LUKE FRASER. Regional infrastructure: if you want something done right…

There is a not-so apocryphal story of a senior government minister explaining his regional policies to party colleagues. Somebody is said to have asked “what is your ‘Regional Assistance Strategy’?” to which he is said to have replied: “It’s a room in a building, in a country town, with a phone.  You pick up the phone.  You ring the number we provide and when somebody picks up, you say “get me the f*#k out of here!’”

Great story.  Sadly, statistics on regional growth in much of Australia bear it out.

Like southern Europe, but with more gum trees

Economics firm SGS produces helpful snapshots of capital city economies; in recent years this has included regions as well.  Last year’s report[i] shows Sydney and Melbourne comparatively barrelling along at 4.5 and 4.4% GDP growth respectively, yet regional New South Wales sputtered at 0.4% and regional Victoria had shrunk, registering minus 1%.  Ten-year averages – just 0.9% (NSW) and 0.5% (VIC) – would be worthy of some southern Eurozone countries across the same period (albeit arrived at with less volatility). The report also posited what interest rates might look like, were Sydney’s economy to have its own central bank and regional NSW likewise, both reflective of each innate economy.  Sydney’s central bank rate was found to be 3.75%, the regional NSW rate just 0.25%.

No plan?

Regional New South Wales and Victoria represent nearly one seventh of Australia’s economy.  What is the plan to address this?  Can a smarter approach to infrastructure help?

Of the 101 projects on Infrastructure Australia’s latest National Priority List, around a quarter could be classed regional or rural.  But some of these ‘projects’ are studies, not commitments to build. Others are agreements to preserve corridors, such as in Wollongong – in case any future government ever bothered to connect the 400,000 people of the Illawarra with fast mass transit to Sydney (a case might be made for building that today).  As its name suggests, the Priority List is instructive.  At times it includes regional highway upgrades.  The most noteworthy one on the present list is part of a c. $10 billion program of Bruce Highway upgrades in Queensland delivered by former Federal Infrastructure Minister the Hon Warren Truss, whose electorate the Bruce runs through. Was this the only or the most worthy regional highway candidate?  Infrastructure Australia reviewed this business case only after the project had been announced and Truss had retired.

The gulf between big city and regional spend appears wide: IA’s proposed assessments for just three regional water projects nationwide (in the driest continent outside Antarctica) appear miniscule against Westconnex (c. $20 billion?) Sydney Metro (c. $30 billion?) and many other big-ticket, big-city projects which too often, as reported in Pearls and elsewhere, show dubious economic returns for dollars spent.

Major cities are great wealth creators, but there seems little political appetite to do the heavy infrastructure lifting that might connect regions more efficiently with cities.  The point would be to stimulate growth at both ends, not simply to turn our regions into cheap commuter ‘sleeping suburbs’, as the Russians refer to them. We also know that in geospatial terms, the proximity of our regional centres to their capitals presents some attractive candidates for two-way growth, if better-connected.

At the head of this queue, as John Austen has written about in Pearls[ii], would be a very fast commuter rail link between Newcastle and Sydney. This appears prima facie technically practical and suggests powerful agglomeration merits: it would link the half million people of Newcastle to Sydney with a comfortable express commute.  Assuming service pricing was competitive, highway and motorway congestion would drop correspondingly, land values and tourism in Newcastle would rise and Sydney would benefit economically from a vast injection of productive human beings, without the corresponding liability of having to house them inside its own expensive urban sprawl.  This is very fertile ground for an economic case.

In a triumph of status quo, this project commands no priority from anybody anywhere.

Such projects usually require a step-change in existing regional infrastructure – very large capital sums spent up front – and this is where regional transformation prospects can die. Governments are liquidity-constrained.  Rather than structuring the necessary finance for these projects with patient capital markets and developing funding mixes that would diminish the balance sheet impacts for the Crown, governments save their own dollars and attention for city projects, where to their minds, vast spending is more acceptable and carries more political weight.

Last week’s Productivity Commission Five-Year Productivity Review makes a similar point, citing ‘continuing poor investment decisions’, it suggests governments tend to display a greater inclination to ‘high-cost, high-visibility projects’ rather than ‘subjecting projects to public scrutiny and selecting for higher benefit-cost return’.[iii]

What about trusting to better cost-benefit to overcome politics?

The Grattan Institute and others have argued that more rigour in benefit-cost ratio assessment of infrastructure business cases would see capital put to better uses and depoliticised[iv]. In principle this is attractive.  Grattan advanced the stark case of the $438m Princes Highway duplication west of Geelong – a project which returned just 8 cents for every taxpayer dollar spent.  This project was heavily politicised – it led to the front door of the then-State transport minister and ran through the marginal electorate of the Federal government whip.  Would more cost-benefit rigour have sunk this project? I am not convinced.

VicRoads has always known – as anybody in western Victoria could tell you – that while the undivided Princes Highway west of Geelong could be a very dangerous road, the real priority lay on the busy artery just an hour north – the Western Highway, which is the main freight route connecting Adelaide and Melbourne.  Much of the Western Highway is also unduplicated and can be treacherous.  Given its higher usage levels and importance to interstate trade, it surely offers an indisputably higher benefit-ratio than the highway that received all the money.  Why wasn’t the Western Highway business case advanced first?  Why do some projects not even make it to the starting line for scrutiny?  Improving the quality of business cases and parliamentary scrutiny thereof is worthwhile, but doesn’t overcome the origination problem, where politics can still exert a more subtle but powerful influence over which projects are advanced and which are left alone.  To overcome this problem, we need to appreciate how projects are developed – and by whom.

Origins: who makes projects up?

The most important question to ask about projects is who makes them up.  This explains more about our problem and might help point to a better solution.

Most major infrastructure projects in Australia are ‘originated’ by varying mixtures of the following parties:

  • Treasury and transport, energy and water agencies;
  • Third-party advisories retained by these agencies; and
  • Infrastructure financiers, builders, developers and fellow travellers (‘the infrastructure lobby’)
  • Politicians (although members of the above groups often place the flea in the politician’s ear)

Meanwhile, the two groups usually left out of early origination processes are:

  • The community – via local government, or an alliance of several local governments;
  • Patient capital – the superannuation funds which are best placed to invest in such projects for the long-term and at lowest cost.

Thus, those with the strongest self-interest in designing projects that are affordable, productive and fit for community purpose are the same parties locked out of their early development.

This system is driving Australia’s biggest infrastructure white elephants, such as Sydney Metro. For these originating parties, regional and rural projects appear especially far away, hard to grasp and require too much up-front cash to make a difference (the illiquidity challenge).  They are a distraction to major urban projects, where those coming up with the ideas are less likely to be confronted by deceptively simple questions like “does this do something useful for people?”, “will this thing make a return on my investment?”, “are there alternatives that might cost less for a similar result?” and “what problem are we trying to solve?”. These things are especially important for funds, which have been burned before on the promises of government priorities.

Regional showbags

Over several decades, Australian governments have evolved Regional Development Agencies to take their part on regional matters.  These agencies hold no authority whatsoever over energy, water, transport or telecommunications fundamentals – the preconditions of any successful modern economy, whether regional or urban.  Instead, they exist as evidence that line agencies have failed the regions.  Despite best intentions of the many committed officials involved, their role amounts to the showbag stall at the fair – small bags of goodies which don’t cost much, but keep the kids amused.  In this way regions receive new sporting fields or localised public works and other not-very-expensive social and economic infrastructure.

Change

This model is getting old.  Regional people are not stupid.  Some communities appear to be coming to the conclusion that democratically-elected local officials should have the power to think bigger for their region and this should include having some say in major infrastructure needs.  At the same time, there are signs that superannuation funds are prepared to venture further afield to find sensible and safe infrastructure investments – safe because, by enjoying grass roots community favour, they are at less risk of political meddling over the life of the investment ad in most cases, they represent improvements to existing infrastructure – that is, they are ‘brownfield’ investments, not risky ‘greenfield’ projects.   By their nature, regional brownfield investments occur in settings far less complex than big cities.

With this shift in mind, regional local governments might look ahead to a rosier future – ushered in not out of any grand Commonwealth or State design, but from the very failure of the status quo in the eyes of local communities and patient capital alike.

In future regional communities may pick up the phone to shape infrastructure projects with funds directly: yes, States would then need to approve and stand behind the investments as developed, but ‘open book’ origination in a direct conversation between market and community promises to avoid excess cost, lazy financing assumptions and poor project design that does not serve community objectives. It might also help some projects and their benefit-cost merits to see the light of day when otherwise they would never make it past the political shore break.

As for State and Federal infrastructure architects, if Sydney Metro’s travails are anything to go by, they may need their own hotline before long.

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. Prior to this he was a national freight industry chief executive.

[i] http://www.sgsep.com.au/publications/gdp-major-capital-city-2015-2016

[ii] https://johnmenadue.com/john-austen-high-speed-rail-where-to-competing-with-airlines-or-cars/

[iii] http://www.pc.gov.au/inquiries/completed/productivity-review/report/productivity-review.pdf

[iv] https://grattan.edu.au/wp-content/uploads/2016/04/869-Roads-to-Riches.pdf

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