State Infrastructure discount rates

The Hon. JOHN GRAHAM ( 16:19 ): One of the things that people hate most in politics is short‑sightedness. When it comes to infrastructure decisions, they should be upset. The rate we use to assess the benefits of projects has not changed in decades. That understates the values of some projects, skews government choices and favours the short term over the long term. The current discount rate is 7 per cent after inflation. That rate has not changed since 1989. Labor shadow Treasurer Ryan Park is committed to reviewing that rate and I congratulate him on that decision. This is not only the view of the Labor Party. In evidence to the Standing Committee on State Development, the Department of Premier and Cabinet and the Sydney Business Chamber also gave evidence that the current rate was not appropriate.

How has it happened that this arcane assumption, this single Treasury number has become front-page news this week? First, because it is crucially important. This is the number that determines the benefit of any project built in New South Wales. This is the number that determines whether a local community gets a rail line, a road, a bridge or new cultural infrastructure. This is the number that the Commonwealth adopted from New South Wales. Secondly, our economic world has changed. When this rate was set the accepted proxy for the risk‑free rate of return, the 10-year Commonwealth bond rate, was 6.8 per cent in real terms. In 2017, it was 0.8 per cent. Since 1989, interest rates have changed, but so too has the nature of the New South Wales economy, our key export partners, our patterns of work, the rates of unemployment and inflation, and the relative balance of New South Wales industry sectors. All these things have changed but our discount rate has not.

I welcome the work of the Grattan Institute on this issue. Its recent report "Unfreezing discount rates: Transport infrastructure for tomorrow" agrees that the current discount rate of 7 per cent after inflation is too high. The report calls for it to vary over time. Grattan's Marion Terrill said a more realistic discount rate would help governments "avoid squandering billions of dollars of public money on the wrong projects". Crucially the Grattan Institute found this:

The choice of discount rate can affect not only whether a project is assessed as worthwhile, but also which project among several is assessed as the most worthwhile.

The Grattan paper includes an example of how different discount rates move particular projects up and down the priority list depending on how long term their pay-off is. The inland rail line is the most extreme example. A good example of some of the other world impacts is the comparison between the F6 road versus rail to Wollongong. The Sydney Morning Herald has already revealed secret government information suggesting that a rail link might be cheaper, even on existing measures. A lower discount rate would make the rail option look even more attractive. A regional example is the Muswellbrook bypass. Both sides of politics have advocated for this project. The locals can see the benefit to the community but it is struggling to clear the Treasury hurdle. With a lower discount rate this project would likely proceed. Meanwhile, in the city the business case for the Sydney stadiums is being bolstered by an additional 20 blockbuster events every year. The Government is unable to state what they are. The business cases for big government projects are being manipulated.

Finally, in the last sitting week we saw that the business case for the Powerhouse Museum contained a key table indicating a discount rate of 6.8 per cent had been applied. The Government was forced to withdraw and reissue the business case to indicate that the standard Treasury rate had been applied. This shows how sensitive the final results are to these important assumptions. The following are some of the principles that we might assert as we set the discount rate in New South Wales. First, having a single discount rate at any one time is reasonable as the Government has to compare projects of many kinds to many different time horizons. Secondly, we might reasonably expect that future generations will be richer. This rate of economic growth is reflected over time in the market rate. Thirdly, having a high rate with no reference to the cost of either public or private sector borrowing costs does not make sense. Labor has called for a review. That review is good news for people living in the bush hoping for regional infrastructure and for anyone who supports public transport and rational decision-making.