Any investments in infrastucture must be made within the context of physical reality. The truth is that oil is now in decline - and so world energy is in decline and economic growth will not occur. Building new or expanded roads or airports for which the demand will not exist is little better than burning money. If money is to be invested in infrastructure (especially if it is borrowed money!) then it should all go into energy generation. As we slip further down the energy supply curve even this investment will become impossible so the investment must be made NOW or never.

I note, without surprise, that the shortfalls in economic infrastructure which business considers need urgent attention do not include universal high-speed internet access. I also note that business rightly calls for potential projects to be subject to rigorous economic analysis. This would allow ranking of projects in terms of rates of return, so that we get the biggest bang for our infrastructure buck.

I further note that no such analysis has been applied to Kevin Rudd's $43 billion broadband project, almost certainly because it would demonstrate that that project will incur massive losses.

Re energy projects, Michael, we need to lay the ground for prospective nuclear power generation, probably the best long-term bet for large-scale power and likely to be significantly more economic than alternatives, whether wind, solar etc or "clean" coal. That means accepting it as a possibility, developing the appropriate regulatory framework and then providing training facilities - the lead time from "No, we won't do nuclear" until power production would be at least 10-12 years, suddenly deciding in 2020 that we need atomic power means getting it in the 2030s.

Greg Gaily makes some useful points in relation to this vitally important topic. And I would generally agree with his position. To do justice to the topic, my comment is long. To comply with the forum rules, I will break my comment into several parts.

Part 1.

Infrastructure is difficult. The projects tend to be very large. Often they must (or at least should) be built at a size that may take many years for market demand to grow to utilise the full capacity. For example, if a gas pipeline were to be built from the NW Shelf to the southeastern markets, it should be built large - say 1 metre in diameter - since many of the costs are largely fixed irrespective of the pipeline size (land access, the ditch, the road access for maintenance etc) and there are significant scale economies.

But building them large means that the challenge of financing them becomes even worse. However, it is surely the right thing to do.

For example, the Sydney Harbour Bridge was built much larger than the market demanded when it was opened in 1935, and it took some years for it to reach capacity.

In recent years, the Federal government has abrogated involvement in provision of infrastructure, arguing that it is a state matter. And of course, most of the states have been struggling to run their economies, let alone invest in long term infrastructure.

Some infrastructure has been built by private enterprise. But the demands of the equity and debt markets has meant that projects are built smaller than they should be (anyone who has travelled the M5 tollroad in southwest Sydney knows that it should have been built with at least three lanes in each direction) and even then, the projects struggle to deliver expected returns (cross-city tunnel, Lane Cove tunnel).

Another problem of letting private enterprise getting involved in ownership and operation of infrastructure is that very often the owners become specialist monopoly exploiters (think Sydney Airport) in an effort to satisfy market requirements for equity and debt returns.

Herbert, there are some strong reasons against government provision of infrastructure. For example, analysis of OECD data of the productivity of Australia’s government-owned utilities 20 years ago showed it to be around 40-45% of the OECD average. Government utilities have been found to be prone to over-manning, gold-plating (building to an excessively high standard), feather-bedding (providing cushy working and pay conditions without incentives for productivity improvement), lack of responsiveness to users (ignoring demand patterns and user concerns) and paying little attention to viability (no consideration of opportunity cost or cost-benefit analysis). My experience in government is that those public-spirited officers who seek better outcomes are treated as outsiders rocking a comfortable boat and sidelined rather than promoted to positions of influence. The lack of exposure to competition before the advent of privatisation meant that such practices could be maintained indefinitely.

The halfway step of creating government-owned corporations, nominally independent from government, failed because in practice state governments continue control and stack their boards and executive with compliant mates. One non-compliant CEO of a Queensland GOC, highly regarded outside government, threw himself under a train following government harassment and vilification.

So are public-private enterprises or privatisations the answer? Problems here include the lack of capacity within government to devise and manage contracts, and the lack of incentive for bureaucrats to pursue the public interest rather than comply with political masters beholden to sectional interests and the senior officers who toady to them.

I have over the years analysed, or directed analysis of, many government-backed projects which were clearly non-viable (e.g. Brisbane’s airport train) but proceeded because the incentive for so-called “public servants” was to sweeten the numbers and get the projects up. (I was unsuccessful in several attempts to institute credible post-construction analysis of how outcomes compared to forecasts.)

The crucial factors in private provision of public services lie in the quality of intitial contracts, regulations and oversight. I have no confidence that they will ever be done well, but I’d rather take a chance on private sector competition and risk-bearing than moribund government.

Part 2

In recent years, the Federal government has abrogated involvement in provision of infrastructure, arguing that it is a state matter. And of course, most of the states have been struggling to run their economies, let alone invest in long term infrastructure.

Some infrastructure has been built by private enterprise. But the demands of the equity and debt markets has meant that projects are built smaller than they should be (anyone who has travelled the M5 tollroad in southwest Sydney knows that it should have been built with at least three lanes in each direction) and even then, the projects struggle to deliver expected returns (cross-city tunnel, Lane Cove tunnel).

Another problem of letting private enterprise get involved in ownership and operation of infrastructure is that very often the owners become specialist monopoly exploiters (think Sydney Airport) in an effort to satisfy market requirements for equity and debt returns.

One problem is the payback period required by modern markets. Many worthwhile or even essential infrastructure projects may require 20 year payback periods to become viable. However, the equity and debt markets simply cannot fund projects of that profile.

So yes, we need a lot more long term planning (which seems to be anathema to both federal and state governments pre-occupied by the election cycle) of they visionary style showed by the Gladstone Port Authority which has a 50 year development plan. And we need to find a solution to the funding problem.

herbert quote<<we need to find a solution to the funding problem.>>, the states [and many councils thought they had that problem licked, seems some clever accountants, running the multinational money market came up with a grand sceme[its part of the reason currently the states and councils are burdend with huge default debt's]

here is how the sceme goes, a clever accountant approaches the target, and offeres to by say our sewrage system, then lease it back to council[council gets a cash injection[initially]of say 2 billion, but in time defaults on making the intrest only repayment[then kicks in a default penslty written into the contract fine print, the net affect of these loans is the investers have recovered their input and still get the ongoing lease income obver their asset,for ever

i learned of the scam in germany [there they sold their sewer for 13 bil[and so far have paid back 16 bil, and still own neither the sewer nor the authority to claim it back,

you will find much of the public infastructure no longer belongs to the people[thus our water and electricity,gas,road fees etc ever increase...no one is going to come out and admit the scam..but i ask que warrento[by what authority];right..did these grossly superanuated public servant's do this dis-service

[how come they still get pensions and not jail?[because the dumbed down people[2 party-voters]dont have a clue]

Part 3

It seems to be assumed that large scale infrastructure projects with long payback periods can only be funded by government. However, this is not necessarily the case. Imagine if a very large listed infrastructure trust were to be created. State and Federal government could sell their mature infrastructure assets to the listed trust in return for paper which they could sell into the market to meet their funding requirements. Assets could be sold at appropriate values. Assets would be grouped according to type (power stations, ports, airports, bridges, toll roads, buildings etc) and 5 year management contracts would be let to tender by appropriately qualified groups - the Lend Leases and Leightons - who would manage each asset group in accordance with national objectives. Assets that have outlived their usefulness would be sold by the managers in accordance with responsible guidelines.

There are huge amounts of equity capital sitting unused on the sidelines right now, in super funds, investment institutions and in private hands. This capital would eagerly seek to invest in a, say, $500 billion or $1000 billion listed infrastructure fund comprised of mature assets delivering market returns. The infrastructure fund could support a bond market to offer secure returns to investors interested in such instruments.

Most importantly, the fund could invest in long term long payback investments using the financing capacity of the fund to invest at the margin. For example, if the fund were of, say, $1000 billion in size, it would be relatively easy for it to invest, say, $50 billion per year in long term infrastructure assets such as a gas pipeline from the NW shelf or similar assets

Part 4

It is notable that many, if not most, of the major infrastructure assets of the past were funded by government. Setting up a fund of the type proposed here would allow harvesting of the assets of the past to fund the assets of the future. It would address the need for long term planning. It would provide a means of financing new assets. It would ensure capable and effective management of assets. It would avoid the risk of monopoly exploitation. And it would do all this through accessing private capital, sheltering governments from the need to get involved in financing.

It would also help solve the funding problems of state governments in that they could access value locked up in their asset portfolios.

No doubt those wiser than me will see many reasons why such a fund should not, or could not, work. My view though is that the idea deserves at least some consideration.

Greig, Michael of Adelaide is right, growth is over.
The game changed last year.
All effort should now be on infrastructure that will be more energy
efficient. We should stop all export of energy and use what we have
to prepare for the coming difficult times.
Greig, I think you belong to the "Business as Usual" group such as
politicians who still cannot say the words Peak Oil.
It happened last year around May, June.

Want a hint ? start plotting GDP, the ASX and the price of oil from 2007.
When you see the price of oil shoot up put your money & any
investments into gold and store in your mattress. I am only half joking.