Are state governments engineering our economic prosperity?
A changing economy
The Australian economy is in transition. Government infrastructure spending is counterbalancing the effects of the downturn in mining and the close-out of automotive industries.
In this transitional period, while private companies have slowed their spending and consumers are holding record private debt, the importance of government investment in infrastructure cannot be underestimated: it improves the labour market, enables consumer activity, stimulates productivity growth, while also improving essential public facilities in areas such as health, transport systems, and education.
The latest GDP statistics from the ABS show that without the current pipeline of large, varied projects requiring government spending, we would have seen a shrinking of our GDP. Adjusted for inflation, public capital spending grew over 15 percent in the June quarter, up $2.7 billion. But overall GDP grew only $2.2 billion, while private capital spending trended lower for the tenth successive quarter.
As Jim Stanford, Director of the Centre for Future Work at the Australia Institute, points out: ‘Since a key goal of infrastructure spending is now to stimulate macroeconomic activity, it is crucial that investments be targeted for maximum stimulative effect.’
In other words, strong infrastructure spending is currently playing a crucial role in this transitional phase in our economy, so it’s critical that governments select the right projects and deliver them efficiently to ensure that the full range of flow-on benefits is maximised for the community.
Are governments taking these opportunities?
Some state governments are doing better than others in selecting projects that have a broader stimulating effect. Examination of recent examples shows how some governments have established the preconditions for good decision making, and in the process have set a best practice standard for targeted procurement.
Consider the example of recent high profile rail contracts signed by the Victorian and New South Wales governments. The contracts were of a similar value, each just over $2 billion.
In Victoria, it was the biggest-ever contract for new trains in the state, purchasing 65 new high-capacity trains, to start rolling out in 2018. An upgraded local facility will see the trains assembled with 60% domestic content, creating approximately 1100 new skilled jobs overall.
This contrasts with New South Wales, where the government recently awarded a contract for passenger rail cars to a consortium led by Korean company Hyundai. The passenger cars will be imported to NSW from Korea and Australian workers may provide maintenance services, but only if they can compete with the unlimited number of Hyundai employees permitted to be brought in under the Korea-Australia Free Trade Agreement. NSW government representatives have maintained that the winning bid provides the best outcome for taxpayers, claiming it would have costed 25 percent more to do the work in Australia.
The NSW government approach shows a fixation on reducing the overall headline cost of the contract. But is a narrow focus on headline cost the best way to assess value in infrastructure procurement at a time when employment is sluggish, private spending is slowing and consumers are carrying record private debt?
Jim Stanford’s recently completed quantitative study of the direct and indirect economic effects of railway equipment manufacturing in Australia suggest not.
Stanford’s analysis shows that the industry directly employs about 5000 workers at facilities in several states (including NSW). It supports 7000 additional jobs through its direct purchases of Australian-made parts, supplies, and services, such as fabricated metal products, and electronic equipment, and transportation and financial services. Stanford’s analysis also shows that consumer spending by railway manufacturing workers (and those employed in the industry’s supply chain) supports an estimated 5400 additional jobs.
Both New South Wales and Victoria will soon have a new fleet of trains, but the Victorian government’s approach shows a better procurement process that delivers much more than just trains: the spending will create jobs, boosting macroeconomic activity across the state.
The decision by the New South Wales government to send high-tech, taxpayer-funded economic activity to Korea will see little returned to the state but the new trains.
Stanford’s analysis of the contracts shows the manufacturing portion of the NSW contract (without maintenance) is worth roughly $1.3 billion. If we accept the NSW government claim that there would be a 25 percent increase in cost to do the work in Australia, this would add $325 million.
Considering that offshoring the manufacturing work will reduce national GDP by $1.4 billion, and cut all government revenues by $455 million, lost public sector revenue from buying the cars from Korea easily offsets the alleged cost of doing the work in Australia.
Why is Victoria different?
Professionals Australia’s report, ‘Engineering Our Economic Prosperity’, clearly shows that the engineering workforce is the key enabler of almost every goal we have as a nation.
Engineering enabled industries add $479 billion, or 32 per cent, of national gross value added, and engineering or engineering enabled industries make up around 22 per cent of the job market, employing 2.61 million Australians.
Victoria has embraced a policy platform that recognises the value of the engineering workforce, putting technical experts at the centre of infrastructure planning and delivery. With strong statutory action and the establishing of new infrastructure authorities, the Victorian government has positioned itself as a smart buyer of infrastructure investments targeted for maximum stimulative effect.
Infrastructure Victoria is up and running with a three-part goal: to prepare a 30-year infrastructure strategy for Victoria; provide high-level independent advice to the Victorian Government on infrastructure; and, publish research on infrastructure matters.
The Victorian government has also budgeted and prepared for the introduction of the Office of the Chief Engineer, and a new mandatory engineer registration scheme will soon roll out, ensuring professional integrity and skills are at the heart of the infrastructure workforce.
Now is the time for governments to focus on the broader benefits of public spending and position themselves as smart buyers. Growth is otherwise slow, and unemployment persists at higher than acceptable levels.
As key enablers of much-needed macroeconomic activity, engineers should be front and centre in a state government agenda. Investing in a professional engineering workforce will ensure smart infrastructure purchases that benefit the whole community.
Victoria is leading the way, and other states would do well to follow.
1. Jim Stanford, Penny Wise, Pound Foolish, (2016) http://www.futurework.org.au/penny_wise_pound_foolish
2. Professionals Australia, Engineering our Economic Prosperity, (2016) http://www.professionalsaustralia.org.au/download/member_only/Engineering-our-economic-prosperity_2.pdf