Abbott's infrastructure projects must have a solid foundation

The Coalition's focus on increasing infrastructure spending is commendable, and will go some way in boosting productivity growth. But it must ensure it invests in the right projects.

The federal government has taken a battering in recent months but it deserves credit for emphasising the importance of infrastructure investment to Australia’s economic future. But a report from the Productivity Commission reminds us that project choice is more important than simply spending more or privatising a greater number of state assets.

The Productivity Commission, in a report on public infrastructure released earlier this week, has declared the need for “a comprehensive overhaul of the poor processes currently used in the development and assessment of infrastructure investments”. In a damning assessment, it cites “numerous examples of poor value for money arising from inadequate project selection, potentially costing Australia billions of dollars”.

Australia has suffered from a public infrastructure shortfall for decades now, as successive governments at all levels have wasted a once in a lifetime opportunity to fund infrastructure, boost productivity and set Australia up for the future. Instead Australia finds itself on the back-end of a mining boom, with a budget and tax system in desperate need of reform and a backlog of necessary infrastructure projects that would make your head spin.

At the B20 Australia meetings this week, infrastructure investment has been a key theme. Treasurer Joe Hockey spoke today and discussed the Coalition’s plan to be the infrastructure government and usher in a new era of greater infrastructure spending.

It’s an admirable goal, and Hockey and Prime Minister Tony Abbott deserve credit for their focus on infrastructure and, by extension, productivity growth. But the Productivity Commission report reminds us that more spending does not necessarily equal better outcomes. Choosing the right projects is far more important than simply throwing darts and hoping that some of them stick.

The Productivity Commission notes that “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”. In short, the Coalition’s infrastructure plans -- including their asset recycling program -- could be disastrous unless they implement effective cost-benefit analysis and rigorous project selection.

Asset recycling “may be a useful program to build community support for efficient privatisation and the use of taxpayer resources to fund and finance new infrastructure”.  But it is not without its risks, and the Commission notes “it 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”.

The Senate has already enforced some restrictions on the asset recycling scheme, with infrastructure projects worth more than $100 million now subject to assessment by Infrastructure Australia. The Senate can also veto incentive payments to state and territory governments on an asset-by-asset basis. The Coalition might baulk at the additional red-tape but it provides much needed oversight to a program that was open to some abuse at the state level.

There must also be consideration on how best to fund projects. The Productivity Commission recommends user charges be utilised as often as is justifiable. In addition, private sector involvement should be undertaken to the extent that it is implemented well -- whether privately or publicly funded, poorly chosen infrastructure projects will cost users or taxpayers significantly.

Well-targeted infrastructure investment will be necessary to boost Australia’s productivity growth and that will go some way to offsetting the twin headwinds of an ageing population and a declining terms of trade that threaten to slow our economy and erode our tax base. Sound infrastructure investment would also go some way to restoring business confidence and encouraging greater entrepreneurialism and risk-taking.

The greatest source of long-term growth and living standards is productivity growth and Abbott and Hockey are correct to place that at the forefront of their economic plan. Now they just have to make sure that they get the projects right.