The East-West Link was a dud anyway

 

1609697_10152650821929989_322121146_nThe East West Link, the Liberal government’s key election promise, was a shameful white elephant. The estimated cost of the first stage ran at $6.8 billion dollars, of which $2 billion would come from Victorian tax payers, and $1.5 billion from Australian tax payers generally. That’s $3.5 billion dollars in public funding. The overall long term cost to the taxpayer would run at an estimated $17.8 billion dollars. These are government figures so they are probably optimistic estimates; indeed academics believe the costs will be higher. The Liberals framed the 2014 Victorian election as a referendum on this this road. Thankfully, the electorate knocked it back. It was a dud.

Imagine that you work for a commercial lender being approached by a developer for a loan for a multibillion dollar project. The developer says there is a cost benefit analysis and that the project will be profitable, but doesn’t give you the analysis or the details. However, you and the developer go a long way back; you trust the developer. This is despite the developer’s shonky history and reputation for dishonest dealings. You give the developer the loan anyway. At this point, if your employer becomes aware of your actions, you will probably be fired for incompetence.

Now suppose that you are a voter being asked to vote for the Liberals because they support the East-West Link. The Napthine government did not disclose its cost-benefit analysis to the public for the East-West Link highway project. It simply asked the public to trust the government. It claimed that you could because of its “economic credentials.” This is no different to a developer asking the bank for a loan, and saying “trust me” rather than handing over the information. How are you, as a voter, able to assess whether the project is worthwhile? You can’t.

Regardless, several of the former government’s own MPs have acknowledged that the Liberals are not to be trusted. The Napthine government spent its term in office subsidising profitable companies like SPC. It raised taxes and charges. It increased government spending. It even promised to spend more on renewable energy schemes than Labor. It had no economic credentials to so much as to presume to bargain with in the first place.

I am not opposed to road projects. Quite the opposite: I want as many roads built as the public demands. The difference is that I don’t pretend to know how many roads the public wants; what their size might be; or where they should be directed to. I am not an engineer and nor am I financier. I do not have the knowledge or expertise to make judgments about whether a road project is worth it. Nor do politicians. I recognize that engineers and investors already invest private money in roads when it is profitable to do so. That’s why toll roads exist: to ensure that roads can profit investors much as supermarkets, banks or other private companies do.

The private sector may have invested some funds in the East West Link, but they have also refused to do so without billions of dollars of public funding. That means the project, as it is currently designed, simply isn’t worth the money, trouble or effort for the private sector. If that’s the case, we must ask ourselves why politicians are willing to spend taxpayer’s money on it. Public choice economics has the answer. The father of public choice theory, James Buchanan, describes it as the study of “politics without romance.” As economist Adam Thierer puts it:

“When one begins to ponder infrastructure management problems through the prism of public choice theory, the resulting failures we witness become far less surprising. The sheer scale of many infrastructure projects opens the door to logrolling, rent-seeking, bureaucratic mismanagement, and even outright graft.”

Politicians are willing to engage in infrastructure projects as long as they look good to the public and appeal to key special interest groups, like major construction companies. The government calculates that other constituencies, like pensioners whose properties are compulsorily acquired, will be insignificant electorally.

As voters, we are regularly being asked to vote on mammoth infrastructure projects costing tens of billions of dollars. The National Broadband Network is a good example. Its initial estimated cost was $40 billion dollars. Malcolm Turnbull and Tony Abbott slammed the Federal ALP for refusing to release its business plan to the public. Denis Napthine adopted the same cavalier approach as Kevin Rudd and Julia Gillard. Releasing a business case for the East West Link would only leave it susceptible to criticism that would undermine his electoral prospects.

The best way to stimulate infrastructure spending and economic growth is to cut public funding to infrastructure projects—and cut the taxes that fund them in the first place. Tax cuts will return money to the people that earned it. It will let taxpayers vote with their wallets on the infrastructure they want. Private developers will then fund that infrastructure appropriately if we let them.

The public needs to make up its mind on infrastructure projects. Do we really want election campaigns that take months and years to be centred on infrastructure projects that politicians are not equipped to assess or properly deliver? Do we want the incredible cost and uncertainty that comes with politicians announcing and then cancelling infrastructure projects for political gain? Or do we just want the job done properly, in a timely manner, at the least expense for all involved? If so, the private sector is the way to go.

It will be interesting to see whether it will cost less taxpayer money to simply cancel the East-West Link. If so, I for one hope the ALP does, and quickly.

Vladimir “Zeev” Vinokurov is a solicitor and an associate editor at Menzies House. The views expressed here are his own.

Time to Build Better Infrastructure

Forbes

Viv Forbes knows only too well what a massive waste of money climate-change and "green schemes" are. Policy changes are needed, urgently! GC.Ed.

Floods, fires, cyclones and drought are ever-present features of the Australian landscape and have been here far longer than cars, cattle, coal miners and timber getters.

Yet every time we have a natural disaster, we find government infrastructure washed away, burnt down, blown apart or lacking water. Meanwhile billions of dollars of community savings are wasted on vain attempts to cool the climate of the next century. 

This surely is the year to stop wasting money on climate-change follies in order to allow more spending on real present-day problems like disaster-proofing government controlled infrastructure and land.

Two policy changes are needed.

First, stop all federal, state and local government spending or legislative support for climate commissions and bureaucracies, UN-Kyoto junkets, carbon sequestration, green energy, biofuels, carbon taxing and accounting, global warming research and climate change foreign aid. In short, abolish every department, position or budget with “climate”, “warming” or “carbon” in its name or description.

Second, re-build government infrastructure and manage government lands to standards that can better withstand the inevitable floods, fires, cyclones and droughts.

Viv Forbes, 

Rosewood    Qld   Australia
forbes@carbon-sense.com

Public Private Partnerships: The key to a successful infrastructure system

Sun Yong Kim cover pictureSun-Yong Kim defines the many problems
with government infrastructure, including lessons not learned. 

Given the relative inefficiencies of
governmental infrastructure over the years, it is understandable that there is
much cynicism on any governmental role in Infrastructure. After years of
government investment, Australian infrastructure is still manifestly out of date with freight railway and a track system that has yet
to move forward from the 1960s. After 10 years of continuing public
commitments, the Parramatta-Epping Rail link has yet to be built, the Epping to
Chatswood Link was built with half the speed capacity originally promised and
High Speed Rail remains a second rate priority for the current government.

Whilst the abysmal failure of
governmental infrastructure is there for all to see, the relative failures of
government infrastructure should not be interpreted as meaning that the
government cannot play an effective role in promoting a world class
infrastructure system. On the contrary, experience in the great modern
infrastructure systems of Asia suggest that an active government in partnership
with the private sector is crucial towards harnessing a 21st century
infrastructure system. Public Private Partnerships have been a feature of the
great railway systems of the past, present and the future and if Australia
wants to move forward in the 21st century, she would be wise to adopt this
proven infrastructure strategy.

At the very heart of Public Private
Partnerships in Infrastructure is an appreciation that the private sector
investment must be at the centre of commercially viable infrastructure. Only
Private companies that run on efficient market mechanisms will be able to
ensure efficient infrastructure investments for the future and eliminate
wasteful investments that have too often been a trait of the government centric
approach to infrastructure investment. Experience shows that the government can
help the private sector achieve these goals, but if it takes its place as the
infrastructure venture capitalist, infrastructure is doomed to fail.

Past experience of success is often a
very good guide for what an instructive governmental role in infrastructure
should look like.  During the
aftermath of the Northridge Earthquake in California in 1994, California Governor
Pete Wilson provided a bonus/penalty of $200 000 for every day before/after
deadline infrastructure tenders finished the project as a means to quicken up
the delays in infrastructure. In addition, Governor Wilson’s exercise of his
‘emergency powers’ which suspended all regulations and statutes that might
impede or delay recovery of this damage for the duration of crisis also helped
create the business environment that made these infrastructure projects more
quickly done. By providing incentives for the private sector to invest more in
infrastructure, Governor Wilson was able to fundamentally change a crippled
infrastructure system dominated by the unions to a modern world class one that
was able to assist his state in its our of need.

It is very encouraging that the
Coalition’s policy at the last 2010 election advocated for a greater private
involvement in Infrastructure.  The
Infrastructure Partnerships Scheme which allows issuance of 10 year Private
Infrastructure bonds that will receive concessional tax treatment in the form
of a 10% tax rebate will undoubtedly replace previously wasteful government
investment with more efficient and effective private infrastructure investment.
Moreover the fact that the scheme allows two-thirds of the tax liability of
superannuation funds to be covered by the tax rebate encourages savings that is
crucial to economic security. However it is only a step in the right direction.

The 10 per cent tax rebate is nowhere
enough of a tax break. The tax rebate amounts to  $150 million [per annum] up as a tax concession that is not
enough to even fund one big project, let alone any number of projects. The tax
rebate in itself is a drop in the ocean and needs to be dramatically expanded
for it to have any effect.

This is perhaps where an instructive
government could play a crucial role. Whilst small scale infrastructure
projects are heavily commercially viable, large scale infrastructure projects
such as High Speed Rail are not. No matter how large the tax break, the private
sector simply would not be interested in funding such large-scale investments
given the scale of costs involved. This is where there is a necessary role for
government in infrastructure.

It is a known fact that the Australian
Governments AAA credit rating allows it to be far better placed than private
companies to cost-effectively fund essential infrastructure. Only with the
credit rating of government was it possible for the Transcontinental Railway to
have been built in the United States and for the Shinkansen to have made any
traction in East Asia. For that reason we should seriously consider the
suggestion of Transfield Holdings chairman Tony Shepherd who has called for
long-term guaranteed indexed bonds. Shepherd calls specifically for 30-year
Australian government-guaranteed indexed bonds, which he believes would be
attractive to mums and dads and super funds. By engaging an efficient public
private partnership which funds large scale infrastructure projects which are
run by the private sector but funded through government securities, a world
class infrastructure system is only a matter of time.

Sun Yong Kim studies Commerce/Law at Macquarie University and is a member of the Young Liberal movement. He has also launched a policy magazine/blog, Aus Solutions. www.aussolutions.com.au

To increase infrastructure spending reform welfare spending

Ralph-Buttigieg

There are other ways to manage infrastructure funding if we reform other areas of government spending, writes Ralph Buttigieg.


Infrastructure and its requirement for capital seems to be on everyone's mind at the moment. Most recently the Sydney Morning Herald reported a Price-Waterhouse study which claims we can not meet expected infrastructure demands due to a lack of capital. It demands we give up our cars, live in smaller homes and generally change our life styles. Drastic measures indeed but what about other options?
Well, a better option may be to increase our savings so we can have more capital. Now, having a government that collects in taxes about 30% of our GDP limits what we can save. Especially since so much of that tax is used to fund a social welfare system that discourages saving. Our welfare system is mostly income redistribution (the exception being the Superannuation Guarantee) it takes money from ordinary working mugs and gives it to people who aren't working or who the government thinks don't earn enough. A lot of this is just income churning, over your life time you get about the same amount back as taken. The main beneficiaries are the public servants who administer the schemes and the politicians who promote them. The last budget allocated $110,884 million for social security and welfare so if a reasonable percentage of that could be converted to savings there would be no lack of capital for infrastructure.
 
So how can we do this? How can we convert our welfare system to a “wealthfare” system, one based on savings and investment?
 
We could expand the Superannuation Guarantee into an Australian version of Singapore's Central Provident Fund. That depends on compulsory savings to provide Singaporeans with welfare benefits and capital for national development. However the compulsory saving rate is up to 34.5% (ouch) and I don't like compulsory anything nor do I trust government officials with my money. We need more liberal alternatives.
 
Back in the good old days of John Howard and budget surpluses Peter Saunders from the CIS proposed Personal Future Funds. All Australians would have such funds funded by the budget surpluses. Eventually the personal savings would replace unemployment benefits and allow voluntary medicare opt-outs. The days of budget surpluses are now over but perhaps there is still room in the budget to introduce such a scheme which could be expanded once the budget is back in the black.
 
Another option is to replace Income Tax with an Expenditure Tax. There are only two things people can do with their money, spend it or save it. An Expenditure Tax would allow the deduction all savings from income and what’s left over, expenditure would be taxed, preferably at a single rate. Combine the Expenditure Tax with welfare reforms that encouraged the replacement of state benefits with the extra personal saving and investments and we can start hacking into that $100 billion welfare bill.
 
I'm sure there are other alternatives but surely cutting taxes, reducing welfare expenditure, increasing savings and investment makes more sense then living in smaller houses and giving up our cars.

Ralph Buttigieg's professional career has included a couple of decades in government and management, proprietor of a Science Fiction & Fantasy bookshop, a stint in direct marketing and now finds himself in the finance industry. He joined the Liberal Party in 2008 and considers himself one of those right  wing bogans who voted in  John Howard in 1996.

The right needs to get innovative about infrastructure

Sean-GarmanA new approach is needed on infrastructure, argues Sean Garman.

Australia’s infrastructure is old, creaking and needs to be urgently replaced or updated. Transport networks are congested. Energy distributors are labouring under old and decaying stations and lines. Australian broadband is slower than anything I’ve had to endure. Water is wasted at incredible rates. We can go on and on about infrastructure problems.

The issue with the centre-right is that too often we get into an ideological fit about infrastructure. The automatic assumption is that the private sector must run it and the distribution – be it water, broadband, energy etc – must be deregulated in order to attract investment and subsequent improvements in services. Life is more complex than simplistic assumptions. Both the left and the right tend to make serious mistakes with infrastructure but I want to focus on the centre-right.

I agreed with Barry O’Farrell when he stood against the privatisation of NSW energy generators. It was not because I wanted to stick it to Labor. Instead of beating the drum of economic liberalism and criticising the Liberal leader, I recognised that it was a policy designed for a different era.

At the time of the attempted sale, the international financial markets spun out of control. Australia has been protected from the worst of the credit crunch. Many Australians, including the commentators, cannot imagine or understand what was happening to banks and financial institutions around the world. The equivalent would be to turn on the television and have the news announcer state that NAB and/or the CBA are about to collapse. Now, imagine what they would do to your confidence?

This is not off the topic, it is very much on the topic because if banks, pension funds, insurance firms, hedge funds and private equity partnerships are all seeing massive losses in the financial markets spilling over to the “real economy”, who on earth would pay upwards of $20 billion to purchase and upgrade an energy network? Australia was largely protected which meant that the media and centre-right thinkers thought that selling the infrastructure network will be relatively easy.

Reality dictates that no one in their right mind would be able to raise the funds from banks. They were hoarding cash like there was no tomorrow. They could not raise it from the markets because institutional shareholders were running for the hills. The centre-right got itself locked into a narrow mind set that could not see the turmoil in front of their eyes. If private sector participants cannot raise enough cash to fund the initial purchase, let alone funding any upgrades, then we should not be supporting such a poorly thought-through policy.
 
We also have to accept that the government needs more than just a guiding hand in infrastructure. It needs to set a strategy to create certainty to get long-term investment – public and private – that results in improved quality of service without costing too much.

I think that the centre-right should look at more innovative financing structures to get private sector funds into infrastructure deals.  Superannuation firms have a massive pool of savings that could be used to invest in public infrastructure deals with a combined private-public board of directors that tries to get the best out of both sectors.

The type of income generated from infrastructure deals will match the long-term liabilities and is less volatile than investing the bulk of funds in the share markets. Many smaller investors will be happier knowing that their super fund will invest in an investment that can generate a regular income stream over a thirty-year period than invest in a volatile and comparatively risky share market.

Convertible debt can be issued which means that if the infrastructure deal has temporary cash flow problems the super firms can convert the debt into equity and take the cash either in dividends or in capital gains if they sell their stake to others. This is a way to ensure that superannuation funds have some level of control over the financial performance of the infrastructure deals.

If Barry O’Farrell is to become Premier of NSW and if we are serious about being competitive in investing in our critical infrastructure then we need to be innovative in funding infrastructure deals. Australia is unique in both that it has a large pool of savings, large-scale infrastructure needs and a rapidly growing population. We need to seize this opportunity to provide the infrastructure that will lift the barriers on economic growth while also providing a good investment for our ageing population.

Sean
Garman works in banking in the City of London.
He is on the committee of City Future; a part of the Conservative Party’s
Business Relations organisation and provides policy and economic research to
the UK
Shadow Treasury team. Sean has a B-Com from Macquarie University
where he was Deputy Chairmen of the Student Council and President of the
Liberal Club.