Some thoughts on infrastructure in our cities

The COAG Reform Council wanted some lateral thinking done about cities – so who you gonna call?

Being Dr Lateral can be a bit tedious from time to time. You know, spending all that time outside the square. What’s wrong with being inside squares anyway? But like those birds inside appliances in the Flintstones used to say “ehhh . . . .it’s a living”.

The session was on “supporting the private sector in the delivery of strategic vision for Australian Cities”. Now I’m all in favour of the private sector – I really am. And indeed the private sector makes the dominant contribution to our cities funding and building houses and cars and physically building the roads and bridges and wharfs and so on. But it also seems to me that the topic smacks of the main problem with infrastructure in the last couple of decades. It was as if good policy maximised the contribution of the private sector – at the expense of other sectors, when each sector can be of greatest use to the other if each are playing to their strengths.

In the process of thinking about it I came up with an exaggerated, but I think enlightening analogy:

By analogy we might almost as reasonably have focused our energies in monetary policy reform on maximising the contribution that private monetary systems – like gift cards, frequent flyer points and barter systems – might make to Australia’s monetary system rather than take the path we did take to further develop our public monetary institutions and to insulate them from short-term political manipulation.

In any event, given the title of the workshop, I wondered if the organisers really wanted the contribution that I had to make, but they said they did so away I went. Those readers who’ve looked at various pronouncements of mine on public goods, will recognise a theme. I’ve come to think that the way in which we talk of ‘market failure’ is wrong.  It’s wrong because ‘market failure’ suggests a somewhat mechanical procedure by which one presumes that things should be provided by the market until and unless one determines that there is market failure in which case you then consider government involvement, subject of course to the consideration that governments can fail as can private markets.

Though my own way of speaking about these issues doesn’t necessarily introduce anything analytically new, the problem with this way of putting it, apart from the presumptions involved (goods and services are presumed to be privately provided unless there’s a good reason to the contrary) is that it is very mechanical.  I think it provides a more thoughtful and less Procrustean backdrop to thinking about the respective role of the market and collective institutions to say that everywhere and always, markets, if they are efficient and productive, are rich ecologies between the providers of private (competitive) and public (collective) goods and services and that different markets embody quite different configurations of this mutual interdependency.

And that’s how I wrote the paper on infrastructure in cities.

I argued that one of the more unfortunate things about reform is that the model for reform has been tariff reform – yet tariffs are about private goods – and they’re produced in one of the simplest markets around. That inevitably dumbs down our understanding of what good reform should be, and of course makes us prey to those who, as Adam Smith warned, wish to pervert the course of clear thinking to their own ends. What a pity, I argued, that the defenders of reform had not been more vigorous in denouncing the debauch of good policy that PPPs have been in Australia.

I wasn’t too sure how it would go down. However I got a lot of positive feedback personally and the organisers passed on other positive feedback.

And the seminar was held at Suncorp Stadium. I kind of like those functions, where you can walk around the stadium and down onto the ground over lunch.  A bit of variation. Nothing like lush green grass surrounded by tens of thousands of empty seats sitting there in silence for your contemplation and perambulation.

Anyway, the paper is over the fold.

1.      Reform and the ecology of private and public goods

Loaves of bread and pairs of shoes are quintessential private goods. They can be both produced and consumed by many parties each competing with one another. This means that the optimal social outcome emerges from private decision making in a market. By contrast other valuable aspects of our lives – such as clean air or a public park – are not private affairs. Their existence for one is existence for others. Given their collective consequences, it is appropriate that their provision results from public, collective decisions.

It is unfortunate that the template for micro-economic reform was tariff reform because the relationship between public and private goods in the market for simple goods is the simplest and easiest. Though the goods market requires certain public or collective goods to function efficiently – most particularly the currency used for trading and the legal infrastructure to enforce contracts – beyond this vigorous competition generates highly efficient markets.

Yet almost all other markets involve a different ecology of public and private goods, and so function best according to a different configuration of public and collective decision making. As reform broadened to encompass utilities, competition policy and monetary policy and subsequently health and education, it has become clear that reform was not so much about shrinking the role of the public sector, though that might be one aspect of reform in appropriate circumstances, so much as reshaping the ecology of private and public goods in specific markets or parts of our economy and society.

Alongside simple deregulatory reform in the area of tariffs or shopping hours, most other areas of reform involved the expansion and refashioning of public involvement. Competition policy, labour market reform, the introduction of economic instruments to manage environmental policy all came with an avalanche of new regulation that became the platform on which private competition was promoted – either more or less successfully in different cases.

2.      The ecology of public and private goods in a city

The ecology of private and public goods is particularly rich in a city with the two frequently inextricably entwined. Planning decisions necessarily involve many people, not just across space, but also across time. And public services – such as utilities, transport, health, policing, suburban services like libraries and waste management – are interwoven through geographic space that is otherwise available for private competition. Indeed these public services and public goods are the arteries of the city’s life. If they are not healthy, the health and prosperity of the city and its suppliers of private goods will also suffer.

Each of these services will require both private and public involvement (collective decision making and collective funding) in myriad ways.

3.      Reform and the ‘do-it-yourself’ economics of everyman

Economic reform is typically antagonistic to what David Henderson (1986) has called the ‘do-it-yourself’ economics of everyman. Before tariff reform could be dismantled it was necessary to convince enough people of influence that in the long run tariffs destroyed at least as many jobs as they created. And given the tenacity of the various fallacies of ‘do-it-yourself’ economics in the mind of the populace, long-term education and leadership was essential.

In 1968, Max Corden accepted the impossibility of tariff reform in Australia “for there is no significant opposition to protection as such”. Within five years, an audacious 25 per cent tariff cut had taken place. Industry assistance was under threat everywhere. After a decade of delay following the setback of two recessions, strong bureaucratic and political leadership from the mid-’80s on saw it become bipartisan holy writ – despite the continuing political difficulties it entailed.

Alan Kholer (2011) recently captured this strange dynamic with reference to contemporary events:

Sometimes politicians act ahead of the curve . . . but most of the time the momentum for reform becomes unstoppable and the politicians simply run out of excuses to avoid it. . . . That’s what happened with emissions trading. [F]our years after a bureaucratic task force first recommended emissions trading, and 11 years afterKyoto, it gets up during a flimsy hung parliament. . . . [T]he force of momentum from the bureaucratic, business, economic and scientific classes had become a steam-roller.

Alas this process by which informed elites come to make an unpopular but correct public policy somehow impossible for their political leaders to avoid has not emerged in some areas even where the intellectual issues are relatively straightforward. This has typically occurred where political and commercial self-interest coalesce around less healthy conceptions of economic reform, particularly the idea that it is the simple expansion of private competitive supply and the intensification of private incentives to invest with a commensurate retreat of government.

This has been true in the United States, for instance, in the areas of finance and health reform. Globally intellectual property has been strengthened (for instance with the extension of patent and copyright terms) with scant economic justification. In Australia it has been clearly evident in the policy effort put into encouraging private infrastructure funding.

4.      Infrastructure and reform – the case of public private partnerships (PPPs)

Infrastructure is both planning and capital intensive – and governments have the authority to plan (though of course they should consult widely) and, providing they remain fiscally prudent, they face much lower costs of funding. Accordingly a world in which each sector plays to its strengths is a world in which governments more vigorously help plan and fund infrastructure with the private sector designing, delivering and maintaining it.

Of course where private investment can make a cost-effective contribution to city infrastructure it should always be welcomed. In this sense the basic methodology developed for managing PPPs – the use of a public sector comparator – is the right policy in principle. However this approach was established with the specific intention that it facilitate PPPs. In that context officials saw to it that – the finer points of economic theory notwithstanding – the public sector comparator imputes to government the same high costs as private financiers.[1]

By analogy we might almost as reasonably have focused our energies in monetary policy reform on maximising the contribution that private monetary systems – like gift cards, frequent flyer points and barter systems – might make to Australia’s monetary system rather than take the path we did take to further develop our public monetary institutions and to insulate them from short-term political manipulation.

5.      Clarifying and strengthening the role of government

Right now infrastructure spending is constrained by well-intentioned but ultimately arbitrary ceilings on public debt levels and by the higher cost of funding from the private sector. Given the private sector’s preponderance in designing and building infrastructure, strengthening the public sector to enable it to fund more infrastructure would benefit both sectors alike. This requires the kind of institution building with which we are familiar in other areas of economic policy like competition and monetary policy reform. In each case, a healthier private sector is the result of clarifying and so strengthening government’s role.

We need to develop institutions to provide regular, public, independent, expert advice to governments on the appropriate stance of fiscal policy (the size of the budget deficit or surplus), the level of debt and the management of public balance sheets including the credit ratings to which they should aspire. The Auditor General could grow to fit the role as central banks grew to take on the independence they had thrust upon them.

This would better enable governments to borrow to fund infrastructure that generated benefits than exceeded debt servicing and project risk costs. And, like a company, the government’s targeted credit rating would be tailored to its objectives, rather than fiscal populism and political sloganeering.

There should also be similar public and independent advice on the wisdom of individual infrastructure projects to ensure that taxpayers’ money was used on the projects that offered the best returns as determined by independent cost-benefit analysis, rather than vote buying.

6.      Intangible infrastructure: a new kind of public, private partnership

As we are becoming increasingly aware, the modern economy is increasingly dependent upon intangible capital – the capabilities and routines embodied in existing technologies and the knowhow embodied in people.Australia’s world-leading introduction of income contingent loans (HECS) and the establishment of the Child Support Agency (CSA) transformed the nation’s income tax system by making it available for social tasks other than pure revenue raising. Thus ‘multi-tasking’ the tax system created new public private partnerships in funding tertiary education and in more efficiently administering and enforcing maintenance payments from Australia’s non-custodial parents.

City intangible infrastructure might be capable of similar adaptation and multi-tasking. Could family homes be upgraded – for instance to improve their environmental performance – using financial instruments built around the rates system in the way that HECS and the CSA are built around the federal income tax system?

7.      Taxing rents and congestion: new front for reform

Tax reform is also crucial to optimising our investment in infrastructure and its use. It has been a commonplace since Henry George that ‘betterment taxes’ are efficient. They also provide both a fair and efficient means for capturing for the state some of the value generated by infrastructure investment.

Congestion taxation is a classic ‘green’ or Pigouvian tax – one of the rare ways of improving community welfare while raising public revenue. As O’Flaherty observes (2005, p. 61), congestion taxes are “like making a large amount of money drop from the sky”. Given this it is remarkable that it has played so small a role in the reform era during which time tax reform has been the predominant focus of micro-economic policy no less than three times – in the early Hawke, Howard and Rudd/Gillard Governments.

Congestion taxation is a critical ingredient of efficient infrastructure more broadly. This is not just because it provides a means of optimising the use of existing infrastructure and so minimising unnecessary new investment, but also because it can prevent new infrastructure from perversely generating sufficient new demand to undermine its intended purpose of relieving congestion costs.

In his book City Economics, Brendan O’Flaherty observes that (2005, p. 67):

the reasons we are giving for tolls are almost totally different from the reasons generally given for tolls in the first place. . . . The idea that tolls should be used to pay off a road’s construction costs leads to the worst possible allocation of resources: high tolls at first that discourage trips that should be made, and no . . . tolls later that encourage waiting that should not be done. It’s like taking a vile-tasting medicine when you’re young and healthy, and stopping it when you get sick and it could help you.

To return to our original theme, tackling the ‘do-it-yourself’ economics of everyman was a long-term cultural struggle for reformers from the time of Rattigan’s Tariff Board in the late 1960s. The reformers triumphed, and we are all the beneficiaries of their victory. By contrast, while we have been distracted with the campaign for PPPs, remarkably little effort has been expended, even by the guardians of economic reform, on the corresponding struggle in the area of infrastructure economics.

But it’s never too late to start.

7.      References

Corden, W. M., 1968. Australian Economic Policy Discussion: A Survey,MelbourneUniversity Press,Melbourne.

Henderson, D., 1986. Innocence and Design: the Influence of Economic Ideas on Policy, Basil Blackwell,Oxford.

Kohler, A. “Carbon tax for the price of a broken promise”, The Drum, July 12, 2011 15:38:20 http://www.abc.net.au/news/2011-07-11/carbon-tax-for-the-price-of-a-broken-promise/2789602 (http://bit.ly/pZK1oV)

O’Flaherty, B., 2005. City economics,Cambridge, Mass: Harvard University Press.

 


[1] The Productivity Commission has argued persuasively that the costs of slightly underpricing access to infrastructure can be much higher than the costs of slightly overpricing access. That is because not having infrastructure imposes high costs, while the allocative inefficiencies imposed by somewhat inflated prices are likely to be relatively minor. By the same token it is likely that if alternative, more conventional means of funding infrastructure are unavailable, PPPs are probably better than the alternative of stalled infrastructure investment.

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12 Responses to Some thoughts on infrastructure in our cities

  1. Judith Sloan says:

    The real issue, Nick, is what possible role the COAG Reform Council should play in relation to cities and their planning. Last time I looked these cities were located in the states and territories. There is no case for a mandated national approach, with one-size-fits-all prescriptions and mandated targets. Yet another example where COAG has gone completely off-track. In any case, COAG is a dead parrot with no level of government now taking any interest.

  2. KB Keynes says:

    to be a bit pedantic you cannot be sitting and be perambulating at the same time.

  3. Nicholas Gruen says:

    KB, the seats are sitting in silence for your contemplation and perambulation.

  4. KB Keynes says:

    sorry nick I missed that

  5. Nicholas Gruen says:

    Not that there’s anything wrong with pedantry. I always enjoy it whether it’s mine or others’. (Did I get that apostrophe right – I fear not!)

  6. Pedro says:

    I always worry that congestion taxing simply reserves certain areas for the rich. Externalities are easy to deal with when they are not the actions of pretty much everyone. Tariff reductions benefit the many at the cost of the few. Congestion taxes will benefit the few at the cost of the many.

  7. wizofaus says:

    But Pedro, it’s rich people that generate all our wealth…so if all that congestion makes it hard for them to do so, everybody suffers.

    Actually, while I originally intended it as parody, there’s probably some amount of truth in it, except for the fact that I rather doubt rich people do benefit significantly more from congestion taxing than the rest of us minions that waste hours of our days sitting in traffic breathing in smog.

  8. MikeM says:

    I always worry that congestion taxing simply reserves certain areas for the rich.

    Congestion itself is a form of tax, and a peculiarly wasteful one. The value of wasted fuel and people’s time that it exacts disappears into thin air. On the other hand, congestion taxing in the form that Nicholas means yields a cash flow that can be applied to improving alternative means of transport: when Red Ken introduced the congestion tax on central London, the resulting revenue was applied to improving bus services and bus travellers benefited mightily from lower traffic congestion.

    There may be other measures as well that can be taken to improve equity. For example, though derided by the motoring lobby, Sydney’s steadily growing network of dedicated bicycle lanes facilitates an extremely cheap method of transport for those whose circumstances allow it.

    Congestion tax is not a universal solution and sometimes fresh thinking is required. For instance during peak hours the traffic around the York-Druitt-George streets area in Sydney’s CBD is heavily congested and traffic consists predominantly of buses. I doubt whether a tax would provide more than very minor relief, but that special case fails to dent the general argument for congestion pricing.

  9. . says:

    Building more train lines is a much better solution than taxing people into shithouse, congestion causing City Bus services.

    There is enough fat to see a privatisation, massive profits and lower ticket prices.

  10. Pedro says:

    No, congestion is not a tax, it’s congestion. It might be economically harmful, but so are droughts and both are just environmental phenomena.

    “The value of wasted fuel and people’s time that it exacts disappears into thin air.”

    Maybe, but all those schlubs sitting in their cars are choosing to pay that price.

    “I rather doubt rich people do benefit significantly more from congestion taxing than the rest of us minions that waste hours of our days sitting in traffic breathing in smog.”

    It is easy to say that we would all benefit if there was less congestion. But, Wiz, if you are sitting in the traffic then you have already dediced that taking the car even in that mess is better for you than the alternative. Therefore, pricing you off the road is not improving your life as evidenced by your own choices.

    A congestion tax benefits the rich because those of us who can’t afford the tax have to catch the bus. It’s best to think about it as road user pricing. Nobody struggles to understand that high prices for footy games lead to the exclusion of the poor who have to make do with TV.

    It wouldn’t much both me, because I cycle, if anything I expect I’d have a few less brushes with death every year. But that doesn’t change the simple fact about fairness.

    Given that that public roads are owned by all of us, don’t you think it would be a bit of a con if our representatives priced most of us out of the most popular bits of the road? Funnily enough, if a congestion charge ring was put around the Brisbane CBD then the guys and girls who decided to impose it would be even better off as their govt cars sail serenely into George St.

  11. wizofaus says:

    Pedro, I don’t personally spend much time sitting in traffic either – I cycle too and use P.T. for most longer distance journeys.
    But to a large degree it’s my higher income that makes that possible: it gives me the choice to live somewhere where those are viable options. And people may decide “that taking the car even in that mess is better for you than the alternative” but all that says is that the alternatives are pretty awful. A congestion tax that is not paired with an attempt to provide and promote better alternative forms of transport for more people is, I would agree, likely to be hardest on those who can least afford it.

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