|CPDS Home Contact||Public-Private Partnerships for Infrastructure Infrastructure Constraints on Australia's Economy Defects in Infrastructure Planning and Delivery in Queensland Review of National Competition Reforms: A Commentary Structural Incompetence and SE Queensland's Water Crisis Brisbane's Transportation Monster Infrastructure Magic Beyond Infrastructure Despair Sorting Out Australia's Infrastructure Mess Needs 'Government' not Micro-management If There is Too Much Risky Debt, Why Not Do Something About It?|
Infrastructure Obstacles and Opportunities: Submission to Productivity Commission
In response to the Productivity Commissions draft Public Infrastructure report, I should like to make a brief submission related to:
By way of background I note that my first qualification was as a civil engineer and I have spent over 40 years studying both the requirements for effective government and also economic strategy (see CV).
My career started with the Queensland Coordinator General’s Department. The Coordinator General’s role was created in the 1930s because of concern about the unreliable (ie politicized) methods of project selection that had been used for infrastructure (ie the Coordinator General’s initial role and goal was similar to what the Productivity Commission is seeking to achieve through the Public Infrastructure report). Doing this has often been impossible as governments have tasked Coordinator Generals with organising (major) projects (just as federal governments have now tasked Infrastructure Australia) and a focus on specific projects is incompatible with promoting effective dealings with all projects (and other activities) by the government as a whole (eg because of the different skills required).
However in the early 1970s a new Coordinator General was more ambitious. One of the first tasks I was given involved improving capital works planning. Though progress then was limited to new forward planning procedures, I became familiar with both the difficulty of centralised planning (eg because of problems in accessing required information) and the distorting effect of federal financial imbalances (eg because these required inappropriately-centralised control of infrastructure decisions by state financial agencies presumably because of the need to coordinate lobbying for federal funding).
In my later career I was involved in efforts to promote regional coordination (eg as acting Regional Coordinator for North Queensland for 12 months) and wrote a master’s thesis in 1978 on coordination in government with particular reference to infrastructure. The primary conclusion of the latter was that planning (eg for infrastructure) had to be undertaken by an organisation that is dealing with related activities - ie it involves deciding what such an organisation is going to do in the future. Planning for infrastructure can't satisfactorily be done in isolation from practical realities (eg by a central planner) any more than it can for the development of an economy generally.
Since the early 1980s I have devoted a lot of effort to study of methods to boost economic development, and since the late 1980s I have also studied and observed at close hand both the theory and practice of public sector ‘reform’ which was hoped would boost efficiency in the provision of public goods and services.
Infrastructure-related documents on the CPDS web-site include: (2000) Notes on 'Strategic Infrastructure for Queensland's Growth'; (2002) Public-Private Partnerships for Infrastructure; Defects in Infrastructure Planning and Delivery in Queensland; (2004) Failure in Queensland's Electricity Distribution Network; Review of National Competition Reforms: A Commentary; (2005) Infrastructure Constraints on Australia's Economy; SE Queensland Regional Plan and Infrastructure Plan; (2007) Structural Incompetence and SE Queensland's Water Crisis; (2008) Brisbane's Transportation Monster; Infrastructure Magic?; (2012) Infrastructure: A Big Picture View; Infrastructure's New Road; and (2014) Beyond Infrastructure Despair
The Public Infrastructure report acknowledges the complexities associated with Australia’s federal fiscal imbalances (ie the fact that the federal government has most revenue while states have most infrastructure responsibilities but are generally limited to narrow / inefficient sources of tax revenues).
However what also needs to be recognised is that those imbalances (which translate into a lack of state / territory capacity to make substantial independent financial commitments) also make it essentially impossible for them to take serious responsibility, or be democratically accountable, for the provision of the public goods and services they are constitutionally presumed to provide (see Federal Fiscal Imbalances, 2003 in Australia’s Governance Crisis and the Need for Nation Building).
The consequences of those imbalances include ongoing: irresponsibility; buck passing; duplication; complexity; and pork barrelling. Moreover it is likely that some of the infrastructure backlog that has developed in Australia is a product of the inability of state / territories in the 1980s to properly carry out their functions because of the escalation of special purpose federal funding by the federal Government in the 1970s (and consequent further constraint on state / territory initiative).
While I have no specific proposals about how those fiscal imbalances can be remedied, I submit that this should be a major focus of any review of Australia’s tax system. Substantially reducing these imbalances should considerably improve the efficiency and effectiveness of governments in Australia – including their role in the provision of public infrastructure.
Fixing Australia's Federation (2010) includes some initiatives that would complement a significant reduction in federal fiscal imbalances – such as methods to promote strategic evaluation of infrastructure issues and coordination amongst state / territories.
Dysfunctional ‘Reform’ of Public Services
A second major reason for the infrastructure backlogs that developed in Australia was arguably the dysfunctional public sector ‘reforms’ in the late 1980s and early 1990s which had the effect of : (a) promoting ‘politicised’ (ie favouring compliant rather than competent) public services; and (b) seeking to use business-like methods to undertake governments’ primarily non-business-like functions.
That process of politicisation, deskilling and disruption of public services is discussed in Decay of Australian Public Administration (2002).The latter includes an overview of the background to ‘reform’ and an outline of how the ‘wheels fell off’. It suggests that this was due to a lack of understanding of: (a) alternatives to boosting productivity by raising public sector efficiency; (b) what ‘governing’ actually involves – including the impact of the significant market failures that affect true public goods and services, which render ‘commercial’ practices ineffective; and (c) the role that a professional public service can play – and misunderstandings of this that first arose from the failure of idealised but unrealistic social reform programs in the 1970s. References to reports on the dysfunctions that then affected governments are in The Growing Case for a Professional Public Service (2001+).
While competition can add to efficiency and economic productivity in a market context, competitive service delivery can give rise to problems in dealing with goods and services that are subject to market failures (as most real public goods and services are). Serious market failures usually mean that such functions cannot be dealt with in isolation. Rather there is a need for collaboration with the providers of other goods / services and / or with those concerned with non-commercial political priorities. Competitive service delivery and purchaser / provider separation can impede such collaboration. And the fragmentation competition requires can also make it impossible to integrate understanding of the complex issues needed to properly carry out governments’ primary function – ie governing. This point is explored further in Review of National Competition Reforms: A Commentary (2004).
The way in which politicisation and attempts to use inappropriate ‘business-like’ methods contributed to severe problems in infrastructure provision in Queensland in the 1990s is outlined in Defects in Infrastructure Planning and Development in Queensland (2002).
When attempts started to be made to catch up on growing infrastructure backlogs, the legacy of dysfunctional public sector ’reforms’ arguably meant this led to inefficiency, cost blow-outs and escalating government debt levels. Queensland can be considered as an example.
The Goss and Borbidge Governments in Queensland had been able to achieve very little between 1989 and 1998 because of problems that poorly considered ‘reform’ had introduced into the public sector. The Beattie Government then seemed to decide (probably realistically) that there was a need for a very large increase in infrastructure investment. But doing so without fixing Queensland’s de-skilled and dysfunctional machinery of government was not smart. The budgetary effects of this are suggested in Recovering from Queensland’s Debt Binge (2012).
The Public Infrastructure report refers to the difficulties that can be associated with the use of Public Private Partnerships (PPPs) for infrastructure. Suggestions that such problems were likely were included in Public-Private Partnerships for Infrastructure (2002). The latter referred, for example, to:
Any serious proposals for improving Australia’s approach to infrastructure needs to consider both: (a) the need for public service professionalism and competence; and (b) the nature, and the different roles, of government and the private sector.
Increasing Rather than Calculating the Economic Value of Infrastructure
The Public Infrastructure report emphasises the need for formal evaluation of the economic value of infrastructure investment (eg by conducting benefit-cost analyses). While this is the least that should be expected, assessing the economic value of infrastructure through benefit / cost analysis is arguably not always the best that is now achievable. Increasing the economic benefits (rather than merely calculating them) is now likely to be possible in some / many cases - providing politics can be kept at arms' length.
Options for boosting economic productivity in Australia have long been available by the use of what could be called ‘strategic market management’ methods to accelerate economic ‘learning’ within industry clusters and economic systems (eg see A Case for Innovative Economic Leadership (2009) and Lifting Productivity: Considering the Bigger Picture (2010)).
In the 1980s some hundreds of millions of dollars of potential benefits were added (and about 60 international expressions of interest attracted) by enabling synergies to be discovered in relation to one unlikely infrastructure proposals for which I was responsible for the initial concept development. This would not have been possible through a benefit / cost analysis.
Similar methods could be applied to some other types of infrastructure to boost their economic value – by promoting the discover of linkages / synergies with other’s potential economic initiatives. This possibility was illustrated by preliminary suggestions about the National Broadband Network proposal in NBN's Bigger Picture (2010).
|Australian's Infrastructure Incompetence||
Incompetence - being a
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.
|Unclogging Australia's Cities||
Unclogging Australia's Cities - email sent 25/9/15
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:
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.
|Central Planning Is Not Smart - For Infrastructure Just as Much as For the Economy Generally||
Central Planning Is Not Smart - For Infrastructure Just as Much as For the Economy Generally - email sent 9/10/15
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.
Here's Why Our Latest City Minister Can't Do What needs to be Done any More than His Predecessor Could
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
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 ).
Elaboration in Reply to Professor Burton's Response - email sent 15/3/16
Thanks for your response.
My reference to ‘professionals’ was overly simplistic. Planning and developing infrastructure is a complex undertaking which requires a lot of institutional time, knowledge, experience and commitment. Also, as I noted, infrastructure typically involves the capital components of functions subject to serious market failures – which thus usually means that they can’t be undertaken satisfactorily by a competitive market process. It is not sensible to try to deal with infrastructure as individual capital ‘projects’. Infrastructure must rather be planned in the context of regional development generally and of other aspects of the functions for which infrastructure is the capital component - and by people with a strong sense of responsibility so that they fully explore alternatives in relation to those others considerations.
There is nothing wrong with .... political / bureaucratic systems collaborating to deal with this – and this was traditional. However the approach that was adopted to public sector ‘reform’ in recent decades produced quite different outcomes (see Decay of Australian Public Administration, 2002). Administrations were politicised (ie came to be dominated by ‘yes men’) to ensure unquestioning political compliance (and thus deprived of a great deal of technical knowledge and experience) and also fragmented to promote competitive service delivery in ways that undermined government agencies’ ability to mobilize the resources needed for effective infrastructure planning and development. The result has been costly.
In Infrastructure Obstacles and Opportunities: Submission to productivity Commission (2014) reference was made to Structural Incompetence and SE Queensland's Water Crisis (2007+). This noted that:
And then there was the farce associated with Failure in Queensland's Electricity Distribution Network (2004) which arose because the technical types who would have been aware of the need to upgrade the network did not seem to have much / any say in a planning process that was driven by financial considerations. And then there have been ongoing problems in trying to get a transport system that works in SE Queensland (see Brisbane's Transportation Monster, 2008).
The overall effect on Queensland’s financial position (ie a loss of its AAA credit rating through massive borrowing for infrastructure – borrowing that arose from the $3bn pa that was seen to be the ‘affordable’ limit in about 2002 to $18bn pa a few years later) in the absence of institutions that could competently plan and develop infrastructure has been massive (see Recovering from Queensland's Debt Binge). Australia’s latest City Minister could usefully consider whether continuing a similar process is likely to win him political applause.
|Alternatives to Monetary Policy||
Alternatives to Monetary Policy - email sent 20/4/16
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.
There are limits to what can be achieved through increased government spending even on infrastructure – because:
Much more could arguably be achieved by:
I would be interested in your response to my speculations
|New Urban Age Requires Competent State Institutions||
New Urban Age Requires Competent State Institutions - email sent 23/3/16
Professor Robert Freestone
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.
|'Smart Cities' Program: Worsening Australia's Infrastructure and Financial Problems?||
'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.
The most pressing need in relation to infrastructure is to fix the mess that exists in the planning and development of infrastructure.
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.
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.
|Infrastructure Spending Is NOT an Answer in Itself||
Infrastructure Spending Is NOT an Answer in Itself - email sent 14/5/16
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.
Some observations that head in much the same direction are in:
I would be interested in your response to my speculations
|Will Infrastructure Australia's Project List Meet Australia's Needs?||
Will Infrastructure Australia's Project List Meet Australia's Needs? - email sent 30/6/16
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.
Bring Infrastructure into the 21st Century: Some Suggestions
Bring Infrastructure into the 21st Century: Some Suggestions - email sent 26/3/17
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:·
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 21st 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:
Outline of 'Time for a Plan ..'
Detailed CPDS' Comments
By way of background the present writer's very early career involved attempts to improve the process of planning and development of infrastructure in Queensland while working for that state’s Coordinator General. The latter role had been established in the 1930s because of problems with infrastructure investment similar some of those the subject article mentioned (eg politicisation of investment decisions).
Many documents on infrastructure management are on the CPDS' web-site (select ‘Infrastructure’ as the subject). This included comments on the need for systemic reforms (eg in Infrastructure Obstacles and Opportunities: Submission to Productivity Commission, 2014). The latter noted:
Other suggestions related to the issues raised in the subject article follow.
First it has been foolish to plan Australia’s cities and infrastructure to cope with the rapid population growth that results from an apparently unnecessarily high rate of international immigration. This is because:
Second, because of the emphasis given to rapidly rising population (as well as natural 'comparative' advantages) as the driver of economic growth, available options to develop 'competitive' advantages in Australia’s economy in ways that would have been more beneficial (eg in terms of increasing business profitability, employee incomes and governments’ tax base) have been ignored (see an alternative in A Case for Innovative Economic Leadership, 2009 and Developing a Regional Industry Cluster, 2000). The former suggested that governments endorse guidelines for apolitical processes to facilitate the rapid development of market-oriented industry clusters by stimulating the development of competitive advantages / productivity gains at the level of economic systems as a whole. The latter suggested how such a process could work in practice based on reasonably successful experiments in Queensland in the 1980s. Those processes would have been equivalent (for economic systems as a whole) to innovation within enterprises. They would also have similarities with the neo-Confucian methods used to achieve ‘real economy’ miracles in East Asia while being suitable in a liberal political and economic environment. Similar methods could be used to:
Third there is no doubt that the process for planning and development of infrastructure needs to be enhanced (as the subject article and other observers it quoted suggested). However some current practices seem dubious while apparently not being the subject of reform proposals. And some of the suggested ‘solutions’ that the subject article referred to would arguably not be constructive. For example:
|Would an 'Infrastructure Boom' Be a Good Thing for Australia?||
Would an 'Infrastructure Boom' Be a Good Thing for Australia? - email sent 29/4/17
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.
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).
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:
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).