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.
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).
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.