Drivers of Infrastructure Costs

in Australia – Lessons learned

from the ‘Perfect Storm’

Joe BraniganSMART Infrastructure Facility, UOW

International Symposium for Next Generation Infrastructure

Vienna, Austria

30 September – 1 October 2014

Outline

• Why has it become more difficult to manage pressures on our publicinfrastructure?

– Public Infrastructure investment in Australia in the 2000s

– A Perfect Storm

• What can we do about it?

– Manage demand better

– Create and sustain future options through better planning

– Incremental is beautiful

– Institutional reform to focus on accountability and transparency

– More integrated approach to land use and transport planning

Why has it become more difficult to manage pressures on our public infrastructure?

3

The 2000s – best of times and worst of times for infrastructure

• Reform in 80s and 90s towards more efficient provision

– Corporatisation of inefficient public utilities (low hanging fruit)

– Fiscal restraint

• 2000s - A boom decade

– Mining boom (2003-2011)

– Electricity rebuild (mid-2000s, post Somerville I recommendations)

– Drought proofing (late 2000s)

– Strong population growth in major cities (overseas migration)

– Response to GFC (2008-09 to 2010-11)

Poor infrastructure decisions have a high opportunity cost and can be a long-term drag on the economy’s productivity.

Gary Banks, Productivity Commission Chairman (2012)

4

Very substantial increase in spending

• For example, the Queensland capital program peaked at $4,000 per person in 2008-09, more than doubling in per capita terms in just four years

5

High input growth was not match by a corresponding growth in output

• Productivity has declined since 2003-04

– Ramp-up in mining boom investment without corresponding increase in output, but benefits from production boom now, compared to…

– Very poor performance in EGWWS, mothballed desal plants, over-spec NEM, roads and tunnels with few cars (built too early)

6

The mining boom

• Mining boom increased competition for inputs used in majorinfrastructure projects

– In economic terms, as export prices rose, the opportunity cost of usingthose inputs for say urban transport projects or for desal plantsincreased

• But once launched, the projects were not scaled back, even when theircosts spiralled out of control

• So to shift scarce resources from non-mining to mining uses, input priceshad to rise even more

7

Mega projects

• Inertia was aggravated by focus on politically salient 'mega projects' in acontext of intensified political competition

• Because these projects were 'one of a kind', their costs and patronageinherently difficult to predict, and very vulnerable to forecasting error

• But once launched, mega projects proved impossible to turn around, anddisplaced less visible, but often no less important, incremental or de-bottlenecking projects

• $10b Cross River Rail is a fiscal bullet dodged,– An internally-driven mega-project with little outside

scrutiny

8

Changing urban environment makes construction more costly

• Higher population density and much higher land values

– Increases disruption associated with major works

– And cost of land resumption

• More brownfields assets needing expanding or ‘decongesting’

• Fewer vacant corridors

– Imposes very costly solutions such as tunnelling

• Greater environmental restrictions and more responsiveness to community concerns

9

Structural factors - Technical standards

• Bespoke engineering (NSW rail)

– Successive build of trains has seen progressively increasing demands insystems requirements, which in some areas have then been built intothe technical standards.

– Generally, off the shelf products do not meet these requirements andso this means each new train must be designed from scratch to meetthe NSW standards of the day.

• Bespoke engineering (Qld roads)

– ‘Queensland Only’ standards set by Roadtek made constructions costsneedlessly high.

– Were removed by the Newman Government early in its first term.

10

Structural factors – Environmental, Planning and Design requirements

• EPBC Act

– Onus of proof to say environment won’t be harmed in any way

• Some EIS submissions run into thousands of pages and take years toassess

• Some progress at Commonwealth-State interface to reduceduplication

• Planning delays through 2000s

– Backlog in Queensland lead to delays of several years

– Approval times have been halved as a result of sensible streamliningreforms

• Design requirements

– Tendering process means designs in triplicate (eg. Toowoomba SecondRange Crossing)

– PC recommended Government purchase/owns the designs so resourcecosts not wasted

11

The overall result has been rapidly rising infrastructure costs (e.g. roads)

12

80

90

100

110

120

130

140

150

160

170

180

19

98

-99

19

99

-00

20

00

-01

20

01

-02

20

02

-03

20

03

-04

20

04

-05

20

05

-06

20

06

-07

20

07

-08

20

08

-09

20

09

-10

20

10

-11

20

11

-12

RCMPI

ABS RBCI

PPI

The costs of Road Construction and Maintenance ran well above the Producer Price Index through the mining boom.

Index 1989-90 = 100

15-25% higher

Where to from here?

13

Very substantial increase in spending

• The Queensland capital program peaked at $4,000 per person in 2008-09 and is now half that at $2,000 per capita, and set to fall by a further 25% by 2017-18

14

How can we get more for less?

15

Create and sustain options through better planning

• Our political masters require a ‘Needs Analysis’ – they want to be sure theproposal isn’t the latest popular thought bubble emanating either from within thedepartment or in the public domain.

• Setting the overall service delivery objectives and the fiscal envelope are necessaryconditions to undertake a sensibly bounded needs analysis.– This is what Cabinet needs to make sensible choices between well considered options.

• Project prioritisation framework is vital and DSDIP has done some valuable workhere

– Business cases alone fail to properly set broad priorities

– Broad CBA is best…what’s the objective and what’s the least cost way toachieve it

– MCA suffers from a number of flaws, including susceptibility to subjective bias

• Clear objectives then guide better planning, including corridor selection andreservation

16

Better Manage Demand

• Cannot continue to try to satisfy forecast demand – an impossible taskwith no end

"Turn him to any cause of policy, The Gordian Knot of it he will unloose,Familiar as his garter" (Henry V, Shakespeare)…not so!

• Congestion manages demand, but has high social costs

• Pricing must be cost reflective and responsive to peaks– New technologies allow for this

• Road pricing must begin to untangle cross-subsidies between privatevehicles, public transport and freight– Heavy vehicles now closer to ‘paying their way’ via the NHVR

– PT is still heavily subsidised with barely 20% cost recovery of just opex

– Private vehicles face a mix of ‘free’ and tolled roads at point of use

17

Incremental is beautiful

• Institutional bias towards the ‘mega-project’

– Political factors• Ribbon cutting

• Fallacy of not properly costing uncertainty and not properly valuing flexibility

– Infrastructure Australia and inexorable rise of Commonwealth co-funding

– Capital recycling

Create offsetting biases – higher hurdles for larger projects, requirement in all projects to identify incremental alternatives, requirement to identify options for adapting project in the event of adverse cost or patronage

shocks, and

Use planning to create lower cost, incremental options for the future – e.g. through innovative corridor reservation strategies, which structure reservations in line with value of the option they give government

18

Incremental v MegaBHPB Pilbara expansion v SEQ Water Grid

19

Institutional reform to focus on accountability and transparency

• How to get from A to B– Set customer-focussed network objectives (service delivery)– Make sure every asset is on a balance sheet that someone is

responsible for disclosing and managing– Corporatise remaining public assets such as the road network– Utilise private sector, but ensure risk is shared properly

• More nuanced risk allocation• Budget constraints will lead to better capex/opex trade-off• Emphasis on portfolio of assets and lifecycle approach

– Project prioritisation framework must work within a set budgetconstraint over the forward estimates

Queensland’s Infrastructure Prioritisation Framework Tool:Key objective is to move away from a bottom-up approach which is leading to too many business casesbeing developed by agencies without sufficient regard for Government’s long term strategy forinfrastructure investment or whole of government fiscal constraints.

20

A more integrated approach

• Integrate land use and transport planning– A greater problem the greater the number of local governments

– Queensland has the great advantage of the Brisbane City Council, compared to Sydney’s 38 councils

– Easier (in theory!) for Brisbane City and Queensland to work together

21

Better priority setting

Better incentives

Better governance

• Less focus on major ribbon cutting

• More use of well-targeted ‘pinch point’ interventions

• Improved life cycle management

• Ensure assets have ‘owners’ whose returns depend on life-cycle performance

• Improve contracts to better align risk, effort and reward

• Use prices or shadow prices to signal costs

• Clarify roles of Commonwealth/State bodies

• Better align analysis methodologies

• Greater transparency at all stages

• Improve public/private balance

22

Summary – what can be done?

Thank you

23

Garry Bowditch

CEO

SMART Infrastructure Facility

+61 414 977 683

garrybow@uow.edu.au

Henry Ergas

Professor, Infrastructure Economics

SMART Infrastructure Facility

+ 61 419 239 710

hergas@uow.edu.au

Additional Slides

25

26

• Improve public sector accounts by selling monopoly rents– Risk is greatest when selling existing assets but can also arise when “up front” payments

are demanded in exchange for a concession to build new assets

• Avoid public sector borrowing for new projects– There is no gain to society from replacing a situation where Government X borrows to build

and operate a bridge by a situation where Bank Y borrows no less to build and operate that bridge

• Move public expenditure off-balance sheet or in other ways manipulate public sector accounts– For example by replacing a net cash inflow that would otherwise have been obtained at

some future date, but would have entailed a cash outflow now, by a cash inflow today that is smaller in NPV terms

• Shift risk, without any enhanced ability to control that risk– The added risk will need to be compensated for

– Moreover, what may seem to be risk-shifting will not be, if the public sector remains the provider of last resort: this merely hides contingent liabilities

• Disguise what are in effect taxes and charges– By replacing taxes by charges levied by the operator, where there is no efficiency gain from

those charges

Bad reasons for PPPs

27

• Key consideration must be efficiency

– The net cost to society must be lower as a result of relying on a PPP than would be the case under relevant alternatives

– The relevant alternatives should not be merely a straw man, fully publicly funded and operated, project but rather include a range of degrees and forms of public and private sector involvement

• Efficiency most likely to be enhanced when PPP allows

– Better decision-making, and/or

– More efficient implementation and operation

Good reasons for PPPs