How to transform Australia’s Federal budget from good to great infrastructure*

 

* A version of this article featured in the Australian Financial Review, 11 May 2017

Garry Bowditch

Australia must be a complicated place. Its people, businesses and private institutions constitute some of the most successful infrastructure innovators on the planet. But when it comes to the heavy lifting of infrastructure provision, Tuesday’s Budget is all about Federal government leading and private sector in the back seat.

Nationalism and nostalgia for the great post war nation building achievements do inspire; past greats like Chifley and Menzies served their nation well. However the Budget’s slavish loyalty to traditional government procurement, to design, fund, built and operate should change and for good reason.

Project risks abound

Big risks for taxpayers abound in the Budget’s infrastructure formula across many of its signature projects like Western Sydney Airport, Snowy 2.0 and inland rail.

Cost blowouts and project completion delays are the norm for government led projects, and taxpayers are burdened with the lot. The Treasurer is simply wrong to argue in the lead up to the budget that government can do this best, and has ignored local and international evidence.

Australia has an unenviable world record, cited regularly by Oxford University as the nation with the world’s worst project. Sydney Opera House was 1400 per cent over budget and significantly delayed. The splendour of Opera house today is simply no excuse to ignore the lessons of planning and project blunders of yesterday.

Unfortunately Australia is a slow learner, as too few safeguards exist against another infrastructure ground hog day; NBN is a timely reminder the problem is far from being fixed.

The frustration with Budget night and its set piece announcements, justified by sugar hit to the economy from construction spending is that it has little or no accountability to long-term outcomes.

Will these projects lower input costs for business and living costs for families, lift productivity for capital and labour, open up new market that together create quality and enduring jobs and places to live?

Unfortunately answers to these critical questions are heavily qualified. Community confidence can be justifiably lifted if there is complete and unfettered transparencies to project performance with clear objectives and measures of success.

Combating project pathologies that drive up costs such as constant shifting of project scope, poor adaptation to new information and a lack of curiosity to alternative capital-lite innovations are critical. The culture of passive grants from the Federal government has not helped, but at least there are signals for change.

Signals of change in government procurement

The government is well aware of its own limitation in infrastructure, although it is unclear how to tackle these while rolling out projects at speed. An Infrastructure Financing Unit (IFU) now to be placed in Federal Treasury is new and therefore untested.

The IFU is recognition that Federal Government is seeking change from its self-described status as a ‘passive ATM’ for infrastructure. Its new aspirational instruments are loans, equity holding, bonds that in theory at least will enable more rigor in project design and financing, and provide better hooks into having a say in the whole of life governance of projects and achievement of outcomes.

Governments, investors and the industry have all been too quick to resign themselves of any possibility that infrastructure customers can be funders as well. Energy, water and telecommunication have all cracked this combination, so must land transport.

A more sophisticated and demanding government buyer of infrastructure outcomes (not projects) will help trigger important reforms and change of culture. The question is how can IFU be catalytic in reforming infrastructure governance. There is deep infrastructure investment expertise in the Future Fund that the IFU would be well advised to tap into it.

Risks with an IFU exist; adventurist off balance sheet financing is front of mind. Its placement in Treasury helps, as they police this type of activity with vigour across the entire public sector balance sheet. However, the panacea to off balance risk is transparency of activity that invites public scrutiny. We look forward to such an announcement from Treasury.

Keynes misunderstood

Some may argue the Government’s budget has channelled the spirit of John Maynard Keynes, with the size of it fiscal stimulus and debt raising. If that is the case then they understand only a one small part of Keynes work.

Keynes lamented almost ninety years ago that too much of human history was lost to both social and economic stagnation; a roman farmer would have felt very comfortable on a farm in late 16th Century. The drivers of economic progression rely on technical innovation, people that can be inventive and institutions that can facilitate it.

Dynamism and enterprise will deliver on the government’s credo of fairness, opportunity and security. But their custodians – individuals, community and business – seem to have been cast aside by a highly motivated government operating with a tight political schedule. Perhaps that can be corrected so what is a good budget can be transformed into a great one.

 

Energy sector can expect an Uber and Kodak moment all in one*

Battery With Energy Progress Bar Loading

Politicians are feverishly driving quick fixes for an ailing energy sector. But heavy-handed government interventions risk more road kill, of an endangered species called market led microeconomic reform.

Energy markets in Australia have devolved into a sandpit for political adventurism rather than bringing together customers and efficient suppliers. An unpalatable energy status quo is now the result, set in concrete by an absence of good policy design and a fake commitment to markets.

When Australia floated the $A in 1983 there was no fiddling at the edges of the foreign exchange market. Quality institutional structures were put in place and not meddled with; political interference with interest rates and exchange rate targeting was cast aside permanently.

If only energy markets were given the same rock solid foundations.

Markets demand consistency with rules and protocols that govern them. Governments can play a pivotal role in their setting and ongoing integrity towards achieving reliable, responsible and efficient energy.

It’s not too late for change. State and Federal governments must adhere hard earned lessons from past reforms. First, is to get out of the kitchen and back into the boardroom.

Setting good market design is key. Microeconomic reform from 1980s to early 2000 was a gift that keeps on giving. Corporatisation, privatisation and market reform continues to underpin today’s high living standards.

It swept away layers of absurd bureaucratic intervention. Many would recall not so long ago taxpayers paid teams of inspectors to studiously spot-check Ansett and TAA; their job was to ensure meals served on domestic airlines were precisely equivalent in quality and quantity. Competition was outlawed.

Going back to this would be intolerable. But when governments intervene over the top of markets as we have witnessed in energy, then the door is open to this bureaucratic slippery slope.

Setting clear objectives and then prescribing the consequences to market actors if they are not met is where Government can do their best; this is the language of performance, success and partnership with private sector.

The new holy trinity for energy security appears to be a combination of gas, batteries and renewables. There might be merit in this formula but we should be circumspect and so should Dr Finkel in his forthcoming review.

Periods of rapid technical change quickly reveal stranded assets and flawed argument. In the late 1700s, sophisticated conversation at many gentlemen clubs around London seriously contemplated how the world could possibly grow enough grass to feed all the horses required to power an industrialised Britain.

Nobody in the energy debate wants to be the modern equivalent of a well meaning but entirely irrelevant and flawed reasoning of the gentlemen club.

That is why governments must change. If they try and micromanage the transformation of energy it will almost certainly deny the nation its innovation, productivity and wealth generation potential for at least a generation.

Business as a protagonist for microeconomic reform has lost its edge. Cosy and profitable relationships appear to have usurped a previous zeal for challenging the nation for better long-term outcomes. Social licence matters and business can and should be powerful voices for reform, restless with the status quo not its silent guardian.

The transformation of energy is going to be breathtaking. It will have equivalence to other upheavals like the advent of passenger motor vehicles, and the impact of refrigeration that changed food production and distribution. Improved storage and reduced perishability of food opened up new trading platforms including the Chicago Futures Exchange.

Energy production and dispatch is changing. The consequences of storage through batteries at multiple levels of the value chain will be profound. Individuals and corporates alike will be able to aggregate and make their surplus energy substitutable and tradeable in both time and geography.

Energy is on the cusp of having its Uber and Kodak moment all in one.

As a result current institutional arrangements and many legacy assets will be stranded. In fact structures and trading mechanisms for new energy markets do not exist yet.

How the energy sector will arrange itself is a big question; where profit will be created an even bigger one. But that is where fortunes will be made and lost.

Energy in Australia need not be a slow motion accident that we passively watch happen. Markets are a key part of the solution, and so is redressing dire straits of public policy capacity and reform appetite that has dissolved since the hey days of Hawke, Keating and Howard.

Politicians that shift the blame for Australia’s energy woes onto markets and previous microeconomic reform is a new normal we must reject because left unchallenged will only diminish the nation’s future.

* A version of this article appeared in the Australian Financial Review on 23 March 2017.

Super Lessons for Infrastructure

Garry Bowditch*

Superannuation and infrastructure have a lot in common, and so they should: they represent two sides of the same coin.

Superannuation plays an important role in intermediating national savings for financing and funding infrastructure. But the public policy settings that enable this to happen must be soundly based.

As has been widely reported, the Australian Federal Government is seeking to define and legislate an objective for superannuation. This is important, because in the absence of clear objectives, governments enjoy more latitude to tinker with short-term priorities without accountability to the risks of inferior long-term outcomes.

It is an indictment on public policy that super has been without any legislated objective since it began in 1992: but it is hardly a one-off.

Infrastructure is in a similar situation but curiously, Infrastructure Australia (IA) doesn’t seem to mind.

Billions of taxpayers’ dollars spent on building roads, for example, is not anchored to a consistent and enduring objective. Could this be a reason why so little benefit is translating to the community from more than a decade of big-dollar transport spending?

Despite the plethora of recommendations from the IA latest audit, the nation’s independent adviser appears hamstrung by a focus on its favourite project list. In part this is courtesy of poorly conceived terms of reference. Australia benefited enormously when objectives of monetary policy were clarified and good institutional arrangements followed, including Reserve Bank independence.

The nation must heed lessons from its past: good governance begets great long-term outcomes.

There is still time for IA to sharpen the national infrastructure pencil through championing good governance.

It can do this by helping develop a clear strategic objective that government can legislate into law. For example, one that takes account of roads within the broader transport system and how service outcomes adapt over time to a rapidly changing world.

Surely this is an appropriate starting point, along with erecting a much-needed scaffolding to reinforce good public policy outcomes like performance reporting, disseminating cost data and rigorous case studies on project and policy success and failure.

Transparency is key and it should govern every moment of IA’s existence. It will help sanitise poor decision-making and even poorer project performance and cost overruns that undermine the nation’s future.

In the case of road pricing reform, IA’s agenda must shift the mindset of all stakeholders to a new standard; it is not just about finding another funding pot.

IA appears blind sided by the evaporating revenues from fuel excise and what that means for funding new infrastructure, without deeper consideration to the long-term outcomes the community expects of their roads.

The roads sector has had a carte blanche operational model for the best part of two centuries, where political will has prevailed without the discipline of balance sheet management, commitment to service standards and rate of return on assets.

A recent Newgate survey commissioned by the Better Infrastructure Initiative points to both tolled and regular arterial roads as holding the “wooden spoon” of infrastructure when it comes to customer perceptions.

Clearly change is needed, where service quality outcomes with roads is the main game, not more bitumen. Whatever are the final reforms for roads pricing, it will be intolerable for the community to be lumbered with another new tax or user charges uncoupled from service quality.

Recognising the uncanny resemblance between infrastructure and superannuation and to act in unison fixing both is a good starting point for 2017.

That means for example, all legislation that commits funds for land transport has clear and actionable objectives enshrined in law.

Australia was a world leader in infrastructure, and we can do it again starting with land transport. Rigorous reform through corporatisation and privatisation from the late 1980s and 1990s is still reaping dividends but is badly in need of the next tranche.

New South Wales and Victoria are channelling this golden era of infrastructure to good effect, but the social licence to sell assets is fragile, and needs ongoing stewardship.

Unfortunately, IA with its project list and appetite for big spending is falling short of challenging the nation to innovate through doing more with less. There is much to be gained for IA to pursue deep infrastructure governance reform, starting with establishing strong objectives to help ensure great long-term outcomes.

* Garry Bowditch is Executive Director, Better Infrastructure Initiative, John Grill Centre for Project Leadership, University of Sydney. This article appeared in the Australian Financial Review on 5 December 2016.

Infrastructure makes Trumps*

President elect Trump has promoted a big infrastructure program to revitalise the American economy. So, Australia and the US have a lot in common for now.

Unlike Australia, the US has been a miserly spender when it comes to public infrastructure. As a result rusty and decaying infrastructure is on display across US cities and its vast regional areas.

The scarcity of money ensured the ‘buff and shine’ of US infrastructure was long ago substituted with something far more potent – innovation and inventiveness.

Necessity is the mother of invention and the US stands as a good example of pursuing high net benefit interventions like decongesting and debottlenecking existing infrastructure.

New York’s Fulton Rail Interchange is a case in point, along with innovation around big data, ride and asset sharing such as Uber and using analytics to sharpen and identify how to make US cities work better.

These are all important and beneficial characteristics for President Trump towards unlocking even more potential from cities and the infrastructure system.

Sweating assets in business and infrastructure is a prerequisite for lifting productivity and getting the most for every dollar invested. But the US is rapidly approaching a tipping point where the net economic gains of austerity are nearly depleted.

It is both timely and laudable that Mr. Trump considers fixing inner cities and rebuilding highways, bridges, tunnels, airports, schools, hospitals as a priority.

The US has room to move on this but not in the traditional way. Its infrastructure stock to GDP ratio sits at about 64 per cent, compared to 70 per cent for other major economies. However US Federal Budget with endless deficits and growing public indebtedness will require a different approach if a new infrastructure era is to be activated.

Australia and the US can work together to help make the Trump infrastructure agenda happen. Its infrastructure reform of the 1980s and 1990s is a worthy benchmark for US to adopt.

Reforming the US government balance sheet should easily connect with the Trump business mindset much like NSW asset recycling has unlocked previously closed doors with a skeptical public. It has the potential to do the same in US too.

We think a new stakeholder led US Infrastructure Bank could generate and allocate the money through corporatisation and privatisation of government assets and businesses much more efficiently than bureaucratic processes.

Despite local successes the social license to privatise is tenuous. Australia has threated the privatisation needle many times, and the lesson for the US is pretty simple; focus on long term efficiency not short-term stimulus.

Australia can share with the US our strong private sector infrastructure empowerment with full accountability to balance sheet reporting. We can work with our American cousins on our lessons where regulation has been kept to a minimum and where government sought to get out of the way to enable private sector to interact with their customers.

This is a winning formula in Australia, and same for the US.

But before that can happen the US must resolve a persistently stubborn contradiction. How can the world’s pin-up capitalist economy be so ambivalent to private ownership of public infrastructure?

Australia can and should seek to help the Trump Administration navigate an overdue national mind shift in favour of privately owned customer led infrastructure. It is an enormous market waiting for long term superannuation capital and expertise from Down Under.

On the other side of the coin there is plenty we can learn about how US cities are introducing smart city transport and local water and energy decentralisation and activating partnerships between universities. We can learn how to unleash new entrepenuership innovation districts that are building new jobs and revitalising large and small communities.

Both nations stand at the forfront of a new urban infrastructure enhanced future that can re-shape opportunities for people and places where both nations become leaders for the world.

*Garry Bowditch, Executive Director, Better Infrastructure Initiative, John Grill Centre, University of Sydney; Edward J Blakely is Chair of the Future City Collaborative and professor and dean at several US Univerities as well an OECD urban expert.

This article was published in the Australian Financial Review on 17 November 2016.

Re-establishing Australia’s Global Infrastructure Leadership

Sydharbour

To read my report released February 2016 with NSW Transport Minister Andrew Constance and Federal Minister Paul Fletcher, please follow the link see report

A Successful Infrastructure Australia should spell its demise*

*Opinion piece published Australian Financial Review, 19 February 2016

Infrastructure Australia (IA) is under new management, with a grand plan and reform agenda that at first blush seems sensible enough.

However, there are early signs of an identity crisis in IA as it wrestles with the need for more market efficiency in infrastructure and how it will evolve from its purpose of anointing projects through an administrative selection process that can produce ‘hit or miss’ result.

The end game may necessitate IA to plan for its own redundancy in no more than 15 years as this would be evidence of its success with markets and would come with the gratitude of the nation.

IA’s call for even more funding is to be expected, but Australia can be too trigger-happy when it comes to spending up big on infrastructure. For example, in the past decade more than half a trillion dollars has been invested in infrastructure, double the previous decade.

Despite this, escalating congestion, higher emissions, greater service costs, lower service quality and lost business and investment opportunities persist in both cities and regional Australia.

It appears Australia has a problem translating big spending on asset building into meaningful benefits that lift competitiveness and improve the lives of its people.

Part of the diagnosis is that too much emphasis is on rushing the engineering blue prints for ‘shovel ready projects’ without proper consideration to setting objectives to measure future success. Compounding the situation further is an absence of problem identification the project is seeking to fix.

Governments must choose their infrastructure well, if it is to live up to the rhetoric of boosting productivity and living standards. The trouble is choosing projects is not easy, in fact it’s very difficult.

Australia’s experience suggests that the best way to deal with this is for the Turnbull government to finish the reform agenda started in the 1980s, and then do some more.

Many sectors in infrastructure have been reformed through corporatisation and privatisation. The big successes like airports and telecommunications has transformed these sectors for the better. We have seen excellent investment in facilities and customer service. Brisbane airport currently looks more like Dubai with its massive new runway excavations is a case in point, and other airports are decongesting and debottlenecking to ensure good customer experiences.

But other sectors like roads and public transport remain largely untouched by reform. As a result an undisciplined investment process has seen taxpayer dollars failing to fix poor service levels, and tardiness with introducing capital saving new technologies. In contrast, telecommunications has had a far more stable investment pathway and has been quick to introduce new technology. Customers have been the winner as they have benefited from markets and competition.

A good first step for new infrastructure minister Darren Chester is to step into the customer shoes and be their champion.

Customers want services, not assets. All governments need to adapt by enabling markets to deliver these services where possible.  It is better that infrastructure is provided through businesses to customers, not politicians lobbying voters.

When markets are not possible, then governments must seek to procure service outcomes. This will invite a broader participation in the market, not just those that want to build assets. It should seek to give greater emphasis to using existing infrastructure better, stimulate innovation and reward risk taking.

These issues are the focus of the University of Sydney’s Better Infrastructure Initiative report ‘Re-establishing Australia Global Infrastructure Leadership’ released on Monday.

Necessity is the mother of invention. But it has been difficult for Australians to bring their genius to the fore in resolving our infrastructure challenges when the system is awash with money without clear purpose and procurement processes inflexible to new ideas

Australia has an infrastructure services deficit, but piling more money into it does not seem to be delivering the outcomes required. Minister Chester and IA can change that by first acknowledging services matter more than asset building, and allowing the discipline of markets and customers to guide the spending.

END

 

Road Reform: Australia’s Last Frontier*

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The Federal government’s willingness to debate the Harper Review recommendation to introduce cost reflective road pricing is an opportunity to move a difficult issue forward; provided it recognises the root and extent of the problem its seeks to fix.

The roads sector has had a carte blanche operational model for the best part of two centuries, where political will has prevailed without discipline of balance sheet management, commitment to service standards and rate of return on assets.

As a result Australia has spent over $210 billion in the past ten years on roads but slower and less reliable travel time persists across the nation. Clearly there is a problem in translating road spending into practical and meaningful outcomes for the community.

Australia has form in cleaning up these problem areas. The roads sector could learn from energy and telecommunications where corporatisation helped make decisions more transparent, linking user charges with building, maintenance and capital raisings. Together this has improved a project selection process that is more centred on customers.

Now is the time to do the same for roads.

While many argue that traffic hyper congestion is a concern, its causes are only partly related to transport problems, like insufficient road space.

Australia has ignored the transport and land use connection for over a century, and to continue along this path is foolhardy.

A fundamental principle that must shape this road pricing debate is ‘efficient infrastructure relies on efficient land use’. Australia is in the midst of a moment of truth, where scarcity of land in cities is preventing the building of cost effective roads. This too is an opportunity for positive change.

For decades, cheaper land on city fringes has served as a safety valve providing respite in pleasant settings for families escaping the artificially exorbitant price of real estate closer to jobs and amenities in and near CBDs.

The combined effect of bad regulation, and policy dementia has resulted in a capital substitution process that is extraordinary in scale and reach. To make fringe suburbs liveable, accessing jobs and services has been made possible through multiple car ownership. Economists call this process capital substitution, in this case buying cars instead of more proximate and expensive land.

To be frank, this capital substitution has worked well enough since the 1930s where cars and public transport together have managed to keep people connected and productive.

But the last decade has seen hyper congestion take hold of our key cities. Cars that are relied upon to commute are using roads that are slower and less reliable. Major roads in Sydney have a peak hour of 13 hours a day, and Sydney has an average speed in the peak of around 40km/h and Melbourne slightly faster. But our smaller cities rate poorly with London being some 30 per cent faster for an equivalent trip in the peak.

Minister Fletcher responding to the Harper Review road pricing recommendation late last year is absolutely right in saying that any change must be transparent and deliver clear community benefit. But the transparency needed is not just microscopic clarity to proposals, but evidence of whole of government deliberation of the problem, and to un-mercilessly break down institutional silos across Federal and state boundaries that are feeding the problem in the first place.

Sparsely populated suburbs that lock in car ownership without proper choice to alternative housing types are a fundamental problem. Along with other mega trends like increasing casual employment are feeding multiple peaks in traffic volumes in the day and very complex travel patterns. High transaction costs for buying and selling property is preventing people moving closer to jobs, necessitating longer commute time. There are clear reasons why our roads are so intensely relied upon.

To launch a discussion on pricing reforms is important but there is much more to this solution. We all understand the proposition of drive less, and pay less but this is not a voluntary choice for many, when so much of our lives have been dictated by an immobile building stock.

Cost reflective pricing may well have its place, but lets avoid treating the symptoms and get to a root cause of our traffic woes by first introducing corporatisation principles to public road agencies and at same time fixing an archaic land use planning regime.

*A version of this artice featured in the Australian Financial Review, Jan. 5, 2016