Infrastructure splurge needs checks and balances

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By Leith van Onselen

The Federal Budget contains a bunch initiatives aimed at boosting infrastructure investment by some $125 billion by the end of the decade:

The Government is getting on with the job of delivering infrastructure that Australia urgently needs by building high‑quality road and rail projects and addressing transport bottlenecks that are a drag on business and communities…

The Infrastructure Growth Package provides an additional $11.6 billion for infrastructure. This will bring the Government’s investment to $50 billion by 2019-20 which, combined with State and private sector funding, will catalyse over $125 billion of additional infrastructure investment nationwide.

The Budget package consists of a $5 billion Asset Recycling Initiative to unlock capital from State and Territory assets, an additional $3.7 billion for the Infrastructure Investment Programme and $2.9 billion for the Western Sydney Infrastructure Plan.

These initiatives are designed to expedite critical infrastructure, create real activity at a time when the economy is going through a significant transition, and boost long-term productivity and living standards…

The Government is reintroducing indexation of fuel excise from 1 August 2014 to create a more stable source of Commonwealth road funding over the longer term. The Government is also redirecting recurrent spending to address immediate infrastructure funding challenges and setting up a new Asset Recycling Fund…

The Asset Recycling Fund will be set up on 1 July 2014 to facilitate the Government’s investment in new infrastructure. It will include unspent funds from the Building Australia Fund and Education Investment Fund, and proceeds of the sale of Medibank Private and other possible privatisations.

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The Government has committed $5 billion to provide financial incentives over five years to the States and Territories to sell assets and reinvest the sale proceeds into additional productive infrastructure. This historic National Partnership Agreement with the States and Territories has the potential to catalyse close to $40 billion of new infrastructure.

The Initiative will leverage a significant increase in private sector investment and create opportunities for investors, including superannuation funds, to invest in quality infrastructure…

By removing bottlenecks, the Government is encouraging construction, driving real activity in the economy and modernising the nation’s economic infrastructure.

In his Budget speech last night, Treasurer Hockey was at pains to stress the deleterious impacts on employment as the epic mining investment boom unwinds, and how infrastructure investment will play an important role in stimulating employment and growth, as well as boosting the nation’s productivity capacity.

Hockey is correct in that the mining investment cliff is real, and by most forecasts is likely to weigh heavily on the economy from 2015 (see next chart).

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And well-chosen and targeted infrastructure can offer Australia 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.

However, to be effective in the long-run, rather than merely another form of short-term stimulus, the Government’s infrastructure program needs to be based on rigorous and objective cost-benefit criteria, with only the highest ranked projects ultimately gaining approval and funding.

Such an approach requires a large shift to existing infrastructure selection processes, which the Productivity Commission’s Peter Harris last week described as generally “poorly planned and swiftly introduced… Whereas the norm in major projects is that the announcement precedes the detailed planning”.

Indeed, the Government’s infrastructure plans contain many worrying aspects. One is that the Government has already placed road investment ahead of rail, instead of choosing projects based on their respective merits, regardless of mode. Moreover, its announced investments in the West Connex toll road in Sydney and the first stage of the East West link road in Melbourne occurred when neither project had business plans, and when Infrastructure Australia – the independent umpire of the nation’s infrastructure priorities – said neither was “ready to proceed”.

Then there is the issue of the privatisations themselves – both by the federal government and the states (encouraged by federal funds) – which look likely to be rushed without proper due diligence in the divestment strategy.

Privatisations are fine if: 1) they do not lessen (or preferably improve) competition in the market place and do not worsen consumer outcomes; and 2) the funds received from the sale more or less offset the income foregone by government over time.

The risk is that in the rush to sell-off assets in a bid to recycle into more investment, the privatisation process is likely to be mis-managed, with overall poor outcomes for taxpayers.

In order to be effective, the Government’s privatisation process must proceed with proper due diligence, and the infrastructure investment program must pass rigorous cost-benefit analysis, in order to ensure that they deliver the biggest returns to society. Otherwise, Australia could be left short-changed and carrying the burden of expensive infrastructure ‘white elephants’ that offer only limited productivity/social value, and whose investment could have delivered much bigger returns elsewhere.

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  1. “The risk is that in the rush to sell-off assets in a bid to recycle into more investment, the privatisation process is likely to be mis-managed, with overall poor outcomes for taxpayers.”

    Sounds like government to me. Have Joe Schmuck pay for an asset, sell to favourite mates at a loss, use “income” to buy more assets, sell to favourite mates at a loss, use “income” to …..

    • notsofastMEMBER

      I don’t see why the Australian States need to sell off any assets to undertake this infrastructure program.

      Much of the road infrastructure proposed (ie completion of major Arterial and Ring Roads) is desperately needed (probably should have been built at least 10 years ago) and should more than pay for itself in productivity gains in the coming decades.

      Having said this I agree the costs, quality (we want this infrastructure to be built to last in the face of intense cost pressures) and the way the projects are implemented need to be seriously challenged but in terms of “a road/freeway is needed here” almost all of the road projects proposed are no brainers. The other factor that needs to be seriously looked at is the rate at which we can realistically do these projects while maintaining value for money and most importantly I believe (because this will be the biggest challenge) maintaining quality. I think there is a tendency to significantly overestimate our capacity to build these projects in the way I discussed. It is not just a matter of throwing more people and more resources at the projects, because it needs to be the right people and the right resources.

  2. May I in front of members this site to predict that fuel excise revenue will far short of what the government wishes to collect.

    Reason: people can soon buy cars that have fuel enconomy of 50km/L. The worst (in term of tax collection) senario is that these cars can avoid using petroleum liquid fuel. So our government needs to learn other productive ways to collect tax on transport. Or saving spending on transport.

    I love the idea of flying cars. Don’t worry build road and bridges. And no need to deal with traffic jams. BTW, if cars can fly and VTOL, why do we need airport? So Tony can terminates the dream of second Sydney airport.

    • No-one is moving to 50km/L (2L/100km) as a fleet average anytime soon, and I’ll bet my grandchildren don’t see flying cars before their grandchildren. But even if you allow that, the idea that there’ll be no traffic jams “in the air” is ludicrous considering the “jams” planes already experience with landing slots around busy airports.

      Finally, no flying car is going to be able to take you intercontinental distances, so you’ll still need a second airport.

      (That’s my feeding of the trolls for the day)

      • notsofastMEMBER

        Its blindingly obvious that the Internal Combustion Engine will still be king of the road in 25 years time and in all probability for significantly longer.

      • Righty-O…blindly obvious the internal combustion engine will still be king in 25 years huh?

        Ummm, I guess global oil production isn’t in an 8% per annum decline then?

        I guess we’ll just continue to find enough oil to service the billion plus internal combustion engines we have currently?
        The whole current civilization construct we ALL have operated under and enjoyed in the last 50 years is underwritten by cheap oil yet the big ticket infrastructure promise in this year’s budget is more mega roads!

        We are spending our non renewables like there’s no tomorrow by encouraging more of what we’ve done for the last 50years rather than looking for a more sustainable way to move people around.

        Many will think this is the rant of a crazy leftie, but our in ability to get off of the oil heroin will not end well.

      • All I need is some VC funding. Anyway. If you do a simple energy balance calculation, you know why it is not fantasy.

      • drsmithyMEMBER

        Its blindingly obvious that the Internal Combustion Engine will still be king of the road in 25 years time and in all probability for significantly longer.

        How are we defining “king” here ?

        I wouldn’t be surprised if electric cars are approaching parity numbers in 20 or so years for personal transport. They’re a drop-in replacement for just about everyone today.

        Heavy transport is obviously a bit different, but there’s biodiesel and gas for most of them.

      • Why do you need a second airport at all? We all lived before air travel. Why? To go on holidays once a year? Airports are not infrastructure we use on a day to day basis. There’s definitely more room for efficiency at KSA in fact the need for second airports is very questionable from an investment point of view. They don’t pay off what you need to invest in and around them. A waste of money if you ask me.

    • Approximately 10 calories of non renewable energy input for 1 calorie of actual food output in commercial food production should be evidence enough that we’re still a long way from addressing the infinate growth via non renewables fantasy governments such as ours continue to embrace.

      • The costs of commercial food production have long been studied. As a civilization we”ve got really good at kicking the can (cost) down the road and we’ll just deal with it latter once we figure out replacement for cheap non renewables.

        A quick ‘online’ starting point:

        Like anything, comprehensive research, examination and reference often sits outside of online publication…

        I wish we had an unlimited supply of oil, save a divine intervention or an extraordinary technological break through in energy, I don’t see us being able to find a replacement for oil anytime soon.

    • drsmithyMEMBER

      I love the idea of flying cars.

      Drivers in this country can’t even keep left properly – one of the most basic aspects of competent and courteous driving – on a road with four lanes going in the same direction.

      The idea of these same people in “flying cars”, scares the crap out of me.

      • Sorry that cowboys on the road scare the crap out of you. As per technologies concern, future flying cars must be fully autopiloted because no human beings can possibly “see” roads in the sky. Even the technologies enable such concepts of 3D transport system, there will be virtual corridors to confine the “flying cars” where they travel. So human intervention will be none.

        Trying to fix transport problem associates with enconomy development and population growth with more road and bridges prove to be costly and inefficient. When we spend more time on road and money on tolls, congestion is getting worse year by year. It happens globally.

        Of course, the type of flying cars people are happy to embrace will not be in current forms because most of them don’t comply ALL the characteristics:

        VTOL capability
        None intrusive in its operation, i.e., dangerous moving parts, noise, bulky etc.
        Fuel consumption enconomically efficient.
        Visually resemble to a real car.
        Fully autopilot and no needs of human operation.
        Multiple redundancies for failure.

        If we have enough of problem of convential transport system on road, we need to think ahead about alternative solutions. Flying cars bottleneck is antigravity solution. If you drive a car with mass of 1500 kg, the minimum energy consumption for antigravity is no more than 2 grams of petrol per second. This is the equation for a gravity field where minimum energy required.

        U(antigravity energy)=0.5mg^2T

        As you can see all the flying machines we have failed with this equation massively. We know all the science. But our engineers have not yet designed the engine that are fully comply with the theories.

  3. We also need cheap land.

    Land needs to be acquired to build infrastructure.

    Why pay high prices for the acquisition of it?

    Then hey, the enterprise said infrastructure services, and the shelter for said enterprise’s workforce could benefit too yeah?

  4. Stephen Morris

    “Asset Recycling” is snake oil of the most pernicious kind.

    I know I’ve posted this before, but given that:

    a) it is central to the new world order being created by Hockey and his Mates;

    b) it is an industry I worked in for many years; and

    c) I predicted it with absolute accuracy in September last year (here, well before the bloggers woke up to what was going on),

    I hope you will indulge me if I repeat it.

    Trying to “pay off” government debt by selling assets to private monopolists and tax farmers is rather like trying to “pay off” one’s home loan by having it transferred from the bank to a bunch of loan sharks armed with cricket bats and rottweilers.

    The debt doesn’t simply “go away”. The obligation to pay doesn’t vanish into thin air.

    Private monopolists and tax farmers are not philanthropists. They are not giving the government money out of the kindness of their hearts. They are doing so in the full expectation that they will be able to gouge it back in the form of monopoly pricing on their captive customers and from their farmed taxes.

    The deadweight losses associated with monopoly pricing and tax farming are no different from the deadweight losses imposed by taxation. And yet, whereas the wacko laissez-faire fundamentalists will condemn any form of transparent taxation, they will applaud such concealed “private taxation” by rent-extractors.

    Private monopolies are classically allocatively inefficient. It’s just that their inefficiency isn’t of the sort that shows up in any published profit and loss statement.

    When a private airport monopoly [which shall remain nameless] needlessly delays – for years – the building of a second runway, the cost manifests itself “invisibly” in the form of lost time for travellers stuck in holding patterns, and in the form of extra fuel usage by airlines.

    For the wacko laissez-faire fundamentalists, however, this would be regarded as “efficient” because it raises the rate of return on the company’s restricted asset base.

    When a private road tolling tax farm runs at below capacity because the profit-maximising toll has encouraged drivers onto local streets, the cost manifests itself “invisibly” again in the form of lost time, in extra fuel usage, and in reduced amenity for those affected by the traffic.

    For the wacko laissez-faire fundamentalists, however, this would be regarded as “efficient” because it raises the company’s rate of return.

    When a privatised grain-handling authority closes regional depots and dynamites the silos (to prevent potential competitors offering to buy them), the cost manifests itself “invisibly” in the form of farmers having to build on-farm storage and transport their grain further by road.

    For the wacko laissez-faire fundamentalists, however, this would be regarded as “efficient” because it raises the company’s rate of return.

    But even more worrying is the direct line running from privatisation to corruption.

    Public agencies put work out to tender on a competitive, transparent, price-based system. In contrast, additional work by private monopolies and tax farms is almost invariably achieved through secretive, “commercial-in-confidence” renegotiations. Invariably the monopolist or tax farmer is in the commercially advantageous position of controlling the critical assets and revenues and thus being able to present a “take-it-or-leave-it” proposal.

    (We still don’t know exactly what concession were offered in order to get the announcement of a new runway shortly after the election. Tolls on drivers dropping off passengers perhaps??)

    As a matter of cosmetics for the gullible, there is usually an “independent adviser” involved, but having myself worked in this role I can testify that it is all but useless.

    To understand why, imagine a judicial system in which supposedly “independent” judges were selected by the Minister on a case by case basis from a pool of barristers. Imagine, if you will, that their deliberations were held in secret (we might call it “judicial-in-confidence”). Imagine, if you will, that those same barristers were themselves hoping to be involved in other commercial dealings with the government. And imagine that the Minister had made it clear that he wanted a particular verdict to be reached!

    If it weren’t so serious it would be laugh-out-loud funny.

    There is a direct line running from privatisation to corruption.

    But even beyond allocative inefficiency and corruption of the transparent and competitive tendering system, funding infrastructure through private monopolies and tax farms actually degrades public finances.

    One only need look at the history of public debt in the United Kingdom. (See ( Public sector net debt (excluding financial sector interventions) fell from 44% of GDP in 1980 to 26% in 1991 following the massive Thatcher privatisation program [much of which was actually “good” privatisation aimed at promoting competition . . . unlike today’s scams] but by 1997 it was back up to 42%. It is now above 70%.

    In the long run privatisation erodes government finances. While public revenues are being progressively alienated, politicians keep topping up the public debt (to buy votes), but have progressively less and less public revenue to service it.

    What we are actually witnessing here is the collapse of the corrupt system of elective government.

    Politicians facing re-election want to spend money buying the votes of powerful minority voting blocs or marginal electorates. And they want to hide from the majority the cost of what they are doing. They try to achieve this by selling monopolies and tax farms.

    Privatisation of this type simply doesn’t address the underlying problem: desperate politicians wasting money trying to buy votes then trying to conceal what they have done.

    Politicians won’t stop spending. But the alienation of revenues though privatisation means that public finances deteriorate and politicians become ever more dependent on the rentiers and tax farmers.

    This is a throwback to the seventeenth century. It is a throwback to the Stuart kings trying to bypass parliament. It is a throwback to the ancien regime. It is a throwback to Colbert and the ferme generale.

    It is not just internally inefficient (involving layers and layers of facilitators and other “ticket-clippers”). It is also a system that imposes layers and layers of deadweight losses: over-pricing and under-investment, costs that are built into every transaction in the economy.

    Buy an imported car? It will have an invisible “private monopoly port tax” built into the price. Buy imported clothes? They will have an invisible “private monopoly airport tax” built into the price. Buy some groceries? They will have an invisible “private monopoly toll road tax” built into the price. And so it goes on . . . and on.

    Over the time the accumulated deadweight losses of this byzantine system can only grow.

    This is a slow-ticking time bomb. It is a system that will eventually collapse under the weight of its own accumulated inefficiency.

    But there is a reason that ancien regimes becomes “ancien”. The reason is that their members refuse to face up to what is going on around them. They keep pretending to themselves that they can go on squaring the circle.

    Until eventually they can’t.

    • intertubernet

      SM, this was gold when I read it the first time, and it still is!

      “The deadweight losses associated with monopoly pricing and tax farming are no different from the deadweight losses imposed by taxation.”

      Monopoly pricing is worse because we can’t even vote against it.

  5. Mark Out West

    Well UE you talk about a good Budget, innovative and plan needs accountability.

    Here is Infrastructure Australia’s list of top priorities, how many roads are there? Obviously you think Abbott is the smartest man in the country!!

    Brisbane to Gold Coast Transport Strategy (Qld)
    Brisbane Inner Rail (Qld; $302m)
    Inner Sydney Regional Bike Network
    (NSW; $185m)
    Sydney Light Rail (NSW; $1,600m)
    Growth areas transport package (Vic; $tbc)
    Airport Rail Line (WA; $2,015m)
    Perth Rapid Transit (WA; $1,882m)
    Canberra Transit Corridor (ACT; $tbc
    Capacity Improvements and Expansion of
    the Metropolitan Commuter Rail Network
    (NSW; $795m)
    Melton Rail Line Duplication and Electrification
    (Vic, $tbc)
    South Australia National Managed Motorways
    Project – South Eastern Freeway, Stirling to
    Crafers (SA; $4.57m)
    Tram Route 86 Demonstration Project, Stages B
    and C (Vic; $tbc
    Capacity Improvements and Expansion of
    the Metropolitan Commuter Rail Network
    (NSW; $795m)
    Melton Rail Line Duplication and Electrification
    (Vic, $tbc)

    • Capacity Improvements and Expansion of
      the Metropolitan Commuter Rail Network
      (NSW; $795m)

      It took them $2bn & 9 years to build 11km of track to two stations in south west Sydney, in an area with a reserved transport corridor and minimal local population to build the South West Rail Link. What makes them think $800m is going to be enough to improve let alone expand the existing network?

      • Mark Out West

        Well lets all just build some more roads through the public/private partnerships cause they’ve been spot on with their projections.

        Roads require cars to make them profitable, which feeds back into greenhouse gases and the importation of cars & crude, increasing debt.

  6. Am I missing something here? Wasn’t the fttp NBN “infrastructure”?

    Maybe Smokescreen Joe and Simple Tone don’t like infrastructure that you can’t put big “Commonwealth Government Infrastructure – built by Tony” hoardings on.

    Hard to put a big sign on an underground cable.

    Just goes to show how dumb and backward-looking these turkeys are.

    • Well the electorate falls for it.

      it would indicate they are dumb and backward-looking turkeys too.