The Social Losses from Inefficient Infrastructure Projects: Recent Australian Experience

Abstract

Australian Government spending on infrastructure projects has increased rapidly in recent years, and especially so over the course of 2009. In this paper, we examine the processes for project evaluation, in the light of the Government’s commitment, in the 2008-09 Budget, to (infrastructure) decision making based on rigorous cost-benefit analysis to ensure the highest economic and social benefits to the nation over the long term...(and to) transparency at all stages of the decision making process. We find that contrary to this commitment, significant projects have been approved either with no cost-benefit analysis or with cost-benefit analysis that is clearly of poor quality. Moreover, despite the commitment to transparency, very little information has been disclosed as to how most projects were evaluated. To better assess the quality of project evaluation, we examine the largest single project the Commonwealth Government has committed to - the construction of a new National Broadband Network - and find that in present value terms, its costs exceed its benefits by somewhere between $14 billion and $20 billion dollars, depending on the discount rate used. We also find that it is inefficient to proceed with the project if its costs exceed $17 billion, even if the alternative is a world in which the representative consumer cannot obtain service in excess of 20 Mbps and even if demand for high speed service is rising relatively quickly. This amount of $17 billion is well below current estimates of the costs the NBN will involve, especially if (as the Government has pledged) the NBN is to serve non-metropolitan areas. We also examine the cost-benefit assessment undertaken for the second largest infrastructure project the Government has committed to, which involves the construction of a rail link in Victoria. We find that lower-cost alternatives to the project were not taken into account in the evaluation, in particular the option of increasing capacity through improved efficiency and better governance of the rail network. Even taking that exclusion on board, we find that the appraisal that was approved by Infrastructure Australia (or at least, the only version of that appraisal that has been made available) is seriously flawed, including errors of double counting and manifestly incorrect estimates of project benefits. Absent these errors, the project would generate benefits that fall well short of its costs. We conclude by noting that high quality project evaluations will not be made if governments do not see value in them. This appears to be the case in Australia, especially with respect to major projects. Nonetheless, we advance a number of proposals for improving the process, including transparency (which is now largely lacking), serious audits and reappraisal of projects at predetermined milestones and steps to introduce greater rigor into key aspects of the analysis.