Infrastructure waste warning

Changes to Infrastructure WA and an appraisal of public projects’ long-term benefits would help prevent poor outcomes from a wave of COVID-19 infrastructure spending, a new report suggests.

The state government has announced it will accelerate $2.3 billion of road projects, while its federal counterpart is planning to inject $100 billion into infrastructure projects nationally.

But while those big numbers can be politically popular, a paper by Mannkal Economic Education Foundation has highlighted some of the downsides.

Chief among the risks is the belief that infrastructure spending should be targeted towards short-term economic sugar hits, rather than growing the productive capacity of the economy longer term.

“Spending hundreds of millions of dollars to create employment today for uneconomic and unessential infrastructure projects does not create wealth, it merely moves it from one productive area of the economy to another unproductive area at the expense of future generations,” the report said.

While a short-term employment boost and the tangible benefit of a project would be obvious to voters, the opportunity cost of spending and potential distortion of decisions were less visible, author Josh Adamson said.

Fast-tracking tendering to spark job creation could expose taxpayers to future risks and invite rent-seeking behaviour, the report said.

That’s where businesses try to secure a bigger portion of the economic pie through lobbying and political clout, rather than productivity.

Rushing decisions would also disregard the advisory responsibility of Infrastructure WA, the report said.

For stimulus purposes, the government has a wide range of alternatives including tax cuts, other moves to spark private investment, or even encouraging household spending.

In terms of the longer-term impact of public infrastructure spending, there’s a breadth of economic literature debating the merits.

The Productivity Commission warned in 2014 that reliance on the notion of an infrastructure deficit could lead to poor investment choices, while work published by the Grattan Institute in 2016 also cautioned against overspending.

“The vast bulk of the transport infrastructure we will use over the next 20 years has already been built,” the institute said.

Yet the share of transport funds spent on maintenance had fallen, Grattan said.

One possible response is to follow a user-pays model for infrastructure provision, including charging road users, the Mannkal report said.

“Continuing to build more infrastructure to manage congestion without managing demand delivers only temporary solutions,” it said.

“The benefits of new roads are eventually eroded away and congestion returns.”

A concrete example was modelling by Infrastructure Victoria, which found using road pricing in Melbourne would have a greater impact on reducing congestion than $40 billion in new transport infrastructure, the paper said.

IWA

The Mannkal report also suggested changes to the government’s new Infrastructure WA (IWA) advisory body.

Under the existing model, a government could still decide to deliver projects independently of IWA, limiting its power.

There was also no way to ensure appointments were bipartisan.

“Without significant reform to the operational and strategic mandate of IWA, it is likely infrastructure will continue to be held hostage by state bureaucrats and their arbitrary political decision making,” the report said.

The advisory should act to encourage private investment into infrastructure, rather than trying to force proposals to fit into its own long-term plan.

“In its current form, IWA merely adds to the bureaucratic maze private developers must navigate,” the report said.

“IWA’s primary focus is the creation of a long-term strategy to identify the state’s infrastructure priorities.

“These centralised, long-term strategies for urban development (and the lack of focus on ad-hoc advisory capacity to evaluate market-led proposals) constrain rather than facilitate the ability of the market to meet (infrastructure needs).”