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| Infrastructure is built with rigorous cost-benefit analysis, not politics | Infrastructure is built with rigorous cost-benefit analysis, not politics |
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| Throughout the election campaign, one of Tony Abbott’s most common refrains was his desire to be known as an “infrastructure prime minister”. This was often linked with the claim that his government would build the roads of the 21st century. Just what a 21st century road is that a 20th century one wasn’t was never made very clear, but perhaps any UK readers might know, because, coincidentally, the UK conservative government is also building “roads for the 21st century”. | Throughout the election campaign, one of Tony Abbott’s most common refrains was his desire to be known as an “infrastructure prime minister”. This was often linked with the claim that his government would build the roads of the 21st century. Just what a 21st century road is that a 20th century one wasn’t was never made very clear, but perhaps any UK readers might know, because, coincidentally, the UK conservative government is also building “roads for the 21st century”. |
| While I might be somewhat glib about the sloganeering, pledging to be an infrastructure prime minister is a worthy goal. The importance of infrastructure was outlined last week in a speech by the deputy governor of the Reserve Bank, Philip Lowe. | While I might be somewhat glib about the sloganeering, pledging to be an infrastructure prime minister is a worthy goal. The importance of infrastructure was outlined last week in a speech by the deputy governor of the Reserve Bank, Philip Lowe. |
| Dr Lowe’s speech, titled Productivity and Infrastructure, began by showing what probably is Australian economists’ favourite graph: | Dr Lowe’s speech, titled Productivity and Infrastructure, began by showing what probably is Australian economists’ favourite graph: |
| Click here for the graph on mobile | |
| From 1985 to around 2001 Australia’s gross domestic income per hour of work grew at the same pace as gross domestic product per hour of work (the standard measure of productivity). But from 2001 onwards, while productivity growth slowed, domestic income continued to zoom. | From 1985 to around 2001 Australia’s gross domestic income per hour of work grew at the same pace as gross domestic product per hour of work (the standard measure of productivity). But from 2001 onwards, while productivity growth slowed, domestic income continued to zoom. |
| The reason was the increase in our terms of trade. Without doing anything differently, suddenly the rest of the world was giving us more money. None of this had much to do with any great skill on Australia’s part, other than for us to have been lucky enough to settle in a country sitting on top of a massive deposit of iron ore. | The reason was the increase in our terms of trade. Without doing anything differently, suddenly the rest of the world was giving us more money. None of this had much to do with any great skill on Australia’s part, other than for us to have been lucky enough to settle in a country sitting on top of a massive deposit of iron ore. |
| But if, as expected, the growth in demand for iron ore declines, and the growth in prices declines with it, a repeat of the good fortune of the 2000s will need more than luck. | But if, as expected, the growth in demand for iron ore declines, and the growth in prices declines with it, a repeat of the good fortune of the 2000s will need more than luck. |
| And this is where infrastructure comes in. Philip Lowe noted that in the recent past we’ve done well at building infrastructure for mining, but “we need to do more if we are to achieve that same success elsewhere”. | And this is where infrastructure comes in. Philip Lowe noted that in the recent past we’ve done well at building infrastructure for mining, but “we need to do more if we are to achieve that same success elsewhere”. |
| Such infrastructure necessarily involves transport because time spent waiting in traffic is a cost for both people and goods – time that could be used more productively. But good transport infrastructure also has other benefits. As Lowe noted, it brings people from various parts of a city together and thus brings more people into contact with more businesses. This has the effect of improving competition – because customers can travel further and businesses can more efficiently deliver goods. | Such infrastructure necessarily involves transport because time spent waiting in traffic is a cost for both people and goods – time that could be used more productively. But good transport infrastructure also has other benefits. As Lowe noted, it brings people from various parts of a city together and thus brings more people into contact with more businesses. This has the effect of improving competition – because customers can travel further and businesses can more efficiently deliver goods. |
| So infrastructure is important, but the solution is not necessarily more of it. For all Tony Abbott’s palaver about building roads of the 21st century, the reality is in the past four years the ALP government has already been doing a lot of it – in fact more roads than ever have been constructed since the ABS began calculating such activity: | So infrastructure is important, but the solution is not necessarily more of it. For all Tony Abbott’s palaver about building roads of the 21st century, the reality is in the past four years the ALP government has already been doing a lot of it – in fact more roads than ever have been constructed since the ABS began calculating such activity: |
| Click here for the graph on mobile | |
| Part of this is because 2000 to 2008 was a near decade-long valley of infrastructure spending, as both federal and state governments valued achieving a surplus above spending money to improve infrastructure. | Part of this is because 2000 to 2008 was a near decade-long valley of infrastructure spending, as both federal and state governments valued achieving a surplus above spending money to improve infrastructure. |
| But not all infrastructure spending will improve productivity. The Grattan Institute’s recent report, Balancing Budgets: tough choices we need to make, comments that infrastructure only improves economic growth “if it is the right infrastructure in the right place, at the right time, for the right price”. | But not all infrastructure spending will improve productivity. The Grattan Institute’s recent report, Balancing Budgets: tough choices we need to make, comments that infrastructure only improves economic growth “if it is the right infrastructure in the right place, at the right time, for the right price”. |
| Lowe noted that “strong governance is critical to make sure money is spent wisely in this area”. He also stated that Infrastructure Australia, which was created by the Rudd government in 2008, had assisted progress, but that “there is no substitute for rigorous and transparent cost-benefit analysis”. | Lowe noted that “strong governance is critical to make sure money is spent wisely in this area”. He also stated that Infrastructure Australia, which was created by the Rudd government in 2008, had assisted progress, but that “there is no substitute for rigorous and transparent cost-benefit analysis”. |
| It is pleasing then that last month the government introduced legislation to amend the governance of Infrastructure Australia. Among changes will be a requirement for Infrastructure Australia to “recommend infrastructure projects on the basis of a transparent and rigorous cost-benefit assessment of their viability” and to “review all projects seeking Commonwealth funding worth more than $100m and publish the reasons for its decisions”. | It is pleasing then that last month the government introduced legislation to amend the governance of Infrastructure Australia. Among changes will be a requirement for Infrastructure Australia to “recommend infrastructure projects on the basis of a transparent and rigorous cost-benefit assessment of their viability” and to “review all projects seeking Commonwealth funding worth more than $100m and publish the reasons for its decisions”. |
| This is a good idea, but there is a touch of cynicism in the move. Much of the speech introducing the legislation by the minister for infrastructure and regional development, Warren Truss, seemed an attempt to justify the government’s decision to fund the east-west link in Melbourne despite the Victorian government failing to make a complete business case for it in time for a full recommendation. | This is a good idea, but there is a touch of cynicism in the move. Much of the speech introducing the legislation by the minister for infrastructure and regional development, Warren Truss, seemed an attempt to justify the government’s decision to fund the east-west link in Melbourne despite the Victorian government failing to make a complete business case for it in time for a full recommendation. |
| Subsequently, Infrastructure Australia’s June report to Coag ranked the east-west link as merely having “real potential”. Crucially, it ranked the project a stage below the ALP’s favoured Melbourne metro project. | Subsequently, Infrastructure Australia’s June report to Coag ranked the east-west link as merely having “real potential”. Crucially, it ranked the project a stage below the ALP’s favoured Melbourne metro project. |
| During the election campaign Tony Abbott was unambiguous in his support for the east-west link of the metro and for roads over rail generally – based on the belief that commuter rail is a state matter, but that the east-west link is a national project. | During the election campaign Tony Abbott was unambiguous in his support for the east-west link of the metro and for roads over rail generally – based on the belief that commuter rail is a state matter, but that the east-west link is a national project. |
| His responses, when confronted over the lack of cost-benefit analysis for the east-west link, however, were rather at odds with his government’s new desire for transparency and evidence-based decision-making. | His responses, when confronted over the lack of cost-benefit analysis for the east-west link, however, were rather at odds with his government’s new desire for transparency and evidence-based decision-making. |
| In August, when pressed on whether he had actually seen the business case for the east-west link, Abbott replied, “Look, there is a business case, there is a business case … I mean, there are lots of things that I haven’t seen but I know, and I know that there is a business case for the east-west link. It says there is $1.40 worth of benefit for every $1 of spending.” | In August, when pressed on whether he had actually seen the business case for the east-west link, Abbott replied, “Look, there is a business case, there is a business case … I mean, there are lots of things that I haven’t seen but I know, and I know that there is a business case for the east-west link. It says there is $1.40 worth of benefit for every $1 of spending.” |
| The Age newspaper in October revealed that the Victorian state government’s business case, which included the claim of $1.40 worth of benefit, relied on assumptions that had “not been used in any of [the transport department’s] other public transport projects or program modeling to date”. The view has been challenged by other commentators, but everyone is operating somewhat in the dark because the Victorian government has not published the full business case. | The Age newspaper in October revealed that the Victorian state government’s business case, which included the claim of $1.40 worth of benefit, relied on assumptions that had “not been used in any of [the transport department’s] other public transport projects or program modeling to date”. The view has been challenged by other commentators, but everyone is operating somewhat in the dark because the Victorian government has not published the full business case. |
| Given the Commonwealth government is on the hook for $1.5bn, you’d think the public have a right to see why our money is being spent on it rather than on another more productive project. The decision is even more absurd given the underlying presumption of the proposed changes to Infrastructure Australia is that its decisions should be fully transparent. | Given the Commonwealth government is on the hook for $1.5bn, you’d think the public have a right to see why our money is being spent on it rather than on another more productive project. The decision is even more absurd given the underlying presumption of the proposed changes to Infrastructure Australia is that its decisions should be fully transparent. |
| The changes to Infrastructure Australia to provide a transparent and rigorous cost-benefit assessment are sensible, and given what has happened with the east-west decision they appear necessary. Unfortunately, it would seem the rules governing such cost-benefit analyses are being changed more to ensure projects like the east-west link are favoured than to drive investment in the most productive infrastructure – regardless of whether it is rail or road. | The changes to Infrastructure Australia to provide a transparent and rigorous cost-benefit assessment are sensible, and given what has happened with the east-west decision they appear necessary. Unfortunately, it would seem the rules governing such cost-benefit analyses are being changed more to ensure projects like the east-west link are favoured than to drive investment in the most productive infrastructure – regardless of whether it is rail or road. |
| If Abbott actually wants to become an ‘infrastructure prime minister”, he’ll need to apply a bit more rigour and a lot more transparency to future transport projects than he has thus far. | If Abbott actually wants to become an ‘infrastructure prime minister”, he’ll need to apply a bit more rigour and a lot more transparency to future transport projects than he has thus far. |
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