Infrastructure PM fails cost-benefit goals

Cross-posted from The Conversation

The OECD’s Going for Growth report released this week is a good reminder of why Tony Abbott wants to be remembered as “the infrastructure Prime Minister”.

The OECD argues addressing infrastructure service shortfalls will help productivity performance and sustainable growth, and in the 2014-15 Australian federal budget, spending on infrastructure was planned to increase substantially, compared to the last budget of the Rudd government.

The focus carried through to the Brisbane G20 meeting. It saw a commitment to use infrastructure spending, along with other measures such as free trade agreements, as a lever to improve productivity and help deliver the additional 2% of GDP growth over five years targeted by the G20.

How is Australia performing?

Australian contributions to the G20 target, in terms of infrastructure investment, are outlined in the Comprehensive Growth Strategy.

Two proposals are highlighted. First, there is a commitment

“to achieve better project prioritisation, selection and coordination by providing greater transparency through cost benefit analysis of major projects and improving the operation of Infrastructure Australia (the body that assesses major infrastructure projects). Rigorous appraisal processes will help ensure that high-quality projects that create the most benefit will be prioritised.”

Things have not started well. For example, The 2014-15 budget provides funding for 36 major named infrastructure projects but, as a report by the Australian Parliamentary Library notes, only four have been assessed by Infrastructure Australia, and only seven appear anywhere on the priority list.

Sydney’s WestConnex motorway is one of the infrastructure projects named in the budget but not prioritised by Infrastructure Australia. The federal commitment comprises a grant of A$1.5 billion to the New South Wales government, and a A$2 billion concessional loan. In December 2014 the New South Wales Auditor-General reported that the government’s Major Projects Assurance Framework had not been implemented and that, as a consequence, there were deficiencies in the analysis of the risks, cost and benefits of the project. Clearly this falls short of the G20 commitment.

Asset recycling

The second proposal is the asset recycling initiative. State governments that sell assets will receive 15% of the net sale proceeds as a grant from the Commonwealth, provided the funds are reinvested in infrastructure. Proposals must pass evaluation and approval before 1 July 2016, with construction to commence before 1 July 2019.

The Australian Competition and Consumer Commission this week flagged concerns about the scheme, warning of the risk of governments taking action that could lessen competition due to the lure of incentive payments.

At A$5 billion, the initiative accounts for only 10% of federal infrastructure spending commitments over the next ten years. However, the government forecast the incentives it provides will leverage an additional A$33 billion of infrastructure investment, making a major contribution to the proposed boost in infrastructure spending.

Asset privatisation was a central issue in the recent Queensland election. Of the estimated A$37 billion proceeds from the sale of energy and port assets, the Newman government proposed to allocate A$3.4 billion to a “cost of living” fund and A$25 billion to pay off state debt. New infrastructure investment of A$8.6 billion would attract a Commonwealth recycling incentive of A$1.3 billion, making A$9.9 billion in total.

Queensland voters rejected these proposals. Should the same result emerge from the New South Wales election next month the asset recycling initiative will effectively lapse.

An alternative approach

Where investment in long-lived productive infrastructure is involved, attaching the label “intergenerational theft” to government borrowing is clearly misleading – the generations who benefit from the investment also service the debt.

If the asset recycling initiative fails to meet its targets, alternatives are possible. The first requirement would be to live up to the commitment made to the G20 for stringent and transparent project evaluation by Infrastructure Australia. Second, think carefully about ways to improve efficiency in state-owned assets. Then, given that the yield on 21-year bonds is currently less than 3%, the government could pursue its infrastructure agenda by borrowing long-term and investing through the states in the same way as in the past.

Implementation of this strategy would require a more mature political discussion about fiscal deficits, debt, and long-lived infrastructure. Relying on slogans like “debt and deficit disaster” is unlikely to achieve positive outcomes.

Article by Graeme Wells, University Associate, School of Economics and Finance at University of Tasmania

Unconventional Economist
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  1. The Age today is reporting that the Auditor General is prioritising an investigation into whether proper processes were followed in promising $3 billion of federal money for the Melbourne East-West Link.

    While they’re at it, I’d be interested to know what (if any) undertakings Warren Truss gave to Brisbane Airport Corporation that suddenly made them agree to build a second runway three weeks after the federal election.

    That just smells odd to me.

  2. Good grief the term inter generational theft is not intended toward generationally beneficial infrastructure.

    • If you don’t invest and instead let the current cpaital stock decline, then yes, it’s definitely intergenerational theft because you’re pushing the burden onto future generations.

  3. Why can’t the Govt just brrow at cheap rates and then have a toll that is designed to cover maintenance and capital over the economic life of the asset?

    Instead of $5 tolls we might be charging $1 instead.

    That way we can take advantage of historically low interest rates wile also keeping the ratings agencies happy that the debt is serviceable.

    • Because that wouldn’t create a gouging private monopoly or private “tax farm” to line the pockets of the investment bankers who offer politicians lucrative jobs when they retire.

      The system of government is corrupt to the core.

  4. In parliamentary question time, Tony Abbott just compared Defence losses under Labor to the holocaust.

    Honestly, what more can you say about this clown?

    • Mining BoganMEMBER

      That was obviously planned. That’s how he works. Shock then apologise. Now everybody discusses the word and not the numbers.

      The problem is he’s done it so often the tactic just looks pathetic.

  5. I’ve never had so many mixed feelings towards Tony Abbott. I feel on the one hand he ought to be burned at the stake for his mistakes, not least of all his Holocaust gaffe today, but then the other part of me wants to see him stay because he’s the one most likely to induce a property crash. I’m just torn about this man. I don’t know what my position on him should be.

    • If Abbott captained the Austrslian one day team he would instruct the bowlers to deliver every ball underarm and along the ground. When the frontline bowler, Hockey, fronts up to the press coference he would then blame thr batsmen, umpires, crowds, anyone but himself and his captain for such an unsporting act.
      May they be gone so very, very soon.

    • I hear you Rob. On one hand nothing would please me more than to see Abbott sitting on the back bench and treated as a pariah rather than a hero of the party. On the other, I really enjoy watching Abbott make a dead set twat of himself day in day out. I’m certain that, short of him not leaving his AFP room, he will make a dick of himself tomorrow. If Shorten had the whit and smarts of Keating, the slow roast of Abbott would be pure theatre.

      • Either way, it’s fantastic! Abbott is roasting himself.

        I’m thoroughly enjoying watching the wall punching wrecker teach the country a lesson about electing divisive thugs.

        I shiver with anticipation thinking about what bizarreness will come next.

  6. “The focus carried through to the Brisbane G20 meeting. It saw a commitment to use infrastructure spending, along with other measures such as free trade agreements, as a lever to improve productivity and help deliver the additional 2% of GDP growth over five years targeted by the G20.”

    No problem. With Abbott at the helm, we’ll be out of the G20 in no time.
    Q.E.D. Problem solved!

  7. No no. You don’t get it. Infrastructure projects (and planning approvals) are to line the pockets of happy insiders. Pollies know exactly what they’re doing.