Trends in Infrastructure Investment

Eighth ACCC ConferenceSanctuary Cove, 27 July 2007

Jeff BalchinDirector

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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

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The null hypothesis…

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Method / measurement

Methodological issues:Extent of aggregation / accuracy

Measure quantities / volumes

Public vs. private participation

Measures:

Decreasin

g le

vel of re

liability

Investment / expenditure

Capital stock

Capital services

Value of past investmentsAccumulated depreciation

User cost of capitalAnnual depreciation

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Data series

InvestmentEngineering construction activity (ABS)

More disaggregated (9 classes of infrastructure)September 1986 onwardsExcludes buildings / landCommenced vs. Undertaken vs. Remaining

Gross fixed capital formation (ABS, OECD)Less disaggregation (3 classes of infrastructure)1960 onwardsIncludes buildings, excludes land

Capital stock (ABS)Same breakdown as GFCFGross asset value = reproduction costAssumed deterioration of stock of assets

Capital services (ABS, OECD*)Same breakdown as GFCF for AustraliaMore aggregated for OECD data

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Breakdown of data: ECA vs. GFCF

Electricity (gen., trans. and dist.) Electrictity, gas and waterPipelines Transport and storageWater storage and supply Communications servicesSewerage and drainage AgricultureRoads, highways etc Forestry and fishingBridges MiningRailways ManufacturingHarbours ConstructionTelecommunications Wholesale tradeRecreation Retail tradeOil, gas, coal, minerals AccommodationOther heavy industry Cafes and restaurantsOther Finance and insurance

Property and business servicesGovernment admin. and defenceEducationHealth and community servicesCultural and recreational servicesPersonal and other servicesOwnership of dwellings

Engineering construction activity Gross fixed capital formation

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1. Trends in investment

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Investment – Engineering Construction Activity (I)

Annual expenditure more than doubled since 1990Above average growth – pipelines, railways, roads, harboursAverage growth – telcos, electricityBelow average growth – bridges, water and sewerage

Infrastructure construction undertaken(chain volume measures, $m, reference year 2004-05)

ABS, Engineering Construction Activity, Cat 8762 Table 6; Deflators purchased from National Accounts Branch,

Underlying indexes for Engineering Construction, March Quarter 2007.

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Investment – Engineering Construction Activity (II)

-

10,000

20,000

30,000

40,000

50,000

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

Infrastructure construction completed Infrastructure construction commenced

Infrastructure construction planned

-

5,000

10,000

15,000

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Total for the private sector For the public sector by the public sector

For the public sector by the private sector Total for the public sector

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 2007.

Infrastructure construction by owner/operator(chain volume measures, $m, reference year 2004-05)

Total Infrastructure construction(chain volume measures, $m, reference year 2004-05)

ABS Engineering Construction Activity, Cat 8762, Table 6.

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Investment – Gross Fixed Capital Formation

More interesting period appears to be the 1980sCaused by state government financial problems?

Accumulated gold plating?

Gross fixed capital formation in infrastructure industries(chain volume measures, $m, reference year 2004-05)

ABS National Accounts, Cat 5204, Table 71.

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Infrastructure capital stock / services

Similar pattern, but dampened Changes in level of ‘services’ dependent on asset lives

Capital services index(1964-65 = 100)

Net capital stock(chain volume measures, $m, reference year 2004-05)

ABS National Accounts, Cat 5204, Table 71. ABS National Accounts, Cat 5204, Table 89.

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2. Adequacy of investment

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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?

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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 2007.

Positive story – growth in all sectors except water, sewerage and bridges at or above GDP growth

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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

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Infrastructure capital stock / services

Growth of capital services relative to GDP (1964-65 = 100)

Net capital stock(per cent of GDP)

ABS National Accounts, Cat 5204, Table 71. ABS National Accounts, Cat 5204, Table 89.

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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

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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

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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 concernedAustralia 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

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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 growthGrowth of capital services to GDP

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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 makingForecasting tools

Financial appraisal techniques

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Changing demand for infrastructure

Reducing importance of manufacturing, increasing importance of services

Population now much more dense

Australian Bureau of Statistics, Year Book Australia 2005.

Change (%)1976 1996 1976-96

Sydney 249 308 23.69Melbourne 338 407 20.41Brisbane 213 321 50.7Perth 150 231 54Adelaide 468 543 16.03

Population Density Capital City Statistical Division

Department of Environment and Heritage, State of the EnvironmentSecond Technical Paper Series.

Industry Shares of GDP Population Density

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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 methodSocial costs and benefits

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Final remarks

Private sector / capital is now extremely importantHence, 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