Efficiency of Infrastructure Provision: Australia, States and Territories

This paper examines the optimality of the provision of economic infrastructure in Australia using a system of Euler equations to represent intertemporal efficiency conditions. Employing Generalised Method of Moments, our estimation results suggest that dealing with individual types of infrastructure investments at State level is helpful for reaching realistic conclusions about infrastructure provision. In particular, the paper finds that while the efficiency conditions are satisfied at aggregate level, a disaggregate analysis which examines individual components of economic infrastructure reveals sub-optimality in the provision of some types of infrastructure across the States. In addition, contrary to other methods, our efficiency approach produces a quite sensible estimate of the infrastructure effect with an annual average rate of return of about 8 percent.