Pearls and Irritations

In the first two posts, the vast scale of Sydney major transport projects was estimated at $85 billion – a figure larger than all European spending on transport public private partnerships for the last five years; the posts also examined apparent strategic flaws in Sydney’s Westconnex and Metro projects which threaten poor returns and unhelpful operational impacts.  How did Sydney get here? Can things be improved?

In October this year Australia’s Productivity Commission launched a new report: Shifting the Dial[i].  It attracted some positive press[ii] for speaking about how Australia has lost the talent for microeconomic reform; it suggested a number of fields which would benefit from fresh effort in future, major city infrastructure included.  Shifting the Dial made two main points about cities:

• They have suffered from confused and inadequate planning;
• investment decisions show a very poor record and cost blowouts are uniformly large.

The report made a recommendation for better cost-benefit analysis, but also refers the reader to the Commission’s 2014 Public Infrastructure inquiry[iii]; this report made no less than 30 multi-part recommendations about how to do infrastructure better; many concerned themselves with prescriptions for cost-benefit analysis, for keeping project cost blowouts smaller, for improving market finance approaches to projects and for better market design of projects.

Dr Michael Keating AC recently reviewed the recommendations in Shifting the Dial relating to governance and public administration and observed that some of these recommendations lacked practicality[iv]. In the case of urban infrastructure, I agree with Dr Keating, but would add that in city infrastructure matters, the PC may have allowed itself to focus on projects at the expense of the strategy and advisory spaces, both of which, as former head of the department of Prime Minister and Cabinet Terry Moran AC has noted of late about public policy standards generally, are of a very poor standard[v].

Strategy and advisory roles in city infrastructure are squarely for government to assume: in the first instance government should be shaping the context in which all major city project proposals are developed, rather than just letting agencies chase their tails administering vast and poorly-considered projects.  The revitalisation and protection of these front-end public sector roles will guide better, more aligned and efficient infrastructure projects in the interests of the community and market investors alike.

Everybody doing strategy (but nobody doing strategy)

Modern Australia lacks simple, agreed plans for its major cities from which all projects should be derived.  Where possible, such plans should avoid gesturing to specific projects (ie road rather than rail or bus solutions, or vice versa) so as to encourage bipartisan consensus around obvious objectives – project solutions can come later.  This is a role for the public sector – but it is one which has withered on the vine in recent decades; today, every second transport employee seems to be ‘doing strategy’, but nobody is actually doing the (overarching, logical, concise) city infrastructure strategy.

Measure twice, cut once

Armed with a clear, settled plan about the city in question, agencies should be expected to develop creative counterfactual approaches to all major transport projects – a major city should never be in a position where a multi-billion dollar projects sails through as the only possible solution to a problem, as too often occurs today.   Counterfactual solutions to the problems should be assessed formally and publicly – in this way, all parties can have more confidence in the ultimate choices, or can at least hold governments to account for taking ideological positions on more expensive projects, where cheaper or otherwise better alternatives were found to exist.

To return to the Sydney example, if its projects were assessed not only for their cost-benefit ratio but also for their alignment to simple, non-negotiable strategic expectations for the city, they would be less problematic, controversial and expensive:

• If the transport department in New South Wales was required to produce a counterfactual case for any major motorway project, perhaps Westconnex would never have metastasised from its original conception as a highway widening and gentrification project for Parramatta Road.

• If Sydney’s city plan required any new passenger rail extensions to be fully interoperable with the existing network (call it ‘the break-of-gauge rule’), the Sydney Metro proposal might never have made it past the first briefing memo – a cheaper, practical solution would almost certainly have taken its place.

The Productivity Commission observed confusion between planning and transport infrastructure efforts.  This should not be allowed to occur in major cities – the core heavy rail and road networks of a city have an overwhelming impact on amenity and productive economic potential; they are also very long-lived, expensive assets which are often impossible to undo.  These matters, alongside the other core economic utility questions – water, telecommunications and energy – must occupy a position of authority in any city plan.  Green space, cycle ways, economic development zones and arts precincts are all important, but they benefit from subordinating themselves to broad economic infrastructure alignment in the first instance.

Lost public sector tempo in strategy and planning also blurs the lines between market and government.  Absent a strong strategy and advisory role within the public sector, the pressure to find better infrastructure solutions can give rise to historically-strange arrangements: not to be confused with Infrastructure Australia (IA) – an independent statutory advisory body to the Prime Minister and Premiers – Infrastructure Partnerships Australia (IPA) is a creation of the infrastructure finance, construction, planning and advisory sector.  Both Fairfax and News Limited have referred to IPA as a lobby group[vi].  Whether it is a lobby group or a think-tank, it is curious that the Secretary of the Commonwealth Transport and Infrastructure department as well as senior New South Wales and Victorian treasury, infrastructure and planning officials are also board members of Infrastructure Partnerships Australia.  Under a better approach, there would be no requirement for public sector infrastructure leaders to sit on lobby group/think-tank boards.  Instead, public servants with settled, published city strategies and a commitment to developing more than one creative solution to commonly-understood city infrastructure challenges could invite as much expert advice and as many proposals as they liked from the market, in good conscience.  In this way, public sector strategy, accountability and transparency obligations might be better preserved, while the market should receive a pipeline of project tenders less prone to party-political gaming.

As for cost-benefit, it can certainly be improved, but like Dr Keating I would suggest going further than the woolly recommendations for more detail, data and accuracy.  For transport projects, one of the most questionable elements of cost-benefit analysis is travel time savings relating to leisure – like a new motorway getting you home a little earlier or to the beach quicker on the weekend.  This is a detailed matter which was treated in an earlier post[vii].  The returns on travel time savings are frequently over-valued because they assume the value of leisure time is the same as that of working time, and on this reasoning is therefore valued at the average wage. However, we know that many people do not employ their travel time savings as productively as when they are actually at work, and they don’t value their travel time savings as highly either.  Furthermore, and worse still, frequently we have no idea how these travel time savings were calculated or valued.  Too often, non-work-associated travel time savings make sometimes poor cost-benefit cases look (unreasonably) better.

Cleaning up cost-benefit rules around travel time savings combined with a requirement for early counterfactual business cases on all major proposals would do much to reduce project cost and controversy, encourage maximum creativity and innovation in project design and improve project alignment to agreed objectives for the city.

The thing about common sense…

For now, many major city infrastructure projects are not subjected to any independent published analysis at all.  When they are, the scrutiny can prove thin gruel indeed – witness Infrastructure Australia’s now-infamous 6-page assessment from mid-2017, waving through the next phase (City and South-West) of Sydney’s controversial Metro  – perhaps a $12 billion dollar additional commitment (for clarity, this is the equivalent of a dozen new Melbourne Royal Children’s Hospital builds).  As a previous post by John Austen has pointed out[viii], no publishable capital costs were tendered for this project by the State government, so IA could not publish a cost-benefit assessment.  Instead of IA either demanding such data be submitted on the public record or asking the proponents the obvious question – wouldn’t expansions to Cityrail be a far cheaper solution to your problem? – IA’s response was to make the Metro extension project a National Infrastructure Priority.

(Perhaps the brevity of this IA assessment was influenced by the sense of a deadline: within a week of IA’s South-West Metro assessment being published, the State Government had awarded the first $2.8 billion tunnelling contract for this project[ix])

There are many other matters – Constitutional limits on Commonwealth spending, road pricing approaches; the list goes on.  Setting aside such complexity, if other cities wish to avoid the cautionary tale of Sydney and its confusing, ever-snowballing bundle of tens of billions in major transport projects, a strong and transparent public sector framework for infrastructure strategy, planning and investment advisory is needed.

The Productivity Commission’s 2014 report rightly noted that private finance is not a magic pudding: the community must pay eventually; responsible market investors and community alike are in these things for the long run.  It follows that both these parties should be open to more plain speaking about where things are going wrong.

Government’s first task is to recognise its best role in this setting – not as people who madly chase their tails overseeing many enormous, disparate projects that too often resemble solutions in search of problems – but first and foremost as custodians of settled strategies for their cities and arbiters of least-cost solutions, in the interests of all parties.

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 national industry CEO roles across the transport and Defence sectors.

[i] https://www.pc.gov.au/inquiries/completed/productivity-review/report

[ii] http://www.smh.com.au/business/the-economy/few-noticed-we-just-saw-a-radical-shift-in-reform-thinking-20171104-gzex8x.html

[iii] https://www.pc.gov.au/inquiries/completed/infrastructure/report

[iv] https://johnmenadue.com/michael-keating-the-productivity-commission-on-more-effective-government-part-1-of-2/

[v] https://www.theguardian.com/australia-news/2017/nov/21/senior-public-servant-says-australias-delivery-of-policy-in-palliative-care

[vi] For example http://www.theage.com.au/victoria/melbourne-traffic-new-data-reveals-how-much-longer-it-takes-to-get-to-airport-20171130-gzw7f8.html and http://www.theaustralian.com.au/news/inquirer/building-a-better-funding-plan/news-story/2f59f19411690a65a55460d9f2cfa3dc

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

[viii] https://johnmenadue.com/john-austen-infrastructure-advice-worse-than-expected/

[ix] IA Sydney South West Metro assessment published 14 June 2017 http://infrastructureaustralia.gov.au/projects/files/Sydney_Metro_City_Southwest_Summary.pdf The first tunnelling contracts were announced 8 days later on 22 June: https://www.dailytelegraph.com.au/news/nsw/sydney-metro-stage-2-digging-to-start-next-year-on-twin-rail-tunnels-under-sydney-harbour/news-story/2be9c5c23f9e8c93669cd59269836ada

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