The Australian ‘infrastructure deficit’ that isn’t

by Marion Terrill and Brendan Coates

Published by Australian Financial Review, Tuesday 8 March

In the competition for national airtime, voices bemoaning our national ‘infrastructure deficit’ come second only to those deploring the budget deficit. But whereas the budget deficit is hard to deny, as Treasurer Scott Morrison would attest, the evidence of an infrastructure deficit is much harder to find. Arguably the real risk we face is not that we won’t spend enough on new infrastructure, but rather that we will spend too much on the wrong infrastructure.

Many have decried the state of Australia’s infrastructure and urged governments to build more. Engineers Australia has estimated our infrastructure deficit at around $800 billion. Infrastructure Partnerships Australia points to $770 billion shortfall. A recent report by Infrastructure Australia, the peak advisory body to the Commonwealth on infrastructure, is just the most recent call for ramped-up infrastructure spending, especially in transport.

But the methodologies people use to come up with these numbers are far from convincing. In truth, it is not obvious how to determine whether an infrastructure deficit exists or not. After all, if there were never any transport congestion, it would imply that we had spent far too much on deserted roads, idle ports and empty trains. While new additions to the network will always be needed as populations grow, simply assuming we have a substantial infrastructure deficit is a mistake, and one that risks leading us towards even more poor investment choices.

The reality is that Australia has already spent an enormous amount building new transport infrastructure over the past decade. We now spend 1.6 per cent of GDP on transport infrastructure, more than any other country in the OECD. If there is an infrastructure deficit, is not because of a lack of infrastructure investment. Rather the opposite.

This boost to infrastructure investment must ultimately be repaid. Some money can be recouped via user charges, and Infrastructure Australia rightly recommends that more should be. But most of the cost of new infrastructure will have to be funded from future tax collections. Interest and depreciation charges, largely a legacy of increased capital spending, have increased from about 6 to more than 9 per cent of state and territory revenue over the past decade.

New capital spending on transport isn’t always the right solution to congestion anyway. As Infrastructure Australia points out, better maintenance and more efficient use of existing assets can be a cheaper option. After all, the vast bulk of the transport infrastructure we will use over the next 20 years has already been built. Yet Australia spent just 15 per cent of all transport infrastructure funds on maintenance in 2013, compared to 25 per cent a decade ago. We now spend a much lower portion of our transport infrastructure budget on maintenance than the OECD average.

Infrastructure spending decisions are inherently political. That’s why Infrastructure Australia was established in 2008 to instil greater discipline in Commonwealth Government decisions to invest in new infrastructure. Several state governments have since followed suit, creating their own oversight and advisory bodies. But our recent track record in choosing infrastructure projects shows that poor decisions are still being made. Victoria’s East West Link is not the only transport project where the Commonwealth committed money – $3 billion – before an independent evaluation of the business case had been made public. Nor is it the only case where the reported costs of the project outweighed the benefits.

One reason that bodies like Infrastructure Australia cannot address the risk of wasteful spending is because governments don’t always ask for their advice. Since June 2012, 55 per cent of Commonwealth spending on transport infrastructure has been allocated to projects where Infrastructure Australia has not published a project evaluation.

In practice, the only way to ensure that new infrastructure projects are worth the cost is to subject them to a rigorous, like-for-like analysis of claimed project benefits and expected costs. If a project’s benefits exceed its costs, then by definition, it will provide a net benefit to the community. And if no government could commit public money to an infrastructure project before a rigorous evaluation of the business case had been tabled in the Parliament, politicians would think twice before committing money to dodgy projects for political gain.

The real deficit is in the governance arrangements for deciding how much money gets spent on what. Greater discipline regarding project selection might not lead to a boost in the amount spent on transport infrastructure in Australia. In fact, based on our track record over the last decade, taxpayers could end up both better off, and spending less on new transport infrastructure than they do now.