The headlines and comment about the Queensland floods are focused on the cost to reconstruct what was destroyed.  We get headlines (CT Monday 24th) “Massive cost of floods to hit us all”. Instead of that headline we could have one that reads “Replacement of Queensland infrastructure brought forward”.

All Queensland houses that were destroyed and damaged had a use by date.  All roads and other infrastructure had to be maintained and replaced.  Using this point of view the floods have not cost us anything, but have made us replace some infrastructure many years earlier than expected.

When viewed in this light the problem becomes the cost of earlier expenditure on something we were going to do anyway.  This only becomes a problem if we consider time in our accounting calculations.  We can remove time by removing the need to pay interest on the funds used to rebuild infrastructure.

The question to ask is what value is there in paying interest on infrastructure funds? The answer is none.  Time cost is used to account for what is called opportunity cost. It gives us a way of evaluating whether we should do project A before project B.  It doesn’t change the real cost of construction of A or B.  If we are going to build infrastructure anyway why should we worry about whether it would be better to use the money on building something else?

The recent disasters has given the government an opportunity to change the way we fund infrastructure so that the monetary cost of rebuilding is reduced. The real cost of rebuilding will be the same but the monetary cost will drop.

One thought on “Early Infrastructure Replacement

  1. Kevin,
    I suggest that it is important to establish that there are important differences between normal daily commerce and infrastructure and that there are many more infrastructure items than we are now accustomed to considering. Even to go as far as suggesting that the current financial system is akin to infrastructure and / or ought to be regulated as a utility.

    I grow trees and nothing that I do in growing trees is now bankable in the US because there is no debt service capability from any tree. So I must either have the funds to pay the debt service out of current discretionary spending or not do the activity. The failure to understand that there are continuous public goods that flow from maintaining forests well (just as there are from having and maintaining a bridge or school or hospital) is tantamount to destroying the life support systems as an austerity measure.

    Like

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