Email sent 8 June 2007

Mr Mark Ludlow
Australian Financial Review

'Neglect catches up with Beattie' - 'Sunshine dims as borrowing goes up'

I should like to comment on a couple of your recent articles on Queensland's 2007-08 budget (and an editorial), which all drew attention to the implications of proposed very large infrastructure spending.

My interpretation of the AFR's editorial: Queensland has had strong growth - yet under the Beattie Government, Queensland has been living off its capital. The state government has presided over infrastructure crises (in energy, health, water) that have forced a large infrastructure program. Queensland needs to overcome years of neglect of infrastructure while also keeping up with flood of interstate migrants. Queensland's net financial assets will fall to $17 bn by 2011, while debt service costs increase - and expenditure growth of 10% pa will exceed 7% expected rise in revenues. Warnings about the volatility of the resources boom have also been given ('Neglect catches up with Beattie', Editorial, Financial Review, 6/6/07).

My interpretation of your articles: Looking past the headline figure and removing $1 bn of QIC returns, gives a different picture on Queensland's budget. For a state that hasn't had to borrow in the past, $28 bn borrowing over next 4 years reflects a major shift in policy. Repayments will be 3% of state revenue in 2011 in general government sector - but 6.4% if GOCs are also considered. This is high, noting that it relies on coal royalties continuing unabated. Government is to be commended for its $14 bn infrastructure program, but (as for Carr in NSW) after 10 years the Beattie Government has not got a lot done. Industry is frustrated at delays in many projects because of refusal to use private equity. Water problems in SE Queensland have also forced government to add $9 bn in water infrastructure at front of queue. This won't help over-stretched construction market (Ludlow M., 'Sunshine dims as borrowing goes up', Financial Review, 6/6/07).

Queensland will engage on the nation's biggest infrastructure program to counter years of under-spending and cope with flood of new arrivals - as another surplus confirms that Queensland is driving the Australian economy. Surplus for 2006-07 was $2.39 bn. Government will have to borrow heavily to pay for 20 year infrastructure program - and this could result in a loss of low tax status. $14 bn will be spent on capital works. Public sector employee costs will increase from $13.2 bn in 2006-07 to $16.9 bn in 2010-11. Economic growth of 5% is forecast for next financial year. Returns from QIC of 14% on superannuation funds and $1bn in coal royalties, ensured strong surplus. When QIC returns are removed, surplus was still $1.3 bn. S&P notes that net financial liabilities will increase from 17% of operating revenue in 2006-07 to 85% in 2011. This increases vulnerability, as revenue is supported by volatile resources sector. Opposition argues that despite large infrastructure spending, Queensland's still has a major infrastructure problem (Ludlow M., 'Beattie rolls out billions to fix state', Financial Review, 6/6/07).

The neglect of infrastructure in Queensland has its origin in history, and is thus something that the Beattie Government inherited rather than originated. An explanation of this problem is suggested in Structural Incompetence and SE Queensland's Water Crisis (May 2007) and, more generally but less recently, in Defects in Infrastructure Planning and Delivery in Queensland (May 2002). The former document describes the problem in terms of:

• the adverse effect that economic reliance on rich natural resources typically has on the quality of a community's public policy capabilities and political leadership;
• Australia's unbalanced federal fiscal arrangements which, particularly since the 1970s, have made it hard for states to take real responsibility, or be held accountable, for their nominal functions;
• neglect of public administration in the 1980s;
• failure of public sector 'reform' in the 1990s; and the resulting amateurish creation of
• unworkable machinery for developing infrastructure, and for growth management in SE Queensland.

In relation to other observations regarding Queensland's 2007-08 budget in the above articles, it is noted that:

• it may not be correct to suggest that Queensland has not had to borrow in the past, as there have been inadequately-investigated indications of creative capital accounting in balancing the state budget for many years (eg requiring Government-owned Corporations to borrow to pay dividends that boosted state 'revenue'; funding GOC dividends from revaluation reserves - a practice whose legality the Auditor General questioned with good reason; and shifting some agency borrowings off balance sheet) - see Enron-itis and About the 2003-04 Budget;
• the proposed large jump in Queensland's annual capital expenditure (ie from $10bn to $14bn) is not the only such increase. The first such jump (from $3 bn to $5 bn pa) was initially reversed, because it was argued that it was unsustainable without significant tax rises (see About Queensland's Budgets);
• the private sector's view that private equity would accelerate infrastructure development seems unrealistic in an already overstretched construction market. A significant effect of the high rate of infrastructure spending has been large (eg 30%) blow-outs in project costs - and thus (a) a need to further increase state capital outlays simply to complete the same work and (b) adverse effects on the profitability of private investment projects;
• in the absence of competent institutions to manage infrastructure development, simply spending a lot of public money does not guarantee that infrastructure problems will be overcome. There is, for example, real cause for uncertainty about whether the Traveston Dam project - envisaged as the solution to SE Queensland's water supply problems - is actually viable (see Structural Incompetence and SE Queensland's Water Crisis).

Regards

John Craig