Panel Discussion: Can the Commonwealth Drive Infrastructure Spending?

July 4, 2014
Transcripts

3 July 2014

TRANSCRIPT OF THE HON MALCOLM TURNBULL MP
PANEL DISCUSSION WITH PAUL BROAD AND HENRY ERGAS
ECONOMIC AND SOCIAL OUTLOOK CONFERENCE

Topics: Infrastructure Spending
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MODERATOR:

Thank you, Henry. That was brilliant. Clear, patient, thorough, comprehensive, and a pathway forward. Always very valuable. There are a few questions that come out of it, of course, and we will pick those up. This is your opportunity now to explore with the panel - I see a first question here, and then there will be a second question on the other side.

QUESTIONER:

Thank you. I mean, we really have had three great –

MODERATOR:

[Interrupts] Could you announce –

QUESTIONER:

Sorry - Michael Porter.

MODERATOR:

Yes.

QUESTIONER:

Three very wise men have addressed us today, and it's particularly exciting to see Paul Broad again. Thinking of Broad and John Paterson, if we had those sorts of bureaucrats fighting the average sort of Minister, particularly of the Turnbull quality – which is not so average – then we would get somewhere. Paterson was simply remarkable. We need a cloning mechanism.
 
My question is about Malcolm Turnbull's, I think, profoundly important question about inter-temporal consistency of regulation, and I would like to illustrate this without breaking confidentiality rules within CEDA. When we had Graeme Samuel as a guest and he was asked, in the peak of the Conroy nonsense, he was about to spend $70 or 80 billion of other people’s money. Worse than that, he was about to destroy the sort of capital Paul was talking about, other investments capable of delivering wired and wireless and wonderful WiMAX and all sorts of technologies. These businesses were being destroyed. I said, I estimate the capital cost of what you're okaying, Graeme, at somewhere around $100 billion. How do you feel? What are you doing? Why are you doing this?

Now, Chatham House rules means I say what he said, but basically he mumbled about the legislation and the cherry-picking stuff and the constraints.  And essentially what I think he was saying was a mere regulator, the head of the ACCC, can always have legislation constraining what he does. So the question, then, Malcolm, and others, all of you, can we not get the powers to the head of the ACCC that we have for the governor of the Reserve Bank? Something like that?

PAUL BROAD: 

I'm sorry, the powers for the head of the ACCC –

QUESTIONER:

The Governor of the Reserve Bank can listen to Paul Keating or Joe Hockey and say thanks, and ignore him and do what they think is right. And they have the power under the Reserve Bank Act to do that. Why isn't there the power under the Competition Act that guides ACCC to vest authority in, say, Rod Sims today, or Graeme Samuel then, to tell Conroy that he doesn't have the power to destroy capital, nor does he have the power to create new monopoly capital.

PAUL BROAD:

Well, I mean, if the question is, should the ACCC have the power to stop the Government from making a stupid investment, while I think it would have been terrific if the investment decision hadn't been taken, for all the reasons you've canvassed and I've canvassed many times, I think that really is a matter for the Government and the Parliament and the people that elect it.

So the NBN folly was extraordinary.  But the ACCC - and, I mean, and Graeme Samuel in particular - cheerleaders for it, frankly. And the destruction of value is gigantic, absolutely gigantic.

MODERATOR:

Well, not wanting to cut Paul out of this conversation, if I just flick to Henry, though. How does that tie in with your model of governance of an entity that looks after a form of infrastructure? In your case, roads. But is there some alignment of views across that?

HENRY ERGAS:

I believe so. I think the issue with the NBN -- and it goes back to points that the Minister was making, quite rightly, at the outset in his speech. I mean, the issue with the NBN was that, really, we were in the midst of privatising the telecommunications assets and yet we didn't put in place a regulatory framework that could support and would support private investment in renewing and expanding those assets.

And the situation created was one of immense uncertainty in the industry about investment going forward. And that provoked what I at the time thought, and still think, were some very, very harmful decisions -- so beginning, really, in 2002 or 2003. And Paul will remember this from his AAPT days, beginning 2002 or 2003, there was an emphasis on trying to force investment to take place. So whole swags of regulatory measures were taken which essentially set quality objectives - so-called quality objectives - but became ultimately the so-called Network Reliability Framework.

And if Telstra didn't meet those Network Reliability Framework objectives, then it had to pay massive fines. And the fines were never subjected to any form of cost benefit appraisal. The only assessment that was done was an assessment I did with Alexis Hardin at one point. And we calculated that the costs were 50 times the benefit.

Now you can argue maybe it was 20 times or maybe it was 60 times, but it was clear that the costs were much greater than the benefits. And there was increased emphasis on these very heavy-handed types of intrusions.  And these were being enforced by the ACCC - actually, the Network Reliability Framework was a technical regulatory instrument, but the ACCC was instrumental in these issues. And in 2005, I wrote a paper which basically said, we can not go on this way. Either the regulatory framework changes or, within a decade, we will have renationalised the basic assets because that's the only conceivable outcome of the situation, is that we will get renationalisation, and the only question is when and how that renationalisation occurs.

Now, that goes to a few really fundamental issues that have to be grappled with, and one of the most important is how you devise the sense - if you want to get private investment with the risks being borne by the private sector investors, you have to have regulatory frameworks that provide some reasonable measure of certainty. And in telecommunications we clearly did not. In energy we did slightly better, though perhaps certainly - well, certainly not perfect. In telecommunications we certainly did not do that, and at some point, you're going to bear a very high cost from that.

The problem was that - well, there were many, many problems; but one problem that it goes to specifically your point is that the framework gave the ACCC immense powers - absolutely immense powers - with very, very little real accountability of any kind at all. And one result of that was that had very few incentives for good quality analysis.
 
I come to the point that Malcolm was talking about: the cost advice that was given by the ACCC to the Government when it was contemplating doing the NBN. The ACCC FOI documents or FOI document suggest the ACCC estimated that the network could be built in the sorts of timeframes that Senator Conroy was talking about for about $42 billion, using essentially a back of the envelope model with whatever it was, three or four days work, because that was when I gave that briefing that Malcolm had organised.

I had estimated that it would have to cost – if they wanted to do it in that timeframe – it would just have to cost between $70 and $90 billion, and that was just plainly obvious when you looked at the international benchmarks and you built even a very simple model of a network. The current estimates are in the order of whatever it is, $80 billion for the approach that the Government had taken in.

So they basically came in at half the cost, and anyone who knew anything about telecommunications networks could have told you that at that time. And yet there was no accountability, no checks and balances that operated on that decision, and we're now locked into, what is it, $96 billion.

MALCOLM TURNBULL:

Well, no. Hang on. Hang on. Wait a minute. Wait a minute. We're not –

HENRY ERGAS:

[Indistinct]

MALCOLM TURNBULL:

We'll complete the project with a peak funding requirement of a bit more than $40 billion. But that is a different - it's a differently managed project. But the role of the ACCC in this area is extraordinary because, as I said earlier, the big questions are: One, why did they presume to give advice in an area in which they had no expertise --

HENRY ERGAS:

Sure.

MALCOLM TURNBULL:

They -- people don't always agree with what they do, and I'm not judging the ACCC on its regulatory decisions.  I add that caveat. But they are not a firm of consulting engineers. They're not a telecommunications business. They've got no expertise in this area at all, yet they gave that advice, and even more improbably, the Government relied on it.

And when you talk to former ministers in the Rudd Government and Gillard Governments, they really did rely on it -- and it says a lot about their naivety that they did, I must say. But there it is. And we are now living with the consequences.  And that's the job we've got, getting the NBN back on track, and we are doing so. But, boy, there has been a lot value destroyed - we'll get a good outcome, but it'll end up costing many, many, many billions of dollars more than it ought to have done.

MODERATOR:

Perhaps if I can bring Paul in and we'll sort of –

PAUL BROAD: 

Just quickly --

MODERATOR: 

Leave the ACCCs bones to be not thoroughly picked. But, Paul, you made the comments can we take the politics out of infrastructure, and the question, if - yes. And we can all remember your question, Michael, but where do you head on this?

PAUL BROAD:

Look, I think it was one of the saddest days of the business I had when that announcement was made by Graeme, and he became a great supporter of it. I don't think it was a lack of power, I think there was commitment on his part to support it and the rest of the industry were completely dumbstruck. We had - in value terms, it cost us about a billion dollars.  The value structure on that day was about a billion dollars and most of that was out of the good investors of Telecom New Zealand at the time.  And on the estimates that Malcolm was saying, that we just build on their work and we did the cheapest form and our sums - well north of $40 [billion] and we wrote to them and tried to tell them that, but no bugger wanted to listen.

MODERATOR:

All right, let's move to a different topic - third row on that side.

QUESTIONER:

I apologise. I'm not a professional, in the sense that I'm here as a teacher of 40 years science and maths and I'm also a trustee of a super fund for 25 years. So I've followed this infrastructure since it sort of started off. There was some guy who used to play for Carlton. We kept on saying he's really smart and he does really good tunnels.

And we always knew that the tunnels in Melbourne were paying money and we invested in them and that was all very good, after that tunnels went bad. So my question - just for a comment, really and it - is first of all in this whole topic - the whole thing is whether being too far ahead of your time is too difficult to distinguish between being wrong, and so that leads to the fear of failure on the people who have to make these decisions. And I just think the whole aspect of this - it's a huge amount of money and it's big stuff, but it's very centric on Sydney, on Melbourne and then on Brisbane - Brisbane/Gold Coast and we could take the tunnel as an example.

We could take this business of Sydney Railway going off to the north-west - what's wrong with Bathurst? What's wrong with Wagga Wagga? What's wrong with Gympie? Gympie can't get lawyers --

MALCOLM TURNBULL:

Many people might think that's one of its appealing characteristics.

QUESTIONER:

It probably is, but I'm saying we talk about getting Australia to be decentralised and instead we say we will build this enormously complicated structure or structures and as a result saying, this is wise, because of the fear of failure.

So I suppose I'm just throwing you the challenge, in other words the challenge really is -- if you're out there, we want driverless cars. We want driverless cars so that -- I'm not going to buy a car until my next car, I just phone up and it's a Google car and it comes to the door and it takes me or perhaps somebody else, my grandmother - the car takes her, the car then disappears. It just hides in the suburbs.

Now, here we are – that’s too far ahead of your time. Therefore, you're a failure. The fear of failure - we say, no, no, no. No, let's not go there. So I'm saying you are wonderfully - the three of you have spoken very well, and you've really informed me about a lot, but this whole thing of infrastructure - is Australia going to be reactive or proactive and are we going to think far enough ahead? And I just think that's what this whole thing is about.

In the terms of Brisbane and water and dams and there's pipes everywhere, it really is, from a Queensland point of view - we have got pipes all round south-east Queensland that are empty because we thought we were going to have a drought and the game was watching the levels of the Wivenhoe Dam. And then the game became oh, we're going to watch the levels of the Wivenhoe Dam increase. It has got to 70 per cent. On the day of the big flood in Toowoomba, we were watching the dam levels at 90 per cent, saying, I wonder if it will get to a hundred.

MODERATOR:

If I could hold you at that point –

QUESTIONER:

I'm just saying the infrastructure there was confusing. Could we have a comment from the concept of fear of failure, which is holding up infrastructure?

MODERATOR:

Anybody wish to --

PAUL BROAD:

[indistinct] failed a lot. We have a lot of infrastructure around that in hindsight was poor - poor investments and we have others that are brilliant. I happen to have a job now called Snowy Hydro and at the time, when it was first built - a bit like the Opera House. People probably thought it was a poor investment.

But the forefathers were smart enough to build it in such a way that captured value both in the water move to the west. You would never move water from one basin to another today. That would somehow be seen as a bad thing. But in capturing electricity in the peak markets made it a very viable and efficient project. So sometimes we get it right and sometimes we get it wrong.

Your fear - I don't know. I think the [indistinct] decision that this government, the Federal Government has made on a second airport at Sydney - we've been waiting for that for 40 years, so we finally got that made. I think the decisions made here in Melbourne under the Kennett regime have allowed you, both Melbourne and the wider Victoria, to grow rapidly.

We, in New South Wales particularly have chased in the bush for roads and buses and bridges and that - Malcolm was saying before on NBN, some subsidies had to be paid then we recommend they be paid, provided they were transparent and so when you're transferring wealth from the city to the bush, we want to be open and transparent about it.

The model that Conroy had in NBN was to hide that in the prices somehow. So they didn't make it transparent. So I don't think there has been - I don't think there's a fear of the future.

There has been successes and failures, as you're always going to have, but particularly here in Victoria, I think you should celebrate your successes more strongly because it has put Victoria particularly in a really good space.

MODERATOR:

Henry?

HENRY ERGAS:

I just wanted to comment on the innovation aspect of that, when you talked about how you wanted a driverless car and I'm not sure how quickly that will come, so I don't know if you should necessarily wait until you can purchase one. You may be waiting a fairly long time.

But what I think is true is that there's enormous innovation potential, is now coming - really beginning to bear fruit in terms of innovations that improve in a fairly decentralised way the use of the transport network, sometimes referred to as demand side types of innovation as against on the supply side, but they also - there's quite a few innovations that are occurring on the supply side.  And just to mention a couple, one is, as I said earlier, use of real-time GPS information to provide real-time direction in mapping guidance to drivers, there's huge potential to improve the use - efficiency of use of [indistinct] in road mapping.

A related innovation which makes use of GPS satellite mapping is - or rather, are -improvements in ramp control and flow control into road systems. So basically controlling the rate at which vehicles enter roads that are subject to congestion, and using very decentralised information sources to then control that flow and stabilise the speed in the part of the road that's [indistinct]. One of the great benefits of having better pricing is that it will provide greater incentives for those innovations to be taken up.

Another whole area of that, which I think is - again, has enormous potential, is in public transport. So we can move to much more on-demand forms of public transport, much more de-centralised, smaller scale types of public transport, and clearly all of these web-based applications which seek greater re-use of private vehicles and vehicles for hire are examples of that. And, again, if we can get the price signals right on that and have a regulatory framework that allows that to occur, then you're going to get much better use of what are extremely costly resources, which is really our infrastructure [indistinct].

MODERATOR:

Did you want to –

MALCOLM TURNBULL:

No, I'll --

MODERATOR:

Okay, another question, one over there and then a second one here. So one two-thirds towards the back.

QUESTIONER:

Karen from the Property Council. Just interested, Henry, earlier you talked about the holy grail issue, which is how do we join up land use planning and infrastructure decisions together over a longer term period beyond just one election cycle. I'd be curious based on your depth of knowledge in this area about ideas of how we engage with states to actually think in a broader way around joining these two up and, I guess, from Malcolm's view, whether or not there's some opportunities in the reform agendas that we're looking at now around, you know, modernising federation, competition policy et cetera, that might actually allow the Commonwealth to provide leaders in this space to get infrastructure [indistinct] planning joined up in the long term.

MALCOLM TURNBULL:

Well, the best example of Commonwealth leaders is the competition policy, obviously. The prospect of receiving large amounts of money, and indeed the prospect of not receiving it, always focuses the mind of state treasurers. And that was a very useful set of tools for reform.
 
Just in terms - the Commonwealth has very limited powers in respect of land use planning, and we are not a government that is planning - seeks to expand Commonwealth power. Indeed, as you just - as Tony Abbott has foreshadowed, we'd like to clarify the roles between state and Federal Government. At the moment it's quite confusing as to who is responsible. I just say this though, that we cannot get away from the fact that the planning regimes in our cities are not ideal, and in Sydney they are an extremely long way from ideal.
 
There has always been a great concern about housing affordability in Australia, and it's - sometimes people like to bang the drum and say it's because of foreigners buying real estate. I mean, this issue has been done to death. I remember commissioning a very comprehensive set of work on it for the Menzies Research Centre in 2003. And the Reserve Bank has done it over several times. We all know what the answer is and Ed Glaeser's done leading edge work in the United States. It's quite clear it is planning. You know, the reason we have a housing affordability problem is because we are not building enough dwellings. It's a supply-side problem, yet we've got plenty of land and there's plenty of -- you can build as many dwellings as you're prepared to approve and as long you feel you can sell them successfully.
 
So this is a big issue, and if you talk to the larger developers, they will tell you that this is a big issue for the New South Wales Government. Sydney is simply not competitive compared to Melbourne or Brisbane - don't canvas the other capitals - in terms of planning. It is a very big issue. You've got too many councils, there's a host - I'm trespassing on my wife's area of specialty, which I hesitate to do – but Sydney's planning environment needs a lot of change.
 
And if we want to improve housing affordability, we have got to increase supply. And the way to increase supply is to make it easier for people to get approval. Don't compromise standards, you don't have to compromise anything.  But make it easier for people to get approval, to know what the rules are. This point of time-consistent regulation is very important. In other words, you know, work out what it is, what your planning rules are, what your design rules are, if any, and then say right, if you comply with that you can go ahead. And that's what's needed to address that.

Now, here I am, a Federal Minister, talking about it. The reality is our fingers are a very long way from the levers, but we all know our cities are the biggest engines in our economy.  And if construction sector is not thriving in our cities, then the economy is not thriving.

MODERATOR:

Thank you. Paul, did you want to come in?

PAUL BROAD:

Thank you. [Indistinct] just want to make a couple of quick comments. You know, Infrastructure New South Wales report, we tried integrate infrastructure [indistinct] and we particularly try to identify the type of dwellings and densities that we might need between 10 and 15-20 years' time. And, particularly, we thought that the greater densities in Sydney were going to happen some form or other.

We identified the area for Strathfield East [indistinct] so we identified the station, Strathfield Station, we identified heights and densities that could go to market, which would go to some of the affordability that Malcolm was talking about, and then that would stretch down through the back of CBD, Randwick, back up the Central Railway Station, then heading out towards Randwick, and then we have a lot of public land out there you could make available relatively cheaply to stimulate it. You have infrastructure already in the ground so you don't get the big infrastructure kicker, which kills most of the developments, and you bring to market far quicker.

So we did that and integrated it, and that's why we were much stronger about that infrastructure than, say, a northwest rail project which we thought developed on the fringes, forced the leapfrogging of development, which added to your infrastructure costs, which added to affordability and whole social dynamics about how people live. And if you think we're going to [indistinct] fast growing household is a single person household in the next 20 years, then you've got to cater for it.
 
So we sought to do that and tried then to then drive the planning agenda around outcomes for the city we wanted to have. And Melbourne in particular is well-advanced on inner city living. We think, for example, in Sydney we think that Macquarie St should turn to apartments and the commercial all down to Darling Harbour, because the day you capture some dwellings through there with significantly higher value then it would be [indistinct] business to work. So that notion about dwellings and inner city and density are really at the heart of a large part of what we said. Unfortunately, didn't get the publicity that other parts needed.

HENRY ERGAS:

I mean, I entirely agree with both Malcolm and Paul.  I mean, to my mind the fundamental problem with our urban areas, and that's particularly acute in Sydney is the governance structure Malcolm referred to. And until you address those issues of governance structure in such a way that the people taking the decisions bear both the costs and the benefits of those decisions, and they take decisions on the scale that those decisions require to be taken, then you're not going to get an institutional framework that is capable of, on an ongoing basis, integrating land use and transport.

At the moment, we are extremely far from that and there are episodic efforts of the kind Infrastructure New South Wales did extremely well, I think. I think that was one of the really highlights of the report that Paul produced. I thought that was one of the best aspects of it, but it hasn't really had a sequel, it hasn't really been taken up, and unless you address those institutional issues, you're just not going to do it. I think part of it is that there is very little awareness of the extraordinarily high cost our poor land use decisions impose on the community. Take the point Malcolm was making about affordability. Because one of the big impacts of our planning system is that it reduces the supply of land, that doesn't merely increase housing crises that were in aggregate. It also changes the relative structure of housing prices, because land is, all else equal, a much larger share of the total cost of low-quality home [indistinct]

SPEAKER:

[Indistinct]

HENRY ERGAS:

Take a low-quality home. Land is a much, much higher share of its aggregate price. And so if you're increasing the price of land, you have a much bigger effect at the low end of the market than at the high end of the market, and that has fed through into the affordability crisis that we see in Sydney. And until you address those issues, those problems are going to persist.

MODERATOR:

We are meant to finish at 3.40, but I did promise one last question down the front. So if it can be brief, and the answer's the same, before the whole system blows up.

QUESTIONER:

Hi, my name's Andrea Durrant. I'll try not to blow up the system. My question is as a taxpayer and stakeholder, if you like, around infrastructure projects. You've described or we've heard described today periods of underinvestment followed by periods of high investment leading to mega-projects, and then obviously going back to periods of underinvestment over time. I'm imagining that that must've been incredibly inefficient model in terms of the commission of projects and, you know, arranging resources to deliver on them.

You know, I think of Toyota, for example, if they were to one year make 100,000 cars because that was what the demand was, and then the next year demand was 10,000 cars, they would only be able to do that if they charged mega-bucks for the 10,000 cars, and I wonder if that's the position we're in when we see ourselves going from these high investment periods to these very low investment periods. Is there any research that shows what the additional cost of projects is, given that that's been the scenario to date?

HENRY ERGAS:

Well, that's - I mean, there is partly a question of the volatility, as it were, of the level of infrastructure investment, and that does have some impact on costs. But where the really big impact comes out on infrastructure costs is when you move from essentially an emphasis on incremental de-bottlenecking type of investments to mega-projects. And mega-projects, per unit of service capacity delivered - so I'm just saying per unit of service capacity that you get out of the project, typically a mega-project is going to cost you somewhere between five and ten times more.

And that's in part of a function of just the sheer complexity of managing, designing and then managing these projects; in part, the fact that they - you have to aggregate lots of resources, and so you're bidding up import prices, and also it's because when you undertaken these projects, their complexity means that there's far fewer entities, for instance, in terms of prime contractors, that are able to undertake. So you get much less competition to manage those projects, and because there's less competition to manage those projects, the markups on the projects are much higher, which increases costs to taxpayers.

And so if you can shift to an institutional structure where there are more incentives to have a steady-as-she-goes kind of approach, where you focus on de-bottlenecking, you focus on incremental investment, you build options to do things incrementally, and you only undertake the really major three kilometres or five kilometres or 10 kilometres of tunnelling when you absolutely have to, then you would get far better value for money from taxpayers' point of view. Unfortunately, we are still very far from that situation, and so we're locked into this cycle, as if were, of very costly projects that are so exposed to cost and demand risk.

MODERATOR:

Other panel members, or is that a wrap?

MALCOLM TURNBULL:

We're done?

HENRY ERGAS:

I mean, a very good example of that, incidentally, is an example Paul brought up which is Botany. If the Botany precinct had had 20 years of incremental investment, it would not be in the complete mess it's now in, and there are all kinds of things that could've been done - for instance, building dedicated roads for trucks - just not even dedicated roads, but bypasses for trucks that would have greatly reduced the pressure on the system. Now it's too late to do that because the demand pressures are so great, so to address those issues, you're going to have to spend many, many billions of  dollars.

MODERATOR:

Okay, thank you very much. Afternoon tea awaits us, but can we thank the panel please?

ENDS

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