Monday, 25 May 2009

National Infrastructure Advisory Board

Via Homepaddock I see that the government has announced appointments to the new National Infrastructure Advisory Board. The chair will be Dr Rodd Carr, Canterbury University Vice Chancellor. The other members are Sir Ron Carter, Lindsay Crossen, Dr Arthur Grimes, Dr Terence Heiler, Rob McLeod, John Rae and Alex Sundakov.

My main question is, Why do we need a National Infrastructure Advisory Board? What will this board be doing? Thinking big? Hasn't history taught us anything about what happens when governments decide to "invest" in infrastructure? The "Think Big" projects were a disaster. The last thing we need in more of this type of "investment".

I have argued here that infrastructure is a loose (meaningless?) term covering a collection of very different industries and assets and, importantly, that the government does not have a major role to play in many of them. Normally we think of things like roads, railways, water, sewerage and stormwater systems, gas, telecommunications, ports and airports as infrastructure industries. Notice two things here, each of these industries has different characteristics and most are run as commercial operations in the private sector. That is, the private sector can and does invest in these areas. Thus is it not possible to talk sensibly about any general infrastructure problem in New Zealand. There is very little concern about gas distribution and transmission, for example. The industry is 100 percent commercial and not subject to problematic capacity constraints.

On the other hand, some of the problems that government "investment" can create are discussed in Matt Burgess's guest post as to why National's plan to spend $1.5 billion building fibre to the homes of 75% New Zealanders is not a good idea. I agree with Matt on this issue.

When it comes to investment a important point to note is that under private ownership (in competitive and well-regulated markets) we can be confident that investments in infrastructure industries will be expected to meet their cost of capital since investors will demand normal returns, adjusted for risk. While some investments will not work out, investors will not continue to throw good money after bad. In contrast, with government ownership political imperatives dominate over time and returns on capital and hence economic growth will be sacrificed. Government ownership of rail is expected to result in losses, which will reduce GDP. Distortions will be created with sea, air and land transport. Political imperatives also impede industry rationalisation, as is obvious in the port industry.

So, no matter who is on the board I don't see good things coming from it. Governments have a very bad record at picking winners.


homepaddock said...

Government's shouldn't be trying to pick winners, but they have a role in things like better roads & more reliable power supply.

Paul Walker said...

Homepaddock: My guess would be that they will in the end just try to pick winners and the best thing the government can do in many cases of infrastructure investment is nothing. That is part of what Think Big should teach us.