29 September 2010

Non-sequitur in Treasury’s approach to infrastructure

There seems to me to be a non-sequitur in Treasury’s advice regarding infrastructure in its incoming government brief as reported by John Kehoe in the 28 September 2010 edition of the Australian Financial Review (see Treasury laments infrastructure mess on page 3).

I am fully in tune with the first couple of propositions:

Treasury criticises the lack of a rigorous, coordinated and long-term infrastructure plan by governments, especially the states

-  Infrastructure Australia has found it difficult to identify ready-to-deliver nationally significant projects for the government’s fiscal stimulus packages.

Indeed, I think the Opposition got off far too lightly in relation to the Howard Government’s abject failure to do anything about the nation’s infrastructure – yet another example of the Rudd-Gillard Government’s inability to communicate a simple story when it had a good story to tell. It allowed the Opposition to berate it from one end of the country to the other with tales of waste and mismanagement relating to school buildings and pink batts, but where were all the infrastructure projects that the immensely capable Howard Government had ready and raring to go, just waiting for funds to be available?

Where I part company from the Treasury is when it goes on to say:

The government’s capacity to finance infrastructure will be limited given its budget circumstances

- ...investing in the right kind of infrastructure and using infrastructure more efficiently...requires appropriate regulation and pricing, private investment, and contestable and competitive infrastructure markets.

-  [A] proposed overhaul of Infrastructure Australia includes ensuring rigorous cost-benefit analysis of all proposed projects...

-  [The Government should] enhance the national infrastructure pipeline, to provide a portfolio of potential investments for the private sector including superannuation funds.

My problems with this part of the brief are:

-  I have no sympathy whatever with the notion that the government’s “budget circumstances” place significant constraints on its capacity to finance infrastructure. This is a function of the current bipartisan political obsession with budget surpluses, which makes no sense when we speak of national infrastructure, which ought to be financed by borrowings and repaid by the successive generations that use it (generational equity, anyone?). The Australian Government has an immense capacity to borrow.

-  Many infrastructure markets are not, and cannot be, competitive in any meaningful sense. If I am dissatisfied with the train service from my suburb to the CBD (I am), what do I do? Catch a different train to somewhere else?

-  Cost-benefit analyses are all good clean fun, but in order to qualify for the term “rigorous” they would have to take account of external, as well as internal, costs and benefits. In other words, we are interested in social costs and benefits, not just whether the revenue stream that can be captured by the operator provides a hurdle rate of return on the operator’s investment.

-  This is where the non-sequitur comes in. If we want infrastructure to be financed by superannuation funds, the cost-benefit analysis they will do can only take account of internal costs and benefits, even though many of the benefits (and costs) will be external, often manifesting themselves via impacts on the value of land.

There are other problems. Cost-benefit analysis of any major infrastructure involves non-linear mathematics and is acutely sensitive to the initial assumptions. To take a simple example, Westgate Bridge reached its design traffic flows years ahead of projections because its existence changed the pattern of settlement and land use to an extent that it induced a lot more traffic.

Transformational infrastructure like fast rail or the National Broadband Network will have so many unanticipated impacts on behaviour that anyone who talks about “rigorous cost-benefit analysis” is simply talking nonsense.

Then there are the bureaucratic tricks. The Speedrail project (fast rail between Canberra and Sydney) of the late 1990s was set up to fail. In undertaking its cost-benefit analysis, the private consortium was required by the forces of darkness to take account of all external costs, but not to claim the value of any external benefits.  This meant that, like the consortium before it that looked at fast rail between Sydney and Melbourne, it could not take account of the enhanced value of land in proximity to the track, and it could not bring to account the benefit of deferring or eliminating the need for a second Sydney airport.

I always thought that that one had more to do with the Howard Government getting a good price for Sydney Airport than anything to do with a rational approach to national infrastructure.

The bottom line is that if the Government wants private investment in infrastructure then “rigorous” cost-benefit analysis has nothing to do with it, unless we try to take account of social benefits through messy community service obligation payments and confusing allocation of responsibilities between the public and private sectors of the kind that has made Melbourne public transport the nightmare that it is today.

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