Why is Australia doing it wrong?

Oct 19

After such a bold statement, I should clarify what Australia is doing wrong. Obviously not everything, and I won’t turn into the stereotypical French know-it-all. I’m clearly refering to transport policy and urban development. Indeed, this summer — or winter down under, but I almost didn’t notice the difference —, I was lucky enough to travel around Australia for a month. Visiting friends working in the transportation and mobility field definitely helped trigger some thoughts and analysis that I find worth sharing.

A few facts about Down Under

From our European perspective, Australia is seen as a great place to live by the ocean, where the sun always shines and people care as much about their body than the environment. There is some truth to every stereotype, but the reality lies in-between and Australia happens to be a bit unsettling because it seems like we understand the country — part of the Western world, with similar cultural references — but it keeps surprising you when you least expect it (like the platypus).

The first reason is geographical. This isn’t a big revelation, but Australia alone is a continent, and it shows. With almost half the size of the European Union and only 25 millions inhabitants, compared to 511 millions living in the EU, the population density is only 3.2 people per square kilometer in Australia — and 118 in the EU. In short, if there is one thing Australia doesn’t lack, it is space.

It is also a remote island, therefore it has no obvious connections to the rest of the world. New Zealand is the closest foreign country and it’s already a 3-hour flight to get there from Sydney. Fiji and Bali are usual getaways for Australians who want to expand their options outside their country, and it takes respectively more than 4h and 6h to get there. Even Japan only attacked Northern Australia a few times during the Pacific War in 1942–43, mostly because it was too far away and they couldn’t manage all their military fronts in the Pacific. This remoteness is the main reason Australia hosts so many different plants and wildlife. It might also explain why they make different choices.

So, what about mobility? When I arrived in Sydney, what struck me the most was the space allocated to cars and the fact that the only people who were bold enough to ride a bike were fully dressed in bike clothing and clearly not joking. What are your options if you don’t have a car? You can walk, but apart from the CBD (Central Business District), the city is quite spread out and waiting five minutes at every block for the pedestrian traffic light to turn green can get a bit unnerving. There is also public transport, that includes a network of suburban and light rails, buses and ferries, but didn’t follow the city’s developments and therefore makes it hard for all Sydneysiders not to use their car on a regular basis.

The importance of good governance

A research publication for the Australian Parliament explained in 2013 that Australia’s transport infrastructure attracts criticism because several major projects are proposed, but infrastructure decisions continue to be complicated by complex jurisdictional responsibilities, problematic financing arrangements and an overall lack of national coordination. Therefore, Australia suffers from an infrastructure deficit.

The project wishlist that the advisory body Infrastructure Australia (IA) has on its books does not necessarily reflect those championed by state governments, political parties and various interest groups. Before an election, major political parties commit funds to various proposals such as urban motorway schemes and metropolitan rail projects, so local priorities can vary from strategic national choices.

Indeed, Australia has nearly 600 (!) different local, state and territory Governments that, together with the Australian Government, fund and plan infrastructure. Through this multitude of players, the infrastructure development is slow and delivery risks are high, which constrains productivity and makes projects less attractive for potential investors.

Another comparison shows per kilometre costs for Australian road, heavy and light rail projects toward the upper end of similar projects in developed countries around the world. This is where I can pitch in some first-hand knowledge. Australia’s biggest light-rail project, from Sydney’s CBD to the eastern suburbs, is a 12 km line set to be finished in 2020 and costs 2.1bn AUD (€1.3bn). France’s Tram 9 is a comparable project, as it is 10 km-long and will connect Paris to its southern suburbs by the end of 2020. However, its estimated cost is €0.4bn (0.65bn AUD). In other words, Sydney’s project costs around €108 million per kilometre, compared with €40 million per kilometre in Paris, i.e. 2.7 times more. One of the reasons is that the route chosen for this future tramway goes through the historical city centre (George Street), which led to high quality design choices, such as a wire-free section. Another reason is that the project suffered several delays and cost blowouts — it is almost 2 years behind schedule and already 0.5bn AUD (€0.31bn) more expensive, with an extra 1.2bn AUD (€0.74bn) demand pending from the contractor Acciona, which could double the original 1.6bn AUD (€1bn) cost of the project. The project is indeed facing classic technical difficulties as building a rail line along Australia’s oldest street is necessarily complicated because of what lies below: two and a half centuries of pipes, conduits and cables, documented or not. This is not specific to Australia and Sydney, as any Transport Authority conducting such works in old cities is facing the same challenges, but it seems this wasn’t anticipated and coordinated enough.

That kind of issues already led Infrastructure Australia to report in its 2013 National Infrastructure Plan that:

“POOR PROJECT GOVERNANCE IN AUSTRALIA IS ONE MAJOR REASON WHY PROJECTS FAIL TO MEET THEIR TIMEFRAMES, BUDGETS AND QUALITY OBJECTIVES.”

— 2013 AUSTRALIAN NATIONAL INFRASTRUCTURE PLAN

A lot is at stake on this issue, because it could convince the population and/or politicians that investing in public transport infrastructures is not worth it.

The devil is in the discount rates

Also, the way we assess potential infrastructure projects is strategic, because we need to ensure that governments understand which road and rail projects are worth building and avoid wasting public money on the wrong projects. But how do we value the impact of an infrastructure?

The explanation is a bit technical, but definitely worth taking some time to fully grasp the consequences. A future benefit or cost needs to be converted into today’s money because future money has a different value to today’s. The usual method used to compare future value to present value is discounting. This is a key parameter for evaluating the socio-economic impact of public investment projects decades in the future and it is done through the choice of a “discount rate”, that varies widely depending on the country. In the United States, there are multiple discount rates. Since 2003, project costs and benefits are discounted at two constant rates: 3% and 7%. In France, a rate of 4% is recommended up to 30 years, decreasing to 2% beyond that (source). However, Australian governments have chosen to keep their central discount rate at 7% since at least 1989, despite the fact that the real borrowing rate varied from as high as 8% to below 1% during that time, as reported by the Grattan Institute. This matters as a transport project’s benefits mostly come about in the distant future, and a high discount rate points to a more sceptical hypothesis than a low discount rate would.

This is well illustrated in this article, with the Melbourne Metro rail project providing a good example of the discount rate’s importance. Using a 7% discount rate, as recommended by Infrastructure Australia, the estimated benefits are only a tiny 10% larger than the costs. But using a 4% discount rate, the project will deliver benefits that are almost two-and-a-half times greater than the project’s 9bn AUD cost.

On one reading, the project is expected to be a major economic success. On another, its value is marginal. Changing the discount rate has huge implications for the cost-benefit analysis of new projects.

This is why the Grattan Institute recommends two lower rates: 3.5% for low-risk transport projects (typically trains, buses and urban roads), and 5% for slightly higher-risk investments (such as ferries and freight rail), closer to France’s discount rate.

As a conclusion, Australia is facing several major issues accounting for its infrastructure deficit. The first one is the complexity of its organisation, with the multitude of players involved in infrastructure developments. The second is the lack of good project governance, leading to projects failing to meet their timeframes, budgets and quality objectives. And the final one is the wrong cost-benefit analysis for new projects, driving governments to not necessarily spend money on the right projects. My personal thought on that situation is that Australia might have had it a little too easy in the past years (and decades), as it didn’t suffer any economical crises for a long time and instead benefited from China’s continuous growth (China is Australia’s biggest trading partner, mainly due to China’s strong demand for iron ore, coal and liquefied natural gas). This doesn’t call for effectiveness, but the winds might turn and citizens can reasonably demand good use of public money. This is the time to explore what the rest of the world has been doing and draw some inspiration for future solutions!

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