Transparency First, the key to a better Infrastructure Australia

A version of this article was published on 6 December, 2021 in the Australian Financial Review

The underperformance of infrastructure has grown as a serious societal problem. High levels of opaqueness, lack of accountability and monopoly power are to blame.

Regrettably, jingoistic nation-building slogans have overtaken infrastructure. It has skewed government to prefer megaprojects, with a casual indifference to our neighbourhoods’ decaying amenity, safety and quality of life.

Infrastructure investing is prone to misjudgements, pork barrelling, and corruption because of a lack of transparency, leading to the misallocation of capital. The role of customers, an absence of competition, political accountability for grand promises and under delivery are all at a low ebb compared to most other areas of the economy. This dysfunction must not be allowed to persist, and it can be fixed.

This context provides Infrastructure Australia (IA) with an opportunity to set itself apart as a champion of transparency, bringing conviction and courage to the fore to shape today’s infrastructure decisions to be the best they can be. When that is a reality, the rest of us can be more optimistic our infrastructure is doing its job – positively transforming lives and livelihoods.

Keeping errant governments inline

In mapping a more purposeful future for IA, we must first accept that depoliticising infrastructure is neither desirable nor appropriate. Infrastructure rightly sits at the heart of democratic processes, yet both political parties rhetorically seek to outsource it. The real issue is that transparency is missing, knowing the opportunity costs of infrastructure decisions, and shining a light of accountability to whether projects ever deliver on their promises.

Many governments worldwide, including Australia, want to give the impression of overhauling project selection and prioritisation processes by establishing independent agencies like IA. But this has struggled to work because too many appointees bring well established political affiliations and a mindset of treading carefully, not wanting to challenge or upset political masters who appointed them.

Next April, IA will be 14 years old. It has matured as an organisation, and its reports, processes and personnel all point to an organisation committed to professionalism and due process. But this is not enough.

A Federal election in 2022, means grand promises of high-speed rail, fantastic transport, water and energy solutions for cities and regions and transforming Northern Australia – will be replete with vision, hope and little guarantee of effectiveness. Australia needs an IA with the courage and conviction to pull errant governments into line.

IA’s insistence for business case preparation to assess and prioritise projects may be reassuring – experts carefully measure and check, in much the same way pilots do pre-flight checks of all systems before take-off.

The problem with the IA flight deck is that it flies by assumption. Nobody at IA is checking that the instruments are accurate. IA should be more forthright with the government that its costs and benefits in business cases are just estimates, often untethered from hard empirical evidence they can be achieved in the future. Moreover, there is a lack of commitment to systematically follow up on projects to confirm and validate actual costs and benefits. Instead, IA substitutes hope over hard evidence that benefit-cost ratios will be accurate, and that discount rates impacting these calculations were appropriate.  The result is a lack of empirical feedback on project performance that reinforces existing biases and inefficient project selection practices. These practices speak to a tick the box mentality without objective evidence that positive legacies from projects can pass to current and future generations.

Other government departments like Federal Treasury have their budget and economic estimates heavily scrutinised against actual outcomes. It is a sobering process, but it provides accountability to do better, seeking out improvements when wrong.

Emulate the Productivity Commission

IA should get the data and inform decision-makers and taxpayers about how projects performed in the years and decades after completion. IA can make a big difference by harnessing the power of evidence, transparency and expertise. It is in the national interest to relentlessly pursue transparency and accountability on infrastructure projects, despite the protests from vested interest groups determined to keep the status quo.

Being an official independent advisor to the Federal government puts IA in a powerful position to effect change. But it requires courage and conviction to transparency, matched with intellectual integrity, quality of data and modelling to inform and disseminate information on the good, bad and ugly aspects of infrastructure policy and projects.

The Productivity Commission and its predecessors represent worthy examples for IA to emulate. The then Industry Assistance Commission’s economic analysis and the ability to communicate complex information to the public earned trust and credibility during the heady debates on tariff reduction. It successfully delivered the public evidence needed to change government policy by demonstrating the damage industry protection was inflicting on ordinary Australians. The nation needs IA to do the same for infrastructure.

It is only a matter of months before political parties roll out election wish lists inviting more budgetary black holes. IA needs to urgently build a body of evidence to support the sustainability of infrastructure spending and help Australia’s fiscal resilience. They could usefully build on the work of the Grattan Institute for this purpose.

Watch out for nation-building promises

IA should be more prudent in supporting megaprojects – the multi-billion-dollar undertakings that deliver significant announcement effects for politicians and a sea of problems that follow. Bent Flyvbjerg from Oxford University coined the iron law of megaprojects: ‘over budget, over time, over and over again’.

For example, the surge in regional population growth post-COVID will no doubt birth another round of high-speed rail dreaming. This will need a firm hand from IA to protect the interests of regional Australia by prioritising the fundamentals – proper hospitals, schools, sports, and recreation facilities to name just a few. All these infrastructure essentials will be less likely if resources are sucked up by unworthy projects in the name of ‘nation building’.

At the same time, super regions around capital cities lack transport connectivity. Renovating the rail system between Sydney to Newcastle, Melbourne to Geelong, Brisbane to the Gold Coast would deliver more widespread benefits sooner than very fast trains between capital cities. There is a need for a more balanced and responsible national conversation about options and IA must set guard rails to keep proponents honest.

In the case of WestConnex – a partially completed megaproject toll road in Sydney – was backed by IA with business cases and cost-benefit analyses.  Better mobility and urban renewal were two prongs of its value proposition. While there was an enormous conviction to getting the WestConnex infrastructure built, the follow-through to urban regeneration has been disappointing, despite IA acknowledging its merits.

There is no doubt IA could have used its powers of influence to secure a better deal for housing and social aspects of WestConnex compared with the sheer institutional determination to build the road alone. IA could add much more value to the way projects impact the community if it pushed back harder on industry biases favouring investors and motorists over communities. A balanced approach would leave more room for other stakeholders to benefit, like residents and home buyers in need of affordable housing. Community trust in infrastructure pivots on the benefits being enjoyed more inclusively.

BIG FIXES supports a more effective IA

There is an enormous community trust bestowed on those responsible for infrastructure to do their jobs well. But the better organisations like IA can do their job, from planning, design, construction, and operations the more room there is for others to innovate, be productive, and ensure well-being and contribute to a better society.

It is appropriate to scrutinise, critique and debate IA as a lot is riding on them to do the heavy lifting in sharpening the nation’s capability to select and deliver excellent infrastructure. Anything less will fail the Australian people, undermine trust, and diminish the quality of life of our children.

Building solid relationships, honing skills of giving back to customers and communities and recognising the primacy of stakeholders over shareholders all form part of the solution. My recently launched new book BIG FIXES: Building bridges to an inclusive future sets out a tried and tested framework and practice of Customer Stewardship for owners and operators of infrastructure to lift performance and accountability.

It was written from a global perspective to help those responsible for infrastructure to understand what we do well and remind all stakeholders there is still enormous room for improvement. BIG FIXES makes the case for organisations like IA to strive for more transparency, impact and create positive legacies.

In reviewing the book, Professor Ian Harper encourages us to think of infrastructure as a gift that current generations pay forward to future generations. “When we invest in infrastructure, we express hope for the future. But we also create the future since good infrastructure empowers human’s ingenuity and creativeness that literally fashion the future.”

No one pretends that IA’s job is easy. However, the difficulties faced by infrastructure policymakers could be more easily overcome by having an honest and accountable commitment to transparency first, and a relentless drive to the centricity of citizens and customers for the whole life of infrastructure. After all, what is essential is not the physical assets but the life-giving services of infrastructure, making the challenge more immediate and manageable rather than constantly building new assets.

*Garry Bowditch is the author of BIG FIXES, available now on Amazon. He is a global infrastructure expert, Co-Founder of Customer Stewardship Alliance, formerly a senior Commonwealth Treasury official and inaugural Executive Director, Infrastructure Partnerships Australia.

Infrastructure Stewardship in an era of biological threat

This article was first published by Customer Stewardship Australia in April 2020. http://www.customerstewardship.com

Infrastructure the world over has been caught off guard by Coronavirus 19 which has highlighted the unique challenges for infrastructure assets operating in an era of biological threats.

Spatial distancing, so critical to controlling the spread of the virus, runs counter to one of the primary purposes of infrastructure – bringing people together. While digital infrastructure has been invaluable in maintaining business, education and social connectiveness during the crisis, this distance can never fully replace face to face experiences and is not conducive to long term mental health.

Infrastructure that has been designed primarily with economic efficiency in mind now needs to be recalibrated with a view to keeping our society connected and our economy operating while also stopping the transmission of biological disease.  The pursuit of efficiency (ie doing more with less) must make room for a requirement of resilience (ie being adaptive to changing circumstances to aid recovery). Improving the effectiveness of infrastructure assets and networks involves developing many nodes that are interconnected and decentralised to ensure that the failure of one node does not bring down the whole system.

The centralisation of infrastructure is evidence throughout the modern, world be that in travel with large airports and train stations, storage and distribution of potable water, major energy generation and poles and wires, shopping in large retail shopping malls and large hospital precincts for healthcare. While this centralisation has been critical for scale and cost efficiency, it can also increase security risks posed by terrorism and infectious diseases.

A decentralised approach that is more resilient to biological risk would involve a greater number of smaller interconnected assets. In the case of hospitals, it would refocus to local and mobile clinics closer to the end customer. In the case of airports, this would involve more collaborative rather than competitive relationship with regional airports with the capacity to support larger long-haul aircrafts. Whatever the sector, more nodes would allow authorities greater flexibility to close specific routes and isolate specific places without shutting down the whole system. This will imply greater cost but we must also be more conscious as to the benefits in light of COVID-19.

Infrastructure system design must seek to accommodate greater spare capacity to reduce the risk of single points of failure.  It’s been apparent just how important private transport has been for safely accessing medical help and maintaining households during this pandemic. The future implications of this does not have to mean more private vehicles although more accessible parking could assist in certain situations. Rather, it points to expanding other private options like e-scooters and e-bikes, collectively referred to as active or micro transport that could be called on in greater numbers when outbreaks occur and the need for social distancing arises again.

Just as excess capacity is needed in transport networks, the same in true for potable water. Even though COVID 19 has not been detected in potable water the risk of water transmission remain a possibility for future diseases. Systems to support more than one way to store and distribute water should be developed to pre-empt possible future biological risk where water is a viable means of transmission.

Rapid urbanisation and environmental practices such as cutting down forests increase the risks that previously harmless microbes will from time to time spill over into human bodies and cause devastating outbreaks. While this provides further reason to protect the environment, it also requires us to fundamentally change our approach to infrastructure development.

The challenges posed in making infrastructure networks more resilient to biological threats are not going to be addressed through private actors operating alone or governments mandating it.  A high degree of collaboration is called for from infrastructure operators working with their peers and overseas counterparts to ensure that private capital and public policy imperatives can continue to adapt and co-exist in a post COVID-19 world.

Australia’s COVID19 wake up call: get smarter about population density

Australia’s COVID19 wake up call: get smarter about population density 

This article authored by Garry Bowditch first appeared in Australian Financial Review on 16 April, 2020

When the war against COVID19 is finished Australia will have depleted its fiscal reserves and be saddled with high indebtedness for at least a decade. Getting the economy back to full health and keeping it that way is key, not only to pay-off national debts, meet the burgeoning costs of a growing and ageing population and to replenish fiscal reserves for the next crisis. 

This is a lot to expect from a small open trading economy subject to so many risks. One prudent measure policymakers must adopt to aid recovery is to strengthen early detection systems and response capabilities to address biological risks like COVID19. 

Pandemics thrive on confusion and indecision. The faster a city, state or nation can learn how to spot the early signs of contagion and take precise decisions to zero in and kill it means more lives saved, less disruption and smaller fiscal rescue packages.

Early intervention should not be an aspirational vision inspired by science fiction, it is urgent and doable. Australia is rapidly becoming more vulnerable to biological risks, because population density is rising very fast. In very near future, social distancing for any prolonged period will be much harder to rely upon to fight pandemics as more Australians take up medium to high rise housing. Less private open space inside and out will stretch community goodwill as it comes to grips with living much closer together while making it easier for pathogens to infect entire communities faster.

It might make sense when times are good for government to require new projects like transport, water and waste and social infrastructure to build up population density to justify costs and deliver more financial benefits from scarce land. But during periods of extreme biological risks the same infrastructure morphs into superhighways for pathogens to spread with alarming efficiency. 

Australia must learn from others if its ambition for greater density is to be responsible and safe. Taiwan is a nation with high population density coupled with significant geopolitical vulnerability. As a matter of necessity, they have a culture of adaptiveness, being technology savvy and most of all collaborative in sharing information across government. In the case of COVID19 this has been key in Taiwan’s effectiveness in getting timely information from immigration, customs, transport and the health sector to pinpoint high risk people and neighbourhoods to quarantine sooner therefore helping avoid costly national shutdowns later.

It also means investing in latent capacity for infrastructure networks to isolate one part, while scaling up another is fundamental to managing continuity of services and acting responsibly to contain people impacted by a serious event. Coordination and collaboration are key, firstly within functional silos such as transport, so there is greater coherence to land use, urban density and transport service offerings to ensure people can remain mobile and safe. Access to online video medical consultations is an excellent example of tapping latent capacity from NBN, health clinic online systems and regulatory tolerance to permit this vital service being more accessible and safer.

It is imperative that infrastructure network owners and operators are incentivised to keep government and each other informed about such threats and cooperate to ensure safety and continuity of services, bound by an objective to quarantine what is unsafe and keep the rest working normally. Densely populated cities like Singapore, Seoul and Taipei have been effective in containing COVID19 because of good alignment of objectives across agencies and a culture to make strong decisions early. 

COVID19 has revealed Australia must fix these key capability gaps concerning the way biological risk impacts humans. The nation is seriously lagging in this area and has not matched successful efforts to implement anti-terrorist measures to protect critical infrastructure and biosecurity in respect of agriculture. 

Australia’s optimism bias towards the benefits of more population density has contributed to blind spots to long term risks. Without investment into vital data, knowledge and monitoring systems to detect abnormalities there is reduced ability for early detection and intervention. Key to this is understanding and predicting how patterns of living in cities and regionals areas change over time and using scenario planning tools to examine long-term consequences.

The practical reality of early intervention means getting information and actionable intelligence about who is sick, how they got that way and what to do about it. While the sciences will do the heavy lifting in finding solutions, it will be helped enormously by a culture of collaboration and trust, so information is shared across bureaucratic and business silos. Cracking this will underpin more skilful and timely interventions, like knowing what and where to shut down specific neighbourhoods, protecting buildings that house the vulnerable while at same time helping preserve the functioning of the rest of the community. 

Australia is an ideal place to do this preparation despite its clumsy federated system. Cities are small to medium sized by global standards and has relatively new infrastructure, combined with deep pools of social media and data from sensors and Internet of Things to track emergent trends. Additionally, there is high quality demographic and spatial data to trace critical interdependencies and their impact on people and businesses. 

Life after COVID19 will be better provided we can learn and adapt from this harrowing experience.  Population density, infrastructure design and management and early intervention skills and capabilities to contain biological risk is an excellent starting place to ensure Australia is a better, safer and more resilient place to live and work. 

Telstra’s retreat has lessons for infrastructure*

* A version of this article was published in the Australian Financial Review on 17 July 2018.

Telstra’s latest predicament exemplifies what is Australia’s problem of failing customer stewardship in infrastructure.

Like a world cup own goal, team Telstra is scrambling to make up lost time by seeking to fix stubborn old problems. The quest to simplify Telstra in one fell swoop is a sign that long-term, steady and consistent customer stewardship of our big institutions is becoming very difficult, but not impossible.

Telstra typifies all the challenges of infrastructure. It has huge upfront investments, big focus on engineering and technology that defines its long term legacies yet these characteristics also make it hard to respond to customers and bring about change when needed – hence stewardship by customers.

The good news is that some Australian infrastructure firms are making the change in mindset and practice to get better at customer stewardship – rich in data, technology and innovation: driven by responsible people accountable for their actions.

These firms have gone beyond the basic compliance mentality of ‘ticking the box’ evident in so many annual reports where the reader can only be hopeful but not assured the right thing is being done.

Customer stewardship is an opportunity for infrastructure investors, owners, operators and policymakers to expand their toolkit of solutions for the nation’s problems from a pretty obvious starting place, the customer.

That means a determination to deliver good long-term outcomes, based on substantive relationships, where reciprocity strengthens performance and participation with stakeholders comes first.

This reflects a realisation among CEOs that not all our economic and social challenges can be addressed through reducing costs, lifting prices or through more funding.

Examples of customer stewardship are not abundant, but there is a growing cohort of spirited exemplars making their mark. Like Port of Brisbane with its storm water treatment in Lockyer Valley is helping redress silt build up down stream and avoiding expensive and disruptive dredging of channels. This is benefiting a multitude of stakeholders, including its private owners.

Unfortunately the social licence to own and operate infrastructure by the private sector is drifting into troubled water and must be corrected. Already there have been calls to renationalise Telstra. While that may seem absurd, nationalisation of broadband assets is exactly what has happened with NBN and UK is in the midst of maelstrom on similar issues.

A lack of connectedness of decision makers in Telstra to the anguish customers often face in dealing with their service provider has persisted across the decade.

While transparency is usually an enabler of managerial accountability to long-term outcomes, in the case of Telstra the sheer complexity and effort to understand the labyrinth by managers inside and outside has aided and abetted half hearted remedies to customer service and corporate misadventure.

Telstra appears to have finally self-medicated with a new business model splitting off its legacy physical assets into InfraCo. This reflects what customers have understood for a long time, that Telstra has reached a tipping point where benefits of size and scope of operations no longer justify the cost of underperformance.

Institutional investors can help buttress an enduring customer led, market based stewardship for infrastructure. That is where responsible owners are active in managing their assets to the shifting needs of customers, and are front footed in reimaging infrastructure to adapt and perform to higher standards of service and innovation over the long term.

While many investors are attracted to the infrastructure asset class because it is typically a safe haven from volatility and with inflation adjusted returns, it is important that they closely engage customers and community to ensure services are timely, scaled and feasible.

A plethora of challenges confront investors, owners and operators of infrastructure. On the one hand, pressure to payout dividends especially to retired security holders dependant on their investment to meet living costs has never been more acute, and on the other immense pressure to reinvest in assets and networks in response to climate, technology and social change. Public trust is delicately balanced as to how investors navigate these challenges.

Australia needs a stronger ambition to an infrastructure future where customers, asset owners and operators exchange information, understand needs and preferences and are motivated to meet them in a way that lifts the entire system. This simple process of stewardship underpinned by respect and humility to the customer and the community from which they come has been lost, as infrastructure gets bigger and more complex.

Customer stewardship is a means to a very important end, rebuilding trust. Integrity demonstrated through consistent behaviour towards the customer (and community) will be a big step forward. Too often communication with customers is not targeted, timely, clear or helpful and dressed with over-promise served on a platter of poor delivery.

Telstra along with the whole infrastructure sector must commit to being a beacon for exemplary customer stewardship. Its time to bring the customer and community in from the cold, and when they do not only will shareholders and customers be better off, so will Australia.

Private Capital Missing in Action*

* As appeared in Australian Financial Review, 14 May 2018 authored by Garry Bowditch

Turnbull’s 2018 Budget is accelerating the shift to ‘equity’ as its preferred spending weapon in its war on infrastructure inadequacy. Securing a commercial rate of return on investments like Melbourne’s Rail Link, Snowy 2.0 enables government to spend up big without exacerbating budget deficits. But this magic pudding of political ambition and public accounting rules has its limits.

Lessons about big infrastructure projects like NBN are commonplace, aggressive spending followed by weak outcomes. Prospects of commerciality and off budget financing delivering good long-term outcomes do seem fanciful. Bad service, irrelevant products and gold plating are just a few of the modern trip-wires that can cause projects to be uncommercial causing debt and deficit blow ups for future budgets.

Being a monopoly was once a fail-safe inoculation against unhappy customers and competition. New technologies like 5G mobile telephony, batteries for energy storage and autonomous vehicles are creating alternatives to legacy infrastructure. They all point to a future where customers are no longer hostages to poor government decisions because they have other options.

The likelihood of stranded assets in infrastructure is much higher than ever before, so taxpayers need to be vigilant that off budget financing of infrastructure projects is prudent. Transparency is key along with ensuring these projects tap the enterprise and dynamism of private capital to do more heavy lifting in resolving the nations infrastructure challenges.

Too many projects in the Budget are all funded and orchestrated by government which sits oddly with the fact that superannuation funds have significant capacity to invest in infrastructure here and abroad.

This situation demands urgent redress so that the many sources of private capital can be put to work as equity and debt partners. Private capital should be given more of a chance to invest in areas that can earn commercial returns rather than blindly relying on taxpayers to fund infrastructure. Substituting private for public capital will free up government funds for budget repair and targeting community and social infrastructure in areas where commercial outcomes are less likely, but with high impact on liveability.

What is missing in Australia is a much richer and more authentic collaboration model for infrastructure where risk, innovation and customer outcomes are rewarded without the need for big capital spending. OFWAT, the UK utilities regulator no longer rules on capex and opex in respect of water, but leaves it up to the utility and customer to find the right mix. Gold plating is now a relic of history. In its place is a mindset to use capital effectively in the interest of customer and community outcomes.

Australia has lost its edge with world infrastructure leaders. To get back on track the nation needs to incentivise and reward more innovation solutions that are less capital intensive and deliver sooner big customer and community outcomes.

To do that, governments must step back from pulling the big dollar spending trigger and focus on governance reform enabling dynamic and innovative leadership of private capital and community sectors.

For example, there is no doubt the $400m Port Botany rail duplication project is critical but why does the taxpayer have to fund this? The problem is not the private operators, but the willingness of government to step in when other private capital options are possible with the right regulatory settings.

Major airports and now maritime ports that are mostly privately owned or leased along east coast need to increasingly look beyond their front gate and take responsibility and stewardship for the connectedness of their business to the broader economy. No doubt this is hard, especially with urban encroachment, a lack of long term planning make 24-hour operations difficult. But this is exactly the sort of innovation and enterprise challenge private owners and operators should embrace, and be rewarded when they succeed.

The scope for improvement in infrastructure governance is enormous. Creation last year of the Infrastructure and Project Financing Agency is a step in the right direction provided it is an instrument for collaborating with the many sources of private capital available for infrastructure. Equity financing by government can be legitimate provided there is plenty of room for private capital to play a big role in being accountable to customers to flex and adjust over the entire economic life of infrastructure.

Australia is much more likely to get back on the best practice frontier when it heeds the lessons of past reforms. Infrastructure businesses have proven to be far superior to that of projects. Fiduciary boards, light handed regulation and active private investors operating transparently and in concert with customers is what will make every dollar and every talent count towards securing prosperity and well being for all.

Playing the long game with US infrastructure*

President Trump’s infrastructure plan last week is pitched in the language of the can do. Not only does it aim to unleash over a trillion dollars of investment, it promises a major project bonanza that will have Prime Minster Turnbull’s business delegation salivating at the prospect of getting a cut of ‘Making America Great Again’.

Massive tax cuts, surging military spending and now an unfunded infrastructure plan is a potent Manhattan cocktail for US economy to digest.

Despite a decade of best endeavours from the US Federal Reserve, President Trump has managed to do what quantitative easing never did, rekindle inflationary and animal spirits.

Observers of the Australian delegation visit must see through diplomatic pleasantries, and recognise the unique opportunities from the heightened interest of the US in Australian infrastructure. Deep superannuation pockets and policy experience can assure the nation a place at the President’s table, but we must be open that the lessons are two way.

The US outperforms Australia on innovation, productivity and finding better use for existing infrastructure. It has achieved this because of many reasons including the harsh reality that money for public infrastructure has been very scarce.

‘Necessity is the mother of invention’ simply rings true when it comes to US infrastructure. But there is no doubt the US has sweated its infrastructure to within an inch of its life. The time for renewal is overdue. Australia on the other hand is the mirror image of the US, where availability of big dollars has breed a cavalier build first mindset.

It will not be a day too soon, when strong investment and robust economic growth is the reason that Australia can jettison its low inflation, low bond yield economy. We must be sober to the reality that a decade of cheap money has not resolved any fundamental infrastructure challenges.

The hollowness of big project proponents that over promise and under deliver has contributed to higher costs and lower service quality. Meanwhile, declining liveability in cities and regional centres reflect the neglect of community infrastructure that is in a permanent state of disrepair.

Inflation heightens investor sensitivity to the time value of money especially when it is locked up for decades in big infrastructure projects. Higher inflationary risks will be critical in reawakening institutional investors to greater diligence in the scrutiny of investments so they are well placed for the long term.

Australia continues to choose projects that are not accretive to long-term economic growth or improved liveability, despite independent infrastructure agencies giving assurances the problem is fixed.

Government led NBN is an unfolding case study about what is wrong in Australia, while inland rail, Snowy 2.0 and Western Sydney Airport might be well intentioned projects but rightly trigger taxpayer anxiety.

Getting the global economy back on track to economic normality with moderate inflation and presence of future inflationary risk will help discipline infrastructure decision-making and invite stronger long-term stewardship.

That is where asset owners and operators continuously lift their game, develop new services, and secure revenues through better services with less reliance on automatic CPI plus increases in prices.

Owners and operators must be better incentivised to innovate, work towards earning customer loyalty and trust that lowers risks of operation, opens new investment opportunities and strengthens financial performance for investors. Governments can do more in ensuring project concession deeds and regulation enable operators to innovate and meet long-term customer needs.

While the promised benefits of President Trump’s infrastructure plan may dazzle some, Australia needs to play the long game in US where exemplarily customer led infrastructure is what distinguishes us, not just deep superannuation pockets.

If infrastructure investors and owners in US and Australia fail this 21st century balancing act between debt obligations, equity returns and keeping customers happy then the alternative is readily apparent. Jeremy Corbyn’s agenda to renationalise large chunks of UK infrastructure is a timely reminder of what is at stake.

*Published in the Australian Financial Review 21 February, 2018.

 

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.