The Australian government used to run the Commonwealth Bank. Ever since they got out of the retail banking business back in the 1990s, there has been a regular drum-beat of people calling for the government to get back into banking. The most popular and credible of these calls is for a government Infrastructure Bank to fund large infrastructure projects for the good of the country. The idea has some merit, at least in theory, but there are also some reasons to be cautious.
The case for an infrastructure bank
Australia has a productivity problem which can only be solved by more quality investment and innovation. Most good capital investment and innovation comes from private business, but there is one type of capital good that tends to be underproduced by the private market — natural monopoly infrastructure, typically related to transport, communications, water, and electricity1.
The existence of natural monopolies creates a tricky economic problem with no perfect solution. Theory tells us that an unregulated private monopoly will be run efficiently and be profitable enough to find investors, but private monopolists can use their market power to overcharge for their services.
To address this problem the government often steps in to either regulate the monopolists or provide the infrastructure themselves. This solution can help to bring the price down, but raises a new set of problems, such as higher running costs, lack of innovation, political agendas, and difficulty in finding investors2.
These last two points have contributed to a chronic underinvestment in infrastructure, at the same time that we’ve seen a population explosion. These dual impacts have worked as a handbrake on productivity and made everyday life more difficult. In this context, it is not surprising that some people have been attracted to the idea of a government infrastructure bank — promising to bypass our recalcitrant retail banks and myopic politicians to invest in the infrastructure Australia needs to boost productivity and quality of life.
Some words of caution
Perhaps the strangest thing about the appeals for a new government bank is that they seem to overlook the fact that Australia already has six government development banks controlling over $84 billion3. Roughly half of those funds are earmarked for infrastructure projects, and the rest for business development and housing. While these banks are popular amongst the people who get their loans, it’s not clear that Australia is getting good value for money.
There are several issues of concern:
Our existing development banks are a mishmash of different agendas that are more about politics than good policy. Some infrastructure projects are covered by multiple banks, while other crucial projects are covered by none of them, plenty of money is diverted into non-infrastructure projects, and the quarantining of money in different accounts prevents that money flowing to the best projects at any point in time.
The actions of our government banks do not show up on the budget. If you have ever heard of the government spending money “off budget”, and wondered how they got away with that, the answer may have been that they were using one of their banks. When the government transfers money into their banks, that doesn’t show up on the budget because it’s reported as simply a change in asset types. Once the money is in those banks, whatever happens next is no longer considered as part of the “General Government” sector. A sharp eye could dig to the bottom of the budget papers to find the truth, but realistically that information is never reported by the media or noticed by the public. A large part of the government’s recent response to the fuel crisis is being done via their state banks, and so will avoid proper budget scrutiny.
In what is perhaps the least shocking consequence, state banks have ended up being a tool for political agendas. Australia’s largest infrastructure development bank is the “Clean Energy Finance Corporation” (CEFC). The billions of taxpayers money funnelled off-budget to renewable energy schemes have certainly increased renewable energy infrastructure (and created a few climate billionaires), but they have also held back other energy infrastructure — such as our ageing coal and gas plants and our missing nuclear plants. Given that state banks are inherently political and are not motivated by profit, there is a very real risk that their actions will result in “mal-investment” that ends up creating a worse outcome.
What are our options?
One option would be to recognise that each government intervention has simply created a new round of problems that have justified the next round of government intervention. The free market solution would be to wind back the regulation on private infrastructure projects so that it is easier for them to attract private capital. This would help address the issues of cost blowouts, stagnant innovation, political bias, and lack of funding… but (as mentioned earlier) monopolists often set their prices too high.
Milton Friedman argued that the private infrastructure monopolies are imperfect but often still the least-bad option available4. He may be right, but voters are unlikely to tolerate private monopolists making large profits on the back of high prices5. If the market solution is not possible, then we need to consider how exactly the government is going to boost infrastructure investment? These are the questions we need to consider:
Should projects be decided by politicians and included in budget allocations, or decided by a government infrastructure bank that operates off-budget? The former is more transparent, but the short political cycle has led to myopic and uneconomic decision-making. Hence the trend towards infrastructure banks.
If we go with government banking, should there be a web of different niche banks, or a single general-purpose bank? Our current approach of six different banks came about for political reasons, and there’s a strong case that they should be merged into a single entity that can consider all infrastructure projects and prioritise them according to economic value.
Should a government bank be strictly limited to infrastructure development or should the bank expand into a broader development goals? There is big difference between funding new infrastructure (which is an input into other businesses) and picking industry winners (which inherently also picks losers). We should be sceptical of central planners who claim to allocate capital better than capitalists. The one exception to that rule may be development projects that are directly related to national defence, which could arguably be seen as a type of infrastructure anyway.
Should a government bank only fund government-owned infrastructure, or should they be open to any ownerships structure that maximised national benefit? Proposals by the Greens and the Australian Lobby Group insist that infrastructure should only be government-owned, but it’s not clear why that matters more than cost and quality considerations6.
Should a government bank be funded by allocations from the government (as done now), or issuing their own government debt (as proposed by the Greens), or from the RBA (as proposed by Gerard Rennick)? While bank independence will help to avoid political bias, the Greens proposal goes too far in removing political control. The Rennick proposal is innovative and deserves some consideration7.
The idea of “more infrastructure” is easy to say, but getting this policy right involves a lot of tricky issues where reasonable people can disagree. This article doesn’t pretend to have all the answers, but hopefully we have helped to clarify the key questions and spark thoughtful debate. If you’ve made it this far, then please consider writing back to the Australian Taxpayers’ Alliance and letting us know your thoughts on an infrastructure bank for Australia?
P.S. This week on the “Death & Taxes” podcast, Gene & John will be joined by Dan Ryan, the Executive Director of the National Conservative Institute of Australia. You can watch live on YouTube, X/Twitter & Facebook tonight at 8pm AEST.
For most people, infrastructure can be thought of as a type of “rented capital” that is essential for production (and everyday life) but they do not own themselves. Large infrastructure projects are often a natural monopoly because it only makes economic sense to build them once for each area (e.g. power lines, train tracks, water pipes).
These problems are generally associated with government-owned monopolies. Switching to regulated private monopolies was an attempt to get the best of both worlds, with the efficiency of the private sector with government price-setting. This works in theory if the government gets the price right, but that is harder than it sounds, so problems persist. There is no silver bullet.
These include the Clean Energy Finance Corporation (CEFC), National Reconstruction Fund Corporation (NRFC), Northern Australia Infrastructure Facility (NAIF), Export Finance Australia (EFA), Regional Investment Corporation (RIC), and Housing Australia. We also have the Future Fund (and six associated funds) with $335 billion worth of assets, but that is more equivalent to a government investment bank than a development bank, since for the moment it is still primarily focused on maximising returns rather than investing in infrastructure or development.
He makes his case in Chapter 2 of his 1962 book Capitalism and Freedom, where he argues that the costs of private monopoly are often transitory due to changing technology and situation, while the costs of government monopolies or regulation remain entrenched. Though he also notes that some circumstances may make a private monopoly intolerable.
The option of regulated private infrastructure (e.g. through Public-Private Partnerships) can be a partial solution, but there are still problems of political bias and under-investment.
The proposals from the Greens and Australian Lobby Group (ALG) are nearly identical in structure, with the main difference being that the Greens want the infrastructure bank to invest in public transport, sustainable cities, and renewable energy… while the ALG want the bank to invest in roads, dams, and base-load power.
The core of Rennick’s idea is that the Reserve Bank bond purchases should be biased towards debt issued against infrastructure projects. By offering to overpay for infrastructure bonds, the RBA would increase the incentive to invest in infrastructure, though that would come at the cost of lower RBA dividends and higher interest rates on bank mortgages. Depending on the details, this may be a trade-off worth making. Rennick also argues that his system would ensure infrastructure debt remains Australian-owned, though this will be offset by foreign investors buying more non-infrastructure bonds, so makes no meaningful difference. He also insists that RBA-funded projects should be strictly government owned, though his underlying idea would also work with private infrastructure projects.
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