Saturday, August 22, 2015
Adequate and well-functioning infrastructure has an important role to play in the efficiency of the economy by raising the productivity (productiveness) of our labour.
According to figures quoted by Adrian Hart, of BIS Shrapnel, we went through much of the 1980s and '90s with little increase in annual federal and state spending on infrastructure. This, no doubt, is how we got it into our heads that we have a huge "backlog" of investment in infrastructure.
Over the noughties, however, annual spending just about doubled, reaching a peak of $76 billion in 2009-10. So don't think we haven't been spending a lot – we have.
Since then, however, annual spending has actually fallen in real terms. By 12 per cent to 2013-14 and, according to Hart's estimates, by another 10 per cent in 2014-15.
Now, the macro-economic commentators are right when they say this is crazy at a time when the mining construction boom is coming to an end and leaving a vacuum in the heavy engineering construction industry and the long-term interest rates paid by governments are at record lows.
But this is where the story gets interesting. As the Productivity Commission says in a recent report, "not all public infrastructure supports productivity and generates economic growth and wellbeing". Poorly selected projects may actually make things worse.
As the Grattan Institute put it more bluntly, "the capacity to waste money is a serious risk for infrastructure, given the very large amounts of money involved".
Get it? If we take the attitude that more is always better, and more is never enough, the pollies will happily spend more of our money, but much of it will be wasted.
So just as important as making sure our infrastructure spending is adequate is making sure what we do spend is spent wisely. But how?
First point, at a time when budgets are tight, governments face a temptation to underspend on maintenance. This can shorten the useful life of existing infrastructure, bringing forward the need to spend a fortune building a new one.
The trouble here is that maintenance spending is politically invisible, whereas opening a new facility offers visible, concrete proof of progress on the pollies' watch, gives them a ribbon-cutting photo op and leaves their name on the plaque for decades to come.
Next, consumers and businesses often have to pay a price for the services of infrastructure – for power and water, for instance. Where no price is charged – road use, for instance – it often should be.
If you undercharge you get excessive demand for the service, which prompts you to build more infrastructure than you really need. Overcharge, however, and you get suppressed demand and don't build as much infrastructure as would be in our interests.
The correct price will incorporate the "social" costs involved in the activity, such as the cost its users impose on the rest of the community arising from its adverse effect on the environment.
So get infrastructure pricing right before you rush off and build more stuff.
Case in point: part of the reason for the recent fall in infrastructure spending is the fall in spending by the electricity poles-and-wires businesses now the regulation of their prices has been tightened up.
Before that, they were being granted big price rises to allow them to gold-plate their networks to cope with imagined future peak-load problems, which weren't going to happen and, in any case, should have been solved by the use of smart meters. This stuff-up was brought to you by the nation's economic reformers.
Finally, pick your projects carefully by undertaking rigorous, published comparisons of each project's benefits and costs. The commission says it "found numerous examples of poor value for money arising from inadequate project selection and prioritisation".
To ensure you pick projects with the highest return to the community as a whole, you need to assess social benefits and costs. That is, you also take account of benefits other than the revenue stream the project would generate so as to include any positive or negative effects on economic activity, social activities and the environment.
The point is to analyse information in a logical, consistent way and encourage decision-makers to consider all the costs and benefits of a project rather than focusing on just a few. You should be evaluating the other ways of achieving the same objective – recycling water rather than building a desalination plant, for instance.
Some important costs or benefits may be hard to quantify. You should quantify as much as you can, then compare this result with the unquantifiable factors, so they don't get overlooked.
As a general rule, you should rank all potential projects according to the extent to which their benefits exceed their costs, then implement the most beneficial until you've hit your budget limit.
The experience of the feds' review body, Infrastructure Australia, is that smaller projects (such as fixing rail crossings or traffic hotspots) tend to have much higher benefit-cost ratios than big projects (such as expressways), many of which have benefits only marginally exceeding costs.
But the commission finds that governments prefer the bigger projects because the private firms participating in public-private partnerships need bigger projects to cover their fixed costs.
Unfortunately, there can be ulterior motives: to get the debt associated with the project off the government's balance sheet and onto the private sector's. Or because fixing traffic lights doesn't impress the punters the way opening a new expressway does.
The commission doesn't say it, but what we need is to take an outfit like Infrastructure Australia and give it the statutory independence to conduct rigorous evaluations and make them public, so all of us can know whenever the pollies are planning to do something crazy.