Trends in Infrastructure Investment Eighth ACCC Conference Sanctuary Cove, 27 July 2007 Jeff Balchin Director

2 Purpose Understand historical trends in infrastructure investment Assess adequacy of infrastructure investment from aggregate data Attribute cause for any inadequacy of infrastructure investment Increasingly difficult Increasingly interesting

3 The null hypothesis…

4 Method / measurement Methodological issues: Extent of aggregation / accuracy Measure quantities / volumes Public vs. private participation Measures: Decreasing level of reliability Investment / expenditure Capital stock Capital services Value of past investments Accumulated depreciation User cost of capital Annual depreciation

5 Data series Investment Engineering construction activity (ABS) More disaggregated (9 classes of infrastructure) September 1986 onwards Excludes buildings / land Commenced vs. Undertaken vs. Remaining Gross fixed capital formation (ABS, OECD) Less disaggregation (3 classes of infrastructure) 1960 onwards Includes buildings, excludes land Capital stock (ABS) Same breakdown as GFCF Gross asset value = reproduction cost Assumed deterioration of stock of assets Capital services (ABS, OECD*) Same breakdown as GFCF for Australia More aggregated for OECD data

6 Breakdown of data: ECA vs. GFCF Engineering construction activityGross fixed capital formation

7 1. Trends in investment

8 Investment – Engineering Construction Activity (I) Annual expenditure more than doubled since 1990 Above average growth – pipelines, railways, roads, harbours Average growth – telcos, electricity Below average growth – bridges, water and sewerage Infrastructure construction undertaken (chain volume measures, $m, reference year ) ABS, Engineering Construction Activity, Cat 8762 Table 6; Deflators purchased from National Accounts Branch, Underlying indexes for Engineering Construction, March Quarter 2007.

9 Investment – Engineering Construction Activity (II) Estimates of remaining infrastructure construction activity systematically exceeds actual remaining expenditure Large increase in infrastructure controlled by the private sector: 13% at start of the period, 42% at the end of the period ABS Engineering Construction Activity, Cat 8762, Tables 8, 10, 11; Deflators purchased from ABS National Accounts Branch, Underlying indexes for Engineering Construction, March Quarter Infrastructure construction by owner/operator (chain volume measures, $m, reference year ) Total Infrastructure construction (chain volume measures, $m, reference year ) ABS Engineering Construction Activity, Cat 8762, Table 6.

10 Investment – Gross Fixed Capital Formation More interesting period appears to be the 1980s Caused by state government financial problems? Accumulated gold plating? Gross fixed capital formation in infrastructure industries (chain volume measures, $m, reference year ) ABS National Accounts, Cat 5204, Table 71.

11 Infrastructure capital stock / services Similar pattern, but dampened Changes in level of ‘services’ dependent on asset lives Capital services index ( = 100) Net capital stock (chain volume measures, $m, reference year ) ABS National Accounts, Cat 5204, Table 71. ABS National Accounts, Cat 5204, Table 89.

12 2. Adequacy of investment

13 Measuring adequacy Upward trend in infrastructure investment is unexpected Economy has grown Need more infrastructure How much does the stock of infrastructure need to grow as the economy expands? In line with GDP growth?

14 Investment – Engineering Construction Activity Infrastructure construction completed (per cent of GDP) ABS, Engineering Construction Activity, Cat 8762 Table 6; Deflators purchased from National Accounts Branch, Underlying indexes for Engineering Construction, March Quarter Positive story – growth in all sectors except water, sewerage and bridges at or above GDP growth

15 Investment – Gross Fixed Capital Formation Gross fixed capital formation in infrastructure industries (per cent of GDP) ABS National Accounts, Cat 5204, Table 71. Picture not so rosy when compared to the heydays of the 1960s

16 Infrastructure capital stock / services Growth of capital services relative to GDP ( = 100) Net capital stock (per cent of GDP) ABS National Accounts, Cat 5204, Table 71. ABS National Accounts, Cat 5204, Table 89.

17 Investment – international comparisons GFCF: Electricity, Gas & Water supply (Per cent GDP) GFCF: Post and Telecommunications (Per cent GDP) GFCF: Transport and Storage (Per cent GDP) The OECD STAN Database for Industrial Analysis

18 Capital services Growth of capital services relative to real GDP (non-residential construction assets, 1985 = 100) OECD, Productivity Database, 6 October 2006; OECD Factbook 2006: Economic, Environmental and Social Statistics

19 Growth of capital services and GDP: Half empty or half full? Two observationally equivalent hypotheses: Australia is underspending relative to the better performers – we should be concerned Australia has managed to achieve substantial GDP growth while only needing a modest increase in infrastructure – we should be impressed Growth rate of capital services to GDP Growth rate of GDP to capital services

20 Capital services and GDP growth Relative GDP growth appears to explain most of the differences in growth of capital services relative to GDP Indeed, the ‘losers’ (in terms of falling capital services to GDP) have been winners (in terms of GDP per capita) Real GDP growth Growth of capital services to GDP

21 Why may infrastructure needs decline as a proportion of GDP? Economies of scale / scope / density Changing composition of the Australian economy Efficiency in investment decision making Forecasting tools Financial appraisal techniques

22 Changing demand for infrastructure Reducing importance of manufacturing, increasing importance of services Population now much more dense Australian Bureau of Statistics, Year Book Australia Department of Environment and Heritage, State of the Environment Second Technical Paper Series. Industry Shares of GDP Population Density

23 How to assess adequacy then? Focus on quantity / quality of outputs rather than quantity of inputs Shortcomings in data – a priority Cannot answer all questions – i.e. whether investment is optimal A micro-analysis is the only reliable method Social costs and benefits

24 Final remarks Private sector / capital is now extremely important Hence, getting the policy settings right is a priority Making robust inferences on issues relevant to infrastructure investment is difficult Trends may be easy, establishing adequacy and causes much harder Focus on outputs rather than inputs would be an improvement Need for improved data collection No substitute for proper analysis of economic costs and benefits