Iemma’s Dilemma

Herewith today’s column in the Fin – on a subject as you may gather on reading the column that gets me fired up. Borrowing to invest could be a perfect issue for Labor Governments – suited to their ideology and a battle they could have with their opponents in which they were right intellectually all in the service of a policy that would prove highly popular. Why don’t they do it? Because they’re too timid. And perhaps more to the point, it would (sorry – it could) involve some short term pain. It would involve the risk of saying that debt is OK, and that if it makes sense we should increase it. This is the kind of thing that Bob Hawke would have had no trouble explaining. It is the kind of thing that any half way decent politician would have no trouble explaining, but first they have not just to believe it’s true, but understand that, over any reasonable period of time, the alternatives are much worse. Morris Iemma’s fate is testimony to that. Anyway, on with the show.

If I recall correctly, Bertrand Russell once joked that economics was the most fanciful of disciplines built as it was around the absurd notion that people generally pursue their self interest. If only thought Russell, the conscientious objector, as millions volunteered to slaughter each other in the trenches.

They were self sacrificing patriots. But they were also sleepwalkers, constrained, as we so often are, by the self interest of the moment the too easy honour of respectability, the embarrassment at standing out. That immediate self-interest kept them from seeing how they were betraying their own deeper self-interest.

Similarly, ALP governments have followed their immediate interest in embracing low government debt, but at the cost of their longer term interest. Theyve been sleepwalking into the policy dilemma that eventually saw Morris Iemmas fatal dash over the top of the trenches last Friday.

Until recently it was widely understood that governments should borrow to build roads, bridges and railways the arteries of tomorrows economy. This increases investment and is fairer because the users of tomorrows infrastructure pay for it when they use it, in the future taxes or charges that meet the interest payments.

Seeking the mantle of economic respectability, politicians have embraced not just the laudable goal of returning operating budget balance or surpluses through the cycle but also full blown fiscal populism. This reached its apogee in NSWs policy of zero government debt.

Being debt free sounds terrific . . . until you ask the economists question at what cost? You could go debt free too but only by selling your home.

The first economic casualty of this new war on economic commonsense was dodgy private infrastructure. Infrastructure is usually built by private contractors, but with structures improvised to privately fund infrastructure . . . well that killed several birds with one stone. It pushed government debt off the books. No matter that private funding cost nearly twice as much, necessitating higher tolls. No matter that the State diverted traffic onto the new roads and signed away its future planning flexibility. No matter to Bob Carr who parachuted out of his Premiership to Macquarie Bank which had made billions packaging private infrastructure. Everyone was a winner.

Well nearly everyone.

Even with private tollroads, zero debt was never sustainable. So the government had a new idea. Instead of reducing debt, theyd . . . well theyd increase it. And an elegant retreat was made to the next arbitrary benchmark of fiscal respectability NSWs AAA credit rating.

In fact NSW is a fair way from compromising its AAA rating even with reinvestment in its power assets and various projects such as the North West Metro. But if the benefits of increased investment outweigh the modest costs of slipping to AA, NSW should do it as most firms do.

I understand why the ALP mightnt oppose fiscal populism from Opposition: its hard if your opponents in government control the agenda. But once securely in Government its a political no-brainer. The electorate likes to see governments investing in the future. And the alternative arbitrarily restricting investment whilst commuters nurse their resentments in traffic jams or waiting for late trains is a political road to nowhere. Ask Morris Iemma.

Of course the Liberal Opposition would object to rising debt as its doing already. But against a confident and visionary state building Government perhaps one receiving regular public advice on the sustainability of its budget from an independent economic advisor like the Auditor General theyd be easy meat. Tell us, Mr OFarrell, which major infrastructure project youd shelve to retire debt.

It would make sense to privatise electricity over time as part of this strategy of rebuilding public infrastructure. Instead, having campaigned against privatisation, the Government tried a panic sale into a traumatised financial market at a time of maximum uncertainty over carbon risk. No wonder Iemma ended up in the trenches.

As new Premier Nathan Rees surveys the debacle produced by trying to foist the financial structure of a retired couple on a growing state, Im hoping the penny might drop. He should ponder this. Had Bob Carrs Government borrowed to fund the tollways that now proudly weave their way under and round our oldest, largest, most spectacular (and most congested) city, the governments net worth would be ten billion odd higher.

It would be rolling in cash and ready for the next generation of infrastructure investment.

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conrad
conrad
13 years ago

“Borrowing to invest could be a perfect issue for Labor Governments – suited to their ideology and a battle they could have with their opponents in which they were right intellectually all in the service of a policy that would prove highly popular”

Any data to prove this would be popular? My bet is to opposite (which is presumably why it has been left as a non-issue), especially in states like Victoria where people had to live through the Cain/Kirner years. People simply don’t trust State governments enough (and with recent remarkable investments like a slighty faster than slow train, it’s not like they’ve got new reasons to), and any opposition is sure to add to the scare-mongering even if they did borrow for decent purposes.

Vee
Vee
13 years ago

How can one ensure that Nathan Rees reads this?

pedro
pedro
13 years ago

Nicholas I don’t think it is simple scaremongering to point out that people might remember large debts uselessly and expensively incurred in the recent past.

I completely agree that governments should borrow for appropriate state infrastructure. PPPs have always worried me because of the risk that the government in question will stack the deal in favour of the developer to get a bigger upfront payment, which will no doubt be used for recurrent expenditure. I also wonder whether it is fair to make developers pay for the rew roads, water and sewerage pipes that government paid for in older parts of our cities and towns, and these charges are a significant part of the problem with housing affordability.

At the same time one must acknowledge that often enough the infrastructure is simple pork barreling, or is at best a poor economic decision. Also, surely we have gotten past the idea that governments should own assets that the private sector are happy to provide in a competitive market environment. I doubt too many people would now think that the government enterprise will be anything but a waste of money in the long run. Your example is the electricity sector and the continuing public ownership in NSW is a result of union power and not any economic good sense.

Ken Parish
Admin
Ken Parish(@ken-parish)
13 years ago

Implicit in Conrad’s customary kneejerk negativity is the notion that somehow the private sector has a magical recipe for picking the best infrastructure projects to invest in. However that assumption is rather less than credible in the wake of Sydney’s Epping and Cross-City tunnels etc. As Fred Argy has argued persuasively here at Troppo:

I then ask myself the question: will the private sector prove a more efficient owner-manager of the proposed infrastructure than government? There is little doubt that the private sector is generally better than the public sector in design, construction and operation of infrastructure. But capturing these benefits does not require private ownership. Governments can and do out-source most operational matters to private companies and consultants.

On the other hand, the efficiency case for private ownership of infrastructure is based on a number of preconditions which may or may not apply in practice.

Fred makes a pretty good case for privatisation of electricity generation (at least once the uncertainties about emissions trading are resolved to avoid selling at firesale prices), but the case is much weaker for natural monopolies (like railway lines or port infrastructure, or for that matter expressways and road tunnels). Such areas will usually be best held under government ownership with contracted private construction and management because governments can borrow much more cheaply, as Nicholas points out, and because decisions about which projects to construct are necessarily influenced by a range of public interest factors and benefits that can’t easily be captured for profit by a private sector operator.

BTW opinion polls over the last few years have consistently shown that voters prefer governments to spend more on social welfare rather than just returning big tax cuts. Whether that sentiment transfers to spending on essential but long-neglected infrastructure remains to be seen, but I don’t see any reason why not. Challenging the idiotic idea that public debt is always bad is obviously the first step, and the analogy with household budgets and borrowing to build the family home is one that most people should find easy to understand. That point was also made cogently by Fred Argy here at Troppo:

However net public debt – the difference between the governments stock of financial (mainly debt) liabilities and its financial assets – is not (except in extreme cases) an appropriate measure of a governments balance sheet strength. The focus should be on net public worth – all financial and non-financial assets minus all liabilities. If governments borrow money to invest in real productive assets with a comparable life to the debt, this adds to net public debt but it does not detract at all from net worth and, depending on the investment, could even increase net worth in the long term.

BTW2 I’m not sure why Conrad feels compelled to denigrate the Ballarat-Melbourne fast train. It certainly isn’t a “Very Fast Train”, largely because isolating the track, eliminating level crossings etc sufficiently to allow operate at extreme high speed would have made the project prohibitively expensive for an insufficient benefit given the fairly modest population of Ballarat. Nevertheless, being able to commute from Ballarat to Melbourne in almost exactly an hour is a pretty significant benefit. Jen and I have looked at Ballarat seriously as a place to live when/if we move “down south” in the next couple of years, but we certainly wouldn’t consider it if we couldn’t commute to Melbourne quickly. This is exactly the sort of project that makes sense in the public interest but almost certainly wouldn’t stack up as a private sector exercise because of their higher borrowing cost and other factors. It makes sense for government to fund it precisely because it allows people to commute from under-utilised regional towns and cities, thereby reducing the need for governments to keep funding infrastructure for extensions of the existing endless Melbourne urban sprawl.

conrad
conrad
13 years ago

Look, I’m not saying that I don’t agree that some public infrastructure spending is a bad thing, I was just pointing out the political reality and why people are cynical. I don’t think it’s a knee-jerk reaction — it’s merely an observation over how competent recent governments have been.

In Victoria (and we’re talking highly competent compared to NSW), the last three big projects we have had are that new freeway that doesn’t get used (and isn’t likely too, since the main new housing developments and hence population growth are in the North and the West), the bay dredging (what’s that for?), and the Melbourne->Ballarat train. Things that really need it, like fixing up the metro train system, haven’t got it.

I might also note that if the Melbourne->Ballarat train had been a TGV (i.e., 300kms/h fast train) or something like that, which would make the journey 20 minutes (and 15 to Geelong), I’m sure people would be clammering for more (and you wouldn’t even have to consider moving there for time reasons anymore). It would also fix Melbourne’s urban sprawl. But that’s not what we get. We get more freeways, useless bay dredging, half-baked country lines, and so on. That’s hardly a recipe for changing people’s attitudes. I don’t think this is cynical — this is just a reaction to incompetence.

NSW is the same (except they’re in even more dire need than Melbourne). If you had a TGV between Newcastle (perhaps Gosford), and Wollongong, you could happily live in those cities (it would be far quicker to get to work than living in the outer suburbs). It would take 20 minutes to go from either of those cities to Sydney. But what to we get? A Lane Cove Tunnel and that freeway that connects Epping to the Western suburbs. At least they managed to stick in a few new train stops, albeit after decades. Again, if you want to change people’s attitudes about this, you really need to do something that makes a big differences, and things like TGVs (which are all over Europe) would probably make this difference. Suddenly people might think that the government did come up with a good idea, and it would be highly visible.

And before you point it out, yes, I realize some of these are PPPs. But I think people are now not just cynical of public infrastructure spending, but almost any government infrastructure involvement at all due to the fact that they don’t seem to be able to get either right.

wanderer
13 years ago

Early impressions of Rees suggest he is literate, has a likeable directness, and courage. Roosendaal is another matter.

Could someone speak to the arrangements with the (Brereton) Sydney Harbour Tunnel? Is there some template in there to be followed?

Ken Parish
Admin
Ken Parish(@ken-parish)
13 years ago

wanderer

This article rather suggests that the PPP model used for the Sydney Harbour Tunnel is anything but a best practice example. The most that can be said is that it hasn’t yet proven quite as disastrous as the Cross City Tunnel.

conrad
conrad
13 years ago

Speaking of Roozendaal, he is of course another reason people probably wouldn’t want the NSW state government borrowing money on their behalf.

For example, here’s his response to a quite reasonable study about Sydney’s traffic woes:

http://www.smh.com.au/news/national/stuck-in-traffic-get-used-to-it-sydney/2008/06/20/1213770924146.html

Do you really want this guy spending your money? I look forward to his commonsense solutions.

JC
JC
13 years ago

Re 9

I have always had my doubts on the workability of tollways in inner city areas. Eg. Toorak Road is gridlocked now as people try to avoid the freeway tolls.

wanderer
13 years ago

Ah, thank you Ken Parish, a template for avoiding initial traveller/voter backlash.

“Its a suggestion that theres a large, worthwhile and potentially popular piece of reform that the ALP could undertake. But it has to be able to walk AND chew gum”…something State Labor should be more prepared to contemplate now it is no longer caught in the Federal Liberal spotlight of spruiked surplus and fiscal respnsibility (aka more loot than vision).

Ingolf Eide
Ingolf Eide(@ingolf)
13 years ago

Interesting thoughts, Nicholas, and a very well written column.

Tel
Tel
13 years ago

Obviously if the money is used corruptly or badly, using more of it is almost certainly worse than using less of it. If you read what Ive written carefully it is intended to suggest that increased borrowing should take place within an institutional framework that would protect us from that kind of thing – as it has in the case of monetary policy – with independent institutions.

Which would also work with public/private partnerships, if the government of the day was forced to go through the process of an open tender with contracts visible to the public, and a suitable time period for comments from the public (and if they actually listened to ANYONE for a change). The fact is the the Iemma government had very little talent, no vision for the future, and even less interest in the public good. They put through expensive projects that no one wanted, with secret contracts and sneaky tendering processes. They only things they ever delivered were excuses again and again. If the Liberal opposition had put together any sort of credible team last election (and without the anti-Howard protest vote) then Iemma would not have got this far.

In the case of the electricity selloff, somehow Iemma figured that although pushing up electricity prices was electoral suicide, selling the whole infrastructure to private hands (who would then immediately push up prices) was going to outsmart the voters with his clever little shuffle. The biggest dope could see through this plan like glass, but Iemma couldn’t be told (not even by the huge majority of his own party). There’s no dilemma here: the team demonstrated beyond a shadow of a doubt that they were unfit to lead, and the people of NSW are going to make sure that someone else gets a go. With a pair of competent hands on the wheel you will find all sorts of maneuvers are possible.

The real question in my mind is how can we have a population in the order of 7 million, and still have such a bunch of no-hope, no-talent losers on BOTH sides of the house? No ideology is going to take the place of genuine vision and leadership. My general feeling is the politics has become an assassination game where everyone tries to keep the lowest profile possible, waiting for their opponents to make any small mistake which they then hammer hard. The result is that the survivors are people who are very cautions, say nothing and stand for nothing. It also generally results in leaders who have no skills beyond the ability to guard their own back and to find other people to blame.

The Hon. Michael Costa — here is his official list of portfolios held:

Deputy Leader of the Government in the Legislative Council
Minister for Police
Minister Assisting the Minister for Natural Resources
Minister for Transport Services
Minister for the Hunter
Minister Assisting the Minister for State Development
Minister for Roads
Minister for Economic Reform
Minister for Ports
Minister for Waterways
Minister for Finance
Minister for Infrastructure
Treasurer
Deputy Leader of the Government

After all that, can someone come up with any project that they remember this guy completing to a satisfactory conclusion? I mean a real achievement that makes people sit up and say “well done!”

pablo
pablo
13 years ago

I believe Mr Costa in the three economic portfolios – economic reform, finance and treasurer – might have overseen NSW going from a AA rating to AAA – but I could be wrong and your point (Tel) is well taken. There is also an old wooden bridge at Millfield (with convict built ramparts) in the Hunter Valley near where Mr Costa lives that he would regard the replacement of as a significant achievement under his ‘Minister for the Hunter’ Ministrer for Roads’ hats.

Tel
Tel
13 years ago

It would be nice, but Australias geography and political history make such a project nearly impossible, getting more so all the time.

Newcastle and Wollongong are both a bit tricky because of their proximity to mountains. However, on the whole, Europe has much rougher geography than Australia (probably 90% of Australia is absolutely dead flat, Conrad just happened to pick a bad example). Consider a quite reasonably fast train between Bathurst and Orange — much cheaper. One might say, “why bother?” but as Australia’s population expands (and ocean warming whips up nastier storms), the coastal areas are going to reach their limit and the inland towns are going to become more important. Maybe build up to a more ambitious project stretching to Wagga. The whole idea of having vision is to look ahead and make a plan before it gets too late.

Since most people travel long distances every day just to sit at a desk, consider the even more visionary concept of actually providing high level encouragement for telecommuting. Why move people around when electrons can be moved quicker and cheaper? This would make the inland towns even more attractive.

But transport is not the only infrastructure. I’m stunned that Sydney’s population can double and double again while running on the same water supply, and the entire government still gets caught by surprise when the water runs out. Then they can turn around and reject the idea of recycling, reject the concept of collecting rainwater or stormwater, and pick the most expensive option — desalination of seawater.

Take a look at the progress the Africans can make in greening the Sahara desert. Why can’t Australians turn our deserts green too? I mean whoever actually said, “yeah, we can take one of the biggest and fiercest deserts in the world and plant trees on that”… that person had vision.

conrad
conrad
13 years ago

“It would be nice, but Australias geography”

Here’s another example to go with Tel’s. You could connect Melbourne->Geelong (flat as a tack) and Melbourne->Ballarat (fairly flat). The Geelong one would be completely worthwhile, because people would actually want to move there (Ballarat would not be so useful — it isn’t on the coast so would never be as nice — but it would still be ok). Many people already live in Geelong and commute everyday (it’s about the same distance as Sydney->Newcastle in case you don’t know). You could also stick a hub in the outer West in Melbourne where there is large population growth, which would allow those people to get in on the train too (the traffic is aweful across the Westgate bridge). Having only one stop wouldn’t hurt from Geelong, since the journey would still be less than 30 minutes. You could then build uber-style high-rises around the hub as they do in Asia, which would help decentralize Melbourne a lot.

This type of infrastructure would have been a thousand times more worthwhile than the new road they constructed from Frankston to nowhere.

SJ
SJ
13 years ago

Costa isn’t someone who should ever have been put in a ministerial position.

Something that someone said over at JQ today about Hayek reminded by of this infamous interview: Michael Costa: the free radical.

The quote everyone remembers is this one:

“I like making coffee,” says the NSW Treasurer. “So it’s one option in retirement. People would get to come along – I’d make coffee and Deb would make cakes – and they’d get five minutes to argue with me about anything they like. The cost would be built into the price of the coffee. Then I’d tell them to get f–ked, for nothing.”

But the rest of it is very telling:

As Costa sits down at the computer to show me some Milton Friedman videos he has discovered on YouTube, I ask if the elderly man whose portrait stares down at him from a shelf is his grandfather. He gleefully informs me it is the Austrian economist F. A. Hayek, who, with Friedman, is one of the founding fathers of what is usually called economic rationalism…

A restless intellectual and autodidact…

Costa is a study in contrast and contradiction. He started his political life as a rabid Trotskyite, but nowadays embraces free markets and the legacy of Ronald Reagan. He is a leading member of a government that invests billions in the fight against global warming, yet he has famously labelled environmental activist Tim Flannery an “idiot” and regards climate change as a natural phenomenon…

In one respect, at least, Costa is like any typical nine-year-old boy: you can tell what’s on his mind by reading what’s on his walls. But instead of posters of Barry Hall and V8 Supercars, the walls of Costa’s office are untidily pasted over with clippings, mostly of abstruse scientific articles that attempt to disprove the theory of global warming as the result of human activity. If John Howard was a “climate-change sceptic”, Costa is something more radical…

“It was only a very short period,” he says of his Trotskyist phase. “I like to play on it. People say, ‘You’ve changed your approach to politics,’ and I say, ‘No, I’ve always believed in the withering away of the state, but the methods might have changed.’ Coming from a working-class background, I hadn’t been exposed to ideas. It was the ideas that were exciting, rather than the shape they took.”…

He also re-enrolled at the University of Sydney and took a degree in economics and philosophy, studying at night. Finally, in 1983, he caved in to his father’s urgings and got a “real job”, following his dad into the railways. A year later, he was driving freight-trains (a vision that, even today, gives those who know him nightmares).

He’s a true believer in the “get it down to the size where we can drown it in the bathtub” view of government. He hasn’t been any good at any job he’s ever been in. No one will employ him as an economist, so he makes it his target to become treasurer. He finally achieves his goal to become treasurer, then deliberately tries to sabotage the operation of the government of NSW.

That’s all history.

So what’s been coming out of Rees mouth for the last few days? The equivalent of “Yeah, what Costa said”

JC
JC
13 years ago

This type of infrastructure would have been a thousand times more worthwhile than the new road they constructed from Frankston to nowhere.

But the government isn’t taking the risk there Conrad. Connect East is along with it’s shareholders.

What’s the purpose of putting in very fast trains to these regional cities? Why are you assuming people living in Geelong need to commute to the CBD for work when the opposite claim appears probable? in other words commutes these days are very diffuse crisscrossing every which way.

Pedro
Pedro
13 years ago

” in other words commutes these days are very diffuse crisscrossing every which way.”

Exactly, I grew up on the gold coast, which was an excellent opportunity for public transport back in the 70s and 80s because it was a strip along the coast. Now it has spread to the west and is more like a normal aussie city.

The gold coast rail line does seem to be a commuter success, but it doesn’t go too fast to service a long strip of destinations. People tend to forget that not everyone works in the CBD and once the public transport requires multiple journeys the time factor expands greatly. Any very fast train will only work if a lot of people want to travel between a limited number of distant destinations. I guess that is why people like cars so much.

conrad
conrad
13 years ago

JC — you can just measure the number of people that travel from place to place each day and where they travel. Once you get over a certain number of people, then the rail link becomes viable (I know actually measuring trips, likely usage etc. is novel for Australia, versus which electorates you need to win, but that’s how it’s done in many place). You may use a lesser number if you have other goals or know there is big population growth likely to use it (like the outer West, or like if you want use Geelong as a regional population hub).

“But the government isnt taking the risk there Conrad. Connect East is along with its shareholders.”

I’m not sure of the ins and outs of the link — but I was under the impression that it was a PPP — it says so on their web page (and hence what liability etc. the government has if connect East goes under).

TerjeP
TerjeP
13 years ago

Motorways or train lines are not generally monopolies or at least not natural ones. Otherwise why would those that tender to build own and operate them want compensation clauses in their contracts to protect them from the risk of competition. And given that there are four platforms at my local railway station I see no reason why rail tracks can’t operate in parallel. Nor any reason why I can’t drive to work or catch the bus if they rip me off. The only area in which I can see anything approaching a monopoly in roads is when it comes to the street I live on. It is one of the very few non-optional roads when I go for a drive. So I can see a case for local governments being responsible for local roads.

As for the notion that governments can go into debt and this can be a good thing then I agree. In fact I have argued that there is a case for making tax cuts even if it puts the government in debt because the tax base (ie the general economy) is the governments most productive asset and any investment in the expansion of this asset offers a good return for the government in the long term (not to mension a great return for society in general). Fiscal conservatism kind of sucks when there are taxes to be cut or abolished and there are so many taxes that should be cut or abolished.

pedro
pedro
13 years ago

TerjeP, I agree that motorways and rail are not natural monopolies, but I am always attracted by the idea that free and efficient movement by private transport is exactly the sort of public good that governments should spend money on. Better to build roads than schools because I think private enterprise can more easily build schools than roads, if you know what I mean. Private roads are relatively easy when you have a greenfield site to acquire, but I expect are less likely to be attractive. The roads we really want are in built up areas and often land needs to be compulsorily acquired, so government then must get involved.

Also, is it fair that some areas have excellent public road networks and other areas have to rely on tolls when the public roads were built at taxpayer expense?

Ken Parish
Admin
Ken Parish(@ken-parish)
13 years ago

The same is true of landline phone infrastructure, as Optus discovered after it set about duplicating Telstra’s system. And railways are also natural monopolies as far as the lines themselves go (as opposed to the services running on them). It’s certainly true that many railway stations have multiple platforms, but that doesn’t mean it would make economic sense to build competing rail lines next to each other. Hence these things, as Nicholas points out, possess most of the characteristics of a natural monopoly. Natural monopoly desn’t mean it’s physically impossible to duplicate the infrastructure, just that it’s commercially impossible to do so, as the relevant Wikipedia article explains.

Roads may be a slightly different case, although as Nicholas points out they too have substantial natural monopoly characteristics. Most of the tollways built in Sydney and Melbourne over the last couple of decades have in fact duplicated existing arterial roads, offering faster and more direct travel as the hook to permit them to charge user fees (tolls). However, in some cases the operators have assessed that these advantages may not be enough to win them sufficient patronage to make a profit, and so they’ve entered into collusive arrangements with governments, obliging the latter to create artificial impediments to using the existing public arterial roads in order to force people to use the tollways. The Sydney Cross City Tunnel is an especially extreme (and fairly unsuccessful) example. These sorts of arrangement are in part attempts to engineer an artificial (as opposed to natural) monopoly, with governments willingly assisting private entrepreneurs to engage in blatant rent-seeking behaviour in order to achieve their own goals of creating an illusion of absence of public debt to impress Moodys or Standard and Poors, even though (as Nicholas and Fred Argy have both persuasively argued) it often doesn’t make sense from any rational standpoint to privatise infrastructure spending. What these collusive arrangements aim at achieving is to use regulation and other forms of state coercion to transfer some of the natural monopoly characteristics of the existing publicly funded arterial road system onto a privately funded (but invariably publicly guaranteed whether formally or otherwise) tollway instead. If roads didn’t possess substantial natural monopoly characteristics these collusive rent-seeking arrangements wouldn’t be necessary.

FDB
FDB
13 years ago

Some things only need to be done once.

You’d have to be a pretty fervent free-marketeer to think the colossal resource inefficiency of parallel roads and train lines was worthwhile for the sake of competition.

And Terje – I think you’ll find that scheduling/signalling/switching of rail lines is difficult and dangerous enough in an overstretched system without competing firms on top.

JC
JC
13 years ago

Im not sure of the ins and outs of the link but I was under the impression that it was a PPP it says so on their web page (and hence what liability etc. the government has if connect East goes under).

Dunno what you call it, but if the Connect East fails the government gets the road back I presume or the lease etc is sold to a bidder. Either way the government doesn’t lose a nickel.

FDB
FDB
13 years ago

They do have a massive advantage in Perth thanks to said linear expansion, but yes Jacques, I’ve always been pleasantly surprised by the foresight there too.

FDB
FDB
13 years ago

You’re kidding!

*slaps forehead with kipper*

What chumps.

pablo
pablo
13 years ago

Premier Rees has just canned the north west commuter train proposal which considering it did not fit with the rest of the State Rail network is probably a good thing. BUT I would argue that the need for a rail link to Rouse Hill and beyond is crucial. Moreover I think Rees should determine a NW rail route for freight and commuters and relieve the burdens of the Sydney – Newcastle intercity central coast route which now takes 15 minutes longer than it did when steam operated ie 2hrs 25 minutes express.
Push a double track – yes with tunnels – the 150kms through the Hawkesbury-Yengo National Park to link with the inland main rail route to Brisbane at Singleton.
This will then provide a rail loop linking Newcastle and Sydney’s NW corridor suburbs. Twenty km south of Singleton/Cessnock is a 2000 ha open cut coalmine due to run out of the dangerous black stuff in 2012. End of lease arrangements are then to allow this huge pit, 100 odd metres deep to fill with water.
Anyone conversant with the Eden project in an old Cornwall copper mine could envisage something similar occurring in this site, currently linked by rail to the Newcastle coal terminal.
Just 20 km east of this site is open farmland, with neighbouring vineyards where sacked Planning Minister Sartor approved a new town of 7000 by developer Hardie Holdings. This lifestyle suburb is predicated on an extension of the F3 motorway which has been talked about for 20 years. Like the metroline, Rees will can it. This new city originally planned for 20 000 has no infrastructure. The Bulga opencut mine awaits someone with imagination, money and a bit of forward thinking about sustainability and global warming.

MMLJ
MMLJ
13 years ago

As Rees and Deputy Premier Tebbutt are both from the Labor Left, why is the discussion about moving them incrementally from a conservative economic/political approach ?

Why wouldn’t they just implement Left policy, as their in-house opposition seems to be impotent, and show everyone what the Left have got ??

alan
alan
13 years ago

The reason for increased infrastructure is increased immigration.

But has anyone checked the actual economic cost of accelerating migration?

Treasury has.

See Chart 8 Intergenerational Report 2007 (IG2): http://www.treasury.gov.au/documents/1239/HTML/docshell.asp?URL=01_Exec_summary.htm

Chart 8 clearly points out that our current govt financal surplus is about to become a 30 percent Debt to GDP ratio in a number of years. Extrapolate the chart out to about 2070 and Australia will have a projected Debt to GDP ratio of 100 percent.

Accelerating migration is going to cost us dearly, at State level and Federal level.

phil@vvb
13 years ago

Bob Hawke would have had no trouble explaining it (value of borrowing to invest), but the trouble is that around the time his ability to influence things was appropriated by Paul Keating, the dominant narrative became the stuff that Mr Costa apparently fervently believes in, and anybody with a different point of view has been vociferously shouted down and pointed at in public.

Just because a little of a good thing is a good thing doesn’t necessarily imply that a lot of it is better. Companies don’t finance all their operations from equity, surely.

And PPPs emerged as a response to the rapidly adopted aversion to government debt, did they not and having emerged hurriedly were mostly either badly designed or governments got done over by financial whizzes who had experience in structuring complex instruments?

It’d be nice to see some kind of an alternative to the dominant narrative emerge soemtime in the next couple of decades.

SJ
SJ
13 years ago

MMLJ Says:

As Rees and Deputy Premier Tebbutt are both from the Labor Left, why is the discussion about moving them incrementally from a conservative economic/political approach ?

All of this crap started under Carr (nominally right, but in reality more of a green) and Egan (left). The trouble was that they fell victim to “ministerial capture”. Treasury took over pretty much as soon as Carr took office in 1995.

NSW Treasury is run by a bunch of Friedmanite con artists, who don’t act in the best interests of either the NSW Labor Party or the people of NSW. It’s not that they’re corrupt, except in the sense of being deliberately dishonest, rather it’s that they regard NSW as the sandbox in which they’ll run their experiments and demonstrate their credentials.

pablo
pablo
13 years ago

Phil@vvb. I think you’re right wrt Hawke and infrastructure investment. As I recall, ex CSIRO boss Paul Wild wsnted a tax break amounting to some $3 billion in order to get the Sydney – Melbourne VRT (very fast train) through the private investors. Canberra turned him down and the project died. Things that might have been.

William Wallace
William Wallace
13 years ago

Budget Blues

It is because of the extend of privitisation in NSW over many years now that the new Premier has rather limited room to manovure. As traditional government revenue sources have dried up nothing has taken their place.

Various NSW Governments in the past 20 years have virtually given away many of the states assets.

The two worst examples are the State Bank of NSW. It was sold off by John Fahey in a fire sale (mates rates?). It ended up being sold for only 1.5 years annual earnings at a time when other banks were being priced in the market around 17 times earnings. The government also took all its outstanding debt negating any money the sale made.

Another is the sale to the federal government of NSW Government land at virtually no cost. The worst example of this was Sydney Airport when very valuable land was handed over to the Feds (also represented by John Fahey) and then passed onto their mates at less than 5% of its true value.

However even if we are low on money to sell power is an enormas mistake. The average rate of return of the NSW Power industry is 10.6%, in under 10 years pays for itself – that is after all costs.

If electricity is privatised NSW businesses and consumers will have to pay 20-40% more for electricity like in SA and Victoria. Further more who would sell such a great assets for the prices being touted (around one third to one half of their true commercial value) if they were in private hands – no one.

It’s time that NSW borrows money just as any business or large public organisation has too. Our politicians need to forget the don’t borrow routine dreamed up by those (who actually atre the same people who are after the State Assets for next to nix) and start to think rationally again – then they might start to get respect from the community…

Tel
Tel
13 years ago

Youd have to be a pretty fervent free-marketeer to think the colossal resource inefficiency of parallel roads and train lines was worthwhile for the sake of competition.

The main spine of Sydney rail transport (City to Parramatta) has about 6 parallel lines all the way out. During peak hour, those are full, and the trains on those lines are packed. There are three major roads running approximately parallel to those tracks (Victoria Road, Parramatta Road and the M4 motorway). You guessed it, they are all packed during peak hour too. And “peak hour” in Sydney means most of the time you can see daylight.

That was all designed by the government, nothing private in that lot.

And PPPs emerged as a response to the rapidly adopted aversion to government debt, did they not and having emerged hurriedly were mostly either badly designed or governments got done over by financial whizzes who had experience in structuring complex instruments?

The PPP idea can work. With the M5 motorway in Sydney, both the construction speed and quality of the results were very impressive and the position of the motorway was exactly in the path where it is most useful. When the thing first went in, the tolling system was a pain in the arse, but to be fair to private enterprise the annoyance of the initial toll system did push forward research into a better system and what they have now on the M5 is really good. You won’t find many Sydney siders complaining about the M5.

On the other hand, we all know what a mess the Cross City Tunnel turned into, so having a PPP does not provide any particular guarantee that the project is worthwhile. This is one of the things that bothers me about Economics. An economist will argue for years about the importance of borrowing money from one place versus borrowing from another place — putting the debt on this book, or tucking it away in that book. An engineer will suggest that it is more useful to give consideration to what the project is actually doing (you know… the real world and all that).

Both private business and public departments can be corrupt, both of them can be pig headed and stupid. Put them together and they can still be all those things. As we are seeing in the US right now, people who make big rewards in the private sphere have always been happy to explain how they take big risks so deserve big rewards — until they suddenly need a bailout because they didn’t really want to be taking any risk. Without taking on genuine risk, there is no incentive for them to make quality decisions (and anyway, even when the company does end up taking the risk, it’s only shareholder’s money and the CEO always gets a golden parachute). Paying some guy more, does not make him any smarter, nor does it appreciably improve the selection process of who should get the decision-making position (invariably it goes to someone with connections rather than someone with ability, and this applies to government and private alike).

Alphonse
Alphonse
13 years ago

Rees can only win in 2011 if he changes tack spectacularly. No-one will ever be in a better position to do the unpopular but beneficial. He doesn’t even need courage. He can be bold and principled purely out of self-preservation, as his only hope for ALP revival.

Examples abound but, for one, he could implement something like what Fred Argy’s 1995 EPAC paper on road congestion pricing recommended – something no Australlian government within a bulls roar of electability will contemplate for at least another decade. Stymied by PPPs? He could price through traffic out of the CBD and into the cross city tunnel and collect negotiated metered dollars from the PPP in return for the favour. I don’t see the Libs reversing breakthrough moves like that once Treasury is on the drip; no more than I see federal Labor abolishing the GST.