. Getting environmental approvals, planning approvals, rounding up the dollars, nimbys on board. Stick a pin in a list of numbers starting from a year to thirty (Badgery’s Creek anyone?).

      Of course it can be done quicker, but you get school halls and pink batts (neither of which were as bad as made out, but still would have been better with a longer planning and design period). The chances of any government doing that again are pretty slim, given the political opportunity it gives any opposition. Yes, yes, it may have stimulated the economy, but oooh, look 3% of principals didn’t like it, and my mate down the pub reckons he could do it cheaper.

      The point being, we are not in a position to start major infrastructure projects since they need to be designed and out to tender NOW in order to start construction any time early next year.

      If the tenders are not out now, any projects won’t start till the middle of next year, no matter how worthy. Cannot happen.

      Best plan for the next recession.

      Point 3 is also valid. Most governments now do not have sufficient expertise to oversee consultants and contractors. I have seen several projects where governments have paid four or five times what they needed to. (For example just do a google check on how much Victoria is paying for its new trams, and how much Prague is paying for a slightly better and proven design – the only difference is that the Czech government operators have retained the technical know-how, but Aussies have not).

  2. I hope Aus doesn’t go down the road of our current government where a return to surplus must be achieved at all costs. Even at the expense of productive infrastructure projects.

  3. I’m not sure Australia has exhausted all our options maybe we just need to extrapolate from what we have been doing (transitioning to a full import economy) because that seems to work.

    What would be wrong with Australia allowing Chinese investors/planners/construction companies/laborers to build a complete city in Australia. They have experience doing this and are efficient at getting the job done.

    Imagine for one minute, Australia picked some location that could support another city and let China do the job. There does not seem to be any limit to the amount of capital that private Chinese investors are willing to invest in Australia (at least according to the local RE spuikers), so the whole city could be funded with private Chinese capital. A city of say 1M people could be fully planned and completed in under 10 years. We specify the location, they plan, finance and build but Aussies get to live there.

    Wow sounds good to me, basically a fully imported city.

    I’d propose Port Stephens (about 40Km north of Newcastle). Great deep water port, close to existing expandable airport, close to expandable rail and road links.
    Far enough, but not too far from Sydney.

    • Normanton?

      A service centre where none exist, rail through to North QLD, and sea traffic away from the barrier reef.

      But how else would this be viewed? HK in reverse?

      Should we just offer a lease for 99 years as Chinese sovereign territory?

      • General Disarray

        And anyone whose foresight extends beyond their own financial interests.

        This is a scenario that is fraught with difficulties. It’s not as simple as “we just pay them rent”.

        Sheesh.

    • But what would the Chinese get out of this? They won’t do it out of the goodness of their hearts.

  4. Yup…. the Howard/Costello legacy right here folks.

    Whilst building up their surpluses, and defining their “superior economic mangerial prowess”, it is evidently clear their favourable balance sheet came at the neglect of infrastructure.

    So let’s net off their balance sheet with hypothetical infrastructure spending.

    Did Howard and Costello accrue $700 billion worth of surpluses?

    No.

    So in the most favourable economic conditions in Australian history, they still impaired the national balance sheet.

    I implore all of you to vote Abbott, please bring this line of thought back… Australia deserves it.

    • Exactly what’s happening here right now with Key/English. It’s all about what they’re NOT doing so they can achieve what they ARE doing.

  5. Stephen Morris

    AAaaaaagggggghhhhhhhhh!!!!

    Private infrastructure provides no funding. It is a means of financing: bridging the timing gap between the outlay of money needed to pay for the resources used to build infrastructure, and the eventual receipt of money from the ultimate source of funding (which might be user charges or taxes or whatever).

    Indeed, the inefficient allocation of risk in many privatisations actually decreases the net funds available to build and maintain infrastructure. Just as one can build something inefficiently, so one can finance something inefficiently.

    This is especially the case with roads, where private investors (either initially or in a subsequent privatisation) are not able to manage traffic risk as well as a state can, either in the short run (because of the state’s traffic network management functions) or in the long run (because of the state’s transport planning functions).

    Not only is the amount received from road privatisation less than the net present value to the state of the same income stream, but there are hidden and (invariably ignored) opportunity costs. These include:

    a) elimination of potential for competition in future developments. This was seen at the very outset in NSW where the M5 concession was privately re-negotiated only a year after the road was opened (on terms extraordinarily favourable to the concessionaire). It will be seen again in the M2 extension where Transurban will almost certainly offer a renegotiation and extension of the M2 concession in return for some “free” road;

    b) the elimination of efficient road pricing. Efficient allocation of road space requires peak pricing to ration scarce road space at times of greatest demand combined with nil pricing at off-peak times when high quality road space is sitting idle. However, efficient pricing is not in the interests of profit-maximising private monopolists; and

    c) long term constraints on transport planning such as prohibitions on competing public transport facilities. (What other business gets a state guarantee against competition?!!!)

    Having worked in this field myself, I can testify that private infrastructure is largely a scam. Its principal beneficiaries are politicians who wish to:

    a) build infrastruture without appearing to borrow money;

    b) ingratiate themsleves with influential campaign donors in the investment banking and contracting industries; and

    c) line up lucrative jobs for themselves with those same parties when they retire from politics.

    As with so many problems we face, the ultimate cause of this is the corrupt system of elective government (“government-by-politician”) which grants a monopoly on power to the very people least suitable to exercise it.

  6. What piss me off is when some argue for commercial return of infrastructure projects (well over 10%)( i.e NBN)

    Large projects can be financed at government rate of borrowing, far less than commercial rate therefore the IRR can be much lower.Even supers would be more than happy with a safe 6%.That is without accounting for their productivity benefits which can pay for them many time over.

    • Wow.. For a self confessed English hating Frenchie from a few months ago, you now have impeccable English. I must commend your English tutor 😉

  7. problem with our infrastructure is enormous cost that runs at twice or more than in other developed countries in Europe or America. We have to spend $200m to built 1km of tram-line. At the same time that is enough to build 1km of heavy underground train-line in Spain, France or USA.

  8. Predictably, Infastructure Australia’s report to COAG envisages more private sector financing, privatising existing monopoly assets (including roads) to generate capital, and funnily enough doesn’t seem too keen on the old ‘tax the citizenry to fund it model’ which delivered so much of our existing common social goods. Nation building for a nation of everyone for themselves. Inspiring stuff.