PC News - August 2014

Public infrastructure is central to the provision of a range of important services and involves a significant investment of resources. For example, engineering work done for the public sector has been equivalent to more than 2 per cent of GDP in recent years (figure 1). In addition, there has been significant investment in public sector buildings, such as schools and hospitals.

While governments have traditionally taken overall responsibility for public infrastructure provision, there has been an increasing recognition that greater private sector involvement has the potential to deliver more efficient infrastructure services. However, there is often a misguided perception that private financing of public infrastructure projects will automatically reduce the cost to governments over the long term. A further issue is that governments have been concerned that Australia has excessive infrastructure construction costs, limiting the investment that can take place for any budget.

Reflecting the interest in greater private sector involvement and concerns about costs, the Australian Government asked the Productivity Commission to prepare an inquiry report on public infrastructure provision, funding, financing and costs. The report was released in July 2014.

The Commission found that there needs to be a comprehensive overhaul of governance and institutional arrangements for public infrastructure projects to promote better decision making.

The report observes that there are numerous examples of poor value for money arising from inadequate project selection, potentially costing Australia billions of dollars. Without the reforms proposed in the report, additional spending under current arrangements will simply increase costs for users, taxpayers, the community generally, and lead to more wasteful infrastructure.

The Commission's proposed reforms include the adoption by all governments of a package of best-practice institutional and governance arrangements, which among other things would require a greater role for rigorous cost-benefit analysis in project selection, including persistent and consistent public reporting. The procurement practices used by State and Territory Governments would also need to be overhauled to improve the initial design phase of a project.

The report advises that direct user charges provide an incentive for efficient provision and use of infrastructure, and so they should be used to address both allocation and development of project funding. A particular focus of the report was on the scope to shift to more direct charges on motorists to improve the provision and funding of roads, underpinned by developments in vehicle and associated technologies.

However, the report cautions that governments will regardless need to at least partly fund selected
infrastructure because it is sometimes impractical to exclude users who do not pay a direct charge, the wider beneficiaries are difficult to identify, or infrastructure is provided to meet equity goals.

The Commission stressed that private financing of infrastructure is not a 'magic pudding' — ultimately users and/or taxpayers must foot the bill. Thus, while private financing may offer scope to alter the timing of government payments to fund infrastructure services, it does not necessarily change the long-run impacts on government budgets. Moreover, governments should be mindful that debt guarantees and tax concessions offered to the private sector are not costless and often involve poorly understood risks.

Though sometimes the origins of cost pressures are misconstrued, there is evidence of recent significant increases in the costs of constructing major public infrastructure in Australia (there can also be marked variation in costs between projects, as illustrated in figure 2). Elevated labour costs due to the mining construction boom has been one factor, but no single cause has played a decisive role in cost increases. For instance, raw material and land prices have also increased significantly. Overall, Australia's costs are not extreme by global standards, and for some projects are comparable to other developed countries.

Until recently, labour productivity growth in the construction sector has generally been sluggish — a problem in some other countries too. Assessing Australia's construction productivity and costs at a more granular level to pinpoint where the problems most lie is bedevilled by data inadequacies. Publication by Infrastructure Australia of a coordinated and coherent dataset on infrastructure costs will address this, improve future project selection decisions and motivate improvement in the areas where Australia is a poor performer.

Despite concerns that significant concentration in the market for large public infrastructure projects inflates prices, the market appears to be workably competitive today. However, a few simple measures would make it more so, and would reduce the cost pressures facing procurers.

The industrial relations environment in the construction industry remains problematic, primarily in general rather than civil construction, with the problems much greater for some sites, unions and states. Governments can use their procurement policies to drive reform among prime contractors and the main unions. The mantra should be 'Government won't buy, if the workplace IR environment is poor'. Penalties for unlawful conduct should rise to deter poor behaviour by unions, employees and employers.