Welcome to the The Conversation’s Election 2013 State of the Nation essays. These articles provide in-depth analyses of key policy challenges affecting Australia as the nation heads to the polls. Today, we examine the issue of infrastructure.
Infrastructure lays the foundation not just for economic growth, but equally, the types of infrastructure investments that are supported - and the means by which they are funded - shape the social fabric of the nation.
Elections campaigns ought to be an opportunity for the voting public to engage with the big-picture visions of our political leaders and the different trajectories they would take to get us there.
But so far, there has been a dearth of analysis, debate and commentary on what the key infrastructure projects ought to look like. The soaring rhetoric that comes with terms such as “nation building” or “building the education revolution” seems to be at odds with the willingness and capacity of both sides of politics to seriously detail where where we’re heading – and why – and how we’ll get there.
We have some very big picture options available for the future that impact the very nation we wish to be:
How do we rank order the priorities in competing spaces such as transport, education, health and information networks (such as the National Broadband Network)?
Does nation-building mean that relative priority should be placed on ensuring that our public schools or hospitals are adequately resourced and the “infrastructure” future ready?
Or do we need to invest in the physical transportation network or information networks of the 21st century that will enable much more efficient movement of goods and services?
What are the trade-offs we are willing to make between economic growth and social equity?
But there has been virtually no debate or discussion at this level of analysis among our political parties. Instead, infrastructure is thought of – to the extent that it is at all – from the very narrow perspective of short-term electoral gain (supporting rail links or freeway projects that may impact marginal seats).
The myth of economic conservatism
How are we to fund the key infrastructure projects that are critical to the nation’s well-being? Given our unparallelled prosperity over the last couple of decades, our collective governmental failure to invest in the future by refurbishing our depleted infrastructure, education and health systems is likely to be condemned by those who follow.
Few businesses would survive if they were to adopt the economic conservatism of governments of all persuasions in this country. A failure to invest in the business landscape of the future is immediately punished by capital markets today because investors’ expectations of the growth prospects of the company are (mostly) revealed in today’s stock prices.
Sadly, there are no such market signals at government levels. Instead, politicians tend to make decisions that coincide with the electoral cycle and do not necessarily have the long-term health of the economy (and society more generally) in mind.
We need more from our political masters. Any incoming government, far from sticking to the title of “economic conservatism”, ought to be thinking very carefully about large investments in much of our depleted sectors, with appropriate metrics for investment appraisal that consider long-term returns beyond standard finance discounting models.
A willingness to spend, and indeed to incur debt in order to spend, ought not be seen as a sign of reckless economic management, but the exact opposite.
For too long, the conservatives in politics have duped the masses into believing that being prudent with economic and financial matters at an economy level entails little public expenditure (balanced budgets), amassing of national wealth and periods of political pork-barrelling in the form of tax cuts to ease the burden of rising interest rates or petrol prices.
The short-term nature of such “vision” would be hounded out of not just big business but the local school tuck shop. Imagine a claim of economic conservatism that amounted to large sums of cash in the till, but broken windows, dilapidated buildings and old fridges in the tuck shop, and no attempt to invest in updating those facilities. I doubt many would consider that good economic management.
That Labor governments at state and federal levels have sought to align themselves with comparable aspirations in terms of economic conservatism is something to be lamented not applauded. Of course there is a difference between well-considered investment appraisal and judicious spending versus some of the waste associated with governments of the past, but lets not confuse incompetence in appropriate financial management with the goal of limiting expenditure.
Economic conservatism ought not be synonymous with good financial management of the economy. We live in a time of turbulence in world markets, globalisation, terrorism, climate change, the advent of the knowledge economy and so on which necessitates an appropriate commitment from our government to configure Australia for the future.
It is well understood that risk and reward go hand in hand, clinging to economic conservatism as a mantra is merely saying we are not willing to take (appropriately vetted) big risks – and by implication, reap the big rewards in the future.
Investing in the future
Both sides of politics have talked of change and revolution in all these realms – this is to be commended. However, to actually achieve that revolution will require much more than rhetoric. It will require a mindset shift from current leaders to accept that investment in the future, even through debt and taxes, may well entail a longer time horizon than the electoral cycle typically allows.
Vision needs to extend beyond the convenience of the current term in parliament, and entails making decisions in the long-term interest of the nation, no matter how unpalatable it may be perceived. Vision requires this new government to go where no recent government has been willing to go: to spend big so as to position future generations of Australians to enjoy the prosperity we currently enjoy.
Computers in classrooms sounded great, but that was not an education revolution. Not even a minor scuffle. If we want a revolution we have to be willing to make some big bets.
State and federal governments of all political persuasions seem to find it difficult to come to terms with the ever-increasing burden of large infrastructure projects on the public purse. The burgeoning of PPPs (public private partnerships) as a mode of delivery of infrastructure projects to limit the call on public funds has been fuelled, in part, by the reluctance to incur debt.
But the actual delivery mode of such projects should be a second order question. First and foremost is establishing the value in undertaking public infrastructure projects: in water, transport, electricity, health and education, to name a few.
Assessing returns
So what is the underlying value question? How do we evaluate the returns from infrastructure investments?
Well, increasingly, large corporations are starting to embrace “real options” methodology in evaluating investment projects. Thus standard net present value calculations are being augmented to incorporate the value of managerial flexibility, or the real option, that an initial investment affords the corporation.
So, in undertaking any large project, current best practice in the private sector entails considering not just the net present value of that investment, but also the option value of future projects that are contingent on the first project being undertaken.
Thus, a project that may be only mildly net present value-positive (or indeed, even mildly net present value-negative) is still potentially a very worthwhile project because of the future projects that subsequently exist as options because of the funding of that first investment. And we can value these using options pricing methodologies from finance.
What then of public infrastructure? Well, using the same basic construct of real options, the stated underinvestment in infrastructure by the government is of an even greater magnitude than most commentators lament, if we start to incorporate such valuation methodologies for these projects. The value question resoundingly calls for more investment in public infrastructure.
With an election just around the corner, it is truly astounding that neither party has been willing or able to articulate their vision for Australia’s future, and a considered infrastructure policy that will get us there.