PC slams Australian infrastructure provision

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By Leith van Onselen

The Productivity Commission (PC) has released a new report into the provision of public infrastructure, which presents a scathing assessment of the governance, selection and execution processes by Australia’s governments:

There are many examples of inadequate project selection that have led to costly outcomes for users and taxpayers. These include electricity networks and desalination plants in some states. An Australian Government example is the decision to proceed with the National Broadband Network without doing a thorough analysis of its costs and benefits.

…poorly chosen infrastructure projects can reduce productivity and financially burden the community for decades with infrastructure that is unnecessary and expensive to maintain…

A key message of this report is that there is a fundamental need for a comprehensive overhaul of the poor processes currently used in the development and assessment of infrastructure investments particularly, but not exclusively, by governments. The costs of poor project selection and delivery will be exacerbated if governments decide to increase their infrastructure investment programs without reforming their governance regimes…

To sum up, governments are sometimes weak at determining what, where and when infrastructure projects should be scoped and constructed. This stems from deficiencies in using coherent decision-making frameworks to assess the portfolio of potential projects, especially:

• scoping and developing transparent cost–benefit analyses

• appropriate long-term planning for corridors, rigorous demand forecasting, investigating project risks fully (including latent risks borne by governments)

• providing opportunities for users rather than taxpayers to fund projects

• efficiently allocating risks between public and private partners.

There is substantial room for improvement, particularly in the decision-making processes of governments…

The PC argues that it is critical that governments build a “credible and efficient governance and institutional framework for project selection”, since “selecting the right projects is the most important aspect of achieving good outcomes for the community”. “Properly conducted cost–benefit studies of large projects, and their disclosure to the public” is seen as key to guide project selection and improve the transparency of decision making.

It also warns against the view that private sector provision is necessarily best, noting instead that it brings “additional risks and costs, which need to be weighed against the benefits”, and “only if well-designed and executed does a PPP agreement offer the potential for efficiency gains compared with traditional public procurement”. 

The PC also supports user charges “to the fullest extent that they can be economically justified”, but notes that they should not be up-front, as currently occurs with housing-related infrastructure:

Well-designed and efficient user charges are likely to be superior to taxpayer funding of infrastructure in many situations. Efficient user charges are an effective means to reveal willingness to pay for new infrastructure and to improve the use and augmentation of existing infrastructure…

As infrastructure can provide benefits over generations, user charges too can span generations if they properly reflect the effective life of the assets concerned.

It also warns against the Abbott Government’s “capital recycling” agenda, whereby it is providing financial incentives to states that sell-off assets and invest in new infrastructure:

[Capital recycling] could act to encourage privatisation in circumstances that are not fully justified and encourage the selection of new projects that do not have demonstrable net benefits. Already, examples of promises to reinvest have emerged in regions where assets are being sold. Tying funds to particular regions is no assurance that the highest net benefit investments are being considered.

The PC encourages further privatisation only where governments can ensure that:

• economic efficiency is achieved
• the risks to consumers and other public interests are managed
• the market structure is amenable to the privatisation
• the sale is conducted efficiently, ethically and transparently.

The report also notes that Australia’s rapid land price inflation has raised infrastructure costs:

…while land prices are often excluded from many measures of construction costs, the prices for large public infrastructure include land costs. These have risen much faster than prices in the economy generally…

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Finally, it is worth noting that the PC has taken special aim at the ACT Light Rail Project as a textbook case of infrastructure pork – supporting the views frequently expressed on this site:

The ACT Government’s decision to proceed with a light rail project appears to be an example of where the results of cost–benefit analysis have been ignored without a valid explanation…

In a submission to Infrastructure Australia in 2012, the ACT Government analysed a number of options including bus rapid transit (BRT) and light rail rapid transit (LRT). The analysis estimated that the upfront capital costs for the BRT and LRT would be $276 million and $614 million respectively (on an undiscounted basis) (ACT Government 2012).

In its economic appraisal (which is essentially a cost–benefit analysis), the ACT Government found net present values of $243.3 million for BRT and $10.8 million for LRT. The benefit–cost ratio for BRT was estimated at 1.98, with 1.02 for LRT. In the assessment, the benefits of BRT and LRT were similar ($491.8 million against $534.9 million respectively), but the cost of BRT was less than half that of LRT ($248.5 million against $524.1 million, when discounted by 7 per cent). The cost–benefit analysis took into account a range of factors including journey times, and avoided environmental impacts and accidents (ACT Government 2012)…

In summary, a cost–benefit analysis showed BRT to be a greatly superior option than LRT…

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Comments

  1. Housing infrastructure charges are not up front to the home buyer in the sense that they are funded by the purchaser’s mortgage and spread over time. This is fair as the user of the infrastructure pays the interest charges of its provision, rather than others paying through government borrowings.

    When infrastructure has to be provided up front eg the tar road at the front of the block, it is a cost of the house as much as the raw land is a cost of the house.

    Rather than all tatepayers in the municipality paying for the road for a new house, the developer pays for it with borrowed money and recoups the cost and financing charges from the sale of the land. The purchaser takes a mortgage and pays off the cost of the land, including the road and the interim financing of the developer, over the life of the mortgage.

    Socialisation of the costs of new housing onto others who don’t need (and often don’t want in the case of unit developments in previously low density areas) is not a fair policy if one believes that the user should pay, subject to a safety net for the say 10 to 20% most disadvantaged.

    • You have failed to acknowledge that charges on new housing developments are also designed to recoup the costs of social infrastructure, like libraries, schools, sporting fields, and the like, which benefit the entire community. How is this fair, efficient or equitable.

      Using your logic, we should do away with rego and excise charges, and instead levy each new car buyer with a $10,000 charge to cover road provision.

      It won’t matter, since the charge can be taken out as a loan and repaid over a long time period.

      What do you think this would do to the market for cars?

      Yours are the views of a crusty old baby boomer that never had to pay when you bought a home, but expects younger generations to pay upfront for everything.

      • You love name calling when your arguments are poor.

        It’s a telling tell when you resort to it.

        Development contributions basically provide a pro rata contribution to the additional infrastructure that will be required by increased populations from new development from higher density zoning. It’s been around in NSW since 1980.

        It’s just user pays as the draft document below shows. You’re getting over excited and emotional (again – you have a history of personal abuse to my contributions of an opposing point of view!).

        http://www.planning.nsw.gov.au/Portals/0/planningsystem/pdf/Draft%20Local%20Development%20Contributions%20Guidelines%202009_targeted_consultation.pdf

      • Okay Explorer, answer me this:

        If the pipes, plumbing and roads had to be resurfaced/replaced in your street, would you support the council knocking on your door and demanding a $30k upfront payment to cover the expense? Or do you instead believe that the council should borrow the funds and recoup the cost via rates levied on all home owners in the area?

        If you do not support the first part of the question – i.e. payment of $30k upfront – but believe that buyers of new homes should pay for their infrastructure upfront, then you are a hypocrite.

        I await your response.

    • The crucial point is that the price of new houses affects the price of all existing houses as well. Therefore wherever a first home buyer buys, they are paying an equivalent to the levies on new homes, and the incumbent generation is reaping this as a windfall gain from the following generation.

      It would be fairer to pay for infrastructure expansion by levying every first home buyer $40,000 to $100,000 explicit “infrastructure duty”, or better still, socking everyone this levy when the turn, say, 25. Actually spending this revenue on infrastructure for expansion, and forgetting UGB’s and levies on developers, would keep housing affordable, enabling the young people socked with the $40,000 to $100,000 fee to actually be still ahead because they can get their first home at a price that saves a lot more than that.

      If this seems repugnantly unjust to the young people, and indeed it would never be acceptable politically, why is the status quo LESS repugnant?

      • Forget the repugnancy – in some parts of Australia, youth unemployment is at 20%, and of those employed only a fraction will have amassed $40k – $100k. How in the hell are you going to collect this levy?

    • What was wrong with the old system where NOBODY paid, other than in the common pot via rates?
      Everybody was in the same boat, were they not? They grew up, got a house, paid rates, enjoyed amenities, incurred a share, in their turn, of the costs “imposed on them” by those who came after them.
      At BEST, the modern day changes could be a zero-sum game. But they are FAR from a zero-sum game at all. They are an intergenerational gouge morally akin to child abuse.

      To remedy this, we could sock every owner of property at the point Development Contributions were introduced, a levy of around $50,000 to cover the DC’s they DIDN’T pay, unlike the cost their children are going to be lumbered with. OR we could grant every buyer of property after the DC policy was introduced, a rates holiday of the value of the DC’s THEY HAVE been levied.

      But there would STILL be disadvantages relative to the old way of doing it. Infrastructure providers, whether Councils or MUD corporates as in the US, can raise the money at lower cost than private individuals can get mortgages. The levies do filter into the price of ALL property, not just capitalise into the price of property in which levies have been lumped upfront into the cost. An ongoing tax against a site, not only avoids this price increase, but systemically lowers site values. This releases capital for more productive uses than sinking it into zero-sum land price increases.

      This stuff was common knowledge several decades ago; the reversal of the traditional practice is a triumph of the rent-seekers in urban land, and a collective loss of common-sense. If Councils have lost control of their costs, ratepayers need to punish them in time, not allow the can to be kicked down the road so that an even bigger crisis will be hit in another decade or two. And inter-jurisdictional competition underpinned by MUD type systems, as in much of the USA, results in the corrupt local administrations hitting the skids as they should, as their residents and businesses flee to surrounding municipalities and further.

      • No Phil.

        I remember those days, and it was bloody hopeless.

        Developers would develop expensive hilly sites with great views, and expect those who lived on the bland, and cheap to develop, sites to subsidise them. It was a rort, plain and simple.

      • Emess, the answer is land taxes, NOT an even WORSE rort, OF the young, BY the old. That is a far worse rort than “people with nice views versus people without”, even if there is any validity to that. Would you want the locations with nice views not developed at all, to avert what you call a “rort”?

        Want to charge the developers at nice locations more? Do it by charging ALL infrastructure upfront?????? Please explain the connection. You are obviously in desperation mode defending the racket.

      • Phil, If you want to have a debate, fine.

        If you just want to reinforce prejudices and indulge in ad hominems, “The Australian” will love you.

        The up front system was tried, and failed badly. If you do not attempt at least to understand why it failed, your chances of overcoming resistance to change are far less.

        I am quite happy to consider new approaches to the problem, and I know people within the land development industry, both regulators and regulated, who wrestle with the very real problems there are in infrastructure development. Anyone who thinks that there is a simplistic fix out there is simply delusional.

        If you are serious, why not go and sit down with some of the players and LISTEN. I assure you, it is far far more complex than you imagine. However, if you do have some genuinely valid ideas to address the problems you have listened to, they will consider them, because the whole subject is a nightmare for all concerned.

        But that would require some hard work beyond a bit of google-fu.

    • What does it matter if the $30k is paid up front, and then paid off via a mortgage, or if it is paid up front by the government and then paid off via increased taxes and charges?

      Put another way, reducing the up front charges only reduces the cost of home ownership if those charges are not recouped elsewhere. Do you realistically think that the States would give up a revenue stream like that without substituting another? The pigs are oiled up and ready to fly!

      In respect of the car purchase question, if paying rego up front implied an equivalent reduction in ongoing taxes and charges, again, why would it matter?

      • For the ZILLIONTH time on this site: the upfront charges push up the price of new houses, which filters through to the price of ALL houses. Therefore ALL first home buyers are “financing the amount of the levy” EVEN IF THEY DO NOT EVEN BUY A NEW HOME.

        Can’t you READ?

      • Phil,

        I can read, but your point is silly. I thought it silly in the past, and unless there is a better reason than you have advanced to date, repeating it another zillion times makes it no less silly.

        Think it through.

        If up front charges are replaced by on-going charges, then those charges will apply to old and new houses, so new home buyers will still pay over the long term. It doesn’t matter which way you slice it or dice it, the cost remains the same and the pool of taxpayers to pay it remains the same. Just imagine, someone bought a house last year and paid up front for infrastructure. You abolish up front charges and institute ongoing charges. Are you going to charge the person who bought their house last year the increased ongoing charges? If so, that’s double charging, grossly unfair, and you’ve got no hope of getting that up. If not, then the on-going charges for the older house will have to be discounted. If you do that, cheaper ongoing costs will reflect themselves in raised prices. So what the fuck has your little exercise achieved?

        I suggest the easiest way to get to grips with this is to actually put some numbers together and see if what you are suggesting makes economic sense.

    • In Australia both private and public organisations have a history of endangering the public by skimping on essential maintenance in order to make upper-management look good and get paid more money. The greed is disgusting.
      Legal action is a partial remedy to the lack of decency, intelligence and engineering skill in management positions. A better system would involve training workers properly, paying them properly and promoting based on merit, and ensuring that engineers outrank accountants, marketing and “human resources” people.
      As an example one would hope that a large Australian telecommunications company would be run by an Australian telecoms engineer with 20 years experience in the company, not a smarmy foreign elite who rose to bonus-fame by firing 2000 engineers in an airline he was running last year after being boss of some bank the year before and firing the tellers.
      .

      • that would be better but it will never happen. Productive people like engineers will continue being treated like second class workers while clueless accountants are running the show.

      • …training workers properly, paying them properly and promoting based on merit, and ensuring that engineers outrank accountants, marketing and “human resources” people.

        Sounds a bit like effort and thought is involved. It’ll never catch on.

      • Sounds a bit like effort and thought is involved. It’ll never catch on.

        🙂 Thanks stat!

    • Not sure how additional infrastructure expenditure would have avoided this failure, in fact additional transmission capacity would have made the conductor breakage harder to detect.

      • this decision was made based on Royal commission finding that “bushfire was caused by an ageing SP AusNet power line”. Spending will be related to replacements not new installations.

      • Why the “unnecessary” then? If it’s broke, it ought to be replaced. Surely this is just a normal activity, and the component involved in this case is considerably cheaper than the effort to find the problem.

        It’s only not the best for taxpayers dollars when, as power distributors have been doing recently in Australia, the install additional infrastructure for usage increases that never come. The cheapest aluminium overhead available to link existing properties is not in that category.

      • the issue is not whether to replace assets that need replacements but how to make decision what assets need replacements and when. Maybe some of these wires can last 5 or 10 more years under normal weather conditions. High fines will scare utilities to start replacing all assets that even remotely fall into this category. This will cost a lot of money.

        How do you know that the installed additional infrastructure for usage increases will never be needed? We had few years of not so extreme climate – without frequent and long heat waves. In addition, increased electricity bills suppressed some of that usage increase, if it wasn’t done we would have been having a problem.Global warming will affect extremes weather conditions more than averages. All the population projections and policies (ABS, government, scientific and political) predict sharp population increase so these assets may be needed sooner than you think.

        We could have waited for the need to arrive first but it takes years to design and build transmission lines while the grid can tolerate shortages for only couple of milliseconds.

        Problem with our electricity infrastructure upgrades is not how much but how. In past investments have been clustered into short bursts of activity followed by long periods of complete negligence when government didn’t allow utilities to replace or build anything. Between late 80s and mid 2000s almost nothing was done, by the end of the period power grid was in very poor state. Than government started building frenzy letting utilities build whatever they asked for. Now they cut everything again and in 10 years cycle will starts again.

      • The failure modes and times of electrical transmission assets are very well studied and largely predictable. Admittedly the failure mode in this case was hard to find, but I understand the conductor was beyond its design life (closer to 15-20 years than 5-10). More transmission km than ever are underground, where the failure modes are more predictable still. Note that expected life for underground HV cables now approaches 60-80 years, and there are routes older than this still in use.

        Climate change impact is not great on electricity use so far- in Melbourne last summer we saw record heat waves (40+ 3 days in a row) with well below record (and design capacity) electricity usage (the record high usage was 2009 from memory), thanks in part to the continued closure of manufacturing and cheap solar panels. And yes, high power bills will continue to encourage people to find ways to reduce their power bills.

        Take point on effect of politics on planning causing feast/ famine.