Infrastructure Stimulus: there are smart projects out there, if we care to look

Infrastructure spending is touted as the path to economic recovery, but our leaders can no longer afford to throw billions at programs with little economic merit or policy logic.

Credit – Unsplash

Good infrastructure investment is always the best response to a recession because, unlike tax cuts and most spending, infrastructure investment can be wound back as the economy recovers.

Government has been desperately short of good infrastructure proposals, but they are out there if Commonwealth Treasurer Frydenberg cares to look.

We draw attention to one such project below.

The Commonwealth Treasurer faces formidable ongoing spending in welfare, health, education and Defence obligations paired with plummeting tax revenues, so he must only entertain infrastructure programs with genuine transformative credentials – preferably those with commercial merit, so market funds will help bear the costs.

There have been disturbing reports about the mooted spending of an extra $220 billion for infrastructure under the title of the Federal government ‘building its way out of the worst recession since the 1930s’.

The list of project candidates has concerning inclusions – and glaring omissions.  Much of it has the look of a construction ‘sugar hit’ without any lasting economic impact: the polar opposite of what is required at this moment.

Before anything else, our Treasurer needs to ask what problem each project purports to solve. Many Australian major projects can’t answer that question.

In addition, as a result of Covid-19, projections of Australia’s population growth have been heavily revised down, and there may be more permanent shifts to working from home in future. Consequently, many of the previously accepted projects may no longer make economic sense, or at least not for now.

Talk of stimulus-funding a Melbourne-Brisbane ‘bullet train’ is especially troubling.

The Grattan Institute wrote a compelling explanation in May this year of why three cities of just 13 million people don’t need a nearly 2,000 kilometre-long fast rail connection costing hundreds of billions of non-existent taxpayer revenues.

This network would be comparable in length to the Beijing-Guangzhou high-speed line.  Yet the Chinese train draws on almost three times the population of Melbourne, Brisbane and Sydney in Guangzhou and Beijing alone – and takes in 10 more major cities en route.   Population density is key. Australia doesn’t have it.

Putting such rubbish into the October budget would be deeply irresponsible.

It is odd to be blithely floating more than $200 billion of such spending at the same time the Geelong oil refinery signals it may have to close with the loss of 700 jobs.

Australia is an urbanised nation, but many regional centres such as Geelong remain disconnected from their capitals and underperform economically.

Now is the ideal time for Frydenberg to fix this major structural weakness in our national economy with his state counterparts.

The first and best candidate is Victoria, which ironically for its small size, has had the worst performed regional economy over the past two decades, even before Covid-19 did its worst there.

Stronger, Together Regional Fast Commuter Rail

Stronger Together is a rail infrastructure refit program to untangle regional and suburban Melbourne trains from their 150-year-old shared tracks and unlock considerably faster more frequent commuter journeys to Geelong, Colac, Ballarat, Bendigo, Seymour, Shepparton and the Latrobe Valley.  It builds on the Melbourne Airport Rail Link program and would share its access tunnel – two projects for the price of one.

It’s not a bullet train and the network employs upgraded existing lines, not expensive new builds. It’s a way to bind the regions and Melbourne into a single housing and labour market thanks to faster, more frequent and pleasant commutes.

This is the same powerful economic effect Copenhagen unlocked when it built a bridge to Malmö, Sweden, in 2000: before the bridge, the cities’ housing and labour markets were disconnected by a ferry ride of several hours.  Now, the two cities are bound into a stronger, diversified housing and labour market by fast rail.

Stronger Together suggests it would employ more than 8,000 people in construction over a decade, many in regions and the outer suburbs of Melbourne.

It is similar to a program that Toronto and its regional cities are already building. The Canadian project was found to return $2.60 for every $1 invested – a far higher return than the major projects on Infrastructure Australia’s ‘Priority List’.

Last month the National Institute of Economic and Industry Research (NIEIR) published a detailed independent assessment of the likely impact of Stronger, Together on the Victorian economy.

NIEIR’s work suggests Stronger Together’s impact is stunning. By mid-century it:

  • Grows the state economy by 5 per cent and regional Victoria by 20 per cent;
  • Places an extra half million people in a liveable and connected regional Victoria;
  • Saves Melbourne $30 billion in congestion costs and frees up suburban rail capacity; and
  • Halves the wage gap between Melbourne and regional Victoria.

NIEIR also projects economic gains in fast rail cities such as Ballarat and Bendigo more than 40 per cent above business as usual, with major gains to working hours, household wages, productivity and skilled labour attraction.

This is the sort of project rigour that the Reserve Bank, the ratings agencies and market investors should be crying out for. Sadly, up until the pandemic, they failed to ask hard questions of infrastructure candidates. The sizeable devaluations of Australian infrastructure assets by funds in recent months tell a more accurate story of how flawed many of these projects always were.

Stronger Together’s proponents claim its business case is both commercial and fair to communities.  Governments should test this claim. If correct, it can be replicated in other states, especially New South Wales and Queensland, which also need better solutions for disconnected regional and capital city labour and housing markets.

Victoria not only needs the construction jobs from this program. More than anywhere else, the state needs a stronger and fairer settlement model.

Melbourne has  grown faster than almost any major Western city for two decades, fuelled by high immigration and housing construction.  The majority of population growth has been thrown into poorly serviced far outer suburbs.

These places contribute very little ‘agglomeration benefit’ to the city. Worse, they mask plummeting wage growth and poor access to opportunity for these residents.

This is not a settlement model Victoria should aspire to return to, post-pandemic. Even if future the state’s population growth is slower, this project would help correct the most severe existing settlement problems.

Canberra can work with Victoria to do much better.

It’s instructive that Stronger Together was commissioned by regional local governments and business groups, which have worked patiently with Australian and UK infrastructure experts for more than two years.

This group wrote recently to Treasurer Frydenberg, the Prime Minister, Deputy Prime Minister and the Victorian Premier seeking assessment of the program’s business case and validation of its economic impact.

Furthermore, proceeding with this Victorian project should act as a catalyst for similar developments better linking Sydney and Brisbane with their major regional cities.

Given his unenviable fiscal position, Treasurer Frydenberg should be walking over hot coals to examine the merits of this sort of program.

Read about Stronger Together here: www.railstrongertogether.com.au

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Michael Keating is a former Secretary of the Departments of Prime Minister and Cabinet, Finance and Employment, and Industrial Relations.  He is presently a visiting fellow at the Australian National University. 

John Menadue is the publisher of Pearls & Irritations. He has had a distinguished career both in the private sector and in the Public Service.

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