Wednesday, August 18, 2010

Bonds are second-best, but better than much else on offer

THE Coalition's infrastructure policy may be a second-best policy. But given the political realities, it is one of the best economic policies of this campaign.

It's second-best in that some of the projects it enables would be more expensive than if they were built in the old way - where governments borrow the money, build the project, and run it.

Private sector operators have to make a profit, and pay higher interest rates (though hopefully not the 10 per cent Andrew Robb cited in selling the Coalition's plan).

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Sometimes their managerial skills will allow them to do all this and still run the project at lower cost to the public. Sometimes they won't. But the reality is that while it makes economic sense for governments to take on debt to build infrastructure, in our climate it doesn't make political sense. The Coalition has fanned a scare campaign against government debt, and Labor has buckled under.

As a nation we seem to think it's OK for us to take on debt to buy overpriced homes, but not for governments to take on debt to build the roads, rail, water projects and broadband that we need. So how will we build it?

The Coalition proposes tax breaks to help private operators to raise the money to build some of it. Under its plan, super funds would pay tax of just 5 per cent on interest from approved projects, a big cut from 15 per cent now.

It's a perfect fit. Super funds are long-term investors, and infrastructure is a long-term investment.

But it's not a total solution.

In some cases, it will shift the real cost from us as taxpayers to us as motorists paying tolls. In others, taxpayers will still pay, but the cost is pushed downstream and into less obvious channels.

Investors might also remain wary. Toll roads are not doing well. In Sydney, the Cross-City Tunnel and the Lane Cove Tunnel went bankrupt. In Melbourne and Brisbane, Eastlink and the Clem7 tunnel are running well below target.

But the tax breaks would give investors more confidence - particularly in ambitious, high-cost projects such as the Brumby government's plans for Melbourne's rail network. And the tax breaks would also apply to state-run projects.

The Coalition also pledges to publish benefit/cost analyses of all projects. It would sound great if only it hadn't also pledged to start building the Melbourne-Brisbane inland rail link - which, the benefit/cost analysis found, would return just 58 cents in benefit for every dollar spent on it.