There’s a new economic buzzword doing the rounds: ‘infrastructure’.
The Productivity Commission recently released a draft report that found Australia gets a poor bang for its buck when investing in infrastructure.
The draft report identified a number of factors that are to blame: slow approvals processes, a lack of rigorous cost-benefit analyses, inadequate industrial relations regimes and mandates dictating the use of Australian labour and suppliers.
It’s a timely report, because the government and many economists have begun to talk of the importance of infrastructure as mining begins to decline.
Our outdated infrastructure is also holding back investment and productivity.
Anyone who lives in an Australian capital city can see it for themselves: crowded roads, inadequate public transport, and inefficient airports.
While there is broad agreement on the need for better infrastructure; the big question is how to fund it.
Why superannuation funds and the private sector
are on the Government’s infrastructure investment ‘hitlist’
We all know that Federal and State governments are running out of money and running up big debts. There is also a critical need for infrastructure to boost productivity and investment.
So the government is naturally eyeing the private sector and the $1.8 trillion pool of superannuation funds.
They want to encourage investors to back big infrastructure projects.
But investors would be crazy to do so.
Infrastructure projects in this country are frequently expensive, poorly planned and deliver a poor return for investment — both for taxpayers and private investors.
The productivity commission report spells it out. But if there was any doubt about their findings, you’d only have to look at a recent string of projects.
Sydney’s Cross City Tunnel, the Airport rail line and Brisbane’s cross river tunnel are notable examples of big, expensive projects that have lost investors’ money.
The projects looked attractive to investors, with the government taking on most of the project cost and providing rosy projections of patronage.
But these passenger projections turned out to be fantastical, and the financial case never properly tested. Construction companies got big contracts, the politicians got their photo ops, and investors either lost money outright or got a bad return.
But the damage wasn’t limited to those who directly invested in the projects. It wasn’t just this wasteful investment that stung taxpayers. Congestion in many cases got worse after these projects were built either as a direct consequence of poor planning or the deferral of more critical projects. That’s not to mention the disruption to business caused by construction, without any pay-off.
Currently under construction, the NBN and East West Link in Melbourne (both government funded) look to be similar legacies of mis-management, bad planning and poor financial modelling.
The real opportunity for investors and governments
The government does have access to another financing option, one that is more attractive to investors: asset sales.
Power plants, ports, government enterprises: all are saleable and will generate billions of dollars of government revenues. The private sector has run businesses such as Commonwealth Bank and Telstra more efficiently than the Government, delivering probability, dividends and strong returns for investors. (Even in spite of the bad publicity around the ‘T2’ sale of shares which occurred just before the dot com bust.)
That’s where investors should be looking.
In the meantime, ignore fancy tunnels and trains with big patronage estimates. History shows they’re probably a load of bull.
Callum Denness
Contributing Editor, Money Morning
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