LUKE FRASER. Good debt, bad debt: Poor infrastructure choices, no reform – and Lee Kuan Yew -A REPOSTDec 30, 2017
In the Fairness, Opportunity, Security policy series and the resulting book, Dr Michael Keating AC and I wrote of Australia’s out-of-control transport infrastructure spending that:
‘It is scandalous that this investment escapes proper scrutiny, while at the same time the proponents are calling for cuts in other government programs, including education and training programs that would actually increase productivity and participation’.[i]
Nearly two years later, the Australian treasurer gave a speech lauding infrastructure spending and drawing a distinction between ‘good debt and bad debt’:
‘It can be very wise for Governments to borrow, especially while rates are low, to lock in longer term financing and invest in major growth producing infrastructure assets such as transport or energy infrastructure. But to rack up government debt to pay for welfare payments and other everyday expenses, is not a good idea’.[ii]
What did he mean? I think he meant – to be fair, perhaps subconsciously – ‘debt that brings immediate elector attention’ and ‘debt that doesn’t’.
How else to explain that education was not singled out as ‘good debt’ in this ‘wheat from chaff’ speech? The Programme for International Student Assessment (PISA) is the accepted world benchmark for 15 year-olds’ literacy and numeracy in 70 countries worldwide. The OECD found in 2015 that if all students in Australia met basic PISA literacy and numeracy tests, it would equate to an annual GDP addition of well over one per cent[iii]. Other recent research has suggested that more effort on excelling in PISA would see Australia jump up to near the leading position for innovative countries worldwide[iv].
Surely education is a candidate for Mr Morrison’s ‘good debt’.
Except education success demands resolve over many budget cycles. Our failing as electors is to be attracted to the shiniest objects – and our politicians oblige. There are no high-vis vests and sod turnings on offer from redoubling effort to ensure kids are exposed to better-remunerated, higher-quality teachers, that extra tuition is on offer where it’s needed, or that all schoolkids study on full bellies and have the wherewithal in books and uniforms to learn and integrate at school.
A shinier, quicker path to favourable press is to spend nearly half a billion to duplicate the highway between Geelong and Colac – except that this project was estimated to return just 8 cents for every taxpayer dollar spent, as Grattan has reported[v]. Or one might spend over $20 billion on Westconnex – a major motorway tunnel pointed from the suburbs at the heart of Sydney – something that a transport economist will tell you is intuitively strange practice, because if people use it, it will create a full car park wherever it surfaces. New South Wales government advised a Westconnex benefit-cost ratio of 1.7. Then billions more were added to the price. Infrastructure Australia’s 2016 assessment of this toll road announces, with all the enthusiasm it can muster, that ‘the BCR remains higher than 1’.[vi] Even this paltry result may be overstated: for road projects, current benefit-cost assessment processes usually value travel time savings as a benefit.
Travel time savings have a direct economic impact only on trucking and other businesses where your car is your job: there is no realisable ‘good debt’ benefit to the Treasurer from getting people home to the kids or off to the northern beaches a bit quicker with a highway upgrade –laudable outcomes, but less a ‘growth-producing good debt’ outcome because the treasurer can’t harvest such dividends. In contrast, government can with some certainty anticipate higher overall tax contributions from a population exhibiting improved literacy, numeracy and innovation skills.
Given that most of the major road project benefit-cost ratios still contain ‘travel time savings’ as a measure of their worth, Australia is not producing an ‘apples with apples’ comparison between big transport infrastructure and education benefits.
Another feature of Morrison’s speech was the absence of economic reform. No mention of the potential for pricing some transport assets, for congestion charges in major cities, for our cash-starved and bureaucrat-run national freight rail network to be (finally) sold off and subject to a successful regulated market system like US rail – a reform which was the subject of an earlier post[vii]. Post-reform US rail has witnessed rail companies invest almost one trillion dollars (Australian) in their own industry since reform.
(Perhaps rail reform was not mentioned because the next Australian budget may include taxpayer money for an Inland Rail designed and built by the public sector between Brisbane and Melbourne?)
It is unfair to lay all these problems at Morrison’s feet. Neither side of politics is driving these outcomes out of ideology. Perhaps they are just swept up in them, lacking the time and courage to question the trajectory.
As Michael Keating, John Austen and others have written in this forum over the past couple of years, the system has become ever more hard-wired to the ‘ready, shoot, aim’ version of transport spending. The problem for investors and community alike remains primarily at project origination level – what projects are most needed? How can we harness the best industry innovation in project design while protecting market intellectual property? Which projects bring the most reliable returns to community and market investors alike? Unfortunately, these things receive scant attention before big announcements and political commitments are made. If early planning were better addressed, project pipeline quality would improve vastly, but once a kernel of a project gets political and industry sponsorship, it can prove impervious to objective criticism, however dubious. Sydney’s North-West Metro looms as a spectacular case in point.
So much for ‘good debt’.
Perhaps we should hope that another Asian leader has the temerity to look at an Australia which has once again run dry on productive reform and which places a premium on low-rent infrastructure projects ahead of excellence in education and genuine competitiveness.
Perhaps that leader will tell us afresh that we are ‘risking becoming the poor white trash of Asia’.
And perhaps we will again be prompted to respond productively, in this Asian century.
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. He has been a board member of Open Family and worked with Les Twentyman’s Twentieth Man Foundation.