Luke Fraser. What the Australian Treasurer can do for roads.Dec 1, 2015
or – How to stop pissing taxpayer money up against the wall!
Australia’s Treasurer Scott Morrison has signalled his reform priority:
“I’m interested in talking to people who have ideas how we can get spending under control. We have a spending problem, not a revenue problem.”
There is plenty of money to be saved in roads. They cost Australians over $30 billion annually, but what does Australia see from all this spending? When major projects are independently assessed at all – which is infrequently – they often expose themselves as commercial and economic duds. As Dr Michael Keating and I explained in an earlier collaboration, this approach doesn’t add to national productivity – it creates conditions where it can drain away[i].
It is too much to expect transport and infrastructure ministers to worry about this. They tend to see their brief as building things: shovels in the ground and memorial plaques bring their own reward. As Treasurer, Morrison is held to a higher standard: he is the one who must shoulder much criticism when national economic growth and productivity slumps. It is in his interest to implement structural spending improvements in the roads portfolio, where others will not.
Doing so would save billions annually and drive renewed productivity in the sector.
The Australian government recently accepted the Harper competition review recommendations for roads. The prescription was for cost-reflective pricing and an end to levying vast, lazy fuel taxes and high vehicle registration charges.
Before Morrison implements this prospective but very complex work, he can make two important changes immediately to create a more fiscally-responsible and productive sector.
- Make the gold, make the rules: demand transparency from project proponents
Morrison is the one doing the spending, so he should demand transparent business cases from major commercial road proposals seeking Commonwealth funds, to provide confidence that these projects represent responsible outlays of taxpayer gold. Economic benefit-cost ratios (BCRs) in the region of 1.5:1, for example, represent a perfectly fair basis for government to proceed upon – but only if that ratio is deemed solid.
The only way to vouch for a BCR’s solidity is to subject all business case assumptions to objective scrutiny. To date, this has been almost impossible. A standard tactic of transport project proponents seeking taxpayer funding has been to ‘redact’ their business case – make it highly confidential – such that often governments, much less the public, cannot satisfactorily see and test the assumptions that shape the headline BCR. Proponents secure redactions by claiming their business case contains sensitive and valuable intellectual property. This claim is usually highly overstated if not completely unfounded, but governments desperate to announce icon projects tend to acquiesce.
It is next to impossible to determine from a redacted business case what assumptions were brought to bear in developing a final BCR for the project. Most important are the revenue assumptions, where Morrison stands to waste the most taxpayer cash and bleed out economic productivity. After all, even for projects that are supposedly privately financed, the track record is that the government guarantees the risks, and the taxpayer is left holding the debt if the project fails.
Let us look to track records: commercial Australian tollways have tended to overstate revenue, making BCRs appear better propositions than they become in practice. Below is an independent expert analysis of Australian toll roads: the top horizontal line (1.00) represents the traffic forecasts that the proponents presumably employed to arrive at their project BCRs. The coloured lines show the forlorn actual tollway traffic levels across time:[ii]
Morrison would be buying a big fight by recommending that full project business case assumptions be published. Lobbyists might declare it will put the major project investment pipeline at risk. But only dud projects would truly have cause for concern: if the project has some merit anyway, Morrison would in effect be clearing out expensive undergrowth to let the better-conceived projects thrive. The market would soon adapt for the better.
If sounder projects delivered a nominal ten percent efficiency gain across the roads budget, this would save over $3 billion annually and add very reliably to productivity yield from this infrastructure class.
Future savings need not stop at $3 billion. Sydney’s Westconnex had an initial $10 billion budget which grew to over $14 billion and is supposedly now nearer $17 billion[iii]. Westconnex stated a BCR of 1.8:1[iv], which has presumably now dropped to only a very marginal 1.1:1, assuming that nothing else has changed except for the blow-out in costs. Unfortunately, however the assumptions have never been made public and in addition the appetite for tolls upon tolls has recently come under serious question[v]. How would this project have fared if subject to full business case transparency?
2. Incentivise a market for better road proposals
Morrison can shape a genuine market for those projects which do indeed display very productive BCRs, but which to date struggle to attract much market or budgetary attention.
He could instigate a ‘priority funding’ category for projects which displayed higher economic benefit-cost ratios (say, 4:1 and above). Any project which could demonstrate robust assumptions at this hurdle rate should be afforded immediate access to limited taxpayer funding.
Such projects exist. There are fine minds in the engineering and traffic planning sectors capable of produce extremely innovative and practical solutions:
- Brisbane’s Gateway Motorway upgrade stated a BCR of over 5:1[vi]
- Adelaide’s Northern Connector freeway exhibited 8.5:1[vii].
- The ‘Managed Motorways’ projects retrofitted intelligent technology into existing congested roads, making them smarter, not necessarily bigger; one displayed a BCR of over 11:1[viii].
Elsewhere, thousands of modest rural, regional and suburban road projects can prove enormously productive in BCR terms. In 2011 the author identified a business case for Infrastructure Australia to improve several hundred yards of road at Chullora in Sydney which cut off a national trucking route from Australia’s largest rail freight terminal: the overlooked problem was costing millions in additional freight costs every year – fixing it required less than a one-off cost of half a million dollars [ix]. Many such projects could be bundled together to form large, inherently productive and even commercial portfolios.
Why don’t these projects win out for funding already? It’s because they are rarely advanced. Usually they aren’t the largest or most profitable to build – Managed Motorways projects are in the low hundreds of millions, not billions. So long as billions flow without molestation to dubious mega projects, there will be little market self-interest in outlaying the considerable time, cost and effort to identify and bundle small but high-yielding projects together.
Bestowing priority funding status for high BCR projects would change this dynamic overnight and produce maximum bang for minimum bucks.
Very few politicians appear willing to stand up to the major road project builders and their lobby cheerleaders to demand more productive solutions. Will this change? Prime Minister Turnbull has called for boldness and innovation. His Treasurer can facilitate this in roads with the stroke of a pen. If not, more and more of the $30 billion roads budget will be consumed by low-rent civil engineering free-for-alls.
Taking bold but sound steps in roads can save billions. It will increase national productivity, rather than piss it up against the wall.
Luke Fraser is founder and principal of Juturna, a public policy firm specialised in road and rail and infrastructure investment reform. With Dr Michael Keating AC he co-authored the infrastructure contribution to the recently-launched Fairness, Opportunity and Security essay collection (ATF press). He is also a former national trucking industry CEO who in 2012 was appointed to the COAG Road Reform Board. He was for a time a chief of staff in the Howard government.
[iii] http://www.smh.com.au/nsw/westconnex-motorway-cost-blows-out-by-14-billion-20151119-gl3isl.html site accessed 20 November 2015
[iv] http://infrastructureaustralia.gov.au/projects/files/NSW-WestConnex.pdf site accessed 20 November 2015.
[vi] http://infrastructureaustralia.gov.au/projects/files/Qld-Gateway-Motorway-Upgrade-North.pdf site accessed 20 November 2015
[vii] http://infrastructureaustralia.gov.au/projects/files/SA_Northern_Connector_Brief.pdf site accessed 21 November 2015
[viii]http://infrastructureaustralia.gov.au/projects/files/VIC_Brief_National_Managed_Motorways_Program_VicProjects_2012.pdf site accessed 19 November 2015
[ix] http://infrastructureaustralia.gov.au/policy-publications/publications/files/Competition_Reform_of_the_Road_Sector.pdf p. 19 site accessed 23 November 2015