NSW Infrastructure Budget reviewed

Last week the NSW Treasurer released the NSW 2008-09 Half-yearly Budget Review.  The half-yearly review is released each year around mid December to revise budget figures based on actual expenditure and financial indicators over the first half of the financial year.

This year the review is particularly interesting because it takes into account the November Mini-Budget and updates the 2007-08 State Infrastructure Strategy (SIS) to incorporate the large changes to the capital works program outlined in the Mini-Budget.

It also incorporates some major financial changes that have occurred since the Mini-Budget.  Specifically:

• The Commonwealth government's decision to front-end a large portion of NSW funding at the COAG meeting in late November in which $477m of the Commonwealth funding earmarked for 2009-10 to 2011-12 will be handed out this financial year.

• $500m of debt in the housing and rail sectors will be paid off this year instead of spreading the payments across the next four years.

• The further deterioration of the world financial markets.

The effect of these changes is to reduce this year's estimated deficit from $917m to $712m.  It also reduces the estimated 2011-12 surplus from $900m to $813m.  In NSW's current financial situation any decision that reduces short-term deficits by eroding longer-term surpluses is the responsible thing to do, especially when the money is used to reduce debt.

The review also updates the SIS based on major changes announced in November.

On the transport side, they will save $7 billion by converting the North West metro project into the CBD Metro.  Savings from the deferment of the South West Rail Link will be absorbed by additional outer suburban train cars and increased Clearways costs.

On the electricity side, they will save an additional $1 billion by selling off their electricity retail businesses but due to their failure to successfully sell off the electricity generation businesses they have earmarked an additional $4 billion in baseload power generation investment.

These changes represent a $4 billion overall saving in the SIS, adjusting the total 10-year expenditure estimates to $139b down from $143b.

The Government has insulated itself as well as it can by back-loading the $4b in electricity investment into the latter six years of the 10-year SIS.  They are hoping not to use this money if they can avoid it.  In summarising the State's electricity expenditure, the review states,

"$3.4 billion...to invest in base load generation in the event the private sector fails to commit to developing adequate capacity."

Obviously if they can get the power generation assets sold off by 2012 the $4b comes back to them for reinvestment along with the $15b in proceeds from the sale, investment that will probably go straight back into the transport capital works program to complete the North West and Western Metros (as implied by the dotted ends of the CBD Metro.)

The most likely scenario is that they'll lose the 2011 election and the Liberals will sell off the power generation businesses, build the metros and slam the Labor opposition for not caring enough about North-West Sydney.

The half-yearly budget review can be found here.