Productivity Commission warns on pork

ScreenHunter_06 Jun. 06 09.33

By Leith van Onselen

Following the Grattan Institute’s recent report questioning the new federal-state government deal to expand infrastructure investment through “capital recycling”, chairman of the Productivity Commission, Peter Harris, delivered a speech on Friday warning against governments committing billions of dollars of funding to infrastructure projects without undertaking any proper cost-benefit analysis:

Projects plans are being dusted off all over Australia in the face of the new incentives for recycling capital from privatisation. We should all hope that there is more than dust being brushed off. But right now we can only hope.

…we identify numerous projects poorly planned and swiftly introduced in recent years. Hastening to contract has been identified by Auditor-General reports and private sector submitters alike as one of the most important factors in poor public sector infrastructure development…

The evidence suggests that we do not have planning and development systems that are sufficiently valued by governments or the public.

If our infrastructure planning systems were valued, they would be regularly churning out detailed published assessments of cost and benefit in advance of announcements, and these would be given to the community to justify the immense size of some of the commitments being made. This would be in-depth analysis in advance of press release.

Whereas the norm in major projects is that the announcement precedes the detailed planning. Then if there is time a cost:benefit assessment may be done but often won’t be published due to confidentiality concerns. Following that, there is a rapid move to tender in order that the promise is not overtaken by the appearance of delay…

It is that the process as just described ensures there can be no pipeline of projects for future private financiers to look over…

For a pipeline of projects to exist, there must be a process of continuous publication. Moreover, it must be sufficiently detailed in its analysis to allow private sector investors – superannuation funds or banks or operators of toll-roads or construction firms – to take the analysis down off the shelf and apply it to their business model.

The current ‘normal’ process is the opposite of what a pipeline needs.

This system can be reformed, and moreover it can be done without stopping projects in their tracks. This is a long term shift needing an equivalent long term approach.

And better planning will ultimately benefit users and taxpayers. All infrastructure is paid for by one or the other of these two parties. They should be the focus of public policy.

As noted by The Guardian’s Lenore Taylor, the Abbott Government has so far taken the wrong approach to infrastructure, pledging “billions of dollars to projects before any business case had been done and is giving some of them even more money in this budget, again without a business case”. Taylor cites “election promises totalling $3bn to the $10bn West Connex toll road in Sydney and the first stage of the East West link road in Melbourne – at a time when neither had business plans, and when Infrastructure Australia, which is supposedly the independent arbiter of the nation’s infrastructure priorities, said neither was “ready to proceed”.

The Victorian Government, too, has fallen into the same trap. In addition to the flawed East-West Link in Melbourne, the Napthine Government has also committed to changing the path of its city rail tunnel without undertaking thorough analysis, undoing years of planning in the process.

I have argued previously that well targeted infrastructure investment can offer 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.

I also believe that going into debt to fund expenditure is not a problem provided that expenditure expands the productive potential of the economy, allowing the debt to be self-liquidating.

However, in order to be effective, such infrastructure investment must pass rigorous cost-benefit analysis, to ensure that it delivers the biggest returns to society. Otherwise, Australia will be left carrying the burden of expensive white elephants that offer only limited productivity/social value, and whose investment could have delivered much bigger returns elsewhere.

It is disappointing to read that Australia’s governments appear not to be following such an approach, choosing instead to base their decisions on short-term political motivations.

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Unconventional Economist

Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.

Comments

  1. I’m sure the cost/benefit calculations are quite favorable to their buddies who will happen to win the contracts. Contracts which are likely to be so dodgy that even if the projects were great, the onerous terms will make them a waste. The very fact they resist an anti-corruption investigation on the federal level should be grounds for being removed from power.

    Keep voting them in Australia. Economics use useless when you have reactionary 3 word slogans.

  2. Re changing the path of the underground rail,

    When the Libs entered the ministry and Guy became Minster for Planning they made a big hullabaloo about Fishermans Bend being ‘reinvigorated’. Then they change the path the of the rail from the sensible linking of the hospital precinct and Melbourne Uni to… Fishermans Bend.

    I’d love Mr IBAC to explore the links between Libs and title holders to property in that area, particularly if there were any ‘donations’ provided to the Liberal Party…

    Forgot business cases. If it walks like a duck and talks like a duck then it probably is a duck…

  3. ceteris paribus

    The centrepiece of the budget is dumb, dumb multi-billion capital city road infrastructure- a technology of the 1950s.  This is Abbott’s era and that of big businessmen, who hang around for lucrative government road building contracts.

    Of course, there is nothing wrong with our city roads at all.  The problem is with our motor vehicle usage patterns (in terms of traffic volume overall and peak congestion periods).

    Hockey’s transport policy mirrors his health policy in stupidity.  He is cutting preventative health funding, (which educates vulnerable groups on healthy diet and structures sensible local exercise), while showing personal favour for stomach surgery and stapling and smoking fat cigars.  Not the sharpest tool in or out of the shed.

    Look at all the benefits of his more roads, more motor vehicles and more road kilometres plan- unhealthy lazy-arsed drivers,finite resource depletion, environmental damage, motor accidents, isolated sidewalks and congested roads, the neglect of more efficient public transport systems.  No wonder the liberals are so wary of cost efficiency studies, and social and environmental impact assessments.  Yes, all that red tape.

    The smart, evidenced-based solutions are obvious- better public transport, government telecommunication incentives to employers to home base the work of employees of many administrative employees from between 1 to 5 days per week- (a good proportion of supervision, communication and monitoring of workers’ output is already done with technology in large office blocks without continual face to face contact)-, staggered starting shifts ( e.g. 7-9 am shift start and 9-11 am start) to alleviate peak congestion, population policy and decentralisation planning, walking school buses for ever primary school in the state to end the parental drop off in the bull-barred Toorak tractor, separately walled bikeways for every major artery, financial disincentives for care road usage etc. etc. etc.  I am sure those who think about transport and planning issues have hundreds more strategies to talk about.

    My favourite piece of smart technology would be the gift of a simple pedometer mailed out to everyone with their car registration.  Enclosed with the pedometer would be a blank piece of paper with the heading “My plan for a 10,000 step day, so essential for body and mind”.  Combined with decent public transport, the pedometer policy nudge could easily get me to any part of the metropolis and well beyond on a daily basis without recourse to an auto.

    Of course, Abbott and Hockey’s dumb roads plan panders, as their policy always does, the lowest motivations in us.  The panic and fear of having to walk the shortest distance instead of learning the meditative miracle of this rhythmic movement.  The incessant restlessness and distraction of always wanting to be “there” rather than “here” , and with least amount of exertion and thinking.  

    The smartest of the younger generation see through this city traffic madness straight away and consider it a relic of the last century.

  4. Is anyone still in any doubt that we are living in a synthetic capitalist-feudal system? Prove:

    1.The main wealth is accumulated in land value (feudal features) with the help of financial sector (capitalist features).

    2.The main ruling class is from FIRE (the best synthesis of rent-seeking classes from both – feudalism and capitalism).

    3.A government, which election is funded by donations from FIRE barons.

    4.A tax system with tax privileges for the landlords, supported by the banks.

    5.Slowly degrading education, health and pension systems (going back from prosperous capitalism to feudalism).

    6.Almost full control on individuals’ personal information and life choices (feudalism) through new technologies and payment systems (capitalism).

    7.Monetary policies disregarding the needs of populaces and enriching only the top1% (both system when decaying).

    8……… I don’t want to continue further, this is enough

    So the infrastructural projects with roads going to wealthy suburbs is just a noise in the media.

  5. EnoughAlready

    By all means, we need cost-benefit analyses. But it must include the LOSS of productivity and amenity from crowding of existing infrastructure (from population growth). Providing more infrastructure to deal with more people (capital widening) doesn’t generate any net benefit, it just mitigates the impact of the population growth – the Red Queen’s predicament of running to stand still.
    So, Leith, when you say “I also believe that going into debt to fund expenditure is not a problem provided that expenditure expands the productive potential of the economy, allowing the debt to be self-liquidating,” you should be applying this to per capita productive potential, not the aggregate. You will usually find that there is no net benefit with which to liquidate a loan. That’s because capital widening is a recurrent cost, not an investment. Paying for it through debt (or even worse, selling off our profitable assets to fund it) is a recipe for ever-deepening impoverishment.