A presentation by SMART Infrastructure Facility Senior Research Fellow Joe Branigan to the International Symposium For Next Generation Infrastructure, Vienna, 30 September - 1 October 2014.

1. Drivers of Infrastructure Costs
in Australia – Lessons learned
from the ‘Perfect Storm’
Joe Branigan
SMART Infrastructure Facility, UOW
International Symposium for Next Generation Infrastructure
Vienna, Austria
30 September – 1 October 2014

2. Outline
• Why has it become more difficult to manage pressures on our public
infrastructure?
– 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

3. Why has it become more difficult to manage
pressures on our public infrastructure?
3

4. 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

5. 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

6. 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

7. The mining boom
• Mining boom increased competition for inputs used in major
infrastructure projects
– In economic terms, as export prices rose, the opportunity cost of using
those inputs for say urban transport projects or for desal plants
increased
• But once launched, the projects were not scaled back, even when their
costs spiralled out of control
• So to shift scarce resources from non-mining to mining uses, input prices
had to rise even more
7

8. Mega projects
• Inertia was aggravated by focus on politically salient 'mega projects' in a
context of intensified political competition
• Because these projects were 'one of a kind', their costs and patronage
inherently difficult to predict, and very vulnerable to forecasting error
• But once launched, mega projects proved impossible to turn around, and
displaced 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

9. 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

10. Structural factors - Technical standards
• Bespoke engineering (NSW rail)
– Successive build of trains has seen progressively increasing demands in
systems requirements, which in some areas have then been built into
the technical standards.
– Generally, off the shelf products do not meet these requirements and
so this means each new train must be designed from scratch to meet
the NSWstandards of the day.
• Bespoke engineering (Qld roads)
– ‘Queensland Only’ standards set by Roadtek made constructions costs
needlessly high.
– Were removed by the Newman Government early in its first term.
10

11. 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 to
assess
• Some progress at Commonwealth-State interface to reduce
duplication
• Planning delays through 2000s
– Backlog in Queensland lead to delays of several years
– Approval times have been halved as a result of sensible streamlining
reforms
• Design requirements
– Tendering process means designs in triplicate (eg. Toowoomba Second
Range Crossing)
– PC recommended Government purchase/owns the designs so resource
costs not wasted
11

12. The overall result has been rapidly
rising infrastructure costs (e.g. roads)
12
Index 1989-90 = 100
180
170
160
150
140
130
120
110
100
90
80
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
RCMPI
ABS RBCI
PPI
The costs of Road Construction and Maintenance ran well above
the Producer Price Index through the mining boom.
15-25% higher

13. Where to from here?
13

14. 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

15. How can we get more for less?
15

16. Create and sustain options through
better planning
• Our political masters require a ‘Needs Analysis’ – they want to be sure the
proposal isn’t the latest popular thought bubble emanating either from within the
department or in the public domain.
• Setting the overall service delivery objectives and the fiscal envelope are necessary
conditions 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 work
here
– Business cases alone fail to properly set broad priorities
– Broad CBA is best…what’s the objective and what’s the least cost way to
achieve it
– MCA suffers from a number of flaws, including susceptibility to subjective bias
• Clear objectives then guide better planning, including corridor selection and
reservation
16

17. Better Manage Demand
• Cannot continue to try to satisfy forecast demand – an impossible task
with 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 private
vehicles, 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

18. 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

19. Incremental v Mega
BHPB Pilbara expansion v SEQ Water Grid
19

20. 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 budget
constraint 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 cases
being developed by agencies without sufficient regard for Government’s long term strategy for
infrastructure investment or whole of government fiscal constraints.
20

21. 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

22. 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?

23. Thank you
23

24. 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

25. Additional Slides
25

26. Bad reasons for PPPs
• Improve public sector accounts by selling monopoly rents
26
– 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

27. Good reasons for PPPs
• Key consideration must be efficiency
27
– 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