Budget explainer: does Australia really have an infrastructure deficit?

While it has become conventional wisdom that Australia has an infrastructure deficit, there is remarkably little shared understanding of what that means.

Does it mean that today’s infrastructure is substandard, or is that we’re not equipped for tomorrow’s infrastructure needs? And how do we even know what we really need, as opposed to what’s on everyone’s wish list?

There is a lot of talk about building physical infrastructure, but it’s the services that these assets provide – like mobility, an internet connection and electricity – that really matter.

So the question is not whether we have built enough infrastructure, but whether it is delivering the quantity and quality of infrastructure services we need now and in the future.

Billions at stake

This is not a matter of idle curiosity. Infrastructure gaps and deficits are used to argue for more government spending, and the amounts at stake are huge.

There is no shortage of estimates of the size of Australia’s infrastructure gap, each spanning into the hundreds of billions of dollars. If we take seriously some of the claims about the size of the deficit, tackling it would require spending of more than 40% of Australia’s annual GDP.

But it is worth remembering that an infrastructure deficit can only exist relative to some benchmark, and it’s far from clear what that benchmark should be.

The 2013 National Infrastructure Plan produced by the Commonwealth Government’s advisory body, Infrastructure Australia, found that: We still face a significant infrastructure deficit, estimated at around A$300 billion. Engineers Australia’s 2010 Infrastructure Report Card stated: The investment in infrastructure has still not caught up with the estimated $A700 billion shortfall caused by years of under-investment. Neither of these bodies defines the infrastructure gap or specifies how it arrived at its estimate. Infrastructure Partnerships Australia assessed the size of Australia’s infrastructure investment task as $A700 billion by adding up the value of a list of potential projects that could be built, on the assumption that they all needed to be built. Similar estimates have been produced by investment banks Citigroup ($A770 billion) and ABN AMRO ($A445 billion). A summary of the Citigroup report states that: Around $A770 billion (2007 dollars) needs to be spent on economic infrastructure over the next 10 years to adequately improve its quality and functionality. Despite being widely cited as evidence of the need to boost infrastructure spending, neither of the methodologies underpinning the estimates from Citigroup or ANB AMRO are publicly available. A striking exception to the deficit estimates is the surplus figure in a McKinsey report. In this report, McKinsey estimates Australia is spending 1.2% of GDP more on infrastructure for the period 2008-2013 than is required to meet its expected needs until 2030. But the McKinsey study only illuminates the challenges of producing a top down estimate of Australia’s infrastructure needs. Instead of evaluating Australia’s infrastructure needs, the authors conclude that Australia is overspending on infrastructure by adopting the curious assumption that the optimal value of infrastructure is 70% of GDP. What we should be measuring If we seriously want to know whether we face an infrastructure deficit, we would need to establish some benchmark level for the quality of services that should be provided. We might, for example, set a maximum time to make a particular journey, and measure how well our infrastructure enables that service standard. If trips regularly take longer, we might decide that we need a new railway line or an extra highway lane. New capital spending won’t always be the best solution. As Infrastructure Australia points out, it is often possible to make better use of existing infrastructure – by better scheduling of rail services, or introducing congestion charging for roads in peak periods, for example. A deficit would only exist where infrastructure was being used efficiently and unmet demand remained. When governments and firms make infrastructure investment decisions, they do so against the backdrop of a system that is already mature. They are not deciding how to build a network from scratch; the real question is what additions to the system are most needed. In practice, the only way to ensure that new increments to the system are worth the cost is to subject them to a rigorous, like for like analysis of claimed project benefits and expected costs. If a project’s benefits exceed its costs, then by definition, it will help close any infrastructure deficit we might be facing. The fact is, nobody really knows whether Australia has an infrastructure deficit or not. Recent figures attempting to quantify such a deficit in fact shed little light on whether the infrastructure we have is too little, too much or just right. Spending vast sums of money on infrastructure is only useful if each additional investment has benefits that outweigh its costs to the community.