If it’s not in itself value adding don’t do it

I share Judy’s exasperation at the push for more infrastructure spending which is a code word for more government waste. If it is government spending, it will never repay its costs. Occasionally a government will grab hold of some natural monopoly – Telecom in the old days – from which even with all of the usual incompetence they were able to take in more money than they paid out. But past those few and far between projects, I cannot think of a single instance where governments take on projects which leave us economically better off. So this from The Australian this morning fills me with tremendous foreboding:

Joe Hockey says state treasurers will find it “very hard to resist” a federal proposal to recycle government-owned assets and boost spending on infrastructure.

State treasurers are in Canberra this morning to discuss spending on infrastructure and the carve-up of the good and services tax.

The federal Treasurer expressed optimism about the discussions ahead of today’s meeting.

The Abbott government is pushing for a deal that will unlock billions of dollars from the privatisation of state government assets to be reinvested in significant new infrastructure projects.

It’s understood proposals put to state treasurers will include new incentive payments from the commonwealth which will be linked to qualification deadlines.

“I have no doubt that the states will find it very hard to resist what the commonwealth is prepared to offer them,” Mr Hockey said.

Mr Hockey said the proposal would be “for the recycling of state government assets and investment in new productive infrastructure that is going to create jobs and improve the capacity of the economy”.

Governments do not create jobs. If you believe that government spending leads to an outcome where there are more jobs in an economy than there would have been had the government not indulged in this kind of spending, or that the economy will end up stronger and more productive, you will never understand a thing about how an economy works. And as an added extra, with increased government spending there will be lower real earnings as well. So let me repeat what Judy said below:

The bigger issue is with all this talk of INFRASTRUCTURE, what we are about to witness is just a monumental waste of taxpayer money on politically popular and excessively expensive projects for which there have been inadequate assessments. Just a continuation of Albo, really, who ramped up infrastructure spending from 1 to 2 per cent of GDP.

The disaster that overcame the Victorian economy in the dismal Cain-Kirner years were built on just those same “hollow logs” they thought they could tap into. If it’s not value adding – that is, if it does not pay for itself after every cost is taken into account – it makes us worse off, not better. Call it charity or welfare or whatever else signifies that it draws down on our productivity if you must do it. But for heaven’s sake, don’t pretend it is a contribution to economic growth.

UPDATE: Here is the Treasurer’s press release, Treasurers agree to boost infrastructure.

The Commonwealth’s incentive will be 15 per cent of the assessed value of the proposed asset being sold for capital recycling. If proceeds are used by the States and Territories for the retirement of debt or other purposes, rather than for agreed, new productive infrastructure, they will not be eligible to receive payments under the initiative.

This is an important initiative to remove debilitating infrastructure bottlenecks, stimulate construction and drive real activity in the economy when it is most needed, as investment in the resources sector declines.

Infrastructure Australia estimates that at least $100 billion in commercial infrastructure assets are currently tied up on government balance sheets and could be sold.

The partnerships could overcome the fiscal constraints Governments face to increase the pipeline of projects and improve Australians’ quality of life, tackle congestion, reduce business costs and help firms better link with their employees and customers.

Those who think this will be of the roads-rail-and-sewers variety of expenditure will just have to wait to see what gets floated instead. At least on the up-side, the States will have to sell up various capital assets to private owners to secure the funds so it’s not all bad.

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47 Responses to If it’s not in itself value adding don’t do it

  1. Paul

    The worst legacy of the Caine-Kirner years was the proliferation of speed cameras (after Joan waited for a wet weekend for political cover), so I guess there’s another kind of “infrastructure spend” that brought in the dough.

  2. Joe

    Infrastructure, or the maintenance of common natural monopoly property, is one of the basic functions of government, along with protection of property rights. In fact you can say that it an extension of the protection of property rights.
    I’d rather have full property rights inviolable by government with goverment ownership of common monoply property, than multiple owners of common monopoly property with watered down property rights. Their rights would be watered down because they would lose the right to refuse access to common monopoly property. You can’t have a workable road if the owner is allowed to arbitrarily refuse access to whom ever they don’t like. If you once allow the government to intrude into property rights, then they will find excuses to expand that intrusion.

  3. Driftforge

    I find the above unconvincing. Maybe I don’t understand a thing about how an economy works. It would seem to me that the place for government to develop assets is in conducting works where the political rather than economic risks are the primary if not limiting factor in the viability of an enterprise.

    In Tasmania I would consider the following to be appropriate due to their inherent political risk:
    — the construction of a major new hydro electric dam;
    — the construction of a nuclear power plant;
    — the settlement of previously reserved regions;
    — the construction of new highways;
    — potentially, the construction of a pulp mill.

    Conversely, the ownership of established hydroelectric capacity is not appropriate; once the political risks have been eliminated or substantively reduced, the assets should be sold.

    This attitude that infrastructure is by nature inherently wasteful is at the very least, poorly articulated. Without infrastructure, the world we live in is unimaginable. This does not justify cherry picked examples of infrastructure, nor the construction of infrastructure without proper consideration of the inherent return.

    It certainly does not help that our taxation system is not design to clearly impute a return from infrastructure spending; one more example of the advantages of a land rent rather than income and profit based taxation.

    I’m all for shifting the risk of development away from government; the concept of governments even having the capacity to take on debt is anathema. But to contend that infrastructure is unproductive is to commit to stagnation and decline.

  4. stackja

    Mention of “hollow logs” reminds me of Nev and David Hill who headed Wran’s Ministerial Advisory Unit. NSW has never fully recovered from the plunder of the “hollow logs”.

  5. Adam D

    Any news on what infrastructure is actually being referred to? FTTN sounds alright to me, some new dams would be positive and reduction of gridlock in the cities are all things I am happy to see taxes spent on. When nothing in particular is mentioned other than the buzzword “infrastructure” I begin to worry.

  6. Bruce of Newcastle

    I agree only in part. The problem Steve is alluding to is that governments are hopeless at building stuff. That is true.

    Operationally it is necessary to optimise the return on investment. NPV if you like. Where the government is investing the NPV can be negative. But the operational task is to minimise how negative the NPV is. Government are also hopeless at doing this.

    That is where I agree.

    Where I disagree is this. A negative NPV, which Steve implies is bad, may not necessarily be so. To accurately calculate the economic value of a project you need to know the return on investment. Unfortunately infrastructure projects are notoriously difficult in this respect since many of the returns do not accrue to the investor (ie the government). A good example of this is the Sydney Opera House. There is no way on Earth a rationalist approach to economically justify it would ever be feasible. But in the 40 odd years since it was built the payoff has been immense. The sails of the Opera House have graced every logo of Sydney, every advertising pamphlet, every tourism advertisement in those 40 years with immense value to tourism, attraction of people to Sydney’s financial hub, house prices and whatever. But you will never be able to quantify that value. It makes ‘intangibles’ look like cast blocks of solid tungsten. But the payoff is obviously immense and completely incalculable.

    The same goes for much of that sort of thing. The M5 duplication for example would save millions of hours a year of poor commuters’ lives, Badgerys Creek is difficult to calculate, but its clear that Sydney needs another airport. And so on.

    So, yes, I support Abbott’s push. I do however think the estimation methodology needs improving. It also needs to be absolutely and completely transparent, down to the spreadsheets and individual line item assumptions. All provided openly, freely and for public comment and fisking. For example public-private road and tunnel projects need a better balance, since quite a few companies have been burned by poor modelling. And a realistic appreciation of the visceral hatred voters have for user pays is sorely needed (eg tolls, mileage tariffs for road licencing).

    If, Steve, you can quantify the very intangible intangibles I would be fine with what you say. Unfortunately that is probably beyond the ability of economics in 2014.

  7. Alfonso

    OT

    Revealing an amazing lack of understanding of Australian property law….Cosgrove pays “tribute to the Nunawhal (sp?) people on whose land we meet.”

  8. Curmudgeon

    What bemuses me about infrastructure spending is that voters seem remarkably fickle in rewarding governments for building new roads, railways, stadiums, etc. Rather, the announcement of such projects seems to have a “sugar hit” effect, which quickly dissipates. Given that being re-elected is what gets politicians out of bed in the morning, and dictates their every word, one can only wonder what is Hockey’s motivation. Moving jobs from union-dominated public sector agencies to non-union contrators perhaps?

  9. stackja

    Liberty Quotes
    What the doctrine of balancing budgets over a period of many years really means is this: As long as our own party is in office, we will enhance our popularity by reckless spending.
    — Ludwig von Mises

  10. Steve Kates

    Yes, governments build roads and bridges, set up courts and public admin, run the public school system, undertake national defence and thus do a handful of useful tasks that are unlikely to be undertaken by others. But we are into the era of NBN, pink batts, school halls and the like for which we will pay and receive no economic dividend. Governments try to maximise votes not value adding output. Past the first ten percent of public spending it is hard to imagine any net value to the community and we are well past that ten percent.

  11. Petros

    I’ve often thought that to get fibre optic cables to homes, people could sign up to a registry if they want it. Once there’s a critical mass in a region, a company could then lay the cables. Business districts would be keen, north-west Tasmania not so much. Save a lot of money for the taxpayers. Also, why not have autobahn toll roads? I’d pay 50 quid to fang it and get there faster.

  12. stackja

    Liberty Quotes
    Nothing is more calculated to make a demagogue popular than a constantly reiterated demand for heavy taxes on the rich. Capital levies and high income taxes on the larger incomes are extraordinarily popular with the masses, who do not have to pay them.
    — Ludwig von Mises

  13. Sir Fred Lenin

    I walk around the City of Melbourne a lot ,its a sort of hobby,I am contiually Amazed at the huge Infrastructure projects completed in the Victorian and Edwardian eras! The railways .ports,tramways ,fine buildings ,all these things which are still in use ,and built to a fine standard using methods now considered primitive.the whol thing is breathtaking those people had vision that is seemingly lacking today.In those days actions overruled Bloody Petty political ambitions.If Thr Great Wall had been a project of todaysgovernments.it would still be at the “environmetal impact “stage ,with the local green councils?

  14. Squirrel

    It will be a comfort, of sorts, to those concerned about the mining capex cliff and a response (if that be needed) to Shorten’s mantra of “fighting for jobs”, but yes, there will doubtless be waste, rorts and stuff-ups.

  15. Past the first ten percent may be one thing, but if we aren’t even investing 2% of GDP into infrastructure? Do we have so little vision that we are scratching by on maintenance?

  16. tgs

    Bruce of Newcastle summed it up perfectly in my opinion.

  17. johanna

    Driftforge, the role of government is to reduce the political risks, not to assume them.

    Nice comment, Bruce. But the Opera House is a drop in the bucket compared to the billions that have been wasted before and since on vanity projects. As you point out, there is no economic modelling that can predict the future.

    Sir Fred, the glories of Melbourne’s old buildings (and they are superb) came from the rivers of gold from mining. The government had nothing to do with it.

  18. Tardell G

    400 thousand people a year migrating to Australia + no money spent on infrastructure = Bombay

  19. Driftforge

    Driftforge, the role of government is to reduce the political risks, not to assume them.

    Ideally, yes, but simply not possible in a late stage democracy. There is always the risk of a Rudd or a Gillard happening.

  20. Driftforge

    If, Steve, you can quantify the very intangible intangibles

    Collecting via land tax has the very real benefit of making these intangibles less so, because the value that infrastructure brings is captured in land value, then directly collected into land tax.

    Also provides a very direct measurement of the value infrastructure contributes.

  21. johanna

    Driftforge, the excuse that our democracy is not working very well as an excuse for taxpayers assuming commercial risk, is essentially reinforcing the problem.

  22. brc

    It’s all true that governments have a poor record in wealth creation beyond the establishment of order. But you’re dreaming if you think any government is going to drop the ‘creating jobs’ line. In the literal sense, jobs are created – one is able to apply for work in the new project. If the true sense, these jobsf are merely transferred from some other part of the economy, or perhaps from the future to the present. But created they are in the eyes of the voter. The sooner the economists of the world realize this and start working on preaching infrastructure is ‘roads, rails and ports’, the more that will be achieved.

    The big danger is that ‘infrastructure’ covers all types of crappy spending, like school halls, landscaping and, dare I say it, NBNing.

    Regional Australia could do with some actual infrastructure. Farming and tourism suffer from the lack of decent roads. The merest heavy downpour cuts the national highway network in countless places – an embarrassment.

  23. Driftforge

    I’m not talking about commercial risk, just political risk.

    And yes you may be right that it reinforces the problem, but it’s one of those problems inherent to democracy.

  24. johanna

    Stop wriggling, Driftforge. A political risk is a commercial risk.

    Asking taxpayers to assume that risk (when no-one else will) is indistinguishable from the mindset that gave us the NBN.

  25. Asking taxpayers to assume that risk (when no-one else will) is indistinguishable from the mindset that gave us the NBN.

    Political risk is only a subset of commercial risk, and it is only this subset that is best dealt with in the political arena. In some projects, it is the dominant risk.

    I’m happy to see this risk reduced by whatever means possible; I just haven’t seen a suggestion for reducing this risk that is as effective for major projects with political consequences — say a nuclear power station — that can be addressed anywhere near as well as by creating a GBE for the purpose.

    Now a GBE can be something like the NBN, or something like the Hydro; a disaster or a triumph. Importantly both outcomes are possible.

  26. H B Bear

    The problem with infrastructure spending, particularly on roads, is that by the time you realise it is too low it is 10 years too late. NSW saw it when Used Carr put up the “We’re Full” sign after the Sydney Olympics, Queensland drifted through the 1990′s while madly waving their success in drawing people to SE Queensland and WA was caught flat footed in the last surge in mining investment.

    There is nothing around the planning functions of State or Federal governments, that are more accurately described as planning socialist wish lists, to suggest that this is going to change.

  27. johanna

    Nope, Driftforge, political risk is a subset of commercial risk.

    You haven’t got the faintest idea of what “commercial risk” means. I very much hope that you are not in charge of any job that involves my investments.

  28. Driftforge

    political risk is a subset of commercial risk

    That is what I said… ???

  29. Combine_Dave

    What’s the alternative to this proposed rail, roads and ports expenditure? More congestion, more delays, more business, investment, tourism detered by and going elsewhere due to our shoddy infrastructure?

    Besides surely this is win-win, with the sales of existing (and shabbily run public infrastructure) being used to fund more projects.

  30. sdfc

    The Commonwealth should just butt out of state affairs.

  31. Combine_Dave

    The Commonwealth should just butt out of state affairs

    This is a position the state take only when the Feds are not offering ‘free’ money.

    I would be interested to see how SA would react to the announcement, given their future job losses and apparent need for a stimulus vs the fact they are very unlikely to sell public assets.

  32. sdfc

    Dave

    Some states, perhaps the majority, probably wouldn’t be in favour but that doesn’t mean sending taxes to Canberra only to receive them back as grants isn’t grossly inefficient.

  33. This is interesting offer in the context of Tasmania; Hydro as it stands is valued at somewhere between $4 and $8B depending on who you listen to.

    It’s more than the annual state budget; not 2% GSP.. its 30-60%.

    Here I see Steve’s concern — how on earth do you profitably invest that sort of money into a place the size of Tasmania without permanently and disruptively affecting the economy?

    Even the 15% bonus would be hard to add in a year….

  34. .

    Infrastructure Australia estimates that at least $100 billion in commercial infrastructure assets are currently tied up on government balance sheets and could be sold.

    Hmm yes well. But does it pass a CBA?

    Where I disagree is this. A negative NPV, which Steve implies is bad, may not necessarily be so. To accurately calculate the economic value of a project you need to know the return on investment. Unfortunately infrastructure projects are notoriously difficult in this respect since many of the returns do not accrue to the investor (ie the government). A good example of this is the Sydney Opera House. There is no way on Earth a rationalist approach to economically justify it would ever be feasible.

    Defence for example only has implicit benefits. Does this mean it is worthless? You have made an assumption about what can and cannot be counted.

  35. nerblnob

    Roads, rail, ports.

    The problem a lot of businesses have with two out of those three is that you have to risk obstruction at a bottleneck controlled by anti-business unionists. Nobody is going to do that for anything time critical. Fix that, and rail and coastal freight might become more attractive to local businesses which would then justify private or public funding.

  36. The Pugilist

    Asking taxpayers to assume that risk (when no-one else will) is indistinguishable from the mindset that gave us the NBN

    Exactly right Johanna. Driftforge, you are on some good drugs my friend. Creating a GBE for purpose??? That’s the statist business model. Perhaps the way to deal with the ‘problem’ is not to build the fucking thing in the first place…you’d be surprised. If people really want something, some bright spark will fucking build it…

  37. Rob

    Sounds to me like a contrarian viewpoint (or a attempt to start an argument)
    Where are the entrepreneurs that would build and provide reticulated water for all and sundry, build and operate sewers, or develop universal mass trasportation systems?
    Unless all roads are tolled, who would duplicate increasingly busy highways. And pray tell who would build the community’s parks and playgrounds?
    Installing pink batts was an exceptionally poor use of public funds. Such outlays should always be the option and expense of the individual and the benefits of doing so, the sole motivator.
    Taxpayer’s money should only be spent where it benefits the entire community and nobody else would do so.

  38. Combine_Dave

    Some states, perhaps the majority, probably wouldn’t be in favour but that doesn’t mean sending taxes to Canberra only to receive them back as grants isn’t grossly inefficient

    Agreed.

  39. If people really want something, some bright spark will fucking build it…

    In some cases yes. In this world, if some bright spark tries to build it then idiots in government with nothing to lose and everything to gain will work to stop it.

    There are advantages to having the government with skin in the game.

    And yes, this is not a ‘libertarian’ position, but we don’t at this stage live in a libertarian world

  40. What is inherent about democratic government that results in this complete paucity of capacity to create?

    This isn’t about government per se, but about out particular form of government.

    It’s not about other people money — public companies utilise other peoples money with stewardship and capacity to generate.

    A big part of the issue is the ownership of government by all — and none. Infrastrucutre when you get down to it is investment in the state itself, and we have no one who’s interests are solely served by furthering the interests of the state itself.

    This is a deep, irreversible flaw in democracy.

    Maybe its time we brought back more than just titles.

  41. Combine_Dave

    Maybe its time we brought back more than just titles

    What ever do you mean?

  42. What ever do you mean?

    It’s time democracy was superseded.

  43. Combine_Dave

    What ever do you mean?

    It’s time democracy was superseded

    Putin, PRC China or pre-magna-carta-uk-style?

  44. Tel

    Putin, PRC China or pre-magna-carta-uk-style?

    How about post-magna-carta-EU-style?

  45. Tel

    Occasionally a government will grab hold of some natural monopoly – Telecom in the old days – from which even with all of the usual incompetence they were able to take in more money than they paid out.

    There never was anything natural about the Telecom monopoly in Australia. It was a continuation of a forced monopoly on communications that started with Elizabeth I who wanted to spy on people’s mail.

  46. Combine_Dave

    Putin, PRC China or pre-magna-carta-uk-style?

    How about post-magna-carta-EU-style?

    Where you still have a democracy but only the left and the welfare dependent come out, voting themselves ever more largess until the whole edifice collaspses EU gets bailed out by the German tax payer Wayne Swan’s borrowed millions?

    We already have that here, it’s called an ALP Government and it happens once every 6 years (unless we are very unlucky).

  47. Tel

    Taxpayer’s money should only be spent where it benefits the entire community and nobody else would do so.

    If it isn’t possible to find private backers on a Private-Public-Partnership there’s a reason for that, and government should take note.

    In some cases you have a toll-gate problem. You can’t make a local park user pays because the billing procedure is more complex than just building the park. Then again, since local residents are the ones who benefit from the park, they can organize it between themselves… if that’s too hard for them then they get nothing, which is presumably what they wanted.

    For roads, water, electricity, communications. and other big-ticket infrastructure the toll-gates and billing are well solved problems. A PPP is an excellent method of finding funding for these projects.

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