Infrastructure Australia warned that although the parliamentary committee’s key recommendation to reduce the discount rate on infrastructure investment would add millions of dollars in future value to projects considered of marginal value, it risks saddling the economy with C-grade investments and allowing sub-par projects to go ahead.
A six-month inquiry by Parliament’s standing committee on infrastructure recommended reducing the discount rate from seven per cent to four per cent. The move would have a significant impact on the cost-benefit analysis of future projects, such as Sydney’s light rail or Melbourne.
It will also open the door to a wider array of approvals as infrastructure struggles to keep up with a population that will double by 2075.
“Reducing the discount rate to four per cent would be a form of intergenerational theft,” Anna Chau, Infrastructure Australia’s acting chief executive, told The Sydney Morning Herald.
“We wouldn’t do this for kids in our schools, just as we wouldn’t lower the standards in our hospitals, so why should we do it for our major infrastructure projects?”
“Infrastructure development has high initial capital costs but long-term benefits. Applying a discount rate puts present and future costs and benefits on an equal footing to help governments understand which projects are most worthwhile.
“Lowering the discount rate, however, won’t make this process any more rigorous. It’s like lowering the passing grade from 50 per cent to 25 per cent.”
A number of announcements are expected in the lead up to the next federal election set before May next year, raising the prospect that expensive, but worthy projects, will be cast aside in favour of ‘pork barrelling’ in key electorates.
“There is always a desire to lower the pass mark, and we really need to be aware of the risks of doing that,” Chau continued.
“Lowering the discount rate doesn’t increase the bucket of money that is eligible for funding. You are just increasing the number of projects that are eligible for funding.”
Calls to cut the discount rate have been backed by the Grattan Institute and the NSW Business Chamber, who have argued that the 29-year-old rate is out of step with the current low-interest rate environment and that some regional projects have missed out due to the high barrier entry.
Infrastructure Australia have yet to respond to the other recommendations brought forward by the parliamentary committee.