The latest Mid Year Economic and Fiscal Outlook further entrenches the Commonwealth’s habit of playing favourites with the states when it comes to infrastructure spending.

MYEFO included modest new transport infrastructure spending of A$813 million and saved A$10 billion over four years by cancelling the Asset Recycling program. Notwithstanding this, the Commonwealth’s contribution to the states for transport infrastructure is at a record high of A$10.2 billion in 2016-17, amounting to a quarter of what states spend on transport infrastructure.

The states aren’t benefiting equally from this largesse. Santa will be visiting Queenslanders while Victoria gets the Grinch, as far as transport funding is concerned. This is true whether you take in data from the last 2, 12 or 30 years. It’s all part of a much larger trend towards politicised infrastructure.

A bizarre funding system

The way the Commonwealth allocates its funding among the states is opaque and does not reflect where people actually live. Victoria will receive only 7.7% of federal infrastructure funding over the next four years, for instance, despite being home to a quarter of the population.

Transport funding doesn’t reflect population growth either. Victoria, the fastest growing Australian state, is receiving a lower level of transport funding from the Australian Government per capita than any other state or territory.

Nor does the Commonwealth’s allocation among the states reflect what different states with different settlement patterns and city sizes need. The most careful and detailed assessment of the states’ relative needs is carried out by the Commonwealth Grants Commission to determine how the GST should be shared out.

The chart below illustrates the spending by the Commonwealth in the three largest states, against the Commission’s benchmark representing the amount of funding needed to enable each state to provide the same level of transport infrastructure to its residents. For the three big states, this is very close to equal per-capita shares.

author supplied

The comparison highlights Victoria’s relative under-funding by the Commonwealth not only over the past 12 years, but even more so in the current year. By contrast, New South Wales and Queensland have received more than their share in the past 12 years. Of the other states, only Western Australia is below this average transport infrastructure level.

Is it really that bad?

But the Commonwealth’s decisions on how to fund states for infrastructure are less important than they seem. This is because most transport infrastructure funding is effectively unwound by the GST distribution. The Commonwealth Grants Commission effectively subtracts either part or all of a state’s funding for transport infrastructure from the share of GST the state would otherwise get. If the project is on the National Land Transport Network, half the Commonwealth’s spending is quarantined and the other half is unwound over time, whereas if the project is outside the Network, then the entire Commnonwealth contribution is unwound.

In practice, Victoria gets most of its share of Commonwealth funding eventually. It’s just that it gets more funding via the GST, whereas New South Wales and Queensland get more via direct transport infrastructure funding. Victoria has to wait a little longer for its extra GST, as GST distributions are based on an assessment averaged over the previous three years. But this is not a major hurdle when borrowing is so cheap – Victoria’s ten-year bond rate is just 2.96%.

Further, the biggest states are pretty well placed to fund their own projects, with New South Wales enjoying a surplus of almost A$4 billion and Victoria [A$1.7 billion]).

But there is still a drawback of this kind of funding. It is no secret that politicians are using transport infrastructure funding for electoral gain, pretending to spend on locally popular transport projects, even if they are not particularly cost effective or of national significance.

When a state gets transport funding from the Commonwealth, there are more strings attached. The Commonwealth does not necessarily favour the same infrastructure projects and there are differences of opinion on how to assess the projects. Victoria’s Western Distributor has a benefit cost ratio of 1.3 under its own preferred guidelines, for instance, and 1.9 under Infrastructure Australia’s preferred approach.

Politics not policy

MYEFO includes an extra A$150 million for Townsville’s Eastern Access Rail Corridor. Townsville is the site of controversial mining company Adani’s future Carmichael mine headquarters, and there is a serious prospect that the next step for Townsville could be an announcement of a A$1 billion concessional loan for a rail link to facilitate Adani’s freight between the Galilee Basin region and Bowen.

A National party member has been quoted as saying that there were six marginal seats in the area and if South Australia could receive a A$50 billion submarine contract to save its handful of marginal seats, as well as a A$49 million loan for ailing steelmaker Arrium, then the government should help out central Queensland.

This is just one example of the tendency of the Commonwealth government purporting to spend more on transport infrastructure in New South Wales and Queensland, where Federal elections are won and lost. By comparison, as the chart below shows, Victoria has very little influence on Federal election results, and consistently receives low levels of Commonwealth funding for transport infrastructure.

author supplied

Of course, plenty of people would prefer to see a more transparent distribution of Commonwealth money, rather than opaque arrangements that don’t line up with politicians’ public statements. Preferable as this would be, Victoria could be waiting for a long time for politicians to put these decisions on a sounder footing, if history is any guide.

Whatever the Commonwealth government pretends to do with its infrastructure funding, in the end it is the states that develop, scope and ultimately select the major infrastructure projects to build. There is not much penalty if a state ignores Commonwealth preferences. As long as the Commonwealth Grants Commission unravels much of the Commonwealth’s decision making on transport infrastructure, choosing and building projects is mainly a states’ game. The larger states, with their stronger budgetary positions, are better placed than the Commonwealth to make decisions in the best interests of their population.