Penny Wise, Pound Foolish

The state government of New South Wales recently awarded a contract for the purchase of 512 new intercity passenger rail cars to a consortium that will manufacture the equipment in South Korea.  The contract is worth $2.3 billion, including an unspecified sum to cover maintenance of the double-decker cars over an initial 15-year period.  The government chose to import the cars from Korea instead of purchasing made-in-Australia products, claiming this was the "cheapest" option.  However, major government purchases have important indirect effects on many economic, social, and fiscal variables: including GDP, employment, incomes, exports, and even government revenues.  A comprehensive cost-benefit analysis must take those broader impacts into consideration; governments should make decisions that maximize the overall social net benefit of procurement, not simply minimize the up-front purchase cost to government.

This paper reviews the economic importance of the railway equipment manufacturing sector in Australia, and describes its broad economic benefits: supporting 5000 direct jobs, and many more than that in supply industries and downstream consumer industries.  And it provides an illustrative simulation to show that offshoring this new contract could deprive the government sector of a cumulative total of $455 million in forgone revenue -- as a result of lower GDP, employment, and incomes.  That is considerably more than any supposed "cost penalty" to government incurred as a result of manufacturing the equipment in Australia.  Worse yet, the NSW decision undermines attempts to coordinate and schedule upcoming railway rolling stock purchases from various governments across Australia, in order to maximize the economic benefits from future transit investments.

The full report can be accessed here.


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