A recurring theme in Australia at the moment is our shortfall in infrastructure, and how this is holding back the economy. In this vein, a recent report prepared by Ernst and Young for the Department of Regional Australia, Local Government, Arts and Sport discusses how local government can better fund local infrastructure:
There is a broad consensus in public discussion that more infrastructure is needed. One notable dissenting voice, however, is the recent Grattan Institute report “Game-changers: Economic reform priorities for Australia”, which stated that increasing the rate of investment in transport infrastructure in particular is “unlikely to substantially increase the size of the Australian economy over the next ten years”. This was partly based on the observation that infrastructure spending is already at historic highs, based on ABS public sector engineering construction data.
The Western Australian Government is undertaking considerable infrastructure investment at the moment, particularly in transport infrastructure. Major highway projects are quite common in Perth – for example, the recent and planned future freeway widening projects; Roe Highway/Great Eastern Highway Interchange; and a range of planned road upgrades around Perth Airport. Is this spending wise? How should we consider the need for infrastructure investment in Australia, and what are the major factors determining the need for further investment?
There are several reasons for continuing infrastructure investment, even in a developed economy:
- First of all, population growth. More people simply need more infrastructure – although less per person as numbers increase, which is an important point. A larger number of people can use a given piece of infrastructure more intensively (at least up to a point), increasing its efficiency. Also, more people mean larger towns and cities, and expanding towns and new suburbs definitely need new infrastructure. Larger populations can also make infrastructure worthwhile that wasn’t previously. For instance, a passenger rail network would make sense in a city of one million people, but perhaps not in a town of 50,000.
This is particularly relevant in Western Australia at the moment, as the robust economy is drawing people to the state in large numbers. Census 2011 data showed that the state’s population grew by 14.3% over the five years to September 2011, or 2.7% per year, to 2.24 million people. The Government’s response has been more infrastructure – new and improved roads and policies such as Pilbara Cities and SuperTowns.
- Maintenance and depreciation – roads, electricity infrastructure, and other infrastructure needs to be maintained and replaced as it wears out. For this reason, there is the danger of over-investment in infrastructure, imposing excessive maintenance and replacement costs.
- Increased economic activity – if we’re doing more business we’re travelling more, using more electricity, making more phone calls, etc.
- New technology – after a time, technological change can make existing infrastructure obsolete, or at least less efficient than what could be built now. The classic example of this in Australia is Telstra’s old copper wire network, a technology which has now been superseded by fibre optics. Another good example would be the London Underground, which was built with Victorian technology (the era – I would never disparage the State of Victoria), and most of what exists today was in place by 1907 – quite mind-boggling, if you stop to think about it. “The Tube” is now over-crowded and is not particularly quick. In situations such as this, further investment is needed.
So given that some level of ongoing infrastructure investment is required, how do we value individual projects, especially very large ones? The normal method for evaluating a major project is a cost-benefit analysis, but for long-lived pieces of infrastructure, producing an accurate cost-benefit analysis is probably impossible. Infrastructure is a public good, that tends to fit into a larger network, and network effects are difficult to predict. My colleague Jason McFarlane discusses the difficulty in assessing major strategic pieces of infrastructure, and some of the issues that have bedevilled significant projects in Australia in the blog below.
Instead of financial analysis, which is inadequate to the task of assessing these major projects, what is needed is an understanding of where a particular piece of infrastructure will take the country. Major infrastructure is an essential part of broader development strategies, something that is lacking contemporary Australia. Infrastructure is a means to an end, and once a vision of the country’s future has been developed, major infrastructure projects can be targeted appropriately.