PC slams Australian infrastructure provision

The Productivity Commission (PC) has released a new report into the provision of public infrastructure, which presents a scathing assessment of the governance, selection and execution processes by Australia’s governments:

There are many examples of inadequate project selection that have led to costly outcomes for users and taxpayers. These include electricity networks and desalination plants in some states. An Australian Government example is the decision to proceed with the National Broadband Network without doing a thorough analysis of its costs and benefits.

…poorly chosen infrastructure projects can reduce productivity and financially burden the community for decades with infrastructure that is unnecessary and expensive to maintain…

A key message of this report is that there is a fundamental need for a comprehensive overhaul of the poor processes currently used in the development and assessment of infrastructure investments particularly, but not exclusively, by governments. The costs of poor project selection and delivery will be exacerbated if governments decide to increase their infrastructure investment programs without reforming their governance regimes…

To sum up, governments are sometimes weak at determining what, where and when infrastructure projects should be scoped and constructed. This stems from deficiencies in using coherent decision-making frameworks to assess the portfolio of potential projects, especially:

• scoping and developing transparent cost–benefit analyses

• appropriate long-term planning for corridors, rigorous demand forecasting, investigating project risks fully (including latent risks borne by governments)

• providing opportunities for users rather than taxpayers to fund projects

• efficiently allocating risks between public and private partners.

There is substantial room for improvement, particularly in the decision-making processes of governments…

The PC argues that it is critical that governments build a “credible and efficient governance and institutional framework for project selection”, since “selecting the right projects is the most important aspect of achieving good outcomes for the community”. “Properly conducted cost–benefit studies of large projects, and their disclosure to the public” is seen as key to guide project selection and improve the transparency of decision making.

It also warns against the view that private sector provision is necessarily best, noting instead that it brings “additional risks and costs, which need to be weighed against the benefits”, and “only if well-designed and executed does a PPP agreement offer the potential for efficiency gains compared with traditional public procurement”.

The PC also supports user charges “to the fullest extent that they can be economically justified”, but notes that they should not be up-front, as currently occurs with housing-related infrastructure:

Well-designed and efficient user charges are likely to be superior to taxpayer funding of infrastructure in many situations. Efficient user charges are an effective means to reveal willingness to pay for new infrastructure and to improve the use and augmentation of existing infrastructure…

As infrastructure can provide benefits over generations, user charges too can span generations if they properly reflect the effective life of the assets concerned.

It also warns against the Abbott Government’s “capital recycling” agenda, whereby it is providing financial incentives to states that sell-off assets and invest in new infrastructure:

[Capital recycling] could act to encourage privatisation in circumstances that are not fully justified and encourage the selection of new projects that do not have demonstrable net benefits. Already, examples of promises to reinvest have emerged in regions where assets are being sold. Tying funds to particular regions is no assurance that the highest net benefit investments are being considered.

The PC encourages further privatisation only where governments can ensure that:

• economic efficiency is achieved
• the risks to consumers and other public interests are managed
• the market structure is amenable to the privatisation
• the sale is conducted efficiently, ethically and transparently.

The report also notes that Australia’s rapid land price inflation has raised infrastructure costs:

…while land prices are often excluded from many measures of construction costs, the prices for large public infrastructure include land costs. These have risen much faster than prices in the economy generally…

Finally, it is worth noting that the PC has taken special aim at the ACT Light Rail Project as a textbook case of infrastructure pork – supporting the views frequently expressed on this site:

The ACT Government’s decision to proceed with a light rail project appears to be an example of where the results of cost–benefit analysis have been ignored without a valid explanation…

In a submission to Infrastructure Australia in 2012, the ACT Government analysed a number of options including bus rapid transit (BRT) and light rail rapid transit (LRT). The analysis estimated that the upfront capital costs for the BRT and LRT would be $276 million and $614 million respectively (on an undiscounted basis) (ACT Government 2012).

In its economic appraisal (which is essentially a cost–benefit analysis), the ACT Government found net present values of $243.3 million for BRT and $10.8 million for LRT. The benefit–cost ratio for BRT was estimated at 1.98, with 1.02 for LRT. In the assessment, the benefits of BRT and LRT were similar ($491.8 million against $534.9 million respectively), but the cost of BRT was less than half that of LRT ($248.5 million against $524.1 million, when discounted by 7 per cent). The cost–benefit analysis took into account a range of factors including journey times, and avoided environmental impacts and accidents (ACT Government 2012)…

In summary, a cost–benefit analysis showed BRT to be a greatly superior option than LRT…

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