LUKE FRASER. ‘Infrastructure stimulus’ mostly ‘stimulates’ the transport agencies and their camp followers.Oct 25, 2019
Under prevailing economic circumstances, our political leaders are in great need of accomplished and resolute infrastructure reform advice – especially in transport, which dominates spending.
The new Federal Treasury Secretary’s advice to the Senate this week was refreshing. It argued that further big infrastructure project spending was not the economic magic bullet so many think it is[i].
In 2017 former head of Prime Minister and Cabinet Terry Moran AC said that if Australian public policy were a patient, that patient would now be in palliative care[ii]. This is too kind for transport infrastructure policy, which died long ago. Since then it has returned as an infrastructure vampire, to feast, mostly unmolested, on increasing amounts of national budget.
Much stronger efforts are needed from our treasury and finance agencies in particular: they must guard government budgets against junk proposals from transport and infrastructure agencies and their camp followers – the ‘rent-seekers and lobbyists’ which John Menadue AO has written about previously[iii].
The New Treasury Secretary’s words suggest the vampire may face a reckoning of sorts, but in the interests of shoving a wooden stake in myself, ponder on these facts:
- Measured per capita, Australian road spending runs frighteningly far ahead of global comparators. In 2017 Australia spent two and a half times as much on roads as the United States and nearly four times as much as the average road spending of France, the UK and Germany – despite three quarters of Australians living in just five cities. The ten-year spending trend isn’t much different[iv].
- Nowadays about a quarter of all annual road spending comes from new debt: for every year beginning in 2007, Australia spent more on roads than it collected in fuel taxes and vehicle registration revenue. In the five years to 2017, over $40 billion of new debt was generated from road spending. It grows larger almost every year. It is not reported: official published figures are shandied with general taxation revenue – on its face a mendacious act, designed to ‘kick the can down the road’ and keep the road spending spigot wide open[v].
- Mainstream commentators blame road spending challenges on dwindling fuel excise, which they attribute to the switch to electric cars or more fuel-efficient modern combustion engines. This is rubbish: road debt is driven by the political orthodoxy that ever more road spending is essential. Lazy bureaucracies do nothing to dispel the road spending farrago with the facts: analysis reveals that between 2012 and 2017, fuel tax and registration charges almost kept pace with growth in both Australia’s population and its vehicle kilometres driven, yet actual road spending levels grew at more than twice this rate[vi].
- Hyper-spending on roads crowds out budget space and political profile for smarter, lower-cost public transport strategies such as rapid bus transit networks which otherwise would start to shift our big city public transport user percentages to healthier levels.
- Big infrastructure spending occurs almost entirely in Sydney and Melbourne: just eight Sydney and Melbourne projects – Metro, Westconnex, Parramatta and Sydney Light Rails; F6 Motorway and Northconnex as well as Melbourne Metro, North-East Link and Westgate Tunnel will cost in the order of $AUD130 billion[vii].
- According to the OECD[viii], $AUD130 billion is within $10 billion (after adjusting for exchange rates) of Germany’s total cumulative road and rail infrastructure spend over the five years to 2017. Germany’s politicians deemed this amount sufficient to spend on 83 million Germans and their $AUD5.5 trillion economy. Here, almost the same amount is deemed only barely enough to fund a handful of major projects for 10 million people in two cities whose combined economic output is about one-seventh that of the German economy.
- Meanwhile, cash-strapped local governments carry the can: some are forced to lower speed limits on the only roads between country towns because they don’t have enough cash to maintain them for conventional speeds. Lazy agencies and private funds make next to no effort to package smaller much higher-productivity programs which, with little effort, can be found lying around in plain sight across the country, especially across regional Australia[ix].
- Deloitte estimates annual infrastructure spending has gone from under $8 billion at the time of the Sydney Olympics to near $40 billion today[x]. Has all that extra capital formation helped productivity? No major infrastructure project is ever analysed ex-post for what actual benefit it delivered. There is good reason to believe much of this spending is junk[xi].
- Investments in advanced research and education are reliably better bets in terms of economic returns and economic diversification/complexity. Australia ranks number 59 globally when judged on its economic complexity – behind Costa Rica and Kazakhstan.
If elected leaders are to do any good they need bureaucracies with eyes on the threats, hands on the controls and both a plan and a resolve to do better. If all this isn’t in evidence, is it the fault of politicians when they make up new plans, or take cues from interest groups?
Two examples: road spending and congestion charges, reveal how bad things are:
Road pricing and non-reform: an excuse to keep the spending party going
Runaway debt is generated in each new roads budget. This should make all talk of direct user charging of motorists absolutely pointless: direct charging simply could not happen when of the $30 billion spent nationwide on roads annually, around $10 billion is unreported (and unlevied) new debt (contingent liability). In simple terms, full direct charging would expose and levy the full amount of this spending mania on motorists.
This implies an increase of around 30% on current cost of fuel tax and registration charges.
What politician in their right mind would ask Australian road users to swallow a 30% increase to current road taxes and charges and then navigate a myriad of private tolls on top of that? The calculus is obvious when spelled out this way, yet direct user charging remains the published policy nirvana of the vampire industry of transport agencies and industry lobby groups nationwide[xii].
By contrast, the only responsible step in reforming road spending is to do a lot less of it – and then balance what is spent more equitably and productively across the network and between communities. Helping the market into commercial-grade investments in bundles of smaller projects would be a good further step.
Last week the Grattan Institute told politicians – in a useful report[xiii] – to consider imposing an extra charge on drivers in the city because the effects on traffic congestion would be transformative.
But modern road agencies and central agencies are not forearmed with any solid body of work which might show their doubting ministers how impacts on motorist wallets might be minimised under these arrangements – such as by converting Sydney’s public parking levy into a cordon charge.
There is no cogent plan in either Sydney or Melbourne to develop a low-cost rapid bus network in outer suburbs which could concentrate commuter densities and offer a viable alternative to those city commuters from the city fringes who don’t wish to pay a city congestion charge.
Nor have agencies worked responsibly through the challenge of how to impose a congestion charge in cities like Sydney which are already strangled in private toll roads, wherein congestion charges might be viewed by toll road owners as a material adverse effect on their patronage and business models.
All these things and more demand a solid body of staff work behind them as a basis for guiding political leaders responsibly through congestion charging. Instead, Grattan is forced to put its ideas out in an agency vacuum: in effect, to do the work the agencies should be doing themselves.
In this setting, politicians decide – quite reasonably – that political suicide is not for them, so they reject congestion charging out of hand. Cue two or three years of inaction, until more or less the same independent report is written again. This is how it works. Grattan’s congestion report builds on another good one on congestion charging written by Infrastructure Victoria two years earlier[xiv] – also rejected immediately.
Are we in danger of assuming ‘better’ will just happen?
In response to the latest rejection, economist Ross Gittins wrote that one day, congestion charging’s time will come[xv]. In making this point, he drew an analogy with previous tax reforms, where over time, Australia had indeed chosen the reform path.
I don’t agree. The big policy reform shifts which Gittins conjures were the result of many years of quiet, dogged and professional agency policy design and research, knowing the answer lay in genuine reform, but realising better and stronger arguments were needed to make the problem understood and the solution palatable to politicians. Eventually, these efforts were helped along by circumstance – in the case of Australia’s competition reforms, recession spurred politicians into action.
In the event that Australia’s economy continues a low-growth trajectory thanks to an extended global ‘zombie credit’ cycle, there may not be any recession impetus for reform.
Transport infrastructure policy is more or less completely adrift, armed with an increasingly big chequebook. Reinforcing this with renewed spending on low-rent projects will only drain public coffers at faster speed, employ some more people in construction for a few years but in the end generate little material economic growth.
The first, best transport infrastructure priority for those who want to improve Australia’s economy is a robust cleanout of this sector’s diseased and discredited architecture.
That would be a major national productivity reform.
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.
[iv] Author’s analysis of OECD Infrastructure Expenditure Database https://www.oecd-ilibrary.org/transport/infrastructure-investment/indicator/english_b06ce3ad-en
[v] The best resource for this is former Infrastructure Australia Head of Economic Policy Mr John Austen, who is the only person to analyse and correct published figures and trend analysis on these matters. See his excellent blog https://www.thejadebeagle.com/broken-record.html
[vi] Ibid – wherein an excellent graph describes the phenomenon
[vii] The author’s estimates, drawing on the calculations he published in 2017 on Pearls (https://johnmenadue.com/luke-fraser-is-sydney-in-thrall-to-an-infrastructure-cargo-cult-part-1-of-3/) plus more recent published estimates and cost overrun reporting for the Victorian projects.
[ix] From my own experience, see the case of the heavy vehicle access road improvements for Chullora Rail Yards in Sydney – a problem found to be costing freight nearly $7 million each year, ignored by road agencies, fixed permanently with a few hundred thousand dollars of road strengthening (see page 19 of: https://www.infrastructureaustralia.gov.au/sites/default/files/2019-06/Competition_Reform_of_the_Road_Sector.pdf )
[x] DAE Investment Monitor (2019)