The Age: Abbott’s biggest broken promise – to build our cities well. April 21, 2014. Peter Martin Economics Editor, The Age
Expect an avalanche of broken promises in the first Abbott budget four weeks from today, none of them as important as the promise he has just broken.
Broken promises are inevitable when an opposition comes in. It’s the first time it gets to see the books, and usually the first time it gets good advice. But none are as overarching as the promise Abbott broke last week.
It was a promise about the way he would govern – about the way he would make really big decisions, the ones that cost us billions.
With the experience of Rudd’s back-of-the-envelope $43 billion national broadband network fresh in his mind he promised that in future his government would require Infrastructure Australia to “routinely publish public cost-benefit analyses for all projects being considered for Commonwealth support”.
The cut in point would be $100 million. Any project worth more than that was to be assessed for cost-effectiveness before Abbott gave it a tick.
Infrastructure Australia was also going to rank projects in order of payoffs. The ones at the top of the queue would be the most deserving.
As Abbott and Hockey have repeatedly told us, governments can’t do everything. That’s why it is crucially important that it direct its limited funds to the projects that most boost productivity.
Then out of the blue last week he announced a second airport for Sydney. A few days earlier the Napthine government announced a rail link to Tullamarine. Abbott will have to stump up funds for that as well. He has promised to contribute 15 per cent to the cost of new projects funded from the sale of assets such as the Port of Melbourne.
The second Sydney airport can better be described as “roads to nowhere”. There’s no especial reason to think it will ever be built and if it is built there’s no reason to think it’ll have many customers. But the roads leading to it will be built. Abbott is starting on them first. Like Melbourne’s East West Link they will move cars between suburbs rather than into the city.
Infrastructure Australia says East West Link has a direct benefit-cost ratio of just 0.8:1 meaning it will return a loss-making 80¢ for each $1 spent. The benefit-cost ratio of the second Sydney airport is unknown but is unlikely to be any better and there’s little evidence (yet) that a train to Tullamarine would achieve much more than the existing Skybus.
The proposed Melbourne Metro is much better. The rail extensions have a direct benefit cost ratio of 1.2: 1 meaning their benefits clearly exceed their cost. That’s because they will get people into the city.
Cities are where workers are at their most productive. They bump into each other, bump into workers from other businesses and are in easy reach of potential employers. A UK study found a 10 per cent increase in the proportion of workers packed into the city centre typically boosts productivity 1.25 per cent, an enormous figure given Australia’s current productivity improvements. The Rudd and Gillard governments were particularly resistant to the idea of bringing more people to city centres, having hitched their wagons to the NBN, one of whose claimed benefits was to take workers out of cities.
In its Productive Cities report the Grattan Institute outlines the experience of SKM, a global engineering consulting firm that used to be based in Armadale, just seven kilometres south-east of Melbourne’s centre. Doubtless a convenient location for many people, with good parking and on two tram routes, it cost SKM around 40 per cent less per square metre than office space in the city.
Yet when the time came to renovate or move, it moved to the city.
“A central location allows the firm to recruit from a deeper talent pool,” Grattan explains. “Previously, some skilled workers and top graduates from the west or north of Melbourne were put off.”
“Clients are far more likely to come to SKM at its new address,” it says. “Most external meetings can be reached with a brief walk or tram ride. These short trips in the CBD are much more productive than taxi trips from the old suburban HQ. In the rich, supportive ecosystem of the CBD, SKM employees say they often bump into professionals from other high-knowledge firms, building personal networks and sharing knowledge. Despite the cost, SKM has little doubt that the move made good business sense.”
Cities exist because they work. And they work best when workers can get into the centre.
Urban economist Edward Glaeser puts it more grandly in his book Triumph of the City. He says, like ants and monkeys, humans are intensely social and excel in producing things together.
“Just as ant colonies do things that are far beyond the abilities of isolated insects, cities achieve much more than isolated humans,” he writes. “Cities enable collaboration, especially the joint production of knowledge that is mankind’s most important creation. Ideas flow readily from person to person in the dense corridors of Bangalore or London, and people are willing to put up with high urban prices just to be around talented people, some of whose knowledge will rub off.”
Glaeser says the central paradox of modern cities is that “proximity has become ever more valuable as the cost of connecting across long distances has fallen”.
Knowledge-intensive work is where big productivity gains come from. Our wharves are becoming increasingly more mechanised.-The employees who work out how to mechanise them work in cities away from the wharves, rubbing shoulders with others who can contribute to their ideas.
Pushing more knowledge workers into our city centre and in to each other is our best bet of producing more. Slow roads to the centre and a train system stretched beyond its limits slows that down. (As well as level crossings, replacing them with overpasses or underpasses turns out to be extraordinarily effective.) It is these things rather than “roads to nowhere” that’ll do the most to lift productivity and lift incomes.
That’s what Infrastructure Australia would have told Tony Abbott if he had kept his one really worthwhile election promise and asked.
Peter Martin is economics editor of The Age. Twitter: @1petermartin