Australia’s Infrastructure Deficit Could be a Myth 1

Friday, June 17th, 2016
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As Australia goes about planning our cities going forward, one concept which is referred to frequently revolves around the notion of an ‘infrastructure deficit.’

Back in 2006, a report from Infrastructure Partnerships Australia identified more than 160 projects it said were necessary in order to build the Australia of the future. Based upon external valuations, these were reckoned at the time to have a combined cost of around $700 billion in 2007 dollars.

In 2008, separate estimates from Citygroup and ABN Amro put the required level of infrastructure spending over what was then the decade to come at amounts of around $770 billion and $445 billion respectively. In its 2010 infrastructure report card, Engineers Australia referred to the notion of a deficit of $700 billion but did not specify the basis upon which this had been defined or calculated. Infrastructure Australia did likewise in its national infrastructure plan in 2013, although its figure came out at $300 billion.

In contrast, by one estimate, we are actually ahead of the game. Adopting an assumption that the optimal value of infrastructure spending was in fact 70 per cent of GDP, McKinsey says Australia has a surplus amounting to around 1.2 per cent per annum between our actual levels of spend over the period between 2008 and 2013 and our anticipated requirements between 2016 and 2030.

Given all this, do we really have a deficit? If so, how big is it?

The bottom line is that nobody really knows, according to Grattan Institute transport program director Marion Terrill. To support claims of a deficit, Terrill says you need to define and articulate the level of service which is required from our infrastructure and compare that to that to what our existing infrastructure is delivering at the moment. This could involve, for example, specifying the average time it should take to travel from the city to the airport or to unload containers from ports and get them to intermodal terminals. Should these times in practice exceed this target, a deficit would exist.

At the moment, however, she says no one has done this, and thus talk of a deficit is pointless.

“There are a lot of people making claims that there is a very big infrastructure deficit and they do use very large numbers to say how big it is,” she said. “None of them have got a methodology that makes any sense at all as far as I can see.

“If you are going to say that there is an infrastructure deficit, you have to say that there is some level of service that we need and that what we’ve got is falling short of what we need. To this point in time, nobody has actually articulated what the level of service that need is.”

Paul Hyslop, chief executive officer of ACIL Allen Consulting, agrees. The definition of a deficit is largely unclear, Hyslop says. In order to have meaningful dialogue about any surplus or deficit, he says we need to price our infrastructure, measure the standard of service currently being derived from it, and compare that against the standards of service which people desire and are willing to pay for.

Hyslop suspects many of the assets which are included in the apparent deficit are either ‘nice to have’ or assets that we will need over coming decades but still have a considerable period of time in which to build.

“Our view is that the concept of an infrastructure deficit is mostly a political term,” he said. “It’s a largely meaningless term from an economic perspective.

“The problem is, there is not a clear definition of what we mean by ‘deficit.’ Does it mean the amount of infrastructure that we need to build between now and a certain period in time to maintain the same level of standard? Does it mean the amount of infrastructure we need to achieve a level of service or standard of infrastructure that somebody has decided that the public needs? It’s very unclear.”

Terrill and Hyslop’s comments follow the government’s announcement in April of a plan to create cities which allow residents to access the places to which they go on a daily basis within 30 minutes.

In absence of thinking about an overall deficit at a macro level, Hyslop says the focus should revolve around delivering those assets which deliver high levels of benefits relative to their cost. In addition, pricing infrastructure would help direct investment toward areas in which it is needed most whilst viewing infrastructure on a network basis rather than an individual asset basis would help us focus around options for the longer term and how individual pieces of infrastructure connect with each other as opposed to being ‘stranded.’

Terrill, meanwhile, says we should view our infrastructure as a mature system and look at how we can make incremental change. She feels there is danger in focusing upon a certain quantity of ‘more’ infrastructure requirements and says we should first concentrate upon maximising the value of our existing asset base, potentially through measures such as road pricing.

She is encouraged by efforts to improve the way in which projects are assessed, but Terrill says these assessments should be made prior to any significant policy announcements being made and that all results should be made public.

Whilst acknowledging that we may well need more infrastructure as the population grows, Terrill cautions that we should only move forward on projects which deliver value for money.

“I constantly hear people say, oh, yes, we’ve got a terrible deficit,” she said. “It just seems to me that you don’t have to think about it too long to see that no-one has made the case for it (the deficit).

“I don’t subscribe to the idea that we have these massive ballooning deficits given that no one has done the work to define the level of service that we are trying to achieve and the difference between that and where we are now.

“I am not saying that no infrastructure is needed, I would say that no one really knows.”

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  1. Peter Tomkinson

    When the developers and their financial backers plan to put say 15,000 new offices in the CBD over the next 5 years, meaning some 15,000(adj +/-) people will occupy them, it is not their task to plan how those people will travel to work. Transport planners cannot just 'pie in the sky' invest in transport infrastructure unless it is real, meaning they are probably behind from the start trying to assess needs, find solutions and to get money and approvals only when actual building work is in the pipeline.
    So where is the problem? Right back at the beginning – PLANNING. In this case not project planning but the big picture planning – look at the change in any city skyline and ask if this development was Project driven or the result of Civic planning involving ALL parties before decisions were made. The latest fiasco in Perth,WA suggests not. Politicians make wild statements not based upon facts, developers must look at a site development not the whole city and last but not least the infrastructure people scramble to meet a need, often one already underway if not in place. A mess is the result and a lot of wasted money and effort expended. Cities, civic centres and infrastructure rarely get replaced completely once in place and fixing up a hodgepodge mess is incalculably expensive and disruptive. Look no further than transport to/from major airports to see how infrastructure fails and the mess that results.
    Plan it right, and fully as an integrated system at the start and all can benefit for a long time. It is not just infrastructure folks.