Jan

21

What to spend public infrastructure money on

January 21, 2009 | 3 Comments | Mark Crosby

An obvious objection to my blog yesterday was the fact that public infrastructure spending cannot be brought on line overnight. Since I am concerned that the government take action ASAP to stimulate the economy, I ought to be concerned about these lags. And I am. But there are many infrastructure projects that are near to tender stage that can be brought to commencement stage more quickly. Infrastructure Australia was established last year, and in December published a report outlining infrastructure priorities for Australia (see the report to COAG published at http://www.infrastructureaustralia.gov.au/). This report details tens of billions of dollars of projects that would improve Australia’s long run productivity, and these projects ought to be fast-tracked as much as possible. There must also be projects awaiting commencement that can be commenced, and perhaps completed more quickly to increase the number of jobs created in 2009 and 2010. Hospitals, schools and Universities are also better recipients of funds than Australian consumers and retailers who were the beneficiaries of the governments December stimulus package.

I hope that COAG acts on the Infrastructure Australia report. It is clear that Australian governments lack long term vision and planning, and this is a key weakness of our economy. My students are always blown away when they visit Shanghai’s Urban Planning Museum. A highlight is a three dimensional plan for Shanghai in 2020. Further maps and models at the Museum show plans for new cities to be built in the next few decades. China’s governments of course have the advantage of not having to worry about short term distractions such as elections, but as a result they are able to take long term planning seriously. Below is a plan for the road network in China for the next 35 years (taken from a slide presentation by Christopher Wright, Australia’s Senior Trade Commissioner in Shanghai and originally from the China Economic Quarterly in 2006). Even if the government can’t get it right and stimulate the economy through spending on projects that have long term impact on the economy during this year and next, one can at least hope that the government starts to properly prepare our economy for the 21st century sometime in the not too distant future.

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Comments

3 Responses to “What to spend public infrastructure money on”

  1. Matt C on January 21st, 2009 9:08 am

    Mark,

    I see two problems with this. The projects that get selected may be the wrong ones (as many are far from the tender stage) and we may end up paying more for the worthwhile ones.

    As you can imagine, the creation of the list was largely a political process so I wouldn’t take the list as any indication of the merit of a particular project. Some projects still require detailed business cases (such as the Brisbane inner city rail project, one of the largest transport projects). And others, such as the very fast train, a more pipedreams than realistic projects that can be done in 2009.

    Further, even for those that could start now, we are far from spending large amounts of money.

    Take the Hume Highway for example. Most would agree that this is a worthwhile project, however, let’s think how we can do this as fast as possible. We need to evaluate the best route, design interchanges, negotiate with landholders, local governments and State Governments. And ideally that would all be done before hiring private contractors to construct.

    And, this is the real risk to taxpayers. The private sector knows when the Government is rushing things. They will use this to screw taxpayers and get a much greater price and more favorable terms. Imagine you were selling your house and told all the potential buyers that you had to sell by the end of the week. Are you confident you will get a good price?

    So, in sum, all of this would take at least 12 months before we start spending real money. Who knows where the economy will be then?

    (As an aside, if we massively expand the number of projects, we are just not going to have the expertise within governments to run tender processes competently. Diminishing returns kicks in quickly in the public sector.)

    So in this light I don’t quite understand the objection to tax cuts. At least they are quick. And it is not a zero sum game as we are looking to expand the government deficit.

    We can uprgrade the Hume, expand hospitals AND make (temporary) tax cuts. We should just make sure the former two are done in a measured way.

  2. Labor Outsider on January 21st, 2009 6:47 pm

    Matt C is exactly right. This list was put together very quickly. How many have been subject to a rigorous cost-benefit analysis? Sure, bringing as many of those projects on line, will, in the short-term, stimulate the economy, but in the long-run, if our infrastructure investment is on projects that don’t meet basic economic efficiency requirements, then the resulting misallocation of resources will hamper longer run growth. Think of it this way – what is additional expenditure on health and education infrastructure worth without simultaneous reforms in those systems to ensure that resources are used efficiently? How many of those infrastructure projects internalise the social cost of carbon emissions?

  3. Kevin on January 22nd, 2009 1:21 am

    Matt C is right when he says that the government may not spend the money efficiently and is right when he says that private industry will take advantage of the government and increase their charges. Labor Outsider tells us how quickly the list of projects was put together. Rudd himself told the local government officials that if they did not spend their grants quickly they would not get it. That is infrastructure spending is likely to be inefficient.

    Unfortunately this is not just a problem with infrastructure spending it is a problem with all government expenditure.

    The process of government expenditure is for a policy objective to be set – e.g. we will reduce greenhouse gas emissions by x% in ten years. The policy is then examined by a team of bureaucrats who work out how this might be achieved. They will almost certainly appoint a group of experts who will also be given the task of working out how to implement the policy (a garnaut review). The expert group will come up with its recommendations. The bureaucrats will examine the recommendations against their own thoughts on how they think it should be done, the relevant minister’s advisers will examine the recommendations on the political impact and look to see that it will not be subject to a public relations disaster. A method will be established to prove that the money is spent wisely and that the objective is reached and can be shown to be reached and the government will decide how the money is spent (or emissions permits allocated).

    No matter how it is dressed up the practicalities are that it is still command driven allocation of resources. This is not the best way to allocate resources. A better way to allocate resources is through a genuine market with real tangible products. To get better government spending no matter what it is for it is almost always best to do it through a market rather than by experts and planners working out an allocation.

    Experts and planners can tell us what we want to achieve. How it is achieved is best left to a market.

    Rather than governments just spending money it is better if governments decide “about” how much is needed for a particular task and then get someone to construct a market with a purpose through which to spend the money. With today’s technology and with our knowledge and experience in building other markets with a purpose it is simple and quick to create a special purpose market.

    What market place do we need to reduce greenhouse gas emissions? We need a market place in infrastructure that will reduce greenhouse gas emissions (solar panels, solar hot water, geothermal energy plants, insulation, etc). Who decides what that will be in the market place – we let the market decide that. Who decides how much of the money is devoted to what infrastructure – we let the market decide that. Who checks to see if the objectives are met – we let the market check that.

    Here is how it could be implemented.

    Announce that an infrastructure market place will be established and that people can register to be buyers and/or sellers.
    Allow any seller of any product or service to put their offering in the market place provided they can show how their product or service will reduce greenhouse gas emissions, how the reduction can be measured, and how much it will cost per ton of reduction.
    Any seller who can meet a given cost per ton is allowed to sell in the market place and agrees to the process of measuring how well their product works and agrees that if they do not meet the cost per ton reduction their product will be removed from the market place. Any buyer who buys must agree to any conditions and procedures that are necessary to measure the greenhouse gas reductions from the product or service. For a household this could be supplying their electricity meter readings and any other relevant changes to their household that would influence the measurement (e.g. an extra person in the house). If a buyer does not meet these obligations then they are not allowed to participate in the marketplace in the future.

    We now have a market place, it has a purpose, and it has built into it how the purpose will be met and measured.

    We now give a large number of individuals money that must be spent in this market place. Let us start by giving everyone in Australia money in inverse proportion to the amount of per head household electricity consumed. We do this because it is easily calculated and can be part of the condition of participating in the market place. This money is “tagged” and it can only be spent in the market place of GHG reductions. That is, it can only have its tag removed by an infrastructure supplier after they receive it. People can use untagged money in the market place if they wish. People can sell their tagged money.

    How do we get the tagged money? Well the government can issue it as zero interest loans that is paid back from the taxes paid on the profits deriving from the infrastructure investments purchased in the market place. These calculations can be built into the market place to show that it happens.

    If we invest $15 billion a year through this market place Australia will have zero net emissions within 10 years. We will have cheaper energy than we do today because the interest costs and repayment costs of capital are removed on renewable energy plants so making renewables cheaper than fossil burning energy plants. There will be no cost to the government budget – and the issuing of the tagged money will not contribute to inflation because it only becomes untagged once it has produced a productive asset. The tagged money might suffer from inflation if too much is issued but the inflation is contained within the tagged money and does not spread to the untagged money. As tagged money does not earn interest it will be spent quickly but in the areas that give the best monetary return to investors.

    This system will stimulate the economy rapidly and it will ensure that community money is spent efficiently. It will remove the need for fractional reserve banking by making new money separate from debt. This removes the positive feedback mechanism inherent in a system where debt=money. Finally it will achieve its purpose which is the reduction in greenhouse gas emissions. Once its purpose is achieved it can be closed down.