4BC interview on hospital cost blowout – Govts need to crunch numbers properly before spending decisions

I spoke to Ben Davis from 4BC’s Drive program yesterday afternoon about the Auditor-General’s report on the Beattie Government’s decision in 2006 to build three new hospitals, including the Lady Cilento Children’s Hospital and new hospitals on the Gold and Sunshine Coasts. It turns out that the hospitals ended up costing around $5 billion when completed, compared with the initial cost estimate provided by the Government of around $3 billion.

The problem appears to have been that the initial cost estimates were prepared in a hurry, possibly based on incomplete specifications of the projects and out-of-date or inappropriate cost data. As the announcement was made in the lead up to an election, the Government might have been too excited about the electoral appeal of the hospitals to do the detailed analysis that is generally expected before committing billions of dollars. Unfortunately, once the election announcement was made and a public expectation was created,the Cabinet would have felt unable to stop the project, had it wanted to, once it saw more realistic cost estimates in the business cases eventually prepared by Queensland Health.

Ben asked me about the comments former Premier Beattie made earlier in the day, which reportedly included the comment that you can’t expect detailed business cases for hospitals because they’re not built to make money but to treat people. I told Ben I thought this was a distraction from the real issue. The debate isn’t over whether hospitals should be run as private businesses, but rather whether the Government should have done more work assessing the costs and benefits of the new hospitals before committing to build them. Clearly it could have and should have. “Business case” is now a generic term for an assessment of the merits of any project or investment, not necessarily a business investment designed to make money. Business cases could have been prepared for the hospitals with more reasonable cost estimates than the Government announced, after the appropriate advice from construction cost experts was obtained, of course. These business cases could have contained an assessment of whether the three hospitals were the most cost-effective means of meeting anticipated future community needs.

Governments can make very bad decisions when they haven’t done the proper analysis. It’s possible that, if the Government had known the hospitals would cost $2 billion more than expected, Queensland Health would have looked for other options for meeting the identified needs in the community. The hospitals decision reminded me somewhat of the Rudd Government’s decision to build the $40 billion plus National Broadband Network, a project that was heavily criticised for being committed to without a proper business case and cost-benefit analysis.

Where there are billions of dollars at stake, the Government has an even clearer obligation to the community to crunch the numbers before making any decision. While Governments often do the right thing, and there are guidelines and expectations in place for the preparation of business cases in many jurisdictions (e.g. see Queensland’s Project Assurance Framework), Governments sometimes bypass the usual processes, alas, so they can score quick political points.

Posted in Health | Tagged , , , , | 7 Comments

Reflections on Gough Whitlam

Gough

I recall with great sentiment now, after news of the death of former PM Gough Whitlam today, that Gough gave an excellent after dinner speech at the UQ Law Ball at the Hilton Hotel in Brisbane in 1996. The former PM, a class act, didn’t go over old political ground or criticise the current Government, but rather spoke of his love of trains, and how pleased he was that his Government had funded the construction of the Merivale St bridge. Up until this bridge was built in the mid-to-late seventies, the nearest train bridge to the centre of Brisbane was at Indooroopilly, and trains from the south had to terminate at South Brisbane.

So Brisbane has at least one thing to be thankful to Gough Whitlam for, among other things, of course. While the Whitlam Government had many faults, including a naivety on economics until Bill Hayden was appointed Treasurer (too late, alas), there is no doubting that it transformed the country in a number of positive ways. I commented briefly on the Whitlam Government in my speech to the University of the Third Age Redlands in August:

The 1970s saw the end of the long boom we had enjoyed since the end of the war…The end of the long boom forced Governments starting with Whitlam’s to consider hard policy choices. Whitlam, despite his faults on economic policy, actually did make a number of sensible policy choices. For example, the 25% tariff cut in 1974 and the breaking up of the old Postmaster General’s Department and the creation of Australia Post and Telecom, which ultimately led to greater efficiency in postal and telecommunications services. But there was much more reform to be done. Whitlam was too beset with political and pressing macro-economic problems to do much in the way of micro-economic reform…

Perhaps I also should have added the Whitlam Government’s opening up of tertiary education, although free education proved to be a costly policy which future Governments have had to wind back through introducing and continually increasing HECS, now HECS-HELP. As is well known, the Whitlam Government’s progressive social agenda came at a high cost, and locked in a permanently higher level of Commonwealth Government spending as a share of GDP, a point made at Catallaxy Files by Sinclair Davidson today:

The Whitlam legacy: Big government

There is no doubt that Gough Whitlam transformed Australia and has left a lasting legacy. It’s a great credit to this country that the bitterness associated with politics in the seventies has dissipated, and we collectively mourned the loss of our former PM today.

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The problem with economic development agencies such as Townsville Enterprise & Brisbane Marketing

It can be very stressful to be responsible for outcomes over which you have very little control. This is the predicament faced by economic development agencies such as Townsville Enterprise and Brisbane Marketing. This predicament was highlighted by the sacking earlier this year of Townsville Enterprise CEO David Kippin, who appears to have been held responsible for Townsville’s relatively poor economic performance in recent years (see this Townsville Bulletin story). But Townsville’s performance hasn’t been that different from other Queensland regional centres that also weren’t major beneficiaries of the resources boom. It seems silly to blame and sack Mr Kippin, particularly given he appears well-regarded in the Townsville business community.

Townsville Enterprise’s Chairman Kevin Gill has committed the organisation to attracting more investment dollars for the Townsville region. Clearly the attraction of Government investment, such as in the proposed Super Stadium, is an important part of this strategy. I’ve often wondered, however, whether agencies such as Townsville Enterprise and Brisbane Marketing are actually focussing on the wrong things. You can spend a lot of time and money chasing after investment dollars that, from a whole economy perspective, aren’t that significant and don’t provide the basis for long-term, sustainable growth. Indeed, one challenge that Townsville now has is that its growth since the War has been dependent, to a large extent, on Government, with Lavarack Barracks, James Cook University and State and Commonwealth agencies all major sources of growth. Townsville doesn’t appear to have developed any important competitive advantages in private sector industries that can provide sustainable growth opportunities into the future.

Rather than waste a lot of time and money chasing investment dollars that may deliver little long-term economic benefit to their regions, bodies such as Townsville Enterprise and Brisbane Marketing should instead focus on lobbying to improve policy settings. These bodies should lobby to remove restrictions on development that are restraining economic growth and also for more efficient local government services (so that people might be attracted by a lower cost of living that other regions). By helping to improve the fundamentals, I expect these agencies would deliver greater value than they do currently.

Regarding how local government policies can restrict economic development, see Bradley Rogers’s post:

Old Queenslanders in a New City

Posted in Brisbane, Townsville | Tagged , , , | 6 Comments

Upcoming Economic Society event on rural & remote service delivery

remoteWith a relatively high proportion of the population living outside of major cities and towns, in outer regional or remote areas (see chart above based on ABS data), Queensland faces an additional challenge in delivering government services such as health and education. Delivering services to rural and remote areas will obviously be more expensive, given the lack of economies of scale associated with service delivery in urban areas. But governments are finding ways to deliver services more cost-effectively in rural and remote locations, including through the use of web-based distance education and tele-health.

The Queensland Branch of the Economic Society of Australia, of which I’m Deputy Secretary, is very pleased to have one of the leading consultants in Australia on the economics of rural and remote service delivery, Dr Abby Kamalakanthan, speaking at an upcoming seminar in Brisbane on Friday, 7 November. If you are interested in how we can continue to deliver government services in a sustainable, cost-effective manner in rural and remote areas, I would encourage you to attend Abby’s presentation. Details are available at the ESA Qld website:

Sustainable Solutions for Rural and Remote Service Delivery in Australia

(N.B. I left Tasmania off the above chart because a very large chunk of it is considered outer regional and including it took attention away from the large differences between Queensland and NSW and Victoria that I wanted to highlight.)

Posted in Education, Health, Population, Queensland Government | Tagged , , , , , , , , , , , | 3 Comments

7.30 Qld interview on asset leases and power prices

I featured in Eric Tlozek’s excellent story on the proposed leasing out of electricity assets on 7.30 Queensland last night:

Government powers up to sell state asset leases

I come in at around 3 minutes, 20 seconds, after the Opposition Leader. The main points I made were:

  • if the assets are leased out, electricity prices are likely to be lower than they otherwise would, because privately operated assets would be run more efficiently, and
  • the Government needs to provide more information on the relative benefits and costs of asset leases to the public, given that it’s clear people are worried about adverse impacts (e.g. on jobs, power prices and service reliability).

Well done to Dr Liam Wagner from the UQ Economics School for his insightful analysis of the potential impact of asset leases on the cost of electricity supply. I particularly liked his discussion of how private operators would save money by spending on capital only where there is a “burning deck problem”.

Posted in Energy | Tagged , , , , , , | 5 Comments

Residential building activity recovering nicely, but still below levels of mid-2000s

Builders across Queensland should have noticed higher levels of residential building activity lately, although they may still be disappointed activity remains below the levels of the mid-2000s (see chart based on ABS building activity data released yesterday below). The new data is generally encouraging, given residential building is an important part of the Queensland economy, and, if the trend continues, it should help the Queensland economy eventually get out of its current sluggishness. That said, population growth still remains relatively low (see my post Qld less attractive to Southerners due to weak jobs market & growing pains), so perhaps the building industry shouldn’t expect large additional gains. For the same reason, I’m a bit skeptical about the latest forecast from NAB that Queensland will top Australia in capital gains in property in the next two years, as reported this morning by the Courier-Mail.

Building_Jun14

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Time for Qld Govt to reconsider $5bn BaT Tunnel – my submission to the EIS process

BaTIt’s now time for the Queensland Government to consider public submissions on the underground Bus and Train (BaT) tunnel project, after the consultation period on the Environmental Impact Statement closed today. I took the opportunity to make a submission, extending an earlier post ($5bn BaT tunnel has unimpressive benefit-cost ratio) into a short letter to the Coordinator-General:

Adept Economics submission to BaT project EIS process

The main points I made were:

  • the cost-benefit analysis provides very little confidence the project will deliver positive net benefits to the Queensland community – benefits are estimated to be only 16% higher than costs over the life of the project, which is fairly concerning for a $5 billion project that is likely to be subject to the same risks of cost blowouts and demand shortfalls as other mega-projects (risks that if realised would lower the benefit-cost ratio); and
  • the EIS appears to assume that the approval of the BaT tunnel is a fait accompli, which is worrying both because of the unimpressive benefit-cost ratio and because all options to avoid inner city public transport capacity constraints weren’t fully considered – I would like to have seen a serious investigation of transport demand management options such as bigger differences between peak and off-peak public transport fares, TravelSmart programs, and staggered starting times for public servants working in Brisbane CBD (and I could have added tele-working).
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