Spending on capital works should be seen and not inferred

12 April 2012

When the Carr government took office in 1995 there was widespread discontent across NSW about inadequate public infrastructure, particularly in health and transport. Today, there is still a perception that spending on infrastructure is inadequate.

But in fact, the NSW government in the past 10 years has more than doubled annual capital works expenditure in real terms - that is, after adjusting for inflation.

Capital works spending has increased faster than the rate of inflation in every financial year since 2000, except 2010. Data on spending in the first year of the O'Farrell government is not yet available. There was a large jump in 2009 because of the ''economic stimulus package'' and the ''nation building'' program, in response to the global financial crisis. But what is most stark is the scale of increase in real spending since 2005.

These figures are clearly at odds with the perception that government does not spend enough. The explanation for the gap between the perception and the reality is straightforward. The public perception is based on observing instances where infrastructure is unable to cope with demands. In some cases, this is because the spending has not yet taken effect; in others it is because it has been spent inefficiently.

We don't tend to ''see'' infrastructure when it is freely available. We notice infrastructure when it is in short supply. As long as lights go on when we turn the switch, as they generally do, there is no perception that power generation capacity is inadequate. We don't, however, think there is too much power capacity, either.

Similarly, when traffic volumes or passenger levels on new roads or rail lines increase to the point where the new infrastructure becomes congested, the public focuses on these inadequacies.

Blackouts, water restrictions, crowded classrooms, hospital waiting lists and higher energy prices also occur when infrastructure spending is inadequate or has gone to the wrong areas.

Many projects are co-funded and much of the infrastructure funding comes from the federal government. But both levels of government announce the expenditures, so the public gains an impression that spending will be higher than it is.

There is also the perception that some spending is wasted and that the same outcomes could be achieved at lower costs with greater efficiencies. This perception is correct. There is no doubt that many projects could be delivered more cost-effectively.

The trend towards public private partnerships shifts some capital costs to the private sector. This gives the impression that projects are completed faster and the public are getting a bargain. However, I would argue that the majority of PPPs have not saved much money for the government. To encourage private participation, they often have penalty clauses that retain risk in the public sector. The profits are also shared; so while costs to the public sector are reduced, so are the returns. In addition, every PPP contract needs to be monitored to ensure the project is on track, thus imposing compliance costs on the public sector which are factored into capital works spending. The government also has less control over the infrastructure.

Another perception is that the spending is disproportionately in the Sydney metropolitan region. But there have been significant projects in the rest of the state, including capacity expansion at ports; increased power generation capacity through a new gas turbine power station and upgrades to the coal-fired power stations; major redevelopment of regional hospitals; and ongoing work on regional roads.

Some spending is necessary to maintain infrastructure in good working condition, some for ongoing projects and some for new projects. All should be viewed as investment in the stock of infrastructure.

Ideally, we would expect the level of investment to be enough to ensure infrastructure growth keeps pace with population growth. Much of NSW's infrastructure is very old and overdue for renewal. This means that a substantial component of capital works expenditure each year is going to just maintaining existing infrastructure.

The second target of spending, ongoing projects, reflects the reality that infrastructure projects take many years to complete and so expenditure in any one year is based on decisions made several years past.

Unfortunately, correcting public misperceptions would need a quantum leap in NSW government capital works funding. This is unrealistic, because it could be only at the cost of reduced spending in other portfolios. And that, in turn, would create other economic and social problems.

Associate Professor Russell Ross teaches in the School of Economics at the University of Sydney.

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Contact: Kate Mayor

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