Wrong way, go back: mega project funding muddle

In The Australian today:

“Australian cities are suffering a double blow: despite ambitious project announcements, public investment has fallen as governments try to rein-in spending; but as infrastructure costs continue to climb each dollar of that investment is yielding less and less relief to frustrated commuters.”

About Henry Ergas

Henry Ergas is a columnist for The Australian newspaper and the inaugural Professor of Infrastructure Economics at the SMART Infrastructure Facility at the University of Wollongong. The SMART Infrastructure Facility is a $61.8 million world-class research and training centre concerned with integrated infrastructure solutions for the future. Henry is also Senior Economic Adviser to Deloitte Australia. Prior to these concurrent roles Henry worked as a consultant economist at NECG, CRA International and Concept Economics. Henry's previous career was as an economist at the OECD in Paris, where amongst other roles he headed the Secretary-General’s Task Force on Structural Adjustment and was Counsellor for Structural Policy in the Economics Department.
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20 Responses to Wrong way, go back: mega project funding muddle

  1. Pete of Perth

    Plenty of busy cranes in Perth CBD.
    Wellington street still under re-construction.

    Thankyou China, Korea & Japan

  2. MiltonG

    A big problem when financing new toll roads and tunnels is that the benefits of reduced congestion on alternative/surrounding roads is free to users, and difficult to fund via tolls for most projects. It may be no surprise that a $1 billion piece of infrastructure can only generate toll cash-flow worth, say, $0.6 billion.

    Selling self-funding assets like airports to build new assets of like toll roads may be called “capital recycling”, but only capital that can be recovered again is truly recycled. The rest is an asset sale to fund a one-off spend (a.k.a. “selling off the silverware” or “emptying a hollow log”) – this can be done for long-term community benefits, but few governments are renowned for prudence.

    All-in-all, I expect “capital recycling” to degenerate into a greater temporary capacity for misdirected spending and waste, as perfected by the Bligh government in Queensland.

  3. Lets not forget that the problems with toll roads are an overoptimistic assessment of the number of users and initial toll charges that deter users.
    There is probably a most efficient toll, like a most efficient speed(most speed for most economic use),but working out what that is the problem.

  4. Driftforge

    I have been pondering the question of when it is economically advantageous for a government to conduct a public works program – or even to continue owning one.

    There are a couple of issues that I’ve noted.

    One is the repeated occurrence of infrastructure being transferred to private control, getting run down and then being sold back to the government because the government ‘cannot afford’ to have that infrastructure fail. This is a problem that needs to be sorted out contractually.

    The other is projects where the primary impediment to implementation is political. Here in Tasmania, the Tamar Valley Pulp Mill is a recent case in point; there is a general feeling in both the Labor and Liberal parties that should that have been run as a government project, the political costs would not have been any higher and they would now have a working pulp mill that they could have sold on for private operation.

    The Hydro was built by government against political opposition, and now represents an asset worth maybe 20% of the state’s asset base. Yet now – what is the argument for continuing to own the Hydro? There is little to no political cover required for the organisation; it’s only operating existing (profitable) facilities. There is however a great political cost involved in selling it. So maybe the best way forward is to utilise it to conduct politically costly advances; new dams, nuclear power, etc.

    So.

    Where the risks to the completion of a otherwise economically feasible project are primarily political in nature, there is a prima facie case for government to undertake the works. When the value of the political risk fades, there is a similar case for the sale of the asset into private hands.

  5. Driftforge

    There is probably a most efficient toll

    I suspect the most efficient toll is not to have one , and just to collect the increased revenue from capital appreciation. Mind you, for that you require a land tax that is properly constituted rather than the shambles that we have now.

  6. Noddy

    If a State is a sovereign body then surely it should use its sovereign powers and create its own money issue to construct whatever is wanted by the people of the State.
    The only limitation is ‘if the people want it’ and the know-how, materials and labor are available for construction.
    When the project is finished it will be paid for so the asset should be credited to the people of the State for their use with only maintenance costs to be met… a truly new concept, free of accumulating debt to the bankers. You will know the Truth that will make you Free… that is free of the banker’s clutches.

  7. Driftforge

    I’ll leave aside the issue that our states are not able to create their own money issue, and consider the option of monetary creation ex nihilo for the funding of public works.

    What you are suggesting is that people accept that the government be arbitrarily able to demand goods and services for exchangeable paper, in a system where those being paid in paper know that the creation of that paper is arbitrary.

    This is actually quite different from today’s system in which the creation of money is intentionally obscured, tied to some consequence, and controlled consistently and generally predictably by an arms length institution.

    If the creation of money is clearly arbitrary, the value of a contract to perform works for said government is arbitrary, because it is know that the supply of funds is unlimited.

    Even if such a system were hosted on an existing currency in which faith existed, that faith would be quickly and irretrievably eroded.

    So – sure, develop a model in which the banks aren’t the creators of money. This isn’t it.

  8. Combine Dave

    The only limitation is ‘if the people want it’ and the know-how, materials and labor are available for construction.

    Just fly in/fly out some foreign construction companies to rush complete infrastructure as you need it, cutting out the rent seekers, the local construction company’s gouging and the unions.

    Kind of like the Mitsubishi factory did – http://www.dynamicbusiness.com.au/hr-and-staff/mitsubishi-factory-chinese-workers-1815.html

  9. craig

    Hence, why the government interest in private\public infrastructure projects, when the project is complete and collapses due to continual under capitalisation, the government has a very cheap infrastructure and is happy to whack a toll on it.

  10. Petros

    Let’s just put a tax on baby-boomers. They are the ones that under-invested on infrastructure over the years. Not sarc.

  11. rickw

    “Let’s just put a tax on baby-boomers. They are the ones that under-invested on infrastructure over the years. Not sarc”

    BS – Melbourne had around 30,000 people p/a stuffed into it over the last 15 years with negligible infrastructure investment. This is not a historical problem, it’s a releatively recent one. eg. 15 years ago to drive from The Shrine to Coburg at peak hour took 30-45 minutes. The same trip today takes around 90 minutes, if you’re lucky.

  12. Combine Dave

    Let’s just put a tax on baby-boomers. They are the ones that under-invested on infrastructure over the years. Not sarc.

    ^^ How? Cutting the pension until all viable infrastructure is paid for?

  13. stackja

    Funding managers are too short-term focused.

  14. JohnA

    Noddy #1148598, posted on January 13, 2014 at 11:50 am and
    Driftforge #1148648, posted on January 13, 2014 at 12:27 pm

    States don’t have to create money, if they go back to explicitly funding capital (works) with capital (loan funds).

    I recall the days of the old 30/20 investment rules, which fed funds from trusts, super funds, banks and insurance etc into capital works via Federal and State instrumentalities.

    In Victoria the Board of Works, SEC, Gas & Fuel (have I missed someone?) issued Bonds backed by government guarantees as to p+i, to fund their construction programs. No doubt the equivalent bodies in other States did the same.

    These were then paid down out of revenue via a 2% per annum sinking fund, which saw the asset paid for over about 50 years (ie. by the users of said asset).

    This worked best for the above bodies which generated revenue for services or supplies, but could have worked for ports, roads and railways too.

  15. Bons

    If we skip two payments on the fridge and one on the TV we can put a down-payment on a half-sized pool table.

  16. Brett_McS

    The obvious solution is to bring millions of more migrants in to the cities.

  17. A H

    The government should not be funding any projects.

    The reason why there is an under investment is because governments are expensive. They take more than they give, and they have syphoned significant wealth from the economy and wasted it.

    Further to that, they crowd out private investment. They push wages up and so on.

    The answer is to deregulate, stop the government investment, and to cut tax.

  18. Combine Dave

    The obvious solution is to bring millions of more migrants in to the cities.

    Should be fine.. so long as you ensure they are of the highest quality possible (after the GFC there was lots of highly skilled unemployed folk floating around) and don’t obtain access to life long welfare immediately upon arrival.

    Based on the top 2 results at the attached link I am not sure this is the case :)

    http://en.wikipedia.org/wiki/Immigration_to_Australia#Country_of_birth_of_Australian_residents

    The government should not be funding any projects.

    I agree on principle, but with super high gov mandated wages and other costs only the government can afford to tender out for projects of this nature (ignoring the fact that the gov “owns” the public land the infrastructure is to be built on/is the only power capable of compelling owners to sell their privately held land to make way for vital infrastructure).

    If the government were to hand out tenders for these projects on an internationally competitive basis (and either waive or deregulate local labour laws) I am sure we would see prices of construction projects fall and a boom in development could commence.

    I recall the days of the old 30/20 investment rules, which fed funds from trusts, super funds, banks and insurance etc into capital works via Federal and State instrumentalities.

    That’s quite scary… Uni super and other funds of that ilk are already bad enough investing in socially responsible schemes without being overtly controlled by gov and funnelled into loss making ventures.

    Imagine if your future retirement plans were contingent on the CLEM7 being a financial success?

    http://www.theaustralian.com.au/business/companies/government-wins-battle-for-bankrupt-clem7-tunnel/story-fn91v9q3-1226728864804

  19. .

    Noddy #1148598, posted on January 13, 2014 at 11:50 am
    If a State is a sovereign body then surely it should use its sovereign powers and create its own money issue to construct whatever is wanted by the people of the State.
    The only limitation is ‘if the people want it’ and the know-how, materials and labor are available for construction.
    When the project is finished it will be paid for so the asset should be credited to the people of the State for their use with only maintenance costs to be met… a truly new concept, free of accumulating debt to the bankers. You will know the Truth that will make you Free… that is free of the banker’s clutches.

    Chartalism and people’s banks are agood way to destroy a nation, ala Zimbabwe.

  20. A H

    combine,

    The government shouldn’t be owning land.

    And wage price shouldn’t be set by the government either.

    As for land acquisition, that can be done through private exchange. Everything will sell if the right price is offered.

    What’s the point of this pragmatic stance of accepting that governments have geared everything towards their continual encroachment upon everyone else? As you point out, the system relies upon always taking more power away from the individual and accruing it centrally.

    Government action, in an attempt to remedy government failure, simply extenuates the failure.

    Instead of saying, governments have ruined us, let’s give them more power so they can fix it, let’s try, governments have ruined us, let’s take the power back so we can fix it, and protect ourselves from them.

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