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Text and accompanying slides of Saul Eslake’s talk to the Tasmanian Branch of the Economics Society’s Annual Economic Forum held in Hobart,  Friday, December 3 ...

INFRASTRUCTURE INVESTMENT AND PRODUCTIVITY
Address to the Economic Society’s annual
Tasmanian Economic Forum
by Saul Eslake, Program Director – Productivity Growth The Grattan Institute
3rd December 2010

Note: This paper has benefited from the considerable drafting and research assistance from my Grattan Institute colleague, Katherine Molyneux.

Thank you for again inviting me to be part of the annual Tasmanian Economic Forum. The theme of today’s forum is ‘Infrastructure for a Sustainable and Prosperous Tasmania’ and in that context I’ve been asked to talk about the linkages between infrastructure and productivity.

For the purposes of today, I will limit this discussion to ‘economic infrastructure’, that is, those parts of the private and public sector capital stock which are intended to facilitate the production or distribution of goods and services. In thus defining the topic I don’t want to suggest that ‘social infrastructure’ such as schools and hospitals don’t also enhance productivity, through their impact on human capital. However that is not the primary purpose of these forms of infrastructure.

Extracts ...

In the current political climate, infrastructure spending is a much more palatable option for governments than measures of the sort which dominated the reform agenda of the 1980s and 1990s. It involves spending money, provides politicians with a platform from which to deploy soaring rhetoric about ‘nation-building’, and gives them opportunities to open things in sensitive electorates at critical times. Infrastructure investment can be readily proclaimed in terms such as these from Treasurer Wayne Swan:

“Our historic investments in nation-building infrastructure are building productivity and capacity as our economy comes up the challenges of commodity boom mark II” (Swan 2010).

Yet a moment’s reflection on the history of major infrastructure projects in Australia (such as the Alice Springs to Darwin Railway) highlights that it is emphatically not the case - as the often seems to be assumed, or implied, by many in both Commonwealth and State government circles - that all infrastructure spending will generate productivity gains in the broader economy. The question of which types of infrastructure spending produce productivity gains needs more consideration.

There are strong arguments from a number of quarters about the decline in Australia’s capital stock. Engineers Australia’s regular report card on the fitness of Australia’s infrastructure for present and future purpose gives Australia a poor bill of health, with only one sector receiving an ‘A’ and a handful receiving a ‘B’ (and note that Tasmania is ranked last or next to last in every category except electricity).

And ...

This is a key point about the government’s proposed National Broadband Network, which will be the most expensive infrastructure project ever undertaken by an Australian government. I have no doubt that broadband is an ‘enabling technology’, and I would genuinely like to believe that the NBN will produce economic gains in excess of its purported cost, now put at $37bn. But at this stage I have no idea whether that is the case, or whether the particular technology embodied in the NBN is the best available, or whether it risks locking Australia into a mode of broadband delivery that risks becoming obsolete quite quickly.

Incidentally, the estimated cost of the NBN is now only $1 billion more than the cost of building 12 more Collins Class submarines for the Australian Navy. It’s an indication of the lack of critical scrutiny given to anything which falls under the heading of ‘defence’ or ‘security’ that this program has received far less attention that the NBN.

I like to say that success in infrastructure is not simply a matter of increasing spending, but also (and in some cases instead) one of getting the right spending in the right place and at the right time. This sounds perfectly obvious, but in practice we often run the risk of allowing planning to be driven by short-term bottlenecks, or by chasing funding opportunities. Or marginal electorates: as the vast difference in the amount of spending on the ‘national highway’ in Bass and Braddon, on the one hand, and Lyons or Franklin on the other, aptly demonstrates.

And ...

The most sustainable avenue open to Tasmania for minimizing the adverse impacts which the side-effects of the resources boom will have on Tasmania’s economic performance (and the well-being of Tasmanians) is to improve the productivity of those of the State’s industries and businesses which are most vulnerable to those side effects.

And here at least recent data provides some potentially good news. The upside of the relatively large downturn in employment in Tasmania during the 2009-10 financial year is that measured labour productivity in Tasmania grew quite strongly, by 4.6% (faster than any State except Western Australia), following a 3.4% increase (the fastest of any State or Territory) in 2008-09. Labour productivity is still lower in Tasmania than in any other State, but it is now up to 86.9% of the national average, the highest since 1998-99, from a low of 82.0% of the national average in 2003-04. Of course it remains to be seen whether this is merely a cyclical improvement – the result of lags between the cycles in output and employment – or a genuine and sustained improvement in Tasmania’s productivity performance.

I’ve spoken many times previously of the negative impact which Tasmania’s relatively low levels of educational participation and attainment have had on the State’s productivity performance, and I don’t propose to repeat those observations today.

However it is appropriate to note that Tasmania’s persistently low productivity levels also owe something to this State’s relatively poor and antiquated infrastructure. Even the most casual observer could hardly fail to notice the poor condition of Tasmania’s major roads, with the exception of the Bass Highway between Launceston and Burnie, and the road to Hobart Airport. Someone who spent a little more time here would be appalled at the condition of the State’s railway infrastructure, and the miniscule role it plays in moving goods, let alone people, around Tasmania. It’s scandalous that people living in (or visiting) towns along Tasmania’s east coast can’t drink the water that comes out of their taps without boiling it first. I could go on (but I won’t).

Part of the reason for this must surely be that Tasmania has invested a smaller proportion of its income in infrastructure than the rest of Australia.

That’s particularly true of private sector infrastructure spending, which has declined as a proportion of gross State product over the past three years and in 2009-10 accounted for barely more than one-quarter of the share of GSP that it did across Australia as a whole (and note that in compiling these figures I have excluded spending on ‘heavy industry’ from the total).

And while infrastructure spending by or for the public sector represents a larger share of GSP in Tasmania than it does of GDP for Australia as a whole, the margin of only 0.4 percentage points is substantially smaller than the 5 percentage points by which Tasmanian State government operating expenses as a proportion of GSP exceeds the average for all States and Territories – especially when one considers that some of the more important infrastructure responsibilities, notably electricity generation and retailing, remain totally in public sector hands in Tasmania, unlike the situation in many other States.

It thus seems probable that there is considerable scope for well-targeted infrastructure investment to make an important contribution to improving Tasmania’s productivity performance, and to that end the State Government would be well advised to re-weight the expenditure side of its Budget away from recurrent spending towards more spending on infrastructure.

However as with the rest of Australia, it is crucial that whatever infrastructure investment does take place is the right infrastructure, in the right place, at the time and accessible at sensible prices – and of course supported by robust cost-benefit analysis. ‘State-building’ for its own sake is no more defensible, and no-more likely to boost productivity, than projects which have as their sole rationale the vague and woolly concept of ‘nation-building’.

Download to read the full lecture, with slides:

Infrastructure_Tas_Eco_Soc_Dec_2010.pdf

Tas_Eco_Forum_Dec_2010_slides.pdf