The Aussie infrastructure reaming

ScreenHunter_06 Jun. 06 09.33

By Leith van Onselen

Garry Bowditch, chief executive of the University of Wollongong’s SMART research ­institute, has delivered a damning assessment of Australia’s infrastructure provision, claiming that $4 billion to $5 billion is being lost to cost blowouts annually on new roads, rail lines and bridges. He has also called upon the nation’s governments to release cost-benefit analysis of major projects to the public in order to improve transparency and governance. From The AFR:

Research from the University of Wollongong’s SMART research ­institute shows for the first time how much Australians are overpaying for infrastructure.

The problem is neatly demonstrated by Brisbane’s Gateway Bridge, built in 1986 and duplicated with a second ­identical bridge in 2010.

Adjusted for inflation, the original bridge cost around $300 million. The second bridge, built during the resources boom, cost six times as much: $1.7 billion.

“Value for money has been thrown out the window a long time ago,” said Mr Bowditch, chief executive of SMART, adding governments needed to time the construction of ­infrastructure better to make sure they weren’t competing with the private ­sector for labour, raw materials and equipment at inflated prices.

Governments should also publicly release cost benefit analyses to show taxpayers they were making the right choices on which projects to build, Mr Bowditch said…

Bowditch’s comments echos the Productivity Commission’s latest report into the provision of public infrastructure, which presented a scathing assessment of the governance, selection and execution processes by Australia’s governments, and recommended that governments build a “credible and efficient governance and institutional framework for project selection”, that includes “properly conducted cost–benefit studies of large projects, and their disclosure to the public”.

They also follow senior Liberal minister, Malcolm Turnbull’s, endorsement last week of stringent new requirements for taxpayer-funded infrastructure projects worth more than $1 billion, including mandatory public disclosure of cost-benefit analysis to make projects “more accountable and responsible”, and “get a higher standard of professionalism and diligence”.

Let me state again that well targeted infrastructure investment offers the nation 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.

Moreover, with the government choosing to run a high immigration policy, living standards of the existing population will be eroded over time via higher congestion, slower travel times, and lower productivity (amongst other things) unless there are commensurate investments in new infrastructure.

However, government’s of all persuasions have failed to implement proper governance surrounding infrastructure provision, and have in many instances blown taxpayer dollars on poorly conceived or executed projects.

Consider, for example, the Abbott Government’s inherent bias towards road-based investment over rail, which heightens the likelihood of sub-optimal investment whereby the costs may outweigh the benefits. For example, I can see few more worthy projects than building an inland rail freight network from Melbourne and Brisbane (including connections to Sydney), with world class intermodal connections at key locations along the way so transfers between rail and truck are fast and efficient.

Labor and the Green’s favouring of urban rail projects shows equal levels of bias, and could also be extremely costly and mostly benefit wealthier residents that live adjacent to the rail corridor (via increased property valuations), as well as the small proportion of the workforce that is employed in the CBD (less than 15%).

This is why it is vital that infrastructure proposals are properly evaluated by an independent authority tasked with maximising overall welfare and productivity at lowest cost, with cost-benefit analysis released to the public. Picking infrastructure winners, based on pre-conceived ideas or political motivations, is a recipe for waste and is likely to end up being productivity destroying for the economy at large.

On this point, it is highly disconcerting that the Abbott Government has sought to pare-back Infrastructure Australia, thereby reducing transparency around infrastructure decisions and heightening the likelihood that the Government will choose projects based on political expediency rather than their broader benefits to the community.

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Comments

  1. New Zealand housing issues update …

    In no hurry to fly the nest … Richard Meadows … Dom Post / Fairfax NZ … h/t PhilBest …

    http://www.stuff.co.nz/business/money/10375819/In-no-hurry-to-fly-the-nest

    … extracts …

    They call them Kippers – that’s “kids in parents’ pockets, eroding retirement savings”.

    A growing horde of man- and woman-children are returning to the comforts of home, or refusing to spread their wings and fly the nest in the first place.

    The trend goes well beyond the stereotypical socially inept male, still living in mum’s basement into his 30s.

    In 2001, there were 110,000 people aged over 21 still living at home. As of the latest 2013 census, that number had jumped by over 36 per cent to more than 150,000 …

    … But it has not always been this way.

    “I think of my contemporaries, we couldn’t wait to leave home,” says Stuart. “When I had to go to university, I even chose another town so I could go into the halls of residence.”

    There was never any thought of dropping off a load of laundry at home, much less actually moving back in, says Stuart.

    So what has changed? For a start, housing has become much more expensive, especially in Auckland.

    National house prices are about 5.5 times the median household income, and well over the seven times mark in much of Auckland.

    Reserve Bank data shows that back in 1980, when Stuart was making her start in the world, the multiple was as low as two times household income. ( … refer too 2014 10th Annual Demographia International Housing Affordability Survey … with Alain Bertaud Introduction http://www.demographia.com )

  2. I’m sure I’ll take a caning for this BUT
    Australia’s biggest problem is inefficiency, it comes in a variety of guises but it really just comes down to the simple fact that we cant compete externally. Unfortunately in the end analysis this also means we cant ever justify our internal expenditures, so opportunity suffers, the infrastructure that could have been gets shelved (along with all the dreams that would in theory leverage this infrastructure)

    I dont know how to break this loop because just like the housing ponzi this inefficiency is ultimately very popular and directly effects peoples hip pockets.

    Logically this efficiency distortion must end sooner or later but I suspect that like housing it’ll only adjust after every other option is exhausted.

    EDIT: just for clarity I’m not simply talking about labor efficiency, the efficiency of capital allocation is an equally if not more important aspect but the most important aspect is probably the inbuilt inefficiency of local project management. Real trouble is everyone’s happy with the statusquo.

    • In my experience a lot of unnecessary cost comes from shelving and delaying decisions until the last possible second. That, and as soon as a project starts getting tough turnover at the highest levels increases and you’ve got new managers coming in with no idea of the history changing things without a clear picture in their minds of what the outcome needs to be.

    • Australia has almost always been in the top 20 in competitiveness and productivity.

      Which is incredibly impressive given our tiny population and HUGE land areas with relatively minimal productive regions.

      Geographically we are easily amongst the most challenged of almost most countries, not just isolation but the tyranny of distance in almost every regard.

      Not sure where you are getting your figures from but I suspect its the same place as Dennis Denuto.

      • Yea I hear what your saying… the only thing I love more then serenity is the sound of a two stroke at full throttle. So what can I say “its the vibe”

  3. I had to do an online course on how to wear a hard hat and how not to touch electrical wires before I could talk to someone on a site recently

  4. Knowing something about the original Gateway Bridge construction, I would make the following observations.

    The original bridge was built in the days when the Coordinator-General’s department was still staffed with experienced engineers who knew about construction and could argue credibly with contractors, especially over claims for variations.

    The economic “rationalists” decided that such skills were unnecessary because we live in a magical world of perfect competition. All those accumulated years of knowledge were made redundant with the result that governments are now at a commercial disadvantage when trying to negotiate with contractors.

    That disadvantage was magnified by the move towards larger projects which limited the number of potential bidders.

    Many city folk may find it hard to accept, but the tight fiscal management of Queensland in the 1970s and 1980s had a lot to do with its government being run by canny farmers (from the Country/National party) who were not going to let a penny of taxpayers’ money slip away. It was a culture, the culture of self-employed small businessmen battling the elements in rural and regional Australia, that flowed over into government.

    I can vividly recall being part of a small group in the late 1980s trying to sell the idea of private toll roads to the then Queensland Roads Minister. We were sent packing with our tails between our legs! But in retrospect, the Minister was absolutely correct. The private toll road scam was – and still is – a scam.

    (The Gateway Bridge Company itself was only nominally a private company. Risks and rewards in fact lay with the state. And it proved to be a hugely profitable investment for the People of Queensland until sold off by the Newman government just this year to the tax farmers.)

    Having had some dealings with all the parties, and having watched them all from a distance in more recent years, I would say that it is the generally metropolitan Liberals (not to mention the metropolitan Labor Party!), drawn of the “professional” classes who are commercially naive and allow taxpayers’ money flow through their fingers like water as they try to ingratiate themselves with their fellow metropolitan rent-seekers.

    (I speak as a former member of the “professional” classes myself. The professions may work in the private sector, but they are not the same as small businessmen.)

    I know that there were problem with the National Party Government, especially in its final years. But it is worth recalling that when it fell in December 1989, Queensland had no net debt and a booming economy.

    In the 20 years that followed, despite the biggest commodities boom in a century, and despite Queensland being one of the most resource rich regions in the world, the subsequent governments managed to blow the whole lot.

    • You are right of course Stephen. As a small business engineer myself, I enjoy working hard to demonstrate Local Government and State Authority inefficiencies. Professional skill and judgement have been either bashed out, or are non-existent.

      The most useful, creative and cost effective government engineers and project managers I come across are from regional local government where budgets are tight, respect for authority is limited and community responsibility a necessity.

    • Wasted OpportunitiesMEMBER

      Spot on Stephen, I always enjoy reading your input.

      The hollowing out of real expertise from our technical state government organisations costs taxpayers far more than the pittance “saved” in wages.

    • Yes Stephen, and even in the unlikely event that the ideologues were to admit their mistakes, it takes decades to acquire the necessary experience and skill sets.

      In theory, doing cost benefit analysis is a great idea. However, when all the expertise is on the contractors’ side, they will always be able to increase the price paid for the project until the net benefits accrue to them and not the government.

      There are many projects out there that could be economic, and produce a benefit if constructed. However, by overcharging prices, the contractors ensure that worthy projects are either never built, or none of the benefits will ever exceed the bloated cost.

    • Unblinkered Optimist

      I couldn’t agree more with your comment. I am a Civil Engineer who was recruited abroad to manage the delivery of some very large infrastructural projects in Western Australia and to ensure the contractors did not totally rip off the client. We had an effective team on a hundred million dollar project of 4 skilled (Civil, Mech, and Elec Engs.) frontline staff. Management staff exceeded 10 people, most of whom had no real engineering experience and whose experience of engineering seemed to be working in office environments. From what I’ve heard on other projects, this situation is being replicated endlessly. Management of projects seems to be occurring as you would manage an office, which is not possible in the field. This leads to massive cost over-runs which could easily be avoided.