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Trends in Infrastructure Investment

Trends in Infrastructure Investment. Eighth ACCC Conference Sanctuary Cove, 27 July 2007 Jeff Balchin Director. Increasingly difficult. Increasingly interesting. Purpose. Understand historical trends in infrastructure investment

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Trends in Infrastructure Investment

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

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

  3. The null hypothesis…

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

  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 activity Gross fixed capital formation

  7. 1. Trends in investment

  8. Investment – Engineering Construction Activity (I) Infrastructure construction undertaken(chain volume measures, $m, reference year 2004-05) • 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 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) Infrastructure construction by owner/operator (chain volume measures, $m, reference year 2004-05) Total Infrastructure construction (chain volume measures, $m, reference year 2004-05) • 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. ABS Engineering Construction Activity, Cat 8762, Table 6.

  10. Investment – Gross Fixed Capital Formation Gross fixed capital formation in infrastructure industries(chain volume measures, $m, reference year 2004-05) • More interesting period appears to be the 1980s • Caused by state government financial problems? • Accumulated gold plating? ABS National Accounts, Cat 5204, Table 71.

  11. Similar pattern, but dampened Changes in level of ‘services’ dependent on asset lives Infrastructure capital stock / services 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.

  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) • Positive story – growth in all sectors except water, sewerage and bridges at or above GDP growth ABS, Engineering Construction Activity, Cat 8762 Table 6; Deflators purchased from National Accounts Branch, Underlying indexes for Engineering Construction, March Quarter 2007.

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

  16. 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.

  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? Growth rate of GDP to capital services Growth rate of capital services to GDP • 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

  20. Capital services and GDP growth Growth of capital services to GDP Real 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)

  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. Reducing importance of manufacturing, increasing importance of services Population now much more dense Changing demand for infrastructure Industry Shares of GDP Population Density Department of Environment and Heritage, State of the EnvironmentSecond Technical Paper Series. Australian Bureau of Statistics, Year Book Australia 2005.

  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

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