Pearls and Irritations

This is the first of three articles considering transport infrastructure spending levels, shortcomings in transport governance and strategy and the potential for doing better.

In a recent article economist Peter Martin raised concerns about tens of billions racked up in dubious Sydney and Melbourne transport projects[i]. These places are Australia’s biggest economic engines, but as Martin rightly suggests, that is no reason for governments to spray taxpayer money at poor projects.

Sydney deserves special attention, because uniquely, it appears to be in thrall to a project cargo cult. It has unprecedented taxpayer sums in play; what is more, a highly questionable choice of projects makes Melbourne’s programme look for the most part quite sensible.

Martin’s article lists the following projects for Sydney:

• WestConnex at $16 billion;
• Westconnex Western Harbour Tunnel Beaches Link at $14 billion;
• F6 Motorway extension at $9 billion;
• NorthConnex at $3 billion;
• Sydney Metro South West at $11 billion;
• Sydney Metro North West at $8 billion;
• Parramatta Light Rail at $3 billion; and
• Sydney Light Rail at $2 billion.

Martin also notes billions more expected for Sydney Metro West.

Many of these projects  underline the risks and costs of Australia’s hollowed-out public sector advisory capacity, which poses a risk not only to public finances, community amenity and trust, but to market investment sentiment as well.  It risks becoming a cautionary tale of how a government can become so giddy on major transport announcements that it drains even the capacity of market constructors to keep up. In this fashion, governments trap themselves and community, economy and investors alike carry the can.

One third of New Zealand’s GDP on Sydney’s new transport projects?

Martin’s article tallies $66 billion of spending in Sydney transport projects over several years.  This estimate is likely to be shooting low for a couple of reasons:

• The costs of taking Sydney Metro west from Parramatta to the proposed new airport at Badgery’s Creek is likely to be similar to the North-West Metro, so assume another $8.5 billion.
• The Productivity Commission pointed out recently that while some of these Sydney projects assume a 6 per cent risk loading for their cost overruns, the average major project cost blowout in Australia now runs at around 25 per cent of project estimates.

On this basis, a figure around $85 billion is more realistic.  This does not include any of the tens of billions in building construction slated for Sydney, some of which has to rely on the same market construction resources as the transport projects.

For context, $85 billion equates to one third of New Zealand’s GDP in 2016, or around 15 per cent of New South Wales’ economic output in that same year.  This may not represent the limit of the State’s transport spending ambition: in a little-read submission to the Productivity Commission in 2014, New South Wales proposed that Canberra should just hand over infrastructure money in a bulk allocation for State infrastructure programs, rather than project-by-project[ii].

The rationale driving this spend-a-thon is that any positive cost-benefit on each dollar spent is worthwhile, that new megaprojects show government thinking and acting big in the community’s best interest. That is facile.  As Professor Henry Ergas explains:

‘there are, in effect, sound reasons for each of lenders, taxpayers and governments as borrowers to be concerned about the merits of individual projects but also about aggregate levels of public borrowing’[iii]:

Amongst these are the aggregate scale of liability for repayment, the desire to retain space to borrow for future contingencies and a desire to maintain a healthy margin for error in the anticipated economic success of these projects.

Leaving aside the fact that redoubling our efforts in education is a more certain path to economic growth[iv], there is deeper magic required for the successful planning of major cities.  A command of this magic is not in evidence in Sydney.  More of that in a follow-up post.

We need to get out more

Lee Kuan Yew quipped that Australia risked becoming ‘the poor white trash of Asia’.  There is nothing poor about Sydney’s urban megaprojects, but the trash part may yet describe their economic returns.  Only by reaching for international comparators can we place Sydney’s scale of spending in proper context.  Without this context, we proceed in a fool’s paradise.

Last year, the United States Public Infrastructure Research Group published Highway Boondoggles 2– an update report on white elephant road projects pursued across the United States at the expense of public transport projects, improved maintenance of existing roads and other transport opportunity costs[v].

Boondoggles 2 lists twelve (12) of that nation’s most dubious highway and motorway projects across twelve different states. All twelve projects only total $USD24 billion dollars.  That is, just a third to a quarter of the major transport projects that Sydney has in play – a mature Westconnex alone is not far off this total value.

Does Sydney’s great size justify all this spending? Sydney is a substantial world city, but not compared to New York. New York’s greater metropolitan area generates more economic product than all of Australia, or Canada, for that matter[vi].

This year New York completed the first phase of its Second Avenue subway, placing three new metro stations under Manhattan Island and upgrading another.  Second Avenue remains a very expensive, controversial metro project[vii], but compared to Sydney, it’s a steal: the new stations were realised at a total cost of c. $AUD 6.6 billion.   The total vision sees 16 new stations moving under New York.  The cost estimate for stages three and four is hazy, but appears billions less than a mature Sydney Metro could cost.  In January this year the Wall Street Journal labelled Second Avenue’s first phase ‘by far the most expensive train track in the history of the world’[viii].  Where does that leave Sydney Metro?

Finally, there is Europe – a world leader in market infrastructure partnerships.  The European Investment Bank’s European Public Private Partnership Expertise Centre (EPEC) maintains detailed data on government and market infrastructure finance projects.

$AUD85 billion is over 15 per cent more than all 77 PPP transport projects reported across the 28 countries of the European Union plus Turkey and the Western Balkans between 2012 and 2016[ix]. For context, EU member GDP in 2016 was around 20 times the size of Australia’s.

Such giddy project costs make good strategy, project choice and governance imperative for all Sydney transport objectives.

A follow-up article will examine these matters.  The signs are not encouraging.

Luke Fraser is the founder and principal of a transport policy and investment advisory. In 2012 he was appointed to the board of the Prime Minister and Premiers Road Reform Project. From the late 1990s he spent over a decade in Canberra in several APS executive, Commonwealth government chief of staff and industry CEO roles across the transport and Defence sectors.

 [i] http://www.smh.com.au/comment/the-fake-economics-cookbook-how-to-make-bad-transport-projects-look-good-20171121-gzqd3x.html

[ii] https://www.pc.gov.au/__data/assets/pdf_file/0003/137280/infrastructure-volume1.pdf

[iii] https://www.pc.gov.au/__data/assets/pdf_file/0005/132197/sub087-infrastructure.pdf

[iv] https://johnmenadue.com/luke-fraser-good-debt-bad-debt-poor-infrastructure-choices-no-reform-and-lee-kuan-yew/

[v] https://uspirg.org/reports/usp/highway-boondoggles-2

[vi] https://www.forbes.com/sites/scottbeyer/2016/10/09/americas-20-largest-metros-have-higher-gdps-than-most-foreign-nations/#6b7d420654db

[vii] https://www.nytimes.com/2017/11/18/nyregion/new-york-subway-system-failure-delays.html

[viii] https://www.wsj.com/articles/new-yorks-second-coming-1483488649

[ix] http://data.eib.org/epec

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