Road Reform: Australia’s Last Frontier*


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


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’


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.

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.

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


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.



Customers first, infrastructure second


Why are customers left out of infrastructure?

The preferred language in infrastructure circles for the people that consume infrastructure services are ‘users’.

And this says it all.

Users are the anonymous and forgotten people that have no say in what is offered to them when it comes to our roads, trains, energy and water systems. Its just take it or leave it.

On the other hand, customers are enticed with a ‘value proposition’ – they get something of value for their spend. Customers can choose on the price/quality spectrum, cheap and cheerful through to luxurious and exotic.

While infrastructure may not be able to meet the extremes of choice in the consumer retail market, there is plenty of scope to do more and no doubt some utilities and companies are trying.

So next time you are travelling on a toll road well under speed the limit as you endure another traffic jam, arrive late for your next appointment you are entitled to ask the question, what service did my toll just pay for?

If there was no service at all, then a toll is just another tax.

The community will fund infrastructure by paying fees and charges provided the value proposition of the service is good enough and can be delivered consistently overtime. Yet, so little of these considerations of the customer come into play when we plan and design infrastructure.

When we recognise the ‘customer’ and account for their needs and expectations many of the problems of infrastructure delivery and funding become far more manageable.

That is why community participation and confidence in the infrastructure planning and delivery process is of critical importance. Connecting major decisions with better and relevant services directly impacts people’s lives.

When projects are accountable to customer service outcomes, this will help prevent inappropriate political influence and lift confidence that proper planning against clear objectives and service outcomes are taking place. Together this can help unlock the infrastructure impasse, win community approval, attract new funding sources and unlock much needed innovation.

Infrastructure assets and services have a very privileged and intimate role to play in our society, because they provide the platform for conducting modern life. For example water for living, energy for growth and employment and technology for connection and coordination.

Shifting the focus of infrastructure planning from its physical attributes to the services it is intended to deliver is a critical reform that will require a different procurement approach and culture of planning within government. The dividend of this reform, however, will better reflect the community’s expectations and help justify the investment and disruption caused during construction.

The increasing reliance on private investors to fund public infrastructure places an even greater imperative on governments to have the ability to interact, negotiate and secure outcomes in the best interest of the community. This requires strong institutional architecture, including anti-corruption agencies. Governments need to be open and transparent about the relationship with private sector participants and the value such participants provide to overall infrastructure development.

Jurisdictions need to be frank about success and failure; and to demonstrate they are capable of learning lessons from the past and can transfer best practice from other projects and jurisdictions.

Australia has an alarming lack of information, data and culture of review (benchmarking) of the performance of its infrastructure. There is an urgent need to build a body of evidence that will inform future infrastructure policy and decisions of past lessons and successes.

Public trust and confidence within a jurisdiction can improve when there is demonstrable success of previous projects. Jurisdictions should recognise public trust and confidence is cumulative, and every project successfully delivered builds trust one-step at a time. Therefore, infrastructure planning must ensure a very high level of competence in delivery, and genuine and in-depth consultation occurs to take account the needs of the customer and the community customers live in.

Public infrastructure in the eyes of the community expects a very high level of accountability and transparency. Of course government must ensure that legitimate commercial-in- confidence considerations are protected but this should not be used as a means of blocking the ability of the community to have an appropriate degree of scrutiny to ensure the value proposition of infrastructure is relevant and good value.

Taxes, till death do us part


Benjamin Franklin wrote anxiously while corresponding to his dear friend Jean-Baptiste Leroy in Paris during the peak of the French revolution about whether he was in fact still alive or had succumbed to the violence.

Franklin wrote (as translated to English): “Are you still living? Or has the mob of Paris mistaken the head of a monopolizer of knowledge, for a monopolizer of corn, and paraded it about the streets upon a pole.

In the same letter, Franklin was feeling the vulnerabilities of life himself, and having just bedded down the US Constitution, he famously remarked: “Our new Constitution is now established, everything seems to promise it will be durable; but, in this world, nothing is certain except death and taxes.”

While not the first to use this term ‘death and taxes’ it is by far the most famous.

The authors of the Re:Think Tax Paper recently released by the Australian Government only wish that tax was in fact as certain as death. The ingenuity of humans whether it be behavioural or technological have managed to highlight the frailties of the current tax system in Australia. It is not longer capable of funding the insatiable needs and wants of government.

While budgets require a tango of expenditure discipline and revenue management,  Australia is struggling like never before to even do the most basic housekeeping on these fronts.

Among the important messages in the Re:think Tax paper, it reminds us that when government tax they change the economy and with that comes the potential to damage economic efficiency if taxes are too high or narrowly based.  Economists call this ‘excess burden’ of taxation, where the benefits of a tax can be overwhelmed by its costs of collection.

Stamp duty on property is identified in the Re:think Tax paper as having a significant excess burden, and I will focus on this because it is a particularly pervasive tax that distorts decision making in business and of individuals. It also has perverse effects like exaggerating the infrastructure deficit.

How does this happen and what are its consequences?

Stamp duty like all taxes has the potential to change economic behaviour. For example, higher income taxes can reduce your incentive to work and stamp duty on conveyances can distort land use, for example by retaining land for relatively unproductive purposes just to avoid stamp duty. The same can be true for individuals when it comes to property ownership and where they choose to live.

In both cases stamp duties for conveyance levied by the states increases significantly transaction costs of buying and selling houses, apartments and commercial land.

Higher transaction costs limit the ability of employers to locate facilities in the most optimal location for access to infrastructure and skilled workers. Equally it directly impacts on people’s willingness to adjust locational preferences for living as their circumstances change over time because of say, a new (another) job, children, health and aging.

With much higher levels of workforce participation, coupled with dramatic reductions in the average tenure of jobs provides some clues as to why traffic congestion is getting worse by the day. Jobs cannot move to people, and people cannot comfortably access jobs is a diabolical mix for our national economic engines. And the solution is, travel more.

Sydney’s major roads such as M5, M1 and M4 all have a daily peak hour exceeding 10 hours per day, and for the more chronically congested in excess of 13 hours. For an equivalent 60km trip in peak hour Sydney,  the average speed is 40 kmh, Melbourne at 44 kmh compared with London at 54 kmh – a city of far greater size and complexity.

Many people may not need to be on the road if they had more choices about where they live, work and play.

A perverse outcome of the tax system I would argue is that it has not only limited work and travel choice, it has exaggerated Australia’s infrastructure deficit. This has caused many commentators to mis-diagnose the cure by supporting even more taxes and debt to invest in better roads and public transport to ease peak hour congestion.

It appears that the new shock absorber to make our cities function smoothly is an over reliance on the transport system which is bearing the burden of an accumulation of tax distortions. Of course, other factors like penalty rates also encourage us to work in the goldilocks eight hour block, exacerbating peak hour traffic as well.

There is an urgent need to better understand the plethora of tax interaction effects with infrastructure and seek to reduce negative consequences.  Taxes and death may share a common inevitability, but our quality of life could be so much better if we managed these negative consequences more thoughtfully.