Constraining infrastructure boondoggles

I was reading an article the other day that I can’t now find, by a pollster whose name I can’t remember (increasing age is like that). It dealt with Coalition strategist Mark Textor’s highly successful four part 2010 campaign theme for Tony Abbott: stop the boats, no big new taxes, end the deficit, stop the waste.

I’ve already said more than enough about the boats. But the success of Textor’s tax/deficit theme was quite remarkable given that Australia had (and still has) the lowest deficit of any western nation by a very long way, and is the lowest taxing western nation bar the US (and will still likely have that status even if the Gillard government succeeds in introducing a carbon tax and minerals resource rent tax as promised). Abbott’s success with those slogans was as much due to the ineffectiveness of Labor’s campaign as to Textor’s skills in reading and exploiting the zeitgeist.

However the waste issue is in another category. There really was significant waste, at least in the pink batts scheme, green loans and the Building the Education Revolution program (at least in NSW; it was pretty efficient and delivered value for money in the other States according to the Orgill Report), and it was an entirely legitimate election issue.

However, there were two aspects of these waste items worth highlighting:

  1. They were avowedly part of the Rudd government’s emergency response to the GFC and as such required that the money be spent quickly to stimulate the economy and avoid recession. Most economists agreed that some such schemes were necessary and that they actually worked. That’s the main reason why Australia still has the lowest debt in the western world, along with low unemployment. The need for speed arguably precluded or at least restricted normal government prudential safeguards against waste and mismanagement.
  2. At least with pink batts and BER, the Rudd government was forced to rely on State governments to manage the projects and provide regulatory oversight. The Commonwealth simply doesn’t have an extensive operational bureaucracy on the ground around Australia to allow it to manage these programs itself.

Of course, this is a classic manifestation of one of the central deficiencies of Australia’s evolved federal system: vertical fiscal imbalance(VFI). The Commonwealth raises most of the revenue but the States are directly responsible for most of the areas where it’s actually spent (leaving aside social security and defence) . The usual criticism of VFI is that it allows both levels of government to evade political responsibility by blaming each other. The Commonwealth blames the States for stuffing up Commonwealth-funded projects and the States blame the Commonwealth for not giving them enough money. However, in the case of BER and pink batts, the Commonwealth copped all of the public odium even though arguably the lion’s share of the blame should have been sheeted home to the States.

We can certainly make observations about the PR abilities of the Rudd/Gillard government to have allowed this situation to develop and seemingly be unable to shift public perceptions despite having a strong case. However that isn’t the point of this post. Instead I want to explore what can be done to repair this broken aspect of Australian federalism.

One obvious solution would be for the Commonwealth to agree to fiscal reform whereby the States are given an ongoing secure share of revenue sufficient to discharge their constitutional responsibilities for health, education and the like on an ongoing basis. However, it’s highly unlikely that any federal government of whatever political colour will ever do so. Howard’s agreement to cede all GST revenue to the States is as good as it’s ever likely to get for them in that respect.

Moreover, there are fairly persuasive reasons why the Commonwealth should remain the dominant revenue raiser in the federation, and find some other way to remedy the evil effects of VFI. First it’s more efficient and better for business to have a single dominant revenue raising authority and therefore a single tax system in most areas of activity throughout Australia. Secondly, Australia’s evolved system also works well in equity terms, with the Commonwealth Grants Commission system ensuring that all States and Territories are funded equitably to allow them to provide a similar level of government services to all Australians wherever they live.

Accordingly, the Commonwealth needs to find a way to ensure more reliably that :

  1. State-proposed infrastructure projects are best value-for-money;
  2. tender processes are competently and honestly handled (the imminent overdue demise of the NSW Labor government should make that task slightly less challenging at least in the short term); and
  3. construction itself is efficiently managed.

All the above should apply with any and all infrastructure projects involving significant amounts of Commonwealth money or financial risk, whether they’re Commonwealth or State government projects or Public-Private Partnerships.

The Rudd government actually established a Commonwealth authority to perform the first of those tasks in Infrastructure Australia. Its structure appears to be fairly closely based on that of the Productivity Commission, but it hasn’t to date carved out a role that would suggest it shares that body’s practical independence and methodological rigour, although in fairness it’s early days for IA. Like the PC Commissioners, the IA’s members are appointed for relatively short terms and its working staff are public servants and therefore not formally independent of government in any sense. However, the real problem with IA is that its functions only include evaluating the business case for new infrastructure when commissioned to do so by the Minister (see s5(2)(e) and 5(4) of the Infrastructure Australia Act 2008). Naturally the Minister doesn’t do so unless it’s politically expedient. As far as I know he didn’t do so in relation to any of the BER projects proposed by the States and Territories, although perhaps there wasn’t time given the urgency of getting money spent for stimulus purposes.

Nor has IA been asked to evaluate the business case in relation to the National Broadband Network as far as I know. Instead the Commonwealth commissioned private consulting firms McKinsey and KPMG to undertake an implementation study and relied on the NBN Co’s own business case document to justify its plan. That turned out to be enough to get the Greens and Independents on board, but you’d have to ask why they didn’t at least insist on an evaluation of that business case by the very semi-independent Commonwealth body established for precisely that purpose.

I’m fairly convinced that the NBN plan is nevertheless the right way to go despite Opposition and other arguments to the contrary. However, these questions of proper process and rigorous scrutiny of major government spending are critically important ones in themselves, even if they’re not “barbecue stoppers”. Maybe it would be a smart move for Tony Abbott and his advisers (Mark Textor, are you reading this?) to transcend the Coalition’s developing image of mindless obstructionism by proposing a positive legislative reform which empowers Infrastructure Australia without the Minister’s permission/direction to investigate the business case (and conduct full cost/benefit analyses) of all infrastructure projects involving Commonwealth expenditure or risk exposure of (say) more than $5 million. It would at least test whether Windsor, Oakeshott et al are politicians of principle or just poseurs with their eyes on the pork barrelling prize while they hold the balance of power.

I won’t be holding my breath though, because by doing so the Coalition would also be placing real embarrassment constraints on its own pork-barrelling freedom of action when it regains government. Still, John Howard had the guts to make the Reserve Bank formally independent of government control. Maybe Tony Abbott could muster similar intestinal fortitude.

About Ken Parish

Ken Parish is a legal academic, with research areas in public law (constitutional and administrative law), civil procedure and teaching & learning theory and practice. He has been a legal academic for almost 20 years. Before that he ran a legal practice in Darwin for 15 years and was a Member of the NT Legislative Assembly for almost 4 years in the early 1990s.
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23 Responses to Constraining infrastructure boondoggles

  1. Patrick says:

    Actually I think you overstate the costs to Abbot, really, since infrastructure is an inherently Labor boondoggle – after all not much better for unions than infrastructure projects.

  2. Patrick says:

    Great post, too, btw.

  3. chumpai says:

    In academia we have the grant system for choosing the best projects to dole out the pool of money the government allocates. If I understand this post are you suggesting the federal government put infrastructure money into a pool and the states apply to Infrastructure Australia get their infrastructure funded via a competitive process?

  4. Ken Parish says:

    chumpai

    No, as at present (but at the moment only if the Minister so directs) IA would simply produce authoritative, independent evaluations of the value for money of all infrastructure projects involving significant Commonwealth money or risk. The elected government would retain the role of deciding which projects to fund but would be more accountable to the people generally because reliable information would be readily available to see whether they had funded projects on merit or instead spent public funds purely for their own electoral advantage. No doubt governments would still succumb to the pork barrelling temptation, one shouldn’t be naive. However it would be an additional democratic check and balance that would help to keep the bastards a bit more honest/accountable than they would otherwise be.

  5. Fred Argy says:

    Great post, Ken. I have always believed that the problem of “waste” was badly managed by the Opposition. The thing had to be done in great haste and it was left largely to the States. Your suggestons are good.

  6. Fred Argy says:

    Sorry, I mean badly managed by the Government, not the Opposition (which did a great job).

  7. wilful says:

    If by great you mean politically advantageous.

  8. Nicholas Gruen says:

    I was always mystified as to why the ALP Federal Government didn’t compare and contrast the states’ performance and then say ‘yes, there have been some stuff ups and we’re not happy about it. You should particularly check out NSW’.

    Gillard almost barely mentioned the states. Does she have a politically masochistic streak or does she want to project herself as strong. I have no idea, but she did something similar when knocking off Rudd. Instead of passing the buck to the caucus as Hawkie would have done, she said that the government had lost it’s way and she’d decided to take over.

    I rather admired that on the first day – a lot less mealy mouthed than ‘I didn’t want to do it but caucus twisted my arm’. But the mysterious thing was that she barely mentioned the caucus and just kept taking credit for the whole thing. Played into the hands of those who wanted to paint her as Lady Macbeth.

    Very odd.

  9. Patrick says:

    I dunno Nick, how many of those states were ran by Labor governments?

  10. Marks says:

    Maybe that was it Patrick.

    There were imminent elections coming up in SA and Tas and NSW a little later. Perhaps the ALP thought that if it made the states take the pain, they would lose SA and Tasmania – at the time, they probably thought they would get over the line Federally. So maybe there was a calculation that the Feds should take some pain so that SA and Tas would remain Labor?

    Back on topic, I am fascinated by the assertion that the insulation scheme was wasteful. Given that it did stimulate the economy, and will provide ongoing benefits in energy consumption, exactly how was it wasteful if it did what it was supposed to do? Perhaps a definition of ‘waste’ would have helped. It seems to me however, that ‘waste’ is a bit like ‘pornography’ – we all know what it is when we see it, but definitions are a bit slippery and one person’s ‘waste’ is just another person’s entertainment.

  11. Ken Parish says:

    Marks

    As far as I can see the insulation program was originally touted as a 2.8 billion dollar program. The estimates of the cost of remediation of faulty work, which is required to be met by the Commonwealth, are around $500 million. I would have thought that is pretty significant waste in anyone’s language. However, as the primary post observes, it flows primarily from inadequate supervision and regulatory oversight by the States whose immediate responsibility it was. That doesn’t absolve the Commonwealth, however, because it should have insisted that the States greatly boost the number of supervisory personnel to cope with the large increase in the number of insulation installation businesses attracted into the industry by the Commonwealth scheme, and that no doubt would have required additional Commonwealth funding to the States to employ those extra staff. Thus, an accurate estimate of the net extent of waste might be difficult to make. However I don’t think one can sensibly argue that there wasn’t significant waste. It also appears that the Commonwealth largely ignored warnings from the States that their current extent of licensing and other regulatory requirements for insulation installers was very low, and that the massive expansion in the number of operators in those circumstances would certainly lead to problems. As the Auditor-General’s report observes:

    The design of Phase 2 was strongly influenced by the clear riding instruction from the Commonwealth Coordinator?General to reduce red tape and commence work on projects as soon as possible, in keeping with the stimulus objective of the program.19 In combination with the compressed timeframe for implementation, this meant that many ‘front?end’ controls that might be expected in such a program were not put in place by the department. By proceeding in this way, DEWHA accepted the risks implicit in this approach.

    See Commonwealth Auditor-General’s report of 15 October 2010. Nor do I imagine you would be likely to regard it as “entertainment” if you had experienced a house fire as a result of faulty insulation installation.

  12. Ken Parish says:

    Patrick

    It has never been an evident feature of Australian politics that federal and state governments have been reluctant to blame each other for problems when expedient to do so, merely because they may be governments of the same political party. I seriously doubt that Julia Gillard is more scrupulous in this regard than other political leaders. Moreover, there wouldn’t have been much political downside from any perspective in slagging the NSW government especially, given that it’s been a walking political corpse for a very long time. The failure is certainly one of PR/campaigning competence, and I suspect it might be partly due to Karl Bitar’s importing of American campaigning gurus who imposed rigid rules with utter disregard to local conditions or expertise.

  13. Marks says:

    Hi Ken.

    I think there has been discussion elsewhere (somewhere on Possum iirc) where it was pointed out that such things as fatality rates and house fire incidents actually reduced under this program – markedly. (I have not seen those figures challenged at all – obviously if they were wrong then the conclusions I am drawing are not valid, and I would happily recant).

    The Cwealth came in to an existing program, reduced significantly fatalities and house fire incidents from levels pre-existing. Granted, they did not change this industry round immediately. But realistically can you think of many industries needing this sort of turn around which do it within the timeframes done here? Most CEOs, on getting this sort of reduction in injury/fatality in private enterprise, would be reaching for the bonus pot.

    You mention $500M remediation of faulty work. Ok, how much remediation is out there needing to be done on faulty work carried out prior to this program? Now, if the remediation work was not needed to be done, that is waste. If, however, given the reported better safety and property damage outcomes were better under this commonwealth scheme than under the previous arrangments, then there is probably a lot more than $500M worth of work that should be done to fix previously installed dodgy work. Would doing that work be classed as ‘waste’ or would it be better termed preventive maintenance? Perhaps a small sample of inspections of houses insulated before this program might be revealing?

  14. Ken Parish says:

    Hi Marks

    Possum’s posts AFAIK did not examine broader issues of waste and mismanagement He only looked at fire risk. See e.g. http://www.crikey.com.au/2010/10/19/possum-insulation-fire-risk-the-data-is-in/ .

    Nor AFAIK has Possum considered the Auditor-General’s report on which I’m basing these comments. Even if Possum has considered wider questions of waste, and even though I greatly respect his skills, I think I’d tend to accept the Auditor-General’s evaluation by preference. He found that there had been inadequate front-end controls and regulatory supervision, that this had led to inadequate attention to risk management and that this had led to a requirement for remediation works likely to run to $500 million or more. This was a new Commonwealth program designed specifically to deal with the GFC. No doubt there was faulty insulation work done before the commonwealth scheme began, but private householders would have had to pay for it themselves, or contractors would have to have done so. Under this scheme, the Commonwealth has been forced to fund remediation. That is waste on any reasonable definition.

  15. Victor Trumper says:

    Ken,

    With respect you first sentence then contradicts your next paragraph.

    My only comment would be that when the number of fires of insulated homes show an eightfold fall by then the number of homes being investigated is being vastly over-estimated.

    This of course relates to your first sentence not the next paragraph

  16. observa says:

    Accordingly, the Commonwealth needs to find a way to ensure more reliably that :

    1.State-proposed infrastructure projects are best value-for-money;
    2.tender processes are competently and honestly handled (the imminent overdue demise of the NSW Labor government should make that task slightly less challenging at least in the short term); and
    3.construction itself is efficiently managed.

    Ahem… compare and contrast the bang for buck and timeliness of the private school sector with BER funds here…? Their kids and their dough says it all really.

  17. Marks says:

    Hi Ken,

    Ok I understand your pov. I was thinking more along the lines of trying to compare whatever might be defined as ‘waste’ in that scheme with what the situation is in houses previously insulated in the private sector. ie to say that if the proportion of fatality and house fire was less under the Cwealth scheme, then the amount of remediation needed to bring those private houses up to standard is likely to be more, (maybe??). If so, viewed from the point of deciding whether the insulation scheme was better or worse overall than what preceded it, would that previous scheme not be more ‘wasteful’?

    I know that the issue has been raised in several jurisdictions whether or not houses should be inspected for defective wiring (and plumbing) whenever a property is transferred. It always turns out to be ‘too hard and too expensive’. So from that policy suggestion and quashing point of view, since it has been ‘too hard and too expensive’ in the past, then maybe the $500M was too hard and too expensive and therefore ‘wasted’. So I would also accept a waste definition along those lines too.

    However, the reason for the remediation was not in reality because the houses were more at risk than houses previously insulated – after all, logically if the houses done under the Cwealth scheme had an absolute necessity for remediation, then surely houses which were much more riskily done previously would have an even greater necessity for remediation and inspection? However, as I have pointed out, when proposed previously, these types of inspections have been rejected out of hand. Thus, the Cwealth undertook inspections, not for the logical reasons of necessity, but for the reasons that the electorate was up in arms about the perceived risks involved (same electorate – ho hum about greater existing risks). Ok, getting there, so therefore was this $500M really ‘wasted’, or was it an expenditure on a political necessity? This is an important distinction, because if it was an expenditure on a political necessity, it is not something that goes to how Garret’s department project managed the scheme, ie it is not project management wastefulness, rather a political wastefulness if you like for which the project managers had to pay.

    From that I question whether the consideration of waste has much relevance to whether the scheme was a boondoggle at all.

  18. Ken Parish says:

    Hi Marks

    I think we’re getting close to consensus. I wasn’t suggesting that the insulation scheme (or BER) were boondoggles, just that they had involved waste and that this was in part due to the Commonwealth being forced to rely on the States for regulatory oversight, tendering and contract administration.

    However there are lots of infrastructure projects put up and funded that ARE boondoggles. Arguably one that’s quite close to where I’m sitting is the Darwin-Alice Springs railway which absorbed several hundred million dollars of Commonwealth money. Having IA undertake and publish full independent cost-benefit analyses and value for money assessments on all such projects would certainly make for greater accountability.

    Thus, my proposal has two major aspects:

    1. To make it harder for governments to get away with approving boondoggles;

    2. For projects that are funded (whether or not they’re boondoggles), to provide a reasonable level of Commonwealth audit oversight of tendering and contract administration.

  19. Marks says:

    Hi Ken,

    Moving on…

    Proposal 1 – I think the most important thing (and I don’t think I am disagreeing with you) is that the voting public needs to know if something proposed is a boondoggle. However, once the electorate knows whether something is a boondoggle and they vote for it and are prepared to pay for it and proceed with it, I think democracy rather than econocracy should rule.

    Proposal 2 – In a previous life I worked in both SA and NT Public Sectors. Each had so much process and oversight and auditing on the procurement systems that just going through the process was a three month nightmare for even small amounts. Not to mention the thirty odd pages of tender documentation that a small supplier had to fill out for relatively small projects. All of this was driven by a list of quite reasonable governance requirements or such things as local content consideration, training, insurances, oh&s etc etc and somewhere usually buried near page fifteen was the description of the work to be done. And of course the week or so delay while the Supply and Tender Board or Procurement Review Board mulled it over. It was this degree of tickboxery and oversight that often made it worth while to outsource functions – the outsourced work did not need to have any of that sort of oversight, and may well have been laced with nepotism/crooked dealings etc etc etc or not, but no transparency at all. OTOH, done next day, sitting up there shiny and new, while the public sector tenderer was chewing the end of the pencil on page twenty five of the tender documents. I guess the point I am making is that if you get any luck with your proposal, you need to include a sine qua non of strict time frames for the process – ie a tender process needs to be one which is able to be called, and let within operable time frames. Otherwise all you will get is the ‘form designers’ coming up with another ten pages of tender documentation and a longer time frame. That, of course, will provide a vindication to the observation that Governments cannot procure or project manage. I often thought that although the public often railed against public sector inefficiency, it was that same public demanding transparency and fair dealing that caused that inefficiency – ie we get the public sector efficiency we truly desire.

  20. Peter T says:

    What would any private firm look like if half the board was composed of people with an interest in driving the share price down, and all decisions were subject to scrutiny by a permanent committee hostile to the existing management? There would then reports in each day’s press of “waste” and “fraud”. As a Departmental Secretary of my acquaintance remarked, if the private sector gets it 90% right, they take out full page ads congratulating themselves, get a right-up as geniuses and a big bonus; if the government gets it 90% right, they get a senate inquiry into why it wasn’t perfect.

    Another point is that to get infrastructure decisions right, you have to be able to do it yourself – have in-house expertise and experience. Most government processes focus on the decision to procure – few or none focus on whether those deciding knew what they were deciding about. The push to outsource operations exacerbates this. You have the in-house mob not because they are the most efficient, but because they keep you informed, and so allow you to keep them honest. If you are not prepared to invest in and defend these, be prepared to put up with any amount of waste.

  21. Patrick says:

    As a Departmental Secretary of my acquaintance remarked, if the private sector gets it 90% right, they take out full page ads congratulating themselves, get a right-up as geniuses and a big bonus; if the government gets it 90% right, they get a senate inquiry into why it wasn’t perfect.

    Anyone have a pin?

    Peter T, you are completely missing the point, albeit in a comfortingly commonplace way. The private sector can congratulate itself as long and as hard as it likes. At the end of the day, the customers will either reward them or not, or will reward the person who came along behind them and did it better, and whatever way it simply won’t matter one jot what they thought of themselves.

    The public sector doesn’t have that natural accountability. So we have a million devices to try and compensate for the fact that no-one actually knows if we have got it 0%, 50% or 100% right or even if we have actually done more harm than if we had stayed at home.

    And pretty much independently of the outcome of all those processes, the public sector gets up and goes to work the next day and precious little has changed. Again, slightly different to the company whose customers are no longer buying.

  22. Peter T says:

    Patrick

    “Natural accountability” is a nice theory. Now look at life. Try getting along without a bank account, electricity, bread…. all privately delivered. And the UK you could add water, gas etc.

    The theory assumes that if there are several deliverers, these will compete, and their customers will have a choice. Assumes away coincidence of outlook and interests (a notable feature of human social life), assumes the customers can know, assumes the deliverers cannot craft things so as to make choice difficult…. Notice that we have the ACCC, labouring mightily with regulation and prosecution to bring the real world into line with theory. Why is it needed?

    Notice also that much private industry is organised along the same lines as government – as a bureaucracy? Why is that? See Coase on the firm. Notice that we impose significant accountability requirements on firms? Why?

    Simple theories are nice. They should not be asked to do the work of actually thinking about the world.

  23. Patrick says:

    Well, Peter, I do beat my wife, so nice of you to ask.

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