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

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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

What’s good for the goose, is good for gander: the case of China’s Infrastructure Bank

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This article recently featured in Australian Financial Review on July 3, 2015.

When the Australian Treasurer visits the Great Hall of the People in Beijing to sign up the nation to the Asian Infrastructure Investment Bank (AIIB) it could reap big dividends, but not as you might expect.

Of course Asia needs more infrastructure and the sooner the better. Recycling China’s massive foreign exchange reserves of almost $4 trillion into roads, schools, fresh water, sanitation and cleaner energy is tantalising for an export nation like Australia.

But unfortunately as Australia’s experience can attest, more dollars directed to infrastructure brings no guarantees of better growth, more productivity or higher living standards. The root cause of this conundrum is not having a robust infrastructure governance framework to identify projects that will consistently yield the best ‘net benefits’ for society.

The Treasurer has rightly pointed to transparency and accountability as being a key for AIIB to lock in Australia’s membership. Because he well knows that transparency enables sunlight to illuminate infrastructure decision processes, where accountability and high likelihood of scrutiny acts to sanitise poor and at times corrupt decisions.

This is an absolutely proper standard for AIIB, but why has Australia exempted itself?

Not a lot is known about the AIIB but its clear in objective, to drive stronger regional economic growth; poverty alleviation does not figure in its mandate.

According to the Chinese, the logic for the AIIB is to redress deep dissatisfaction with

Bretton Woods institutions such as IMF and World Bank. They are perceived to be cumbersome to deal with, overly bureaucratic, have confusing and multiple objectives and are wasteful with resources that together impact on the quality of infrastructure investments.

Regardless of the merits of these accusations, there is an uncanny parallel with Australia. Economic efficiency of Australia’s infrastructure has been waning for over a decade. For example labour productivity in electricity, gas and water is 30 per cent lower than a decade ago in part reflecting government owned enterprises being overloaded with too many objectives, spanning commercial, social and fiscal arenas.

Inevitably these objectives while important have been executed inconsistently and sometimes with perverse effect. The reliability of electricity supply is a case in point. It traverses economic and social objectives, however widespread ‘gold plating’ and extravagant use of scarce capital occurred without a proper governance framework.

SMART has estimated that a better infrastructure governance framework could deliver the nation a massive saving exceeding $4-5 billion a year, from better planning, improved procurement techniques and cutting green and red tape.

This goes to the heart of the Chinese concerns, which has been replicated at a global level, and Australia must also heed it as an important reform lesson too.

But the task before Australia is to follow through with its demands on making the AIIB a case example of good infrastructure governance. Its authority to do this would be strengthened if Australia had a better track record in this area.

So while some may be counting the benefits of AIIB as being principally about more trade, investment opportunities and jobs for Australians the potential dividends extend well beyond these direct benefits.

If AIIB lives up to its rhetoric of seeking to push the boundary for better practice in infrastructure governance, and it appears Australia will goad it along, then the scene is set for reform. Put another way, surely for Australia to have any international credibility on this matter it must close the gap between what it expects of AIIB and the way it conducts itself domestically.

Just as the G20 Infrastructure Hub has aspirations of shifting the best practice curve for infrastructure governance, there is an important opportunity for Australia to connect these different initiatives into a coherent single framework.

The starting point for reaping the benefits of our imminent AIIB membership, along with the G20 Hub is to recognise that Australia’s track record for sound infrastructure governance is at low ebb and in urgent need of reform. Having the courage to admit this coupled with humility to learn from those abroad on the same journey is a good starting place to bank the dividends of these international initiatives.

Stop the infrastructure ‘boom bust’

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The Australian Financial Review’s National Infrastructure Summit last week resonated with calls for reform to deliver better value for money, proclamations of broken procurement models, need for more rational risk allocation and furious agreement about importance of infrastructure to help rebalance Australia’s post-mining boom economy.
No doubt these sober deliberations confirm once again that Australia is a much better manager of adversity than it is of prosperity. This national characteristic was clearly evident at the Summit, and begs the question how Australia can be better prepared for the next bonanza and have more to show for it.
The boom-bust cycles of commodity prices are here to stay, but that does not mean infrastructure has to follow suit. Currently it does, which is a serious indictment on the nation that is failing in its long-term planning capabilities.
Despite the measured and grounded discussions of reform at the Summit a framework for growth remains illusive until Australia rebalances the scales so that its passion for more infrastructure is matched with its reason.

PROLIFIC BENEFITS
Sure, governments invest in infrastructure because the benefits are so prolific. It connects people and institutions with markets and opportunities, creates competition, drives up productivity and elevates living standards.
The promise of so much, however, is not an excuse to passionately invest in the blind hope the next crop of infrastructure will yield more again.
But governments need to heed the message and plan infrastructure for the long term. Current 15-year planning horizons of Infrastructure Australia and their state equivalents are a good start, but remain too short-sighted.
Infrastructure plans should not be just a project list but also a narrative of Australia’s demographic and spatial challenges, aspirations and intentions. The population task alone in accommodating 70 million people by 2100 is an unprecedented national challenge.
What is the future shape of Sydney, Melbourne and Brisbane as these cities absorb most of the additional 30 million people. For example, do we have in place the rudimentary options for growth that our mega cities will need such as land corridors for freight, utilities and passenger logistics.
President Eisenhower made the astute observation that ‘plans are useless, but planning is indispensable’.
The challenge before Australia is to break away from the stop-go, boom-bust approach to infrastructure, and set out a purposeful and strong planning framework for growth of cities and regions. This will demand a fundamental mind shift of policymakers and stakeholders alike.
Governments across the globe are calling for more long-term investors to finance infrastructure. When that is done well, the old way of ‘invest, set and forget’ should be a relic of history.
For that to happen, owners and operators of infrastructure must be more exposed to customers, and incentivised to meet their preferences. This strengthens scope for innovation, improves business cases, lifts ROI and long-term asset values while lowering revenue and political risk.
Unfortunately, the model today is back to front; infrastructure first, customer second.

SWEATING THE OPTIONS
The big utilities like electricity and gas companies are sweating the options to better understand and partner with customers, despite decades of loyalty they still know very little about them. Utilities have not been helped by plethora of regulatory changes that have been poorly thought out and executed in a vacuum of research and data on customer behaviour.
Transport and electricity infrastructure share a great deal in common. Their customers demand more in the peak as average consumption declines, which present a very challenging situation. It is exorbitantly costly to ensure reliability in the peak and holding idle capacity at other times.
The upshot of the utilities experience for the rest of infrastructure is clear, especially for transport, get closer to the customer sooner.
Of course, infrastructure needs to be marketed better in the language of community and customers. What does it mean for my commute time, access to different types of transport, kids drop off, getting to hospital, my house price and liveability of my neighbourhood.
Community support and trust towards credible infrastructure plans must be earned with sound community engagement and better customer service outcomes. These must form the central plank of the new long-term infrastructure-planning regime, not just a focus on assets and projects.
This is by far Australia’s most pressing infrastructure imperative.

 

Infrastructure Australia Audit: first ‘listen’ to the people

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Infrastructure Australia is under new management, and it shows in its first national audit report released today.

Demographics, land use and infrastructure are all bundled together in the Audit, and its not a minute too soon. The mega trends in demographics and land use are the big drivers of infrastructure demand and recognition of ‘integrated infrastructure planning’ is welcomed.

But how IA proposes to capitalise on this ‘integrated infrastructure approach’ is unknown at this stage. So we are all left wondering about the types of infrastructure outcomes, how our cities might be shaped, community impact and liveability we might expect in the future. Without these types of pointers, its hard to know what IA’s big picture strategy over the next 15 years is all about.

However, while ‘integrated infrastructure planning’ language should be encouraged, putting it into practice is a whole other ball game. Thats because there remains a culture of resistance across Australian bureaucracies and industry to the big picture shape of networks and cities into the future.

The culture of silos, where transport, land use, energy and water (to name just a few) are all separate and isolated from one another remains as big a problem today, as it has been in the past.

This is where IA can play constructively.

The biggest problem with silos is that they fragment infrastructure planning and intelligence. Departmental silos prevent proper recognition of the ‘customer’ who is having to traverse all the silos at once as they live, work and play. In addition, silos prevent proper policy and design reasoning so that the community can be assured that every time a new project is proposed that its actually makes people and the network of infrastructure better off.

Remember Sydney’s Cross City Tunnel, and closure of adjacent roads to drive up patronage for the new tunnel. Such business models are destructive to community trust and are typically incubated in a silo.

Securing permission from the community to do infrastructure is Australia’s newest and biggest hurdle.

While IA appears to be trying to express themselves in the language of openness and consultation, so much more is required. Engaging the community goes deeper than traditional consultation asking ‘what do you think’ of our latest project thought bubble.

Government’s must be prepared to ask the community what are the problems that concern them most, and set up a deliberative conversation to explore how these problems can be addressed, identify the trade offs without the presumption that building something new is the best way of meeting that need.

This is how infrastructure can inject much needed innovation and drive up productivity by being focussed on the problem and inviting more ‘unsolicited bids’ to solve them. There have been too many projects in Australia that are engineering brilliant solutions but are in search of a problem. Inland and high speed rail, decentralisation initiatives and reversing rivers come to mind.

Finally, headlines leading the IA Audit like congestion costs Australia $53 billion are simply meaningless. Instead, the community deserves to be engaged about infrastructure with language and values that meaningfully impact their lives, like travel time to school drop off, access to services like hospitals, schools and amenity, air quality and can it help my kids get a job. This is the new and necessary language of infrastructure.

These are some of the issues that shape liveability and infrastructure must be slavish to them, not the other way around.

Another budget of ‘reverse philanthropy’

Australia brought down its Federal budget tonight. Sure the Prime Minister was right, it had ‘no surprises’ and the flip side is ‘no aspiration’ either.

While Europe and US have had an appetite for public debt for a prolonged period of time, and have enjoyed the favour of the capital markets, Australia should not bank on the same.

Yet the budget is on track to do exactly that, with deficits that will accumulate as a burden on the Australian taxpayer for decades into the future. The big difference for Australia is its volatile ‘terms of trade’ (the relative price of exports to import prices) must be planned for, and contingencies put in place to ensure living standards can be sustained.

Debt is not the answer, and younger people in particular need to get on the case.

The question in search of a proper response is why does this budget, like so many budgets that  came before it from both Liberal and Labor, enable the transfer of wealth from the young to the old.

Australia has a serious case of what I call ‘reverse philanthropy’, and the consequences are serious.

The budget provides extraordinary tax expenditures to older groups by virtue of concessional tax treatment of superannuation, and an expectation of a universal pension funded by the taxpayer. Other benefits include, tax exemption to the family home that favours incumbent land owner, generally the older generation who also had the benefit of free university education as well.

In contrast the younger generation face extraordinary house prices, (fuelled by poor land use regulation that has restricted supply in favour of the old), and the burden of financing their university education as well.

Young people in Australia need to make their voices heard, and question the inter-generational  wealth transfer that is doing them no favours what so ever. For the younger generation to pull off this financial trick of supporting themselves and paying off the debt legacy of the older generation, is going to rely on a productivity boost equivalent to the invention in 1765 by Hargreaves of the spinning jenny which could spin numerous spools of cotton simultaneously.

Of course, if such transformational technology does not eventuate the impact of high marginal tax rates required to fund the budget will crush incentive and productive purpose. If you think this sound a bit like Greece today, then your probably not wrong.