Australia's Infrastructure Incompetence - being a
Comment on 'Australian Dollar to Head into the 60s'
email sent 25/5/15

Greg Canavan
Daily Reckoning

Re: Australian Dollar to Head into the 60s, Daily Reckoning, 25/5/15

One reason that Infrastructure Australia released its National Infrastructure Audit as the basis for a possible 15 year Australia Infrastructure Plan is that: (a) Mr Abbott aspires to be Australia’s infrastructure PM ; and (b) the G20 meeting in Australia in 2014 committed participants to major infrastructure efforts.

However, even though Australia has a serious infrastructure backlog as Infrastructure Australia’s audit will undoubtedly show, there are problems.

The first is that central authorities such as Infrastructure Australia can’t plan infrastructure any more than they can plan any other aspect of economy. My first job when I started work for Queensland Coordinator General in 1970 was to help the staff who prepared Queensland’s infrastructure plan (a role equitant to that of Infrastructure Australia) to upgrade the way they did this (ie to work systematically off ‘needs’ criteria). However it was immediately obvious that this was impossible – because the Coordinator General (and thus Infrastructure Australia) could never get all of the information needed to do so (as this required deep knowledge about existing infrastructure and other complex related issues). Providing the Coordinator General merely assembled proposals from the organisations that had that detailed information a viable result could be seen. But if the Coordinator General (and thus Infrastructure Australia) said ‘we should do this or that’ (ie actually tried to plan anything) – the information needed to make that decision would cease to be available and the central planner would be made to seem like a fool because they would propose something which those whose noses were out of joint would then ‘prove’ was silly. The problem Infrastructure Australia faces (ie of integrating the project proposals by umpteen different agencies Australia wide) would be an order of magnitude harder (see Infrastructure Magic? 2008)

I have an email from one of Infrastructure Australia’s staff agreeing that they can’t actually prepare an infrastructure ‘plan’.

A second problem is that Australia’s machinery for planning and development of infrastructure has become a shambles (see Infrastructure Constraints on Australia's Economy, 2005). The problem started with the escalation of Commonwealth special funding for state functions in the 1970s. This increasingly deprived states of the ability to take any real responsibility for their nominal functions. Their focus shifted from doing what they were supposed to be doing through functional agencies to centralised lobbying for funding. An infrastructure backlog began emerging in the 1980s. The problem was escalated by: (a) attempts to make government infrastructure provision market-competitive and commercial; and (b) the emphasis on private funding of infrastructure via public private partnerships.

Commercialization and competitive service delivery left no one in charge of dealing with systems that needed to be planned as a whole (while simultaneous politicization of public services largely eliminated the capacity to know what to do) – see Defects in Infrastructure Planning and Delivery in Queensland, 2002. This resulted in huge wastage through developing ‘white elephants’ (eg see Structural Incompetence and SE Queensland's Water Crisis, 2007). This was the primary factor in the debt crisis that Queensland’s government subsequently experienced – and which now constrains its ability to spend money on anything (see Recovering from Queensland's Debt Binge, 2012). Though others did not go overboard on infrastructure investment with ‘broken’ machinery as Queensland’s Beattie Government did, there aren’t any governments in Australia whose debt levels don’t constrain large new debt-based spending.

And attempts to mobilize private funding are anything but straight forward – because private ownership and control of functions subject to significant market failures (as most infrastructure is) creates serious problems (ie Basic Problems in the PPP Model, 2002). Though there can be efficiencies in the private provision of individual projects, the effect on the system as a whole is arguably negative.

The best thing that Infrastructure Australia could be asked to do is to analyze the shambles that Australia’s machinery has become – and put forward proposals for fixing this and for funding infrastructure properly (eg see Sorting Out Australia's Infrastructure Mess Needs 'Government' not Micro-management, 2014).

The problem with Australia’s housing supply is very likely to be mainly about affordability (ie that too many people can’t afford to pay for what they need – so developers can’t provide it). Some suggestions about this were in Some Thoughts on Housing Affordability (2007). One factor in this was undoubtedly ever declining interest rates which directly stimulated large rises in asset (eg property) values but had a highly constrained impact on ‘real’ economic activities (because the real economy only grew when demand rose, and this was relatively constrained). Affordability (and thus the provision of housing) declined because capacity to pay for those who did not already own significant assets depended on ‘real economic growth – and this was much below the increases in the value of property that resulted from steadily declining interest rates.

Your point about the need to get out of the low interest rate ‘trap’ is valid. However this is not that easy. Jason Stevenson suggested in his article that:

“Contrary to what the mainstream tells you, the stock market always rises with higher interest rates…following the initial frightened sell-off by the masses. The stock market rose, when the US Fed raised interest rates from 1994 to 2000 (peak of the tech bubble) and from 2004 into 2007 (peak of the stock market pre-GFC). “

This is not true of what followed the initial stages of recovery from the 1929 stock market crash. The bond market first rose, and then crashed spectacularly in late 1931– and this led to a general crash in all asset values in 1932 which in turn what really ushered in the ‘Great’ Depression (see Stocks waiting on Bond Collapse, 2012) .

At present bond values are sky-high because of QE (ie reserve bank buying to get interest rates down in the vain hope that this would boost the ‘real’ economy). It could never do so for reasons suggested in Why Interest Rates Can't Stimulate the Economy (2015). However the bond market now provides essentially no yield to investors. Investors have bought them because QE has offered a steady capital gain. The moment easy money policies (and thus capital gains from bonds) ceases to be available, everyone will need to have sold them ‘yesterday’ (because holding them guarantees a low initial yield and large capital losses). This has the potential to produce another bond market crash like that in 1931 – and thus a rapid escalation in the interest rates that anyone who wants to make large infrastructure investments would need to pay. Markets are already moving in that direction without waiting for reserve banks to act. The only question is when ‘everyone’ will realize that they needed to sell ‘yesterday’.

As I suggested at the start, this issue is a bit complicated.

John Craig

Unclogging Australia's Cities - email sent 25/9/15

David Crowe,
The Australian

Re: Malcolm Turnbull Sends Gang of Three to Unclog Cities, The Australian, 25/9/15

There is no doubt about the need, that the federal government now seems to acknowledge, to emphasise public transport in Australia’s cities.

However the main requirement to achieve this (and to overcome infrastructure problems more generally) is systemic. The three ministers who have been asked to try to sort out the mess might help if they investigate those systemic problems, but they will merely compound them (and put Australia on a path to losing its AAA credit rating through funding white elephants) if they seek to get ‘project’ proposals from Australia’s currently-highly-dysfunctional ‘infrastructure’ machinery.

My Interpretation of your article: The federal government is launching talks with states with a view to ‘unclogging’ Australia’s cities – as part of a $50bn infrastructure plan that no longer vetoes public transport. The federal government would support projects that lure private investment. Three ministers have been assigned to lead the agenda in the face of concerns about poor planning. The new Minister for Cities (Jamie Briggs) wants to states to give them public transport projects. The new Major Projects Minister (Paul Fletcher) stated that new projects would be judged on their national / economic significance. Infrastructure Australia’s list is expected to include several urban rail projects. The ALP’s infrastructure spokesman (Anthony Albanese) criticised federal government’s past roads’ emphasis. The new agenda will focus on: integrated planning; infrastructure funding; and ‘greening cities’ (so Environment Minister (Greg Hunt) will be involved).

Some observations about problems in transport planning in a representative city are in Brisbane's Transportation Monster (2008). This pointed to problems associated with: (a) the impossibility of getting the cheap rights-of-ways needed for affordable freeway systems after urban ‘footprints’ had been defined by urban planners for valid environmental reasons; and (b) existing urban densities that were far too low for affordable public transport systems.

However, in dealing with such challenges, there has been an underlying systemic problem because Australia’s machinery for the planning and development of infrastructure has been made highly dysfunctional. My reasons for suggesting this are outlined in Infrastructure Obstacles and Opportunities: Submission to Productivity Commission , 2014; and Australia’s Infrastructure Incompetence, 2015. For example:

• Australia’s world-champion federal fiscal imbalances and the escalation of special purpose federal funding of state activities from the 1970s: (a) caused states to lose the ability to take real responsibility for their nominal functions; and (b) resulted in the emergence of arrangements characterised by irresponsibility, buck passing, duplication, complexity, 'pork barrelling' and wastage (see Federal Fiscal Imbalances in Australia’s Governance Crisis and the Need for Nation Building (2003+);
• The 1980s-1990s ‘reforms’ to government machinery to promote political compliance and business-like ‘efficiency’ in the provision of public goods and services further degraded governments’ ability of to deal with infrastructure. Infrastructure tends to be a true public good (ie to involve market failures) which means that projects can’t be dealt with in isolation. Traditional government machinery deals with such complexity by facilitating collaboration amongst those dealing with different issues that impact on any project. Requiring agencies to focus on competing and breaking the links between those planning and operating infrastructure ensured that the collaboration required for sensible decisions was no longer likely. And the preference given to ‘yes men’ in senior public service roles deprived governments of the technical support required to avoid stupid decisions.

The consequences of simplistic political commitments to massive spending on infrastructure despite the existence of dysfunctions in underlying government machinery can be illustrated by what happened in Queensland under the Beattie administration. Ever increasing commitments to infrastructure spending were made – presumably in the hope that this would overcome infrastructure constraints on Queensland’s economy. Huge sums were simply wasted (eg see Structural Incompetence and SE Queensland's Water Crisis, 2007). Queensland ultimately lost its AAA credit rating (see Queensland Debt Binge). And there is still a perceived need for massive additional infrastructure spending.

If the three ministers charged with unclogging Australia’s cities focus on the systemic obstacles to the effective planning and development of infrastructure they might make a constructive difference. If they focus on trying to get Australia’s dysfunctional machinery of government to identify ‘projects’ that the federal government can throw money at (as your article implies is their intent), the current mess will simply be perpetuated.

John Craig

Central Planning Is Not Smart - For Infrastructure Just as Much as For the Economy Generally - email sent 9/10/15

Michael Pascoe

Re: Even our big visions have become small, Business Day, 9/10/15

There is no doubt that the proposal to provide $10bn to turn Infrastructure Australia into a ‘concrete bank’ (ie to fund a federal government’s pet infrastructure projects) is a small vision.

The shambles that Australia’s machinery for the planning and development of infrastructure has become needs to be fixed – not further aggravated (see Infrastructure Obstacles and Opportunities, 2014 and Sorting Out Australia's Infrastructure Mess Needs 'Government' not Micro-management, 2014). Central planners will always be less able to determine appropriate infrastructure investments that the organisations that: (a) deal with other aspects of the function of which infrastructure is the capital component; and (b) routinely liaise closely with the other organisations that deal with related regional development issues. And ‘reforms’ to government machinery in recent decades (ie politicizing public services and promoting ‘efficiency’ by requiring commercialization and competition in undertaking functions subject to significant market failures) have dramatically reduced governments’ ability to deal with the complexities of infrastructure.

In order to fix the mess, Infrastructure Australia could be commissioned to identify (and propose ways of overcoming) the systemic problems that have been introduced into Australia’s infrastructure development machinery. In 2014 the suggestion that Infrastructure Australia should make a list of road projects for federal government funding seemed to be one of several candidates for a ‘pink bats’ award (ie a proposal that sounded superficially plausible, but contained the seeds of severe problems that experienced / careful consideration would have revealed). Nothing has changed.

John Craig

Memo to Professor Paul Burton: Here's Why Our Latest City Minister Can't Do What needs to be Done any More than His Predecessor Could - email sent 15/3/16

Professor Paul Burton
Griffith University

Re: Memo to our latest cities minister: here's what needs to be done, The Conversation, 15/3/16

Your article suggested that the federal government should develop a national ‘spatial’ policy for cities and settlements in order to provide a basis for infrastructure development. This unfortunately is not a valid assumption for reasons suggested in Infrastructure Obstacles and Opportunities: Submission to Productivity Commission (2014) and Central Planning Is Not Smart - For Infrastructure Just as Much as For the Economy Generally (2015). These suggested the need for an approach to reform that puts an end to the assumption that ‘central planning’ or ‘market competition’ can be the solution. Infrastructure planning (ie dealing with the capital components of functions that are subject to significant market failures) has to be a technical process undertaken by those with relevant professional knowledge and skills. It cannot successfully be a political or market driven process, as all this does is reduce the ability of the professionals to do their job.

Your article also referred to the Federal Government’s plan for northern Australia. I would submit that the north Australia plan also requires considerable rethinking (see The Need to Rethink Malcolm Turnbull’s New Strategy to Unlock the North ).

John Craig

Alternatives to Monetary Policy - email sent 20/4/16

Glenn Stevens
Reserve Bank of Australia

Re: McKenna G., The world needs more than just low rates and cheap money, Business Insider, 20/4/16

You were quoted as suggesting that global economic recovery needs more than low interest rates because, while monetary policy was effective in the aftermath of the GFC, there is a limit to what it can achieve. It was thus, you reportedly suggested, up to governments to do more – eg through increased spending especially for infrastructure. However there are other alternatives.

My Interpretation of the above article in which you were quoted: RBA governor Glenn Stephens has joined others in advocating reduced reliance on monetary policy and more economic support from governments. At a New York conference he pointed to the success of monetary policy in preventing catastrophe after GFC and its limited capacity to boost recovery. This is incompatible with the so-far-ineffectual adoption of unconventional monetary policy, ie negative interest rates, elsewhere (eg by ECB and Japan). ‘Helicopter money’, he suggested. would not be a solution. Rather governments need to move from austerity mindsets and resume spending. He also identified a possible need to recognise that future growth may be slower than it has been in the past – and perhaps adjust people’s expectations to that new reality.

There are limits to what can be achieved through increased government spending even on infrastructure – because:

• increasingly easy money policies since the late 1980s (and ultimately quantitative easing) have encouraged most governments to incur high debt levels. This will seriously constrain their ability to borrow (eg to fund infrastructure) especially as interest rates now need to be normalized (ie increased significantly). Normalization is now vital because ultra-low rates and quantitative easing have distorted financial markets – and this has in turn:
  • encouraged investors to seek:
    •  relatively easy capital gains in developed economies from escalating asset values (ie financial assets and property) rather than from productive ‘real economy’ investment which is much harder;
    • higher interest rates from investment in emerging economies - thus contributing to an export-oriented industrial overcapacity which generates a global deflationary problem given simultaneous weak consumption in many of their major export markets because of high debt levels and suppressed household incomes;
  • increased the risk of financial instabilities (including playing a role in the real-estate boom / bust that caused the 2008 global financial crisis and the risk now of another international financial crisis related to excessive debt levels everywhere);
  • led to a significant increase in social inequality in developed economies (because those with existing wealth became richer – while others’ positions stagnated); and
  • could potentially lead a major democracy (ie the US) to political instability and perhaps incompetent / banana-republic-ish government - as a consequence of very widespread grass-roots economic dissatisfaction;
• Australia has national debt / GDP ratio that is seen to be dangerously high - and investment thus needs to be encouraged which has a very high value added to debt ratio (so as to reduce the national debt / GDP ratio) - and this will require encouraging investment in areas of competitive advantage rather than in areas with mainly 'trickle down' economic impacts which would often be the case for infrastructure;
• at least in Australia’s case, machinery for planning and developing infrastructure is a shambles (see Infrastructure Obstacles and Opportunities: Submission to Productivity Commission , 2014; Australia's Infrastructure Incompetence, 2015; Here's Why Our Latest City Minister Can't Do What needs to be Done any More than His Predecessor Could, 2016; and Elaboration in Reply to a Response to the Latter).

Much more could arguably be achieved by:

• serious efforts to restore competence in government administration (eg see Broken Governance and Ineffectual Economic Strategy: Two Sides of the Same Coin?). As the latter suggests, efforts to make Australia’s democratic system more competent would also allow the adoption of policies that would improve economic performance, eg by:
• boosting the supply side of economies such as Australia’s through accelerating apolitical market-oriented development of regional industry clusters – so as to increase international competitiveness and economic value added (and thus business profits, employee incomes and governments’ tax base) - see Lifting Productivity: Considering the Bigger Picture (2010) and A Case for Innovative Economic Leadership (2009). Economists now recognise information as the most important factor in driving economic growth – and much more effective than (say) government spending. The suggested approach would seek to boost regional economies’ ability to access and use strategic information both in creating industrial 'ecosystems' that support individual enterprises and in ongoing operations;
• officially recognising and addressing the problem in global financial systems (ie structural demand deficits / ‘savings gluts’ – especially those in major East Asian economies) that required the distorting effects of ultra-easy money policies to be used in the first place because global growth would otherwise be unsustainable – see Structural Incompatibility Puts Global Growth at Risk (2003) and Impacting the Global Economy (2009). This is an issue that the G20 has long needed to address – but has not done so to date because of the complex cultural issues that would need to be understood to do so (see G20: Announcing ‘Peace for our Time'?, 2009 and Will China's Presidency in 2016 End the G20's Chronic Failure?, 2014).

I would be interested in your response to my speculations

John Craig

New Urban Age Requires Competent State Institutions - email sent 23/3/16

Professor Robert Freestone
University of NSW

RE: Hopes of a new urban age survive minister's fall, The Conversation, 14/1/16

Your January article outlined many options for improving Australia’s cities that the federal cities minister might encourage states to undertake.

I should like to submit for your consideration that none of that is likely to be achievable unless serious attention is given to the creation of state institutions that are able to competently plan and develop infrastructure. My reasons for suggesting this are outlined in Memo to Professor Paul Burton: Here's Why Our Latest City Minister Can't Do What needs to be Done any More than His Predecessor Could, and in Elaboration in Reply to Professor Burton's Response which gives examples of the effect of the institutional incompetence that was: (a) long promoted by federal fiscal imbalances; and (b) increased dramatically by public sector ‘reforms’ in recent decades.

John Craig

'Smart Cities' Program: Worsening Australia's Infrastructure and Financial Problems? - email sent 29/4/16

James Massola and Peter Martin

Re: Malcolm Turnbull to borrow big in multibillion-dollar cities plan, Brisbane Times, 29/4/16

Your article suggested that Australia’s Prime Minister (Malcolm Turnbull) “will scrap what he calls blank cheques for state and local government infrastructure projects and announce a ramp-up of debt to fund major schemes”. However this seems very risky because: (a) Australia’s machinery for the planning and development of infrastructure is a mess; (b) the methods envisaged to increase infrastructure spending under the ‘Smart Cities’ program are likely to worsen that mess; and (c) reducing Australia’s reliance on exploding levels of debt to drive growth seems vital to reduce the risk of a financial / banking crisis.

My Interpretation of your article: The federal government will impose conditions on funding for state infrastructure projects and increase the use of debt to fund major schemes. States and local authorities would need to rigorously demonstrate projects’ benefits. A Smart Cities program will be started to plan investments and brokerage deals between Commonwealth and private funders who want to leverage off the government’s balance sheet. Long-dated (eg 30 year) bonds are proposed to lock in current low interest rates. Conditions on projects would include: boosting growth / tax revenues and ‘value capture’ . One goal would be to create ’30 minute cities’ to make it easy for everyone to get around – and boost housing affordability by allowing people to live further from CBD. Cities Minister (Angus Taylor) said the Commonwealth was interested in outcomes, not just handing over blank cheques. The Commonwealth’s ‘massive balance sheet’ would be used to back projects that produce a return and improve housing affordability. Concerns about the effect of significantly increased Commonwealth debt would be offset by the quality of projects selected..

The most pressing need in relation to infrastructure is to fix the mess that exists in the planning and development of infrastructure.

Why: Reasons for this are outlined in Infrastructure Obstacles and Opportunities: Submission to Productivity Commission, 2014 (and also in Australia's Infrastructure Incompetence, 2015; Here's Why Our Latest City Minister Can't Do What needs to be Done any More than His Predecessor Could, 2016; and Elaboration in Reply to a Response to the Latter). The ‘mess’ is largely a by-product of:

• the chronic federal financial imbalances that have long distorted every aspect of government in Australia by allowing the federal government to provide extensive special purpose funding (eg for infrastructure); and
• the further distortions of the delivery of public goods and services over the past couple of decades by: (a) public service politicisation (which discouraged reality checks on populist policies); and by; (b) naïve attempts to apply competitive / ‘business-like’ methods to functions that are (as infrastructure tends to be) subject to significant market failures.

Recovering from Queensland's Debt Binge (2012) illustrated the effect of trying to stimulate the economy and achieve various political goals through a massive commitment to infrastructure investment while the machinery for dealing with it remained ineffectual.

If the interpretation of the ‘mess’ referenced above is valid, then what is now proposed (ie expecting states / territories to nominate projects for which the Commonwealth would broker government-backed funding) will compound it. As your article noted, a high quality of selected projects would be essential to offset concerns about a large increase in Commonwealth Government debts. Such quality simply can’t be achieved (see Queensland example illustrated here) unless and until a serious effort is made to deal with the grass-roots ‘mess’ in the planning and developing infrastructure that is the result of the long term impact of processes that are similar to those involved in the ‘Smart Cities’ program.

Why? - added later: That the necessary quality of infrastructure options is unlikely to come through the Smart Cities process can be illustrated, for example, by the segment of the Australia Infrastructure Plan that deals with improving the process (ie Better Decisions and Better Delivery). The latter envisages centralised decisions about ‘projects’ after state agencies have submitted a business case for options that would hopefully achieve both economic and political goals.

This reveals a lack of understanding of what is required in managing complex issues in government. Generating quality infrastructure options requires a high level of effort and creativity. Such options will: (a) be technically complex; and (b) need to be integrated with other aspects of the function of which infrastructure is a capital component and with the requirements of regional development generally. This can't be a routine process. It will require as much motivation / commitment as a business owner needs to find competitive advantages in a market economy. That level of motivation / commitment can exist in a bureaucratic environment where those involved have a sense of responsibility for / ownership of a problem. However it can't be expected if all they are doing is 'ticking boxes' in a process someone has defined to establish a 'business case'. But the latter is all that can be involved where states / territories can't make decisions but only lobby for federal funding. The present writer's study / experience of central coordination in government (see CV) showed the importance of 'ownership' / control of an issue if high quality (rather than routine) outcomes are to be achieved where the issues involved are too complex to be understood by anyone other than the experts in that area.

The so-called 'Smart' Cities process also reveals a lack of understanding of what is needed to manage the complexity of cities. It would be virtually impossible for anyone to confidently develop proposals for other projects / operations that depended on / related to a 'Smart Cities' proposal because: (a) the local officials who were aware of the details of the 'Smart Cities' proposal would have no idea whether it was actually likely to happen; and (b) the Canberra officials who might have some idea of the ranking of the 'Smart Cities' proposal  would not be in a position to reliably explore its relationship with other projects / operations in the 'Smart' city.

No real improvement is likely until some basic assumptions that are the foundation of the Australian Infrastructure Plan are challenged (eg that: central planning can work; infrastructure can be dealt with as ‘projects’ distinct from the functions of which it is the capital component; and private ownership and control can be appropriate for: (a) functions subject to significant market failures; and (b) 'projects' that need to be compatible / integrated with other elements in a complex (eg transport) system).

Furthermore trying to boost the economy (and achieve various other political goals) through a large increase in government debt does not seem wise considering the domestic and international risks that Australia would then be even more exposed to – for reasons suggested in A Banking Royal Commission and a Potential Financial / Banking Crisis at the Same Time?. The latter includes speculations about possible options to sustain growth without simply continuing the rapid rise in Australia’s national debts.

John Craig

Infrastructure Spending Is NOT an Answer in Itself - email sent 14/5/16

Joe Branigan
SMART Infrastructure Facility
University of Wollongong

Re: Targeting infrastructure spending as a % of GSP won’t work, Queensland Economy Watch, 12/5/16

Your observations about spending on infrastructure for the short-term gains that come from spending on ‘something’ are spot on. Productivity and real relevance to regional needs are critical and won’t result from interest group lobbying or seeking populist political support by announcing ‘projects’ or adopting spending targets.

My Interpretation of your article: Infrastructure spending is cyclical. Raising productivity matters more than short term engineering / construction jobs. Infrastructure Partnerships Australia suggests that Queensland should set annual infrastructure spending as a percentage of gross state product (ie at its 10 year average of 4.25% of GSP). This is a poor idea because: (a) infrastructure needs to be assessed on a case by case basis to ensure that it is value for money; (b) there is a need to emphasise the benefits of what would be created, rather than the benefits of short term spending; (c) past spending included some associated with the commodity boom and massive borrowings to fund an ill-considered response to the GFC; (d) decisions about large infrastructure networks should be left to the responsible government-owned corporations; (e) it won’t be possible to create all the needed jobs by investment in public infrastructure – raising productivity is more important; (f) spending must be within the constraints of the state budget; and (g) it is wrong to suggest that governments should be the ones to borrow for infrastructure just because they can access lower interest rates.

Some observations that head in much the same direction are in:

• 'Smart Cities' Program: Worsening Australia's Infrastructure and Financial Problems? – which addresses: (a) the reasons Australia’s methods of planning and developing infrastructure are a mess – ie distorting government administration with chronic federal fiscal imbalances and administrative ‘reform’ by politicising public services and applying ‘business-like’ methods to governments’ primarily non-business-like functions; (b) problems that Queensland experienced over the past 15 years through large increases in infrastructure spending with poor machinery – including infrastructure spending vastly in excess of capacity to pay and a resulting loss of its AAA credit rating; (c) the likely worsening of the infrastructure ‘mess’ through ongoing Commonwealth funding of centrally-planned ‘projects’; and (d) Australia’s need to seriously consider the possibility of interlinked global / China / national financial crises that could constrain access to the capital needed for investment;
• Alternatives to Monetary Policy – which questioned the RBA’s views about the importance of increased government (especially infrastructure) spending because of: (a) risks with simply increasing debt levels to drive growth; and (b) problems in Australia’s methods for planning and developing infrastructure. It also suggested the higher priority importance of: (a) increasing the effectiveness of governments operational and policy functions and of civil policy machinery; (b) the gains that could come by targeting improvements in regional economies’ ability to obtain and use market-relevant information – eg as suggested in Reinventing the Regions, 2010; and (c) addressing the cultural incompatibilities that have led the world economy to be increasingly dependent on low interest rates and escalating debts for decades;
• The Need to Rethink Malcolm Turnbull’s New Strategy to Unlock the North – which suggested that building on and building up the competitive advantages of north Australian communities (ie their ability to access and productively use strategic information as suggested in Reinventing the Regions) should be considered as a potentially better alternative to mainly directing several $bn of government capital into politically-vetted infrastructure and industrial projects in that region;
• Infrastructure Obstacles and Opportunities (2014) – which was a suggestion on the above lines to the Productivity Commission about the nature of problems in infrastructure planning and development in Australia and what might remedy them.

I would be interested in your response to my speculations

John Craig

Will Infrastructure Australia's Project List Meet Australia's Needs? - email sent 30/6/16

Marion Terrill
Grattan Institute

Re: Election 2016: will the infrastructure promises meet Australia's needs?, The Conversation, 27/6/16

There is no doubt, as your article suggested, that political pork-barrelling in an electoral context (ie promising projects that would be popular in the most marginal electorates) is most unlikely to result in commitment to infrastructure investments that are in Australia’s real interests.

However there is equally little reason to expect that infrastructure options put forward by Infrastructure Australia (whose judgment of projects your article suggested was reliable) would be much better. My reasons for suggesting this are outlined in Australia’s Infrastructure Incompetence (2015) and Central Planning Is Not Smart - For Infrastructure Just as Much as For the Economy Generally (2016). The former, for example, drew attention to: (a) the impossibility of reliable central planning of infrastructure – because of the same inability to get all required information that renders central economic planning hazardous; (b) lessons from the present writer’s early-career involvement in development of infrastructure planning processes; (c) the shambles that Australia’s infrastructure development machinery has become (eg due to federal fiscal imbalances and public service politicisation); (d) problems generated by private funding and control of goods and services subject to significant market failures (as infrastructure often tends to be); and (e) the desirability of commissioning Infrastructure Australia to identify ways to ‘fix the systemic mess’ – rather than proposing lists of suspect projects.

Also Australia seems to face a potentially significant financial / economic constraint because of its high ‘national’ debt levels (eg see Don't Overlook Australia's Risk of a 'National' Credit Crisis) and this implies that sustainable growth now has to be driven by something other than increased debt-based spending. How information (which economists recognise as the most important factor in economic growth) might be mobilized to achieve this as an alternative to government spending (on infrastructure or anything else) is suggested in Alternatives to Monetary Policy.

John Craig

Bring Infrastructure into the 21st Century: Some Suggestions - email sent 26/3/17

Andrew White
The Australian

Re: Time for a plan to bring infrastructure into the 21st century, Weekend Australian, 25/3/17

Your article (which I have outlined here) highlighted the need for a new and better process for planning and providing infrastructure. There is no doubt about this, and some suggestions are in Detailed CPDS' Comments on my web-site. In brief the latter suggested that:·

• The planning and development of infrastructure is made incredibly complicated by: (a) the fiscal imbalances in Australia’s federal system (ie states have most infrastructure responsibilities without commensurate revenue sources and thus can't take that responsibility seriously); and (b) public sector ‘reforms’ in recent decades (eg public service politicisation and seeking to use business-like methods to undertake governments’ largely non-business-like functions have eliminated necessary competencies and fragmented responsibility);
• Those structural difficulties have been further compounded by very rapid population growth due to a high rate of immigration. Making debt-funded property and infrastructure investment into a major driver of Australia’s economic growth has: (a) contributed to a brewing national debt crisis; (b) burdened state and local governments with debts that now limit infrastructure funding; (c) led to private funding and control of services even where this is dysfunctional because the services are subject to significant market failures; and (d) contributed to housing affordability problems in major cities;
• There are better alternatives to reliance on rapid population growth (and natural ‘comparative’ advantages) as major drivers of Australia’s economic growth. New methods for developing ‘competitive’ advantages are available that would, amongst other things: (a) strengthen governments’ tax bases and revenues; (b) enable the development of high-income population ‘magnets’ in larger regional centres and thus reduce population growth in major cities; and (c) enable value to be added to some infrastructure developments;
• Many current practices and ‘solutions’ that are being suggested need more consideration, including: (a) attempts at ‘central planning’ of infrastructure; (b) uncritical approaches to climate change; (c) proposing large scale additions to Australia’s national debts that lack short-term revenue increases to sustain them in the face of a potential national debt crisis; and (d) the national security implications of infrastructure development.

Better processes for planning and development of infrastructure have to be part of a broader process to upgrade Australia’s machinery of government (ie progress can’t be achieved by dealing with infrastructure in isolation). Some now-dated suggestions about the need for and possible nature of broader reforms to bring Australia’s machinery of government into the 21^st century were in Australia's Governance Crisis and the Need for Nation Building (2003). Achieving change would require stakeholders with likely operational involvement in a reformed system to: (a) be made aware of the challenge – including issues related to infrastructure; (b) consult in developing proposals for implementing change - presumably in a COAG framework; and (c) submit their proposals through normal channels for gaining executive approval together with public comments on the issue and proposals for managing the financial implications of potential systemic changes.

However long before new methods for planning and developing infrastructure were implemented:

• Australia’s international immigration levels could usefully be reduced to make rapid population growth less disruptive of effective urban and infrastructure development. Doing so should also significantly reduce problems related to housing affordability in major cities;
• Experiments could be arranged in the use of methods to accelerate the development of competitive advantages in Australia economy – a process that would run into opposition by many established interest groups (see Strengthening Innovation in Australia By Challenging Interests Who Resist Change, 2017).
• A review of the scientific basis of current assumptions about climate change would also seem useful.

John Craig

Would an 'Infrastructure Boom' Be a Good Thing for Australia? - email sent 29/4/17

Jackson Stiles,
New Daily

Re: Morrison’s Budget Flourish Paves Way for Infrastructure Boom, New Daily, 27/4/17

Your article suggested that distinguishing between ‘good’ and ‘bad’ government debt will enable the federal government to stimulate Australia’s economy with a large increase in infrastructure spending. ‘Good’ debt you noted is regarded as that associated with acquiring capital assets, while ‘bad debt’ is that used to finance the gap between recurrent government income and spending on (say) defence, health and welfare programs.

My Interpretation of your article: The government has cleared accounting impediments to a ‘big spend on infrastructure’. ‘Good debt’ (ie borrowings for economy-boosting capital expenditure – eg roads / trains) will be distinguished from ‘bad debt’ (ie borrowing to pay for ongoing programs). In 2017-18 there was a projected underlying cash deficit of $28.7bn but only a $19.2bn operating deficit. Last year the Treasurer said that ‘good debt’ would not be increased until problems with ‘bad debt’ were resolved. However the RBA (and other organizations) have been encouraging the government to take advantage of record-low borrowing costs to renew public infrastructure. A former RBA governor (Glenn Stephens) argued that the economy will not pull out of its malaise unless someone with balance sheet capacity is willing to take on more debt and spend. The Opposition’s infrastructure spokesman (Anthony Albanese) said that Labor, the RBA and economists have been advocating this for years. The proposed establishment of an infrastructure unit in the Department of Prime Minister and Cabinet was seen to be ill-advised as compared with reliance on independent Infrastructure Australia (because of the risk of pork barrelling). Creating more bureaucracy (eg the North Australia Investment Facility) has been shown to be ineffective – as after 2 years it has not invested in anything.

Making a distinction between ‘good’ and ‘bad’ debt will probably be very useful by helping in the development of a case to eliminate ‘bad’ debt.

However Australia does not just have a problem with ‘bad’ government debts. There is a ‘national debt’ problem that is even more serious. Australia ‘national debt’ to GDP ratio is hazardously high and there have been many expert warnings about the associated risks (see Australia's Risk of Financial / Banking Crises as Growth is Driven by Rapidly Rising and Often Misdirected Debt). The ratio of ‘national debt’ (ie that incurred by business, households etc as well as governments) to GDP is VERY high by international standards, and growth has come to depend on rapidly increasing it (especially because of extensive household investment in housing). The latter, which is a form of consumption: (a) makes limited immediate contribution to GDP, as a major financial benefit lies in asset price increases which provide a wealth effect for some households but limited income (and tax revenues) unless and until investment properties are sold at a profit); and (b) puts Australia’s banking system at great risk in the event of a significant fall in property prices as the RBA has recently been highlighting in relation to the potential for an urban property investment boom to ‘bust’ (eg see Uren D., Economy at Risk as debt bomb grows, The Australian, 5/4/17 – which is outlined here).   

Note added later: There have been many warnings (eg by IMF and Standard and Poors) that Australia potentially faces a risk because of high national debt levels (see ‘concerns about Australia’s debt levels’ here). The RBA has referred to the risk (see here and in ‘Economy at Risk as Debt Bomb Grows’). The latter also noted that David Murray (chair of Financial System Inquiry) drew attention the parallel with what happened in the 1890s – when an inability to obtain offshore capital made it impossible for Australia’s banks to invest in real estate, leading to: (a) a property market collapse; (b) many bank failures; and (c) a depression.

The very high ‘national debt’ to GDP ratio is particularly hazardous because of instabilities in the international economic and financial environment. Australia has become economically dependent on China which faces an even greater risk of a debt crisis.  

Note added later: A significant financial and economic setback for China seems inevitable and will adversely affect Australia's economy and ability to attract international capital (see China Seems to Be Serious in Trying to Deal with Its Debt Crisis and The Effect on Australia Could be Nasty).

And very high debt levels worldwide are likely to disrupt international financial systems (and thus the availability of international capital) as interest rates must now normalize to eliminate the adverse side effects associated with the unsuccessful long-term use of easy monetary policies to try to stimulate growth.

Reducing Australia ‘national debt’ to GDP ratio is essential to eliminate the risk of a ‘national debt’ crisis. Ways to do this are arguably available. However large increases in government borrowing to fund an ‘infrastructure boom’ would increase Australia’s national debt risk while probably being of limited net economic / financial benefit – eg because defects in the machinery now being used to plan and develop infrastructure make it extremely hard to competently identify projects that are likely to be of most benefit (see below).

The suggestion that now is a good time to borrow for infrastructure because interest rates are low is naïve. It was recently pointed out that Australia has been able to attract foreign capital because it provided relatively high interest rates. Foreign capital has been vital because of Australia’s structural current account deficits. Now the US Federal Reserve is raising rates – and other reserve banks worldwide are likely to follow because of the adverse side effects and unsatisfactory economic effects of long-term low interest rate policies. However the RBA is holding Australian interest rates down. Thus Australia's interest rate advantage is disappearing. The $A, it was suggested, could collapse and bring high inflation and a need for much higher rates while the economy remains weak.

In order to stabilize and reduce Australia ‘national debt’ / GDP ratio, emphasis needs to be given to investments that are likely to produce short term increases in GDP that are larger than the associated increases in national debt. Infrastructure investment cannot produce short term benefits. The effect of an ‘infrastructure boom’ on Australia’s national debt / GDP ratio is at best likely to be delayed for years / decades, and could easily be negative if the assumptions about many investments prove false (a problem that 'central planners' usually encounter within an economy generally).

There are, however, options that should be more effective in both stimulating Australia’s economy and reducing the national debt / GDP ratio (see Bring Infrastructure into the 21st Century: Some Suggestions and More on Rethinking the Government's Northern Development Plan).  The former:

• suggested an emphasis on building on and building up Australian’s competitive advantages, rather than on fiscal stimulus. Methods are available to more effectively access, and use, strategic information (which prevailing growth theories recognise as the major driver of economic growth) in order to create regional environments that would more effectively support the establishment and growth of high productivity enterprises.  Those methods  should be more beneficial than distinguishing between ‘good’ and ‘bad’ government debt to allow a debt-driven fiscal stimulus;
• drew attention to the serious deficiencies in the machinery being used for planning and development of infrastructure. For example, Infrastructure Australia can’t do so reliably any more that a special unit in the Prime Minister’s Department would be able to. And the private ownership and control of public goods and services that are subject to significant market failures prevents those functions being adequately managed as a whole (eg consider Australia’s Energy Crisis: The Real Problem is Machinery of Government Changes That Made Long Term Planning Impossible). The federal government’s reported intent to potentially increase those distortions (Crowe D., Budget to be replete with ‘roads, rail and runways’, Coalition says, 29/4/17) is a further reason for reviewing any proposals to simply fund an ‘infrastructure boom’. Huge increases in infrastructure spending with defective machinery (based on an apparent assumption that infrastructure spending was inevitably a ‘good thing’) resulted in large scale wastage and the loss of Queensland’s AAA credit rating (for reasons outlined towards the end of Appalling Queensland Governments). Avoiding a repeat of such financial disasters is vital.

Note added later: Is Inland Rail a Productive Use of $10bn of New Debt?

Private investors are endorsing the Turnbull Governments $10bn inland rail network and are willing to invest in new infrastructure to connect to that line [1].

However economists have questioned the economic benefits of such a project.

IMF has argued for years that governments should take advantage of low interest rates to invest in infrastructure. However project selection has become political - so limiting confidence in what economic value will be added. Inland rail is likely to cost more than it delivers. Bent Flyvbjerg (Oxford Uni) argues that with projects over $1bn only the 'unfit' survive. Projects that look best on paper have highest cost overruns and most limited benefits. Major rail projects have averaged 45% cost overruns and traffic 51% below initial projections.  Those who develop proposals see that their job is to make projects look good. Marion Terrill (Grattan Institute) has done similar analyses for Australia. Average cost over-runs are 20% (with 18% of projects having over 50%). Larger projects are most likely to have cost blowouts. Inflated demand projection have been common in transport development proposals in Australia that turned into financial disasters.  [1] 

Australia needs investments that increase national income in the short term by much more than they increase national debt. As noted above, the dependence Australia’s economic growth has had on real estate investment has had the reverse effect. Though better infrastructure is needed, simply funding an ‘infrastructure boom’ would also worsen the national debt / GDP ratio – especially because the machinery reforms needed to competently plan and develop infrastructure have not yet been made.

To implement an alternative approach, efforts first need to be made to boost public understanding of these issues and a commitment to address them. Publishing relevant analyses as inputs to a series of regional and national forums might be a useful way to start. Clearly Australia’s political system cannot be relied upon to initiate this - as neither of the major parties seem aware of the ‘national debt’ risk or of the fact that an ‘infrastructure boom’ is likely to exacerbate it (just as it has done in China).

John Craig