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.

 

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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.