Get smart or face infrastructure chaos

With budgets getting squeezed tighter and tighter, governments are likely to shy away from funding large-scale infrastructure projects. For Philip Lowe, the key is not avoiding debt but spending more wisely.

Governments are spending a lot on infrastructure but not getting bang for their buck. The result is an inefficient public transport system, too much congestion on our roads and internet infrastructure that is pretty embarrassing. Reserve Bank of Australia (RBA) deputy governor Philip Lowe today called for smarter infrastructure investment.

Speaking at a conference on productivity, Lowe turned his attention towards infrastructure investment. This followed a detailed discussion on Australia’s productivity performance and the drivers of income growth over the past two decades (Not just a bump, but a permanent economic thump, November 26).

Most of Lowe’s speech on infrastructure investment focused on transportation but the general principles and sentiment can be extended across the economy. It is clear that the RBA is becoming increasingly pessimistic about the outlook for the Australian economy and while growth might be moderate over the next few years, the outlook beyond that concerns them. It is a welcome shift that will hopefully push the public debate towards acknowledging the challenges faced by the Australian economy.

In recent years Australia has done a fairly good job of increasing capacity in the mining sector to take advantage of the rising demand for commodities in China and the developed world. But Lowe is concerned about our investment in other sectors of the economy and our ability to compete successfully in international markets in these sectors. Given the debate about the car industry right now those concerns are warranted and widespread.

In his speech, Lowe focused primarily on the transportation system and given it takes me over an hour to get to work I would certainly appreciate any improvements that could be made. I suspect many of us have experienced the frustration that comes with moving through our major cities, and it is not just a casual frustration but a daily one.

Improved transportation has some obvious benefits. First, reduced travel times and costs for both people, and goods and services. Second, there are potential environmental benefits as well. Third, reduced travel times create an increasingly integrated community.

The final point is what Lowe refers to as ‘agglomeration spillovers’. By reducing travel times, infrastructure investment can bring consumers closer to more businesses and bring workers in contact with more opportunities. With an inefficient transportation system it becomes increasingly important for workers to be located nearby business hubs; for example, people often want to live near the city.

This is one factor behind rising house prices – a constantly rising demand for well-located land clashing with a relatively fixed supply of housing close to the CBD. Better transportation infrastructure effectively increases the supply of well-located land by reducing the importance of living near the city.

Greater community integration also promotes competition by creating alternatives for consumers. And competition encourages innovation and a more productive economy.  The internet achieves this to some extent but is not always as applicable at the community or small business level.

Lowe highlighted several challenging facing transportation infrastructure:

Project selection: There is, at any given time, a range of potential projects that could be undertaken but obviously not all projects provide the same benefits. Government budgets will become increasing tight in coming years as our population ages, so there is a need for more rigorous cost-benefit analysis before projects are undertaken. Money needs to be spent on infrastructure investment but more importantly it needs to be spent wisely.

Financing projects: For the private sector, the aversion to infrastructure investment has less to do with a lack of money as it does with an unwillingness to take on the risk of investment. Infrastructure projects are often huge, as are the potential risks. There is certainly a role for the government here to either share the risk of projects or to invest more directly. Superannuation might also be an option for some projects.

Given the outlook for government budgets, and the aversion to public debt, future governments may be less willing to agree to large-scale projects. But debt is important for financing long-term projects and if the benefits are sufficient then increasing debt is warranted. Governments need to think beyond the election cycle when it comes to infrastructure investment.

Lowe acknowledges that we need to find a sustainable way in which to finance our infrastructure. He suggests that it may be easier if the infrastructure itself can generate revenue through charges or levies (such as toll roads).

It may not be a popular position (who wants to pay more?) but I’m in favour of using charges if it improves the quality of our infrastructure. It is in my opinion a price worth paying. For toll roads, those who reap sufficient benefits from the road can choose to use it and those that don’t choose to use the old roads – the result is time saved by both parties.

Governments are currently spending more than ever on public infrastructure but they don’t seem to be getting much bang for their buck. The result is an inefficient public transport system, too much congestion on our roads and an internet infrastructure that would almost be impressive to the third world. Clearly both the public and private sectors need to be a bit smarter and ambitious when it comes to infrastructure growth.