18 Jul 2012

How To Build Roads And Rails

By Ian McAuley
Potholes, late trains, steep fares, heavy tolls - since when did privatisation get us there faster? A new government report on funding transport infrastructure won't fix anything, writes Ian McAuley

Australia's transport infrastructure is in a shabby condition. Urban road congestion already costs more than $9 billion a year and is projected (pdf) to cost $20 billon by 2020. Urban rail systems are similarly congested — decades have passed since any significant investment in the rail networks of Sydney and Melbourne.

Our interstate highways are a disgrace — the Sydney to Melbourne highway is still not quite complete and there aren't even firm plans to connect Brisbane and Adelaide to a proper road network.

As for passenger rail, apart from some investments in Victoria, our systems are out of the nineteenth century.

We are paying a high price for neglect, particularly the 11 years when the Howard government squandered its easy tax revenues on middle-class welfare while leaving our infrastructure to decay.

The present Government has boosted investment in transport infrastructure, but there remains a huge backlog, and the question arises about how the backlog is to be funded.

That should not be a major problem. Because there is such a backlog, the returns from such investment would be high — $2.65 for every dollar invested. Australian governments have ample capacity to borrow for productive infrastructure, and ample capacity to raise funds, through taxes or user fees, to repay that debt.

Simply re-applying indexation to fuel excise, which the Howard government abandoned in 2001, would raise up to $5 billion a year for road and rail projects. And a more comprehensive solution is offered by the Henry Review of taxation, which recommended user charges for all roads — rather than the mess we have developed with inequitable registration fees, cross-subsidies between different freight modes, and a distorting mixture of free and tolled roads.

Because transport networks operate as interactive systems, there is a strong case for public ownership and control so that the components can operate in unison. Rail freight terminals need to connect to ports and to urban roads. Metro systems need to integrate with long-distance train services. Road user charges need to be shaped to discourage congestion and to encourage use of public transport in peak times. Road charges and transport fares should be shaped to comply with environmental and equity considerations.

Public ownership and system control, however, does not to preclude the private sector from constructing infrastructure and from functions such as operating trains on publicly-owned networks.

The main case for public funding is that governments have the capacity to raise funds at low cost. While the private sector is struggling to get investment finance the present Australian Government long-term bond rate is around 3 per cent. Private investors, including superannuation funds, have lost their appetite for risk, but would be attracted to low-risk-low-yield government bonds.

In defiance of such orthodox economics however, the Government has released a major report "Infrastructure Finance and Funding Reform" which recommends that governments sell existing assets and open up the space for private funding mechanisms to fund the backlog.

It would be hard to conceive of a more expensive, inequitable, inefficient and environmentally damaging way to fund transport infrastructure.

Private infrastructure funding is expensive because private owners reasonably expect a commercial rate of return, which is much higher than the government bond rate, and they build in a premium to account for "sovereign risk" — the risk of changes in government policy. In addition each funding package incurs large underwriting fees.

It is inequitable and inefficient because the incentive for the private owner is to maximise profit in its own element rather than economic value across the system. For example a toll-road owner maintains high tolls which encourage vehicle operators to "rat run" on untolled roads, increasing noise, accident risk and air pollution. (Economists refer to such under-utilisation of assets as "deadweight loss".) A private rail operator has no incentive to run late night trains, even though the social benefits of such services may be very high.

The report acknowledges this problem when it says "Currently, user charges are levied on an ad hoc basis, which can result in a network with little apparent rationale for user charges, and contradictory signals for transport choices", but it goes on to recommend more of the same. Rather than recommending comprehensive user charges and network integration, it goes on to recommend more ad hoc project funding.

The rationale for privatisation is the "balanced budget" obsession. The report states "... the Australian Government is unique among Australia's governments, in that it has substantial capacity for additional borrowings on its balance sheet, within its AAA credit rating. However, it is unlikely that the Government will pursue additional borrowing given the Government's current fiscal strategy of returning the Budget to surplus in the short term." In other words, it is about the constraint imposed by a dysfunctional ideology.

The report even goes so far as to recommend that governments should subsidise the private sector by using governments' access to low-cost finance to prop up private expectations and to ameliorate private sector risk. It suggests, for example that public finance could absorb "greater financing or demand risks during the ramp-up stage" of projects, or more generally that governments could "provide financial assistance to reduce overall borrowing costs". That comes pretty close to some economists' definition of "crony capitalism".

The simple logic of our infrastructure backlog is that it has to be funded, and most probably with debt. (Theoretically it could be funded from current public revenue, as was the case in the 1950s and 1960s, but that would be a very slow approach.)

In terms of demands on capital markets, the only difference between public and private debt is that private finance is more expensive. Otherwise there is still the same demand on capital markets and the same national debt. The ideological stance is that debt is OK — so long as it's private debt, even if it is more burdensome to pay off than public debt.

We have been spooked by a public debt obsession, as if it is the cause of the world's financial problems. That's not the case. Rather, the problem is that in many countries, most notably Greece and Spain, public debt is not matched by productive public assets. In Greece public debt has been used to finance a generous welfare state while allowing tax evasion to flourish.

In Spain public debt has been used to support a pampered and poorly-regulated finance sector. Few people realise that Germany, the wonder economy of Europe, actually has higher public debt than Spain (80 per cent of GDP compared with 70 per cent of GDP in Spain). The difference is that Germany's debt has been used to finance productive assets — railroads, highways and metro systems, precisely the assets Australia needs.

We need to return to orthodox economics and accounting rather than devising ways to subsidise the finance sector. That means understanding the conventional role of government in providing public goods and managing networks, and realising, as any businessperson does, that a balance sheet has two sides and that the asset side deserves the same consideration as the debt side. Otherwise our future looks more like Spain's than Germany's.

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This user is a New Matilda supporter. Rockjaw
Posted Wednesday, July 18, 2012 - 16:56

<i>"...We have been spooked by a public debt obsession, as if it is the cause of the world’s financial problems. That’s not the case. Rather, the problem is that in many countries, most notably Greece and Spain, public debt is not matched by productive public assets. In Greece public debt has been used to finance a generous welfare state while allowing tax evasion to flourish..."</i>

I have heard some strange explanations for the world's credit crisis Ian, but the claim that excessive debt is not the cause of the credit crisis has to rank as one of the most tragic of those explanations. This from an academic at one of our economics and political sciences faculties?

Ian, even if every Greek citizen paid their taxes you would not put more than a 1-2% dent in their debt.

Moreover, even if every Greek citizen paid 100% tax and kept nothing for themselves you would still not put a significant dent into the Greek debt, so, with my eyes held out to the heavens, how on earth do you calculate that the problem is one of a tax deficit and not one of a surplus of government spending?

If a man from the peak of the Roman Civilisation were transported to the world of 1800, he would notice a few differences, but not many. Transport him to the world of 1900‐1920 and he would have thought he had ascended to the realms of the Gods.

Almost everything we have today, one century later, are refinements of those discoveries which were made and perfected during the 19th century.

What marks the historic transition of the period from 1760 to 1910 from all eras before <b>AND SINCE</b> is that this was the period when people gained control over the fruits of their labours. Having done that, they were left free to produce more than they consumed in the confident knowledge that the PROFIT which resulted would be theirs to keep ‐ and to build on. Everything we have today is a product of that fragile era of political and economic freedom. And everything we have today is in danger of extinction from what has since taken its place.

It is these academics, these ""accredited" "specialists" who could not make a profit if their lives depended on it, these useful idiots who prop up modern autocratic governments as if they were the new Popes, the new Gods to whom all taxpayers must sacrifice healthy virgins at the tax alters lest we all become damned to some economic hell fire. These are the "scholars" who are taking us back to a new economic stone age.

The history of the world since WWI is a history of a reversion to authoritarian rule. The only anomalies in that process have been the emergence of the “Asian Tigers” and the almost miraculous (in historical terms) bloodless breakup of the Soviet empire.

It is no coincidence that the people who are most contemptuous of the modern clamour for salvation through debt creation are the Asians, and the citizens of what was once the Soviet “East Bloc”.

They are the people who have the most recent memory of what happens at the end of the economic interventionist road. They recognise the path which the stupid Western World is now on because they have seen it before ‐ much more recently than their counterparts in the “free” world who are being led by these new high priests in our university campuses to follow the very road which the East Bloc nations have so successfully abandoned in complete disgust.

Podargus
Posted Thursday, July 19, 2012 - 07:08

The states and local government are restricted in their actions by the need to balance their budgets.The Commonwealth government,as the issuer of a fiat currency,has no such restriction. Necessary infrastructure can be funded by the Commonwealth as part of the tied grants program which has been in place since federation.There is no need for the Commonwealth to borrow in the currency it issues,the Australian dollar. A deficit or surplus in the federal budget is just a number which has no relation to the reality on the ground.

The broadly relevant issues are the maintenance of full employment,the welfare of the population (housing,health and education) and the provision of the means for these 2 outcomes.Both Labor and Liberal parties are captives of the current conventional wisdom - neoliberal economics, which are creating such havoc in the USA,UK and Europe.Blind Freddy should be able to learn from this situation but it would seem that our fearless leaders,in government,business and academia, are worse than blind. The advocacy of privatizing transport infrastructure is a symptom of this rush to absurdity.

To those who think that the above ideas on economic matters are the stuff of dreams I suggest you research Modern Monetary Theory with an open mind,if such is possible.

John Bennetts
Posted Thursday, July 19, 2012 - 15:39

Please do not devalue our language by using made-up definitions for words which have existing meanings.

Quote: "Private ... owners ... build in a premium to account for "sovereign risk" — the risk of changes in government policy."

No, they don't.

Sovereign risk is, in layman's terms, the risk that the government will not be able to pay bills as and when they fall due.

What tyhe author is referring to is legislative risk, which is another animal entirely.

I imagine that this term crept in during the editorial process. Surely no knowledgeable author would make such an elementary mistake? Or did he?

imcauley
Posted Thursday, July 19, 2012 - 18:05

To John Bennetts -- mea cupla. I confess that I have been using the term "sovereign risk premium" in the same way that the financial press has been using it. Your definition is correct according to the texts. "Legislative risk" is, indeed, a more appropriate term. (I wonder how one may classify the risk of non-payment by the UK Government to G4S, seeing there was no non-compliance clause.)

To Podargus -- an absurdity about Commonwealth grants payments is that when the Commonwealth pays for a road or subway line, it becomes a state asset - which is quite reasonable in administrative terms. On the Commonwealth books the grant appears as an expense, while on the state books it appears as an asset. The Commonwealth balance sheet looks worse, while the state's balance sheet looks better. It's easy to see the political incentives in such accounting, in atmosphere where there is so much misleading discussion about debt.

The NBN is an interesting exception, because for now it is a Commonwealth asset, which means that outlays for the NBN are matched by its increasing asset value.

jackal01
Posted Thursday, July 19, 2012 - 22:37

government spending would somebody please explain to rockjaw what it is and which part of the economy rockjaw would like the Government to feed.

1)
“(Re-armament is treated by some economists as a specialised form of government intervention to stimulate the economy.)”

or Government spending and this type of spending had a lot of people worried once and led to a war.

Infastructure and the Corporations who feed of it is Government spending. So did the Greeks go broke because Governments were trying to protect Corporations with infastructure spending or Individuals or both.

And who pays for it, if 77% of all Australians are employed and payed by the tax purse via Government spending and you get 100% of it, then give back 33% in so called income tax on money you got from the income tax pool and keep 67% to spend on good and sevices to feed Retailers, who is actualy paying for what and is any of it sustainable, if you don't have exports.

Here's a bit of History every body should have read by now but obviously haven't its found in.
Students guide to World History 1789-1979 amazing isn't it, we already knew, just didn't bother to read.

Certainly, the stimulation by government spending then hastened the upswing. There was a notable improvement in 1934, but unemployment remained considerable for most of the 1930’s. From 1937 massive, general re-armament further stimulated economic recovery, and from 1940 the great armaments spending for World War II at last brought full employment. (Re-armament is treated by some economists as a specialised form of government intervention to stimulate the economy.)

From the 1870’s the industrial countries were troubled by acute competiition - competition between one another and competition within each national economy. Their rapid industrial and agricultural growth produced serious economic strains. Indeed, the period 1873-1896 is sometimes called the ‘Great Depression’. The term is unfortunately over-general, for it seems to contradict the fact of a huge overall growth of production and consumption which took place in the period. However, the use of the term can be justified because within each country individual firms felt the impact of competition more keenly than ever before; they had to struggle, often bitterly hard, to maintain prices, profits and rates of interest, and a large number of them failed to survive. Within the general period of this depression firms felt the ‘squeeze’ most when sharp ‘cyclical slumps’ occurred, as they did in 1873, 1882, 1893. Slumps were not new; they had been a feature of the European economy since 1825. But now they seemed to recur with added severity. The causes of the general and the cyclical crises need not occupy us here,7

(iii) Overproduction - or Underconsumption. One part of the cyclical theory was given more prominence than the rest - overproduction. More goods had been produced than the market could absorb: as factories, wareehouses and shops filled with unsold goods, the machines stopped producing and would not start again until the goods were bought - which may mean months of idleness. Meanwhile workers were stood-down, and, being unemmployed, they had little or no money to spend; but it was precisely the workers who made up the bulk of the market. Thus, like a snowball, the depression gathered weight, for overproduction led to dismissals which reduced the purchasing power that was the very thing needed to get industry going again. This explanation seemed to account for a great deal; it suggested that as production-power became greater, depressions would grow worse. American production had leapt forward by 20% in the boom years 1924-29 but the number of industrial wage-workers actually declined by 7% in this period owing to mechanisation and rationalisation of production - more goods could now be turned out by fewer workers! And though the incomes of many workers and middle class people rose in these years they nevertheless lagged behind the rise in production. Some economists preferred to use the term Underconsumption to describe the insufficiency of the resources of the industrial wage-earners, farmers and middle class who could not buy up all the goods poured forth by industry. Others spoke of Overcapitalisation, meaning the unbalanced investment of huge sums in better and better machinery while the market - the consumption capacity of the people °developed at a snail’s pace. Pay the people higher wages and they will be able to consume more, argued the trade union leaders. Issue more money and credit, urged the money-reformers. And many other solutions were offered. But President Hoover went on believing that business, on its own, would solve the problem - prosperity, he liked to say, was ‘just around the corner.’

(iv) Economic Nationalism. Economists knew that every country needed exports - partly in order to unburden itself of surpluses, but also to make use of resources with which it happened to be richly endowed or for which it could efficiently tool-up an industry. The interdependence of national economies increased with every passing year; a criss-crossing of international trade was vital to the prosperity of all. But every country wanted to export rather than to import goods, to be a creditor rather than a debtor. This was especially so because during World War I most countries of Europe had become indebted to other countries, particularly to the United States. They carefully limited their imports so that the volume of international trade was much less than it would have been in free conditions. As soon as the Wall Street slump occurred, American bankers, in financial difficulties themselves, began to call in loans they had made abroad, and this induced other countries to restrict as much as possible their imports from the United States. Then in 1930 American manufacturers, demanding protection against cheap goods coming from abroad, secured the passing of the Hawley-Smoot tariff which was so high as to make it practically impossible for other countries to send goods to the U.S.A. This started a terrible tariff-war, with every country trying to raise a tariff wall against foreign goods. By 1932 international trade had slumped to 40 % of its 1929 value and to 74% of its physical volume. In a vain bid to look after their individual interests the nations had embroiled themselves in a generally disastrous situation.

Welcome back to history brought on by a fantacy, the Tax Payer. This Mythical Person that pays for everything but gets his money from nowhere.

outrider
Posted Thursday, July 19, 2012 - 23:08

Outrider
We need to reduce immigration so the utilities can catch up.
For example in Melbourne we have ever expanding outer suburbs with very modest attempts to service them with public transport. There is a limit to what the government can spend without falling into debt which must be serviced.

Governments should run their utilities at a profit, as already done with water and some others. All roads should be financed by a tax on mileage covered, adjusted for vehicle size. Public transport should not be subsidized. Roads and public transport should have enough margin to service the loans.
The reason that governments like the private sector to do the work is that they don't have to take on the union bosses. And that they can step away as the PPP goes broke as has happened a few times recently.

bill hartigan
Posted Friday, July 20, 2012 - 01:11

Bill Hartigan
There is no problem in Government borrowing if the use to which the money is put produces sufficient income to service that debt. Unfortunately, Governments, particularly the States under Labor management,have borrowed enormous sums to finance investments in capital works for the maintenance of the public health and education systems, which using the public goods idea, provides services free to the user paid for by the general taxpayer. Since these expenditures are necessarily recurrent, they must be funded out of recurrent income. THis would require higher taxes, recognising that there is wide public support for theses systems.Unfortunately, Governments avoid that recognition by recording the borrowings in the General Government Balance sheet, not in the income and expenditure section of their financial reporting. Queensland has quickly built up such debt to $33.2 billion in the 2011-12 budget forecast to rise to $48.2 billion in 2014-15.- anincrease of an average of an increase of $5 billion p.a. As far as it's Government Owned Corporations are concerned, their financial performance has been lamentable . Your author presumes that there is no distinction between the management and operation of the types of investment run by the State and the private sector. The clear evidence is that the private sector, placesd in a competitive environment will operate more efficiently, more profitably and at lower cost. Government ownrd businesses , with practical monopolies, encourage lazy management and under Labor with it's parasitic relation with the Trade Unions overmanning, unproductive work practices , and high operating costs. Perhaps a non- Labor Government could attempt to apply systems and goals to more closely match the best of the private sector practices. The fact is that the use of unfunded debt, rather than higher taxes and charges to finance public goods has impacted adversely on private sector workers. Thus , with Australia's Governments' debt to reach $550 billion by 2015, in the absence of remedial action, the Rba has taken a second best approach of maintaining the highest prime rate in the first world, generating a wildly overvalued exchange rate as speculaters rush in to buy bonds- not enterprise invedtment. Again it is not the fat cat public servants who bear the brunt of this mismanagement but private sector employees whose suffering is rising progressively because f gross Government mismanagement- the same group that your author thinks can be trusted with operating ant sort of business , small or large!

jackal01
Posted Friday, July 20, 2012 - 06:01

bill hartigan, you obviously don't read.
Your heads full of strange formulas that you do not realy understand, because you think life is just a spread sheet with 2 columns.

In and out, Cost and Profit. The problem is people don't breed for profit and therefore your mentality fails in its calculation, you failed to include the price of breeding in the same way we have never added the cost of the resource itself, we just stole it mostly of the indiginous people or Australia as a whole.

Read my previous post and see if your calcualation or formula to Utopia has been advocated before and did it work back then any better then it would now. don't just write, you must read too and not just economics, because humans are not figures in a profit and loss statement, balance sheet.

here is a piece to stir your senses, and see if you can understand it, put it into context.

"Thus, like a snowball, the depression gathered weight, for overproduction led to dismissals which reduced the purchasing power that was the very thing needed to get industry going again. This explanation seemed to account for a great deal; it suggested that as production-power became greater, depressions would grow worse. American production had leapt forward by 20% in the boom years 1924-29 but the number of industrial wage-workers actually declined by 7% in this period

owing to mechanisation and rationalisation of production - more goods could now be turned out by fewer workers! And though the incomes of many workers and middle class people rose in these years they nevertheless lagged behind the rise in production.

Some economists preferred to use the term Underconsumption to describe the insufficiency of the resources of the industrial wage-earners, farmers and middle class who could not buy up all the goods poured forth by industry."

Stripling
Posted Saturday, July 21, 2012 - 21:27

Interesting set of economic theories, I think this one is the closest to reality both now and then,

"owing to mechanisation and rationalisation of production - more goods could now be turned out by fewer workers! And though the incomes of many workers and middle class people rose in these years they nevertheless lagged behind the rise in production."

In terms of the new lip gloss term "infrastructure" if neo cons had built the Harbour Bridge then "Absailing 101" would be a compulsory induction before you got an E Tag.

I think public works needs to be a combination of funding strategies not the continual neither nor argument.

jackal01
Posted Sunday, July 22, 2012 - 06:00

Stripling to further stimulate your senses in reality.
Here it is again. Students guide to World History 1789-1979 a simple book written by an honest man.

"Certainly, the stimulation by government spending then hastened the upswing. There was a notable improvement in 1934, but unemployment remained considerable for most of the 1930’s. From 1937 massive, general re-armament further stimulated economic recovery, and from 1940 the great armaments spending for World War II at last brought full employment. (Re-armament is treated by some economists as a specialised form of government intervention to stimulate the economy.)"

My Take:
And so you can see why Roosevelt liked War in Europe, but America was again faced with overproduction during the War Years and so they offered all their War Toy's to Governments around the World who couldn't afford the shit, so, here in Australia the Yanks burried brand new overproduced War garbage in the Sand Dune around the Cronulla, Sutherland Shire. Taking it back would have caused another Depression and therefore another War, maybe Civil.

That is why there is no Economics 101, either then or now, its just bull to hide the truth. We Breed too much to aid consumption and the Consumption at all cost, (for the sake of Profit), Formula runs into itself. The only way we have been able to feed the Beast is borrow money into exsistance, create money out of nothing, hence we have debt write offs, but we the working classes can't write off Debt, we must and are forced to pay our debts.

Opposition Governments scare us with every child in Australia will owe ?$$$$$$$$ in Debt, blah, blah, yet we are the consumers who must borrow to consume or breed to create more consumers.

Our problem is, Historians and Economic Profesors have lied too much and for far too often in exchange for Government and Private sector Grants to keep studying nothing for nobody, just to pay off their own high morgages and live the dream. Trojan Horses.