Me on debt and infrastructure

Well it’s not a new topic for me, but if anyone’s interested Lateral Economics got quite a bit of coverage for a study for Western Sydney showing that had the toll roads of Sydney been funded by governments rather than the private sector the NSW public sector would be worth over $4 billion more than it is now. Inside Story asked me to write it up, which I did and now Crikey like it and want to republish it. I wasn’t going to post it here, but there you are – if they like it, maybe you will – so go read it.

Then come back here and comment on it if you want.

Postscript: Ross Gittins takes up the story.

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13 years ago

As a mug punter, I’m happy to agree with your arguments about interest rates and funding (although it’s hard to see any government bothering to build two desalination plants — roads, bridges, etc., however, are obviously another story). However, it’s pretty obvious why other people don’t agree with fully publicly funded things these days, even those that are not rabidly right wing:

a) The average person doesn’t know and probably never can know the difference between pork and something useful until some years after it’s been built. So at least if it’s a PPP, the taxpayer won’t pay for all of it.
b) People simply don’t trust the NSW (and probably the VIC government) to run fully public projects and get them completed at a reasonable cost. This is no surprise because many previous projects have gone horribly over budget or entirely failed (i.e., anything to do with public transport), and now the VIC government tactic appears to be to quote ridiculously high costs for everything and then hide the cost of things so you can’t find out how much they cost anyway. At least with a PPP, there are two parties that have to agree on a price, one which can’t just get extra money from the taxpayer simply, no matter how convoluted the actual calculations.

Having lived in two countries where government projects tend (but certainly not always) work just fine and to budget, it’s easy see the difference in attitude — the less pork there is and the better the assets constructed, the more people won’t mind the government building them.

It seems to me that at least the federal government has the ability to redeem itself here. If the NBN runs basically to plan and price and turns out to be something good, I think people will not be so cynical. If it doesn’t, I couldn’t blame people for being even more cynical than before.

timothy watson
timothy watson
13 years ago

Great article and paper Nicholas.

I saw John Lenders talking on the issue of State debt in Victoria earlier this year and he was very candid. He said the State’s balance sheet could bear further indebtedness, and that the State could be more directly involved in borrowing to finance infrastructure provision.

The State could even take on significantly more debt and maintain its AAA rating given that it possesses the highest net-financial liabilities trigger range of any Australian State (in excess of 130% of operating revenue according to S&P’s).

However, he noted that any Labor government that moved to increase State borrowing would be voted out. This is partly as a result of the continuing fallout from the Cain-Kirner years and the successful anti-debt jihad run by the likes of Kennett and the IPA amongst others at the time that still reverberates today.

So I think we have an interesting dynamic- the public is very strongly of the view that public borrowing is bad and will be mismanaged, and this is potentially against their own best interests in NPV terms or otherwise. Any politician that seeks re-election is bound by this misunderstanding.

Nicholas, you write:

“The politicians of the last twenty years have served their own short-term electoral interests by mortgaging their constituents’ future. Their constituents are now paying.”

I would argue they are giving the public exactly what they want, but what the public wants is not in their own best interests. It’s sort of similar to a fallacy of composition type situation where taking on more public debt will be of benefit to everyone; however from a micro perspective individuals are highly debt averse. They are about as highly geared as they can possibly be in their homes, and the prospect of further debt seems like madness no matter who is proposing it.

This is the real issue- how can politicians act in the best interests of the broader population when the general public have misplaced ideas concerning what is in their own best interests?

John Quiggin is also correct when he points to some of the views around the EMH and other notions of the supremacy of the market sector and how these feed into the debate concerning PPPs. For Departmental Secretary’s and senior public servants who went through university in the mid to late 70’s neoclassical ideas predominate. Any idea that government could be best placed to manage a major procurement project is seen as outright heresy.

Maybe an independent budget office as you propose would allow Labor governments to be bolder in taking on more debt and managing major procurement projects internally. However, even within government there is a highly skilled and deeply entrenched lobby that pushes for PPPs.

Furthermore, given what has happened over the last twenty years the public sector is now full of lawyers, accountants, and financial people. They are good at managing contracts; however they may not make the best project managers. The public service has lost a lot of the practical skills around construction management and engineering that it previously had.

So there are many internal and external barriers to change that even a PBO may not be able to overcome.

There is also a technical debate that needs to be won. The target of this debate should be the public sector comparators and judgements made concerning value for money. Unless these notions are diminished academically, there will always be a strong case for Minister’s to prefer PPP’s on the basis that they offer better value for money than a State procurement.

Getting opposing views in the technical debate is difficult where Universities are engaged by Government to provide the academic underpinnings for their privatisation programs.

I also like your idea concerning an internal government ratings agency, and I think Garnaut proposed a similar idea in his book on the Crisis. Maybe this could be another subject for the Son-of-Wallis review of the financial system.

Fred Argy
Fred Argy
13 years ago

Great piece.Who knows you may get some good returns on your article.

You have got the theory right – but alas, just imagine what a Coalition Opposition will do with a scare campaign like debt downgrading of AAA and the enormous ability of governments to stuff everything up. I think their argument is largely bullshit but you can throw in all the economics you want but you won’t convince a public mood that is anti-government.

timothy watson
timothy watson
13 years ago

The paper is made even more relevant following the Victorian result on the weekend.

The seats that overwhelmingly lost labor the election were the outer-metropolitan seats.

I think you could mount an argument that Labor lost these seats through failing to invest adequately in growth areas. In transport, hospitals, schools and other community infrastructure. So they should have been more bold on the investment and debt front especially considering they had ample fiscal space to do so.

The other argument is that the oppositions waste/debt campaign was particularly successful in the mortgage belt where you have highly geared households who are highly debt averse.

The whole debt/deficit debate makes me think about Mancur Olson’s bipartite definition of human capital.

There is privately marketable human capital in the form of individuals’ skills, the propensity to work hard, predilection to save, entrepreneurial attributes and such. Then there is that component of human capital which you would call “public good human capital” or “civic culture”. That is the knowledge that individuals possess about how they should vote, and what public policies would be successful.

No political party at this election called for greater investment in roads, public transport, schools or the like through working the governments balance sheet harder. No party was calling for greater levels of government borrowing- not even the Green’s to the best of my knoweldge.

The Liberals did mount a lower debt, lower waste campaign although it was not particularly high profile along the lines of the debt truck of campaigns past.

This suggests to me that there is a shortfall of “public good human capital” or “civic culture” in the community, and a lack of capacity at the individual voter level to vote for public policies that would be in the broader public interest.

Surely if voters were convinced of the need for more infrastructure projects to be undertaken by government, utilizing the benefit of the governments lower cost of funds, there would be political parties in the market place offering these policies for their consumption.

I think we can point to the media and academia for failing to prosecute the alternative case strongly enough in the debate concerning PPPs. They have failed to generate the public good human capital, and the information necessary to fully inform the public of the options available to government to finance large procurement projects.

13 years ago

“I think you could mount an argument that Labor lost these seats through failing to invest adequately in growth areas…..The other argument is that the oppositions waste/debt campaign was particularly successful in the mortgage belt where you have highly geared households who are highly debt averse.”

Surely these two are in opposition?

At least in my seat own rather controversial seat (Bentleigh), I think they probably lost a lot of votes on local issues, not least of which was to allow (or steamroll — not that’s there’s any other way you can build these things) a big community housing project to go ahead without any community consultation. Madden basically just said “bad luck” and that was that. I’ll bet that happened in all of the places they did this.

“They have failed to generate the public good human capital, and the information necessary to fully inform the public of the options available to government to finance large procurement projects.”

I still think both you and Nicholas are off track on this. It seems to me you can inform the public all they want about their options, but you’ll get nowhere. I don’t see any solution to this except some successful actions, so until some party has a bit of courage to go against the trend, lose some votes for a while and then pick them back after they’ve run something good successfully, I think there’s essentially nothing anyone can do to change it (especially with many places in the rest of the world going broke because of too much debt at the moment). Basically, you need short projects that can be run and done within an electoral cycle so people can see some successes — I doubt a lot of people really care about the merits of different economic theories and the fact that they might save 2-3% on interest costs using one funding method and not another (note that I’m not being rude to economists here — just looking at the current reality).

“And bring back tram conductors (Cost $100 mil) – how pathetic.”

You can complain about that, but the Myki system is surely one of the reasons the government lost and one of the things that turned people off big government projects — and not just because of the failure in implementing it — it’s also because no-one was willing to take responsibility for anything when it went wrong.

timothy watson
timothy watson
13 years ago

An update on debt, infrastructure and the Victorian election

Julie Novak of the IPA links Labor losses in the outer south-eastern suburbs seats to problems on the Stoney Point and Frankston lines:

“I happen to agree with my IPA colleague Richard Allsop that the core problems have been a lack of public sector investment in rail infrastructure maintenance amidst a period of substantial increase in patronage.”

Robert Merkel at LP argues that the underlying cause of Labor’s defeat was the “… long-term and deliberate policy decision to moderate Victoria’s state debt levels.”