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.

 

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

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.