Why the federal government should stay in its lane on infrastructure funding

The federal government has called a 90-day snap review of the Infrastructure Investment Program. The program was originally intended to fund projects of national significance, but has since ‘drifted away’ from those lofty ambitions.

But should the federal government be involved in infrastructure funding at all? Grattan Institute research has shown that federal funding of state and local infrastructure projects is often an exercise in pork-barrelling. After all, local road roundabouts and train-station carparks aren’t exactly the Sydney Opera House.

In this special Grattan Podcast, our transport and cities experts Marion Terrill and Natasha Bradshaw discuss with host Kat Clay how federal infrastructure money should be best used.

Transcript

Kat Clay: The Commonwealth Government has called for a 90 day snap review into the Infrastructure Investment Program, or IIP. Where the original intention of the IIP was to fund projects of national significance, the program has since drifted away from its original intentions. But should the Commonwealth government be involved in infrastructure funding at all?

Our previous research has shown that federal funding of state and local infrastructure projects can often be used as an exercise in pork barreling. Roundabouts and car parks aren’t exactly the Sydney Harbour Bridge. I’m Kat Clay, and welcome to the Grattan Podcast. Here to talk about how the Commonwealth can stay in its lane on infrastructure spending are Marion Terrell, our Transport and Cities Program Director, and Natasha Bradshaw, Associate.

So Marion, can you tell us a little bit about this snap review and why it’s happening?

Marion Terrill: In May, the Minister, the Commonwealth Minister for Infrastructure, Catherine King, announced that there’d be a review taking 90 days and there’d be three external expert reviewers. So it’s a quick review for such a big program.

And, and the rationale for the review stresses two factors. One of them, as you’ve said, is that the investment program has drifted away in recent years from projects of national significance. And the other point that they make in the setup to the review is that the pipeline needs to be sustainable and, and sort of take account of the market capacity, which is a very salient issue at the moment.

Just to explain a little bit more, the Commonwealth doesn’t itself generally build or operate infrastructure, but it co funds it with, mostly with state governments and to some degree with local governments. So this review is really about what the Commonwealth government gives in funding. to other levels of government as a partial funding contribution.

One of the interesting things about this review is that the terms of reference asks the reviewers to make recommendations about reforms to ongoing and terminating infrastructure programs. And what they’re talking about is things like roads to recovery and black spots and bridges renewal. These are programs that support regional roads and are particularly important to local government.

So the minister has stressed that these programs are not in jeopardy, But the Commonwealth is seeking advice about whether they’re the best way to deliver assistance.

Kat Clay: So in this podcast, we want to focus on this particular aspect in some detail. Yeah, and we’ll talk a little bit about where you think the money should be spent a little bit later in the podcast.

But Tash, I mean, 120 billion sounds like a very big number. Can you put that into context for us around the infrastructure spend? And what would happen here if the Commonwealth pulled right back and actually spent a lot less than 120

Natasha Bradshaw: billion? Yeah, it’s a big number, Kat, and it’s about a 50 percent increase on what they would typically spend.

So the Commonwealth government typically budgets about 8 billion per annum for infrastructure. So over 10 years, that would be about 80 billion. One thing to note though, is that we do often see an underspend on infrastructure compared to what has been budgeted and that’s because the states don’t get the money out the door within the budgeted year.

And if you step up spending even more without an equal increase in the capacity of the construction sector, then there’s a good chance they’ll kind of continue to struggle to get that funding out the door. If the Commonwealth pulled right back and spent less. I don’t think you’d get too many complaints.

The sector has been calling for this for quite a long time given that they’re really hitting capacity and that’s causing problems for the sector. And in a time of high inflation and budgetary pressures, it would really fit well within the government’s agenda. The problem is that they’ve already committed this funding.

And so the scope of this review is not to determine how much they should spend, but rather how to distribute the 120 billion. So what we’re proposing is to pull back at least in the first few years and, and delay that spending until the sector can catch up.

Kat Clay: Marion, everybody seems to love a really big infrastructure project.

So The question I want to ask you, and I probably know the answer to this, is why shouldn’t the government fund more infrastructure projects instead of holding back, holding the reins?

Marion Terrill: Yeah, so we do love big infrastructure projects, particularly if it doesn’t feel like we’re personally paying for them.

So this review is just focused on the Commonwealth’s role here, so it doesn’t mean that the state, it doesn’t really have it take a view. about what the states should or shouldn’t do. But the Commonwealth has divided up roles and responsibilities with the states. And after all, they’re the ones who build and operate most of the infrastructure.

And it’s laid out these roles and responsibilities in the National Partnership Principles. In other words, specifying the circumstances where federal support for a state project may be warranted. The principles aren’t just about infrastructure, they’re general, but in this context what’s relevant that they specify that Commonwealth support may be warranted if the project’s got spillovers.

So it benefits people beyond the boundary of the state that it’s in. So an example of that might be the interstate highway network, or you could even say Sydney. airport is like that because it serves more than just New South Wales. It’s the biggest, it’s a key airport in Australia. You could a second principle is that where the project has a particularly strong impact on aggregate demand or sensitivity to the economic cycle.

And that’s important because the Commonwealth has this responsibility for macroeconomic management. And thirdly the Commonwealth might fund a project where there’s a need for interstate harmonization, like setting standards, that kind of thing. To go back to, well, why shouldn’t the Commonwealth fund more of them?

The terms of reference are really asking about where the Commonwealth should focus its effort. And this is what we should be thinking about. And they specify national significance, which is, and there’s a, and also mentioned the National Land Transport Act, which is where the National Land Transport Network is specified.

These are the key roads and railway lines that form the sort of the backbone of the country. So I guess I would be saying the Commonwealth government. Should just be funding things that are on the national land transport network rather than kind of any old project that comes up and that’d be a way I think for, it doesn’t prevent the states from doing what they think they need to do, but it’s just not everything is the Commonwealth’s job.

Tash, can you talk a bit about the, the capacity constraints and the macroeconomic management aspect of this?

Natasha Bradshaw: Yeah. So one of the principles as Marion said, is that. The Commonwealth should be funding programs that are consistent with its macroeconomic management responsibilities and sensitivity to these responsibilities is very crucial at the moment during a period of high inflation and budgetary pressures.

So, currently, a combination of soaring demand and supply constraints are quite threatening to the construction industry and causing some unnecessary inflationary pressure. Way back in 2019, Infrastructure Australia warned that the growth of these really large scale infrastructure projects was stretching the capacity of government and industry.

And in 2020, they were asked by COAG to start monitoring the industry and its capacity constraints. The most recent report they put out showed that the industry is being stretched. There are shortages of skilled labor and of key materials. And because of these shortages, the prices of both labor and materials is skyrocketing.

Now this causes problems both for industry and government. So for the industry, when prices rise really quickly or they can’t meet deadlines because they can’t get the supplies or the labor that they need, we’re putting businesses at risk of not being able to fulfill their contracts. And what we’ve seen this year is quite a stark increase in the number of construction businesses that are entering or at risk of insolvency.

And for the government, if they enter contracts while the sector is already overheated, they’re likely to be overpaying for projects, which is not good value for taxpayers. And further, Commonwealth investment in infrastructure can further overheat the sector and provide stimulus to the economy, which is not really what we need at the moment.

So we’re suggesting that the Commonwealth should delay starting any new major projects until the economy and the industry is a little less overheated.

Marion Terrill: That’s right. Like, even if you were to sort out these timing issues that Tash has talked about there are still a range of problems with megaprojects.

Our research has shown that over the past two decades, Australian governments have spent 34 billion more on transport projects than they first told us that they would. And so the actual costs are, have been exceeding expected costs by an average of 21 percent. And the thing about this is that big projects are particularly at risk of cost overruns.

So more than a third of the overruns since 2001 came from just seven gigantic projects. And also projects that are announced before governments are prepared to commit formally are also quite risky. Only a third of projects are announced before the government will commit formally often sort of in an election context, that kind of thing.

But these projects that are announced prematurely account for more than three quarters of the cost overrun problem. So in essence, there’s often just much better value for money and value benefit to the community from more modest upgrades and also maintenance of the infrastructure that we’ve already got.

Kat Clay: So Tash, even though Some of these projects do get agreed to in the heat of an election campaign, and often without the full scrutiny that’s needed. When we look back at, you know, the great projects of Australia, you know, things like the Sydney Harbour Bridge, or the Sydney Opera House, I mean, if people had insisted on full scrutiny of these projects, they might Not have actually been built.

Natasha Bradshaw: Well, Kat, all of these decisions are about trade offs. So if you build a particular tunnel or a railway, we’re not suggesting that no one will use it, but we do have a constrained budget. And so we need to carefully consider what are the best value investments. And we can’t do that if projects are not assessed on an even playing field.

So often the decision to invest is made without the public knowing what the project will cost. And this is misleading to taxpayers who ultimately fund these projects. And unfortunately, we often do see these cost overruns as a result, as Marion just said. So taxpayers spent 34 billion. more dollars on transport projects between 2001 and 2020 than they had first been told they would spend, which is a fifth of the initially expected costs.

Now, had taxpayers known in advance about these costs, they might have felt differently about the projects.

Kat Clay: It’s interesting because when you think of that in a consumer context, on a small scale, if you go in and someone says, oh, it’s going to cost a fifth more at the end of say your appointment. As a surprise, you know, you’d be up in arms about that, but it’s surprising that we’re not actually as angry about these kind of overspending on mega projects, considering the scope of the spend itself.

Marion Terrill: It’s almost becomes this kind of you know, arbitrary number because it is so big. It’s also because I think one of the reasons is that when the decision to invest is made and it’s all announced and there’s lots of hoopla. That’s all great, and there can be electoral advantages for the politician in question, but these things take quite a while to build, and so, you know, three or five or seven years later, whatever it turns out to be quite likely that person’s long gone, there might be a different government altogether, so there’s sort of no one who really it sort of retains a feeling of accountability throughout the process, and I think that is partly so we have a set of incentives to announce things without doing due diligence and that’s actually what we see happen.

Kat Clay: So the Simpsons monorail episode was very accurate here. So the thing we were talking about at the start is how we would actually spend this 120 billion dollars and I’m really interested in your ideas here. Obviously we don’t need any more opera houses. What should we be spending the money on instead, Tash?

Natasha Bradshaw: What we think the government should do is to divert more of the funding away from megaprojects and towards the maintenance of local infrastructure, particularly roads and bridges. While local roads are trafficked a bit less than state and federal roads, locally managed roads make up about 80 percent of the length of the to our total road network.

And all of these roads together make up a national network. So the Commonwealth has a role in ensuring that these roads meet a minimum standard so that people and goods are able to move safely and efficiently across the country. The Commonwealth also has deep pockets because of its extensive taxation powers.

And many councils are struggling to meet their spending obligations as they’re expanding into different service areas and costs are increasing. After a few years of La Nina, we’ve all seen the headlines in recent years about pothole plague and nightmare roads. So clearly the community isn’t satisfied with the state of our roads.

And so the Commonwealth does have a role in helping the fund, helping the councils fund improvements to the road network. Now, many councils, particularly those in regional and remote areas, don’t have sufficient ability to raise the revenue that they need to fund their road networks. And this is because if you look at these regional and remote councils, they’re very vast in terms of land area.

So they have very large road networks, but very small populations from which they’re able to raise rate revenue from. And so these councils in particular have a difficult time funding their road network. And so the Commonwealth has this redistributive role of helping these councils that are much more reliant on grants to fund their road networks.

Marion Terrill: There are real benefits to getting this maintenance, sort of dealing with some of the backlog and getting it onto a more even footing. I think from the point of view of drivers, there are benefits because, as you said People are unhappy about the state of local roads, but poorly maintained roads increase the risk of crashes, especially in wet conditions.

But they also mean that drivers have to slow down to and they use more fuel to travel a given distance. If they hit a pothole, it’s not only dangerous, it’s also expensive to get your vehicle repaired. So there’s, there could be benefits for drivers, but. One of the other things that’s perhaps sort of less obvious is that you might think that delaying maintenance would save money but it’s actually turns out to be more expensive to run a regime of fixing the worst roads first, rather than what’s known as a stitch in time strategy, where repairs and rehabilitation.

happen at the optimal time to prevent the an accelerating deterioration of the road. There’s actually sort of overall cost savings to be had as well as significant benefits to drivers in, in doing sort of in keeping the, the local roads maintained to an adequate standard.

Kat Clay: Marion, I’ve just got a couple of follow up questions for you.

Given that you’re calling for local roads to be funded by this Commonwealth body which is traditionally funded federally significant projects, do you think there should be a shift in that definition to fund projects that are actually going to be the most beneficial versus federally significant?

Marion Terrill: Yes, the Commonwealth funds the local roads under a different funding program. Which is in scope, so a suite of smaller programs, such as roads to recovery and bridges renewal. They’re not actually part of the formal infrastructure investment program, but I think it does make sense to think of them in the same frame, because it’s really.

The Commonwealth spending money on transport infrastructure, the arguments for providing funding to local governments are different to the arguments for providing funding to state governments with state governments. It’s much more a matter of these nationally significant projects national. Standards and harmonization across the country and a role in, in macroeconomic management.

Those are the, the guiding principles for providing funding to state governments for infrastructure projects. But when it comes to local government, it’s a different thing. As Tash said, what’s going on here is that while some Local governments are well able to raise adequate revenue, typically metropolitan councils.

It’s a very different story in remote areas in particular, and to some degree in regional areas. And so the arguments for the Commonwealth to be involved in funding there are more to do with the fact that the Commonwealth does raise more revenue than it does. its spending requirements and whereas for, at least for some councils, that’s not the case.

But also because there’s very good value for the taxpayer dollar in spending this money on maintenance rather than on mega projects.

Kat Clay: Yeah, and I think Tash made the very good point that, you know, there has been severe weather conditions, you know, there are a lot of maintenance issues with roads at the moment.

How do we avoid local road funding becoming another pork barreling scheme, like funding the roads in the areas where you want to win an electorate?

Natasha Bradshaw: There are several Very effective infrastructure sub programs at the Commonwealth level that do provide support to local councils. These are typically about 2 billion a year that the Commonwealth spends on these programs.

Now, previous Grattan work has shown that the programs that we’re suggesting continue getting. More funding those that are allocated on an objective criteria, and that really reduces any risks of port barreling. So for example, both the black spots and the roads to recovery program funding is just as likely to go to safe and marginal seats under both labor and coalition governments.

And the funding is distributed more to regional areas than urban ones reflecting, as I said before, where road quality and safety improvements are most needed. The other thing is that these programs often provide a bit more bang for buck than the mega projects we’ve been talking about. So for example, the criteria for the black spots funding, which is a road safety program require that projects have a cost benefit ratio, sorry, have a benefit to cost ratio of two to one, which is well above that of many of the major projects that have already been funded.

So for example, The Westgate tunnel project had a benefit cost ratio of just 1. 1. The suburban rail loop is likely to be close to 0. 5. And one of the worst offenders is inland rail, which had a benefit to cost ratio of 1. 1 when its business case was first released and the project was expected to cost 9.

9 billion, but that cost has now blown out to about 30 billion, suggesting a much lower benefit to cost ratio. And so. These programs not only are fairly distributed, but also provide better value for money than many of the large projects. Thanks Tash.

Kat Clay: Marion, I mean, if these programs do get more funding, would you make changes to them?

Marion Terrill: I would. One thing that we’ve been focusing on is red tape. So the programs that we’re talking about here have grown up organically, but if you look today at the requirements as the review panel are doing, the programs don’t always make a lot of sense. So here’s an example. Every council gets Roads to Recovery funding, and it’s based on a formula.

But if they want to get their share of funding, they have to submit a work schedule of specified programs, which meet the criteria, and they have to spend the money within six months of getting it, regardless of how hard it is to get labor and supplies, and they need to meet the criteria. Minimum requirements for their own funding contribution.

They need to put up a sign. I’m sure you’ve seen those Roads to Recovery signs. They need to submit quarterly and annual financial reporting of the funds in their use. And so that’s one example, but several other programs use the same criteria to distribute funds, but they’ve got their own application and reporting requirements.

There’s wasteful red tape here. We at Grattan have run a survey of councils, asking them a range of questions about how they fund and maintain local roads. And we’ve found that the average council spends three hours a week just applying for grants. This is nothing about how long they spend complying with the reporting requirements.

So, so it’s quite, it is quite a drain when they do actually get the money in the end anyway on this, these set criteria. So. Well, I guess I think that there could be significant rationalization of the red tape associated with this funding. Another thing that we would, that we hope that the reviewers will look at, and that is betterment.

Now rebuilding after natural disasters is a big issue at the moment, and there’s several reviews underway about the way that assistance is provided. What’s important here is that the Commonwealth, Commonwealth acts as the ultimate insurer. for eligible expenditure above defined thresholds. The money’s actually managed operationally by the states.

So the requirement to get funding is basically that you build back like for like. We, we do see an opportunity here for rebuilding back in a more disaster resilient way. So, so there’s scope to reduce future funding requirements. If the road or the other infrastructure is more resilient in the first place, where that’s how it plays out, we’re very conscious that it is a lot better for the individuals in the communities affected by a natural disaster if their infrastructure is a bit more resilient.

So it can’t solve everything, but I think there is scope to improve the way that the Commonwealth funding is provided in the aftermath of a natural disaster.

Kat Clay: Thank you so much, Marion and Tash. It’s been a really interesting conversation, especially around how we can rebuild roads and improve local amenity through that Commonwealth funding.

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