Good investment, bad investment

Michael Kilgariff, Managing Director, Australian Logistics Council.

Michael Kilgariff, Managing Director, Australian Logistics Council.

This column first appeared in the February/March 217 issue of Logistics & Materials Handling Magazine.

There has been much talk recently about budget repair and ‘good’ and ‘bad’ debt. It comes at a time when government debt and interest rates are very low by historical standards, and when Australian governments still have excellent credit ratings compared to other countries. In that environment, surely it would be a good time to borrow to fund infrastructure?

It is an important question, but it carries the danger of over-simplification: The oversimplification is the suggestion that all borrowing for spending on infrastructure is ‘good’ and all borrowing for other purposes is ‘bad’.

In reality, however, it is more important that any borrowing or, indeed, any spending by government, be a good investment, whether it is spent on infrastructure, on one hand, or on education or health, on the other.

The tale of the two trains illustrates the point. One train is the Very Fast Train between Sydney-Canberra and Melbourne for passengers.

The other is the Inland Rail Project between Melbourne and Brisbane for freight.

The former is glamorous and attractive to people who might use it, but has an extremely weak economic case, particularly as the route is already well served by air, something which will only get better with the building of Sydney’s second airport.

The latter gets little public attention and very few people will actually travel on it, but its economic case is convincingly sound and ultimately it will greatly benefit many people.

Alas, freight does not vote, even if its efficient delivery improves the lives of those who do.

To build the former would be worse than useless. It would take valuable resources away from more worthwhile ones. Recently, the respected Grattan Institute produced some sobering and disheartening research on how badly Australia evaluates transport infrastructure. It looked at all 836 projects that cost $20 million or more since 2001. Premature announcements – when a politician promises to build a road, bridge or rail line without a funding commitment, often in the run-up to an election – caused three-quarters of the $28 billion in cost overruns, yet they comprised less than a third of the projects, the research found.

In short, when proper analysis is done before a commitment is given, projects generally run on time and on budget. The Grattan Institute said, “All main political parties have committed to sound planning of infrastructure, and to making decisions with broad social benefit, yet in practice they continue to promise projects that Infrastructure Australia (IA) has not evaluated or has already found to be not worth building.”

The Australian Logistics Council (ALC) has long supported IA and the need to do proper cost-benefit analyses, particularly as infrastructure funds are getting harder to find and the freight task in Australia is growing rapidly.

The ALC has a major role in making the public aware not only of the need to build the infrastructure required, but also of the need to avoid diverting precious funds into projects that have low or even negative economic return.

Ultimately, politicians in a democracy must make the decisions on what infrastructure to build. However, by ensuring the information is out there on how wasteful and irresponsible bad decisions can be, they can be constrained from making them.

Former Infrastructure Minister and Deputy Prime Minister John Anderson has made a spirited case for the Inland Rail Project because IA has, on the most conservative projections, proved its economic value. Even such an obvious candidate as Inland Rail – connecting not just Melbourne and Brisbane but also, via Parkes, Adelaide, Darwin and Perth – faces political difficulty through lack of national coordination.

Anderson’s environmental and safety case for Inland Rail was also impressive, but without a national strategic context the argument is in danger of being lost.

Of course, Australia faces an extra difficulty beyond identifying economically sound infrastructure projects: a three-tier federal system of government – each having the capacity to make things difficult for the development of national infrastructure.

Local governments can impose load limits and curfews on their roads to appease their ratepayers, but at a cost to the national supply chain. They can also oppose freight-related proposals and allow development in places that should be preserved for future transport corridors.

A classic example is the opposition to the development of the Moorebank Intermodal Terminal in Western Sydney.

State governments can also change land uses and produce transport plans that end at their borders with the aim of serving their own cities and towns, without reference to national freight requirements.

This state of affairs cries out for the development of a coordinated national freight and supply chain strategy to embrace not only new infrastructure but also the uniform regulation of all transport modes to reduce compliance costs.

When people bemoan the lack of national productivity reform, the logical industry to take on a national focus is Australia’s freight industry, which represents 8.6 per cent of the national economy.

It obviously has to be led by the Federal Government, which raises about 70 per cent of revenue in Australia. If it lacks constitutional power to legislate, it can use its financial power to persuade. It can also persuade the states to rein in local governments’ predilection for ratepayer interests over national freight needs.

Some progress has been made with the National Heavy Vehicle Regulator whereby a national scheme has begun using mirror state-by-state legislation.

Last year, further progress was made with the abolition of the Road Safety

Remuneration Tribunal, something ALC opposed from the beginning. The tribunal had less to do with road safety than with being an industrial-relations exercise on driver pay. Progress like this, however incremental, requires sustained, industry-wide, evidence-based advocacy. But there is a long way to go.

The crying need for a national freight and supply chain strategy has prompted ALC to make the theme of its annual ALC Forum this year: Getting the Supply Chain Right. This is not about ‘players’ in an industry. It is a highlevel, intelligent discussion about national functionality. In the past, the ideas emerging from the Forum have significantly influenced national thinking, and will continue to do so.

When issues are fleshed out in detail the results usually carry more weight.

A national freight and supply chain strategy must also deal with financing.

Corridors cannot be preserved and bottlenecks removed without money. There is no point in building a grand piece of infrastructure if the linking bits are missing.

In 2014 and 2015, ALC and others were promoting the use of ‘asset recycling’ as a means of getting more into the infrastructure funding pool. The idea was that governments would sell existing working assets and then use the money to invest in new infrastructure where the private sector was not willing or able to.

The advantage of governments doing start-ups is that it can get the finance using low interest rates and high credit ratings. It can sustain the great risk in any new infrastructure project. But once built and functioning, the government is often not especially good at running such infrastructure. Rules-based bureaucracies avoid risk, cover their patch and are not especially interested in seizing opportunities to innovate and expand. At that stage, governments should sell and use the money for the next initiative.

A national freight and supply chain strategy would provide a better framework for asset recycling.

The ALC has constantly urged that the provision of supply-chain infrastructure and logistics be above politics. The supply chain is national – the freight task is national. It does not stop at state borders and it requires vision that can be delivered by a national freight and supply chain strategy.