Four principles to help governments structure medium-term economic stimulus packages

Posted April 20, 2020

SGS Economics and Planning Andrew Mc Dougall

Governments throughout Australia are preparing short and medium-term stimulus packages to help bolster economies impacted by the COVID-19 pandemic. This article introduces four principles that will help governments identify and prioritise projects and structure coherent infrastructure stimulus packages.

Governments recognise the financial costs of debt funding stimulus packages and understand that these costs are bearable when compared with the economic and social costs that would stem from:

  • mass unemployment and/or underemployment
  • undermined consumer and/or investor confidence
  • skill and/or capability losses that are important for our nation’s future competitiveness.

When unemployment rates skyrocket, it takes several years before rates return to between 4 per cent and 6 per cent, as seen in the figure below.

SGS Economics and Planning Unemployment Rate

Current stimulus packages in response to the COVID-19 pandemic focus on the short term. Frenetic work is happening behind the scenes now to structure medium-term infrastructure investment programs. These programs will aim to kick-start economic recovery once Australian communities emerge from the COVID-19 shutdown.

Past experience shows that infrastructure stimulus packages don’t have to be perfect to be effective and, in times of crisis, some waste is inevitable. But it is important to try to avoid investing in the wrong projects or in projects that have unacceptable risks in delivery. So what principles might governments adopt when structuring their infrastructure stimulus packages?

4 principles to help structure infrastructure stimulus packages

PRINCIPLE 1: Adopt a business case mindset

Governments are always preparing a multiplicity of business cases. The reason most projects don’t secure funding is that they are not considered to present value for money, so it would be a mistake to blindly roll out previously rejected projects just because funding is more readily available.

However, some highly meritorious projects have not proceeded in the past purely because of a predetermined limit on budget funding. Only the true insiders, such as the expenditure review committees and their central agency advisors, know which projects fall into this category.

It’s pretty safe to assume that governments need to identify new projects if the medium-term stimulus is to be effective. To do this, they need to adopt a business case mindset to help truncate the prioritisation process and appropriately invest in the development of business cases for highly ranked projects in the short term.

This means establishing prioritisation processes that enable competing projects to be assessed against a manageable set of criteria - criteria which reflect the core elements of business cases across all Australian jurisdictions - such as:

  • Strategy – how does the project contribute to the government’s objectives and priorities?
  • Need – is there a clear unmet need that the project aims to address?
  • Financial – what is the likely whole of life cost to government?
  • Economic – what is the likely scale are of net benefits after considering social, economic and environmental impacts?
  • Risk – can the project be implemented in a manner that effectively mitigates delivery risks?

SGS has used multicriteria scoring processes to sift through potential projects in the social housing, urban development, transport, cultural, education and community infrastructure industry sectors. What has become apparent during these exercises is that ranking:

  • similar projects is easy, but when you’re comparing aquatic centres with public transport upgrades and with irrigation infrastructure, difficulties quickly creep in, and
  • projects that have a developed information base is easy, but integrating undeveloped projects requires in-depth experience and real nous.

To overcome these challenges, governments should consider pushing prioritisation processes down to discrete functional units, trusting that public servants can best assess worthy projects, and in doing so, identify where to invest future business case development efforts.

PRINCIPLE 2: Don’t abandon strategic directions

Principle Two reaffirms Principle One. It is a mistake for governments to fund or fast-track projects that are at odds with their clear policy objectives and priorities - even if the projects significantly stimulate the economy.

Right now, the private and not-for-profit sectors will be inundating governments with investment opportunities or partnership proposals. While these opportunities should be considered, given each investment partners’ purpose and agenda, governments should steer away from projects which are clearly against strategic directions or which transfer an unacceptable level of operational risk.

PRINCIPLE 3: Think about ongoing service delivery

By definition, all forms of infrastructure are capital intensive during construction. However, there is variation in the operational stage; for instance, transport, social housing, utilities and arts and cultural infrastructure have wages to total expense ratios that range up to 20 per cent. Essentially this means that, once built, the services supporting by these infrastructure categories are cheap to operate.

Upgrading existing facilities to improve health or education service delivery could help many Australian regions close the under-servicing gap that has grown over recent decades. However, health and education services require significant resources to operate on an ongoing basis, with wages to total expense ratios ranging upwards from 50 per cent.

Consequently, it is very important that the rollout of health and education projects respect the priorities outlined in existing infrastructure investment plans. Prioritised projects should be accelerated but the sequencing of competing projects should not change materially. Otherwise, the ongoing call on future government budgets will quickly accumulate, potentially leaving the most under-serviced regions neglected for an extended time.

PRINCIPLE 4: Geographic and temporal dispersion are important

Australia comprises a wide variety of regional economies, some of which have been impacted by drought, bushfires, floods and COVID19 shutdowns more than others. Some tourist and hospitality dependent regions are reeling, whereas others are faring much better.

When preparing economic stimulus packages, governments need to consider the different economies and different labour force capabilities and capacities across Australia. Overwhelming vulnerable regions with infrastructure projects will misallocate resources, effectively stealing construction labour, for example, away from neighbouring regions when interregional travel is reinstated. Crowding out effects are real possibilities once regional economies get kick-started.

Perhaps the best way to manage this dynamic is to line up a range of small to medium scale infrastructure projects for progressive delivery in specific regions. This process should be relatively easy given the coordination efforts of regional development agencies, which coordinate regional development efforts across government and non-government sectors throughout Australia.

Put simply, to prepare a coherent medium-term infrastructure stimulus package it is important to bring together projects - that have been assessed by public servants from functional units - and overlay geographic and temporal perspectives (based on ongoing stimulatory need and cross-checked against previously identified project priorities).

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