There’s something faintly pathetic about the Prime Minister sitting down with the mugs who make up our State premiers today to debate the minutiae of consumer credit laws, hazardous materials and registering business names. The contrast between that and the conflagration engulfing financial markets makes the whole COAG process look like an exercise in unreality.

Appearances are deceiving, however. The boring work of getting the Australian federation to work in as effective and business-friendly a manner as possible is a key reform, and the Prime Minister’s determination to cajole, beg and bribe the states into harmonising their regulatory frameworks across a range of areas is laudable.

Economic reform in Australia doesn’t tend to get noticed unless it comes with a capital R — the floating of the dollar, the end of protectionism, a new industrial relations regime, a GST. The smaller stuff, the 5% stuff, is mainly of interest to businesses. That’s why The AFR devotes plenty of space to today’s COAG meeting.

Same with the local government summit announced the week before last. That looked bizarre at the time — the world financial system in meltdown, and Rudd is talking about inviting mayors to Canberra? But it wasn’t actually a bad idea at all; given their importance to Australian businesses and to the country’s economic and social infrastructure, anything that improves the performance of local governments (not taking bribes from developers springs to mind) will have significant flow-on benefits.

This is the nature of the Rudd Government. It’s a 5% government, the reform program of which is focussed on the unglamorous world of regulatory harmonisation, better consumer information and greater efficiency of administration, one that knows that a single set of OH&S regulations or less local government red tape won’t change the world but will reduce business costs, or that better-informed consumers will get markets and service providers working more efficiently.

Such reforms yield significant long-term benefits because they mount up across the economy, year in and year out. We don’t notice it because we’ve become used to big-bang reform, led by a Keating or (to a much lesser extent) a Costello telling us it’s critical to Australia’s future.

Public-private partnerships are also on the COAG agenda today. The goal is to try to establish consistent guidelines for partnerships to minimise costs for businesses. But the biggest issue about public-private partnerships won’t be dealt with — the problem of how to manage risk. Barring some sort of miracle recovery in the financial sector, this problem is going to have major repercussions for Australia’s economic growth for decades to come.

John Quiggin wrote a series of articles for Crikey last year on the role of risk management across societies, suggesting that risk might be one of the central ideas of the early 21st century. He didn’t focus specifically on financial risk, but the financial crisis has proved him right, although perhaps in a more dramatic fashion than he anticipated. The crisis arose from a grievous misjudgement about risk, a conviction that “risk management” could amount to “risk elimination” if it was spread thinly enough and hidden well enough.

As it turned out, that only spread the damage further.

So now we’re in a risk-averse financial world, so risk-averse that no one wants to lend anyone anything. Leveraging taxpayers’ funds for infrastructure projects will now be far harder. Public-private partnerships are supposed to maximise the capacity of governments with limited funds to get major projects built now rather than years hence, but they’ve been plagued by an incapacity of both governments and infrastructure providers to get the risk balance right.

Usually, the likes of Mac Bank have played bureaucrats for suckers, leaving government stuck with all the downside while they reap monopoly rents. Occasionally, though, it’s been the private sector left with an underperforming asset like the cross-city tunnel in Sydney.

Getting the balance right is now even harder because the cost of money has gone up and the appetite for risk amongst lenders has vanished. COAG fiddling with PPP guidelines is all fine as far as it goes, but the central problem of apportioning risk remains, and can only be solved by state governments getting smarter when developing projects, so each individual infrastructure proposal can be risk-assessed on its merits. This will be a key role for Infrastructure Australia when it assesses major projects for funding.

If the credit crunch continues for any length of time, however, there’ll be no resolving the risk problem. Governments will simply have to take more responsibility for infrastructure, which will mean borrowing more – provided their credit ratings remain intact — spending less and raising taxes. There may not be too much of a surplus to dip into from next financial year.

The most equitable and economically efficient means of accessing more funding for infrastructure is by making its users pay for it. Despite the growth of tollways, most of our road system remains free to motorists and road transport companies. Our water infrastructure is loaded with cross-subsidies and relies on rationing, not pricing, to curb demand. And our health infrastructure has virtually no price signals at all. Tougher fiscal times might encourage tougher decisions about how we fund our infrastructure.

And now that the economic growth of the last decade looks like slowing significantly, the Howard years look more like a wasted opportunity than ever. Imagine if some of that money used for electoral bribes and handouts had been directed toward urban infrastructure — particularly public transport. Or even funnelled into superannuation, providing Australia with a greater buffer against the credit crisis. We’ll be paying for Howard and Costello’s profligacy for years to come.

Peter Fray

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