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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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

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

 

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.