2015 thus far has seen unprecedented levels of false political promises, start-stops on major infrastructure projects and general instability created by the changing political environment in each of the major jurisdictions.
More than $21 billion worth of projects were dropped in the March Quarter alone. I grant you that these projects relate to resources and energy related infrastructure, and Australia's role in those sectors are changing in a global commodity market, however there is a major question to be asked around the political influence on the market.
“Promises, Promises, Promises”
This isn’t the time or place for general constitutional scepticism, however it cannot be denied that party politics have a major part in industry, corporate and economic confidence. The ramp-up required to make billion dollar infrastructure projects happen requires significant proactivity by the private sector. Often, this will see major players assembling consortia (in principle) some 12 to 24 months prior even to an initial market sounding or launch of a project. Whilst the incentive exists to be prepared, and have the best partners on board, this early assembly is often because the market is forced to make a decision upon which direction, sector or key project they will focus, usually at the cost of pursuing parallel opportunities.
Whilst this focus makes business sense, in retrospect, cancellation of the project causes significantly greater cost than perhaps first envisaged. Cancelled projects cost business (and dampen confidence) irrespective of the rationale or any Government contributions.
At a minimum, the following costs result:
- The actual cost of pursuing the project
- The opportunity cost of the project not proceeding
- The opportunity cost of the projects they did not pursue
How does cost and dampened confidence impact the economy? At a macro level, it can destabilise foreign investment, delay new market entrants and create significant reputational damage to Australia in global financial markets. At the micro level, it can mean anything from immediate staff retrenchments through to reduced workload and deferred staff hires.
Calling cancelled projects a "cancer" is not a comment to be made lightly. Problems can begin from a seemingly small and insignificant oversight (read: sun-smart) which discreetly but gradually escalates to a point of reckoning. The Queensland Asset Sales, the SA Law Courts development and the East West Link are but a few of the major projects which have met their demise in spite of significant private sector interest and investment. Whilst I don’t wish to weigh in on the ‘cost-benefit ratio’ debate nor the ‘rail versus road’ rhetoric, it is both regretful and highly unlikely that the full “cost of cancellation” has been truly understood by the decision-makers in government.
Whilst the statistics may or may not show it, I know from my work in industry that confidence has been undermined and key decisions are being deferred. Indeed, many firms are now looking beyond our Asian neighbours to other developing markets such as North America, India and Africa. Yes, this is a great reflection of Australian business weathering the storm of the GFC and growing, however this doesn’t reflect the true need to expand.
Federal and state governments’ lack of pipeline, lack of conviction and lack of commercial acumen means private business can’t wait for the public sector to get its act together. Indeed, Australia is destined (under the current culture of red-tape and embarrassing productivity rates) to continue to be a pedestrian economic power. Meanwhile, the Aussie-economic-battlers will continue to look at new markets and build valuable infrastructure and economic activity for the benefit of citizens in other countries.
What can be improved?
- GET IT RIGHT FIRST TIME
Engage the market’s best and most appropriate advisers who understand both public and private sector needs. Get the numbers tested and test them again. Don’t waste the market’s time lightly with ill-informed or ill-conceived projects.
- NO FALSE STARTS
Nothing frustrates business more than deferred decisions. It is imperative to market confidence and to delivering value for money that when a project is launched the public sector holds its stakeholders, decision makers and delivery team to a strict timeline. The private sector should not be kept ‘on the hook’ or else market opportunity costs escalate rapidly.
- EMPOWER LONG-TERM DECISION MAKING
Everyone else has woken up to the reality of political cycles. Where decisions on long-term infrastructure are required and where the benefits will only be realised outside a single term of government, liberate the decision from party politics to expert industry advisors and a government delivery corporation.
- BEFORE PULLING THE PLUG, CHECK WHERE THE WATER GOES
If, in spite of all of this advice, a project does require cancelling, ensure that the full impact of cancellation, from all fronts, is understood. As counterintuitive as it may seem, sometimes the cost to proceed can be less than the cost to cancel.