From the AFR:
Treasurer Joe Hockey is considering identifying government borrowings raised to fund infrastructure as separate from debt raised to cover the budget deficit as the Abbott government contemplates an infrastructure spending splurge.
Mr Hockey confirmed last week the government was “looking at ways that we can stimulate growth, particularly in the next 18 months and beyond”.
“There is a challenge that we recognised in opposition, and the government talked about, of sustaining growth and increasing economic growth,” he told reporters.
“From my perspective – and the Coalition’s perspective – infrastructure investment that is based on proper cost-benefit analysis is a good investment that helps to improve productivity growth and that is the sort of thing we need to drive.”
The Australian Financial Review revealed last month the government was preparing an about-face on the economy, looking to boost infrastructure spending to stave off a post-mining boom investment slowdown that could push up unemployment.
While the Coalition hopes it can lift private-sector investment in infrastructure, senior sources concede the government will have to boost its own spending if it is to get a rapid injection of funds into infrastructure projects.
Some sense here, obviously, in the recognition that the mining boom is over and a vast capex cliff looms before our feet, even if , as usual, our pollies refuse to articulate in the open lest they disturb the confidence fairy.
But there are dangers here. Rushed infrastructure projects are clearly not going to go through the rigorous cost-benefit analysis that they should. This is already apparent in the Abbott road agenda which has already elevated projects ahead of the assessments. Of course, big ticket roads and the like are less probably going to result in “pink batts” scandals but if poorly planned will almost certainly cost more than they should as well as not deliver the long term productivity boost that makes them the priority in the first place.
Then there are the dangers of further public sector capture. As urban planning expert and regular MB commenter Stephen Morris has argued:
These projects involve creating private tax-farming monopolies that are then in a position to effectively eliminate competition in the supply of extensions to the road network.
Typically, as the network grows there will need to be an extension or augmentation . . . and that increases traffic flow through existing tolling points.
The state then finds itself in the invidious position of having to deal with the tax farmer on the farmer’s terms, or allow the farmer to sit back and earn a super-profit.
For example, with the extension to the M5 motorway (in 1994 from memory) the developer – Interlink – agreed to undertake the extension which would draw more traffic onto the road. The following details come from the Freedom of Information release requested by the Liverpool Council at the time (under Mark Latham, if I recall correctly):
– the additional work did not go out to tender so it was never known how much it actually cost, but it was notionally valued at $65 million;
– of this, $50 million was actually paid by the government in the form of subordinated debt;
– under the agreement, the concessionaire agreed to refund to government 70% of any savings which brought the cost below the notional$65 million, but kept the remaining 30%;
– the concessionaire entered a superprofits agreement under which it would reimburse 95% of profit when, and if, it ever achieved an agreed cumulative rate of return. This was calculated on the construction cost of the original road plus the entire $65 million cost of the extension, not just the $15 million (if that) actually advanced by the company!
Despite the commercial-in-confidence secrecy, it is widely believed that the superprofit rate was 19% per annum after tax.
Similar secret re-negotitions have taken place on the M2 and are about to happen again with the M2/F3 connection.
In each case the state is ultimately forced into a take-it-or-leave-it deal with the monopolist.
We can afford these projects with a commitment to an open debt schedule. I submit that they would also be cleaner and quicker if executed that way. Most analysts see the projects not kicking off until 2016 as it is, which is far too late to offset the capex cliff.
Only the interests of the debt-cornered Liberal Party would suffer.
