Infrastructure: Its full cost and benefits

Infrastructure is very expensive. And it brings to us and to the next generations enormous benefits. What are we prepared to pay for it? The Productivity Commission has released two volumes of a draft report recommending a “comprehensive overhaul of processes in the assessment and development of public infrastructure projects”.

Overhauls are vulnerable moments in a polity. Vested interest groups will be sharpening their pencils and saving their drafts to ensure they continue to earn a good living from providing more infrastructure.

The good people of Australia pay for infrastructure in more ways than one. Let us examine these.

Firstly, there are the design costs. These used to be incurred by the Dept of Public Works, or Main Roads, or Natural Resources considering the long-term needs of the growing population over larger areas of the state. The permanent public servants who specialised in infrastructure planning undertook this work. And for their efforts they received a salary and ongoing professional development.

Now “infrastructure planning specialists” work with marketing staff of large engineering firms to lobby for more work for the firm. These firms are led by people with interests in industry, construction and sales across a range of corporations, in Australia and elsewhere. The price of the design is factored into the overall price in jobs that the firm wins, regardless of whether the design costs were incurred for only that project.

Secondly, there are planning and financing costs. These used to be the role of public servants on a salary. Now they are funded by banks and firms looking to gain projects in the private and public sectors.

Thirdly, there are construction costs. These, again, used to be incurred by the public sector from its capital budget. The funds were frequently raised from bond issues, or straight out of revenue. The Commonwealth would fund part of the state project, with the state funding the remainder. Local governments sought funding from both Commonwealth and State governments. ┬áNow these are paid for from funds allocated by banks and, with recent changes, superannuation companies’ investments of our funds.

Fourthly, the operating costs. These used to be paid out of consolidated revenue. Now they are funded from fees and charges to private firms.

Fifthly, the maintenance costs. These used to be paid out of consolidated revenue, with departments provided an annual budget to cover maintenance, and to fund their maintenance crews. Frequently small country towns thrived on the back of salaries earned by maintenance crews working on the local council. Now these costs are form part of the contract price and are paid by shareholders, users and maintenance levies.

Lastly there are disposal costs. These used to be borne by the State department upgrading the infrastructure or resuming the land under it for other purposes. Examples include old railway lines diverted to other uses, and scrap metal and other disposals. Now these are generally still born by the state or local government and include the resumption of sites and the reclamation of the sites.

The rapid change in technology has meant the old ways were not sustainable, as governments could not afford the risks of new technologies for their staff. So now governments pay private sector firms to develop the new technologies and the contractors learn to use them on the job.

Examples of the public sector developing new technologies include: underwater electrics for the freeway that becomes a drain in metropolitan Kuala Lumpur, Malaysia the SMART tunnel.

McKinsey has estimated that over $1 trillion a year can be saved worldwide from the way infrastructure is managed. See:

Infrastructure costs a lot, and it is worth monitoring that cost to ensure the citizens of Australia get value-for-money from the contracts entered into and the investments made on our behalf.

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K McGovern & Associates