Government should step up on infrastructure funding in Australia

Thursday 27 February 2014

The large waved Swinburne signage of the Advanced Manufacturing and Design Centre building in Hawthorn which faces East down Burwood Road.

The Engineers Australia Infrastructure Report Card released in 2010 rated Victoria’s Infrastructure as 'barely adequate'. The same is true nationally. The report noted that there is a fundamental link between sound infrastructure investment and a healthy, productive economy that contributes to a liveable and sustainable society Infrastructure projects such as new met-ro lines can shape a city and leave a legacy for future generations. We either invest in infrastructure or suffer the con-sequences. We are now beginning to suffer the consequences from years of infrastructure deficit, with urban sprawl, con- gestion and reduced levels of service.

Despite a lot of planning in recent years, there has been little in the way of projects that address the shortfall in public infrastructure, primarily because of a perceived lack of funds and the increasing reluctance by government to increase their debt. Recent trends to public private partnerships (PPP) are inadequate in addressing the issue, with the private sector increasingly hesitant to fund major green field infrastructure, following a string of high profile projects that failed financially.

The federal government needs to lead and use its financial leverage to deliver a quantum increase in the level of infrastructure spending nationwide. Government needs to take ownership of major greenfield projects that are essential for the public good. The economic climate is ideal for long term investment in infrastructure with low interest rates and superannuation funds hungry for long term safe investments.

Waiting five years for a better~ situation is unrealistic and will not make the challenge any easier.

Leadership is required now to break the piecemeal approach that has seen infrastructure spending decline from 4.5 per cent of GDP in the 1950s-1970s, down to the current level of around 3 per cent. Despite the establishment of Infrastructure Australia, infrastructure planning and procurement is still very political and strongly influenced by a short term crisis or political expediency.

An example is the prioritisation in Victoria of the Avalon rail link over a link to the established and fast growing Melbourne Airport. Nationally, a recent example is the notion that the Gillard government would fund rail projects while the Abbott government would fund road projects. Such statements trivialise the complexities of transport infrastructure planning to a meaningless simple short term political grab for votes.

Aside from such simplistic political behaviour, the core issue is around the perceived shortage of funds. There seems to be general acceptance in the wider society that we need better infrastructure, but the question of who pays is very vexed we dont want higher taxes, we don’t want user pays, we dont want to sell assets, and we don’t want to borrow.

Sir Rod Eddington, chairman of Infrastructure Australia, remarked 'there seems a profound disconnect between our aspirations and reality'. In recent years PPP mechanisms have been favoured as this type of 'off the books' borrowing protects the government’s AAA rating. However, it delivers infrastructure at a considerable cost, since the interest rates associated with private sector borrowings are significantly higher than government bonds.

Moreover, governments will find it increasingly difficult to attract the private sector to greenfield projects following several financial disasters such as EastLink in Victoria and Airport Link in Brisbane, where overly optimistic traffic forecasts resulted in significant losses and asset downgrades. Desalination plants around the country have suffered similar issues following their mothballing. In addition, most fund managers would prefer not to put aside capital for mega infrastructure projects for three or four years while they are commissioned.

Australia currently has around $1300 billion of superannuation funds invested, which is likely to triple over the next 20 years. Such super funds are ideally suited to the long term investment nature of infrastructure, provided that the risk profile is reduced and a long term return is secured at a fair rate. One hybrid option is for government to lead the development of major greenfield projects which have a clear flow-on benefit to the wider economy but the direct returns are uncertain. The government would raise the funds through long term loans or infrastructure bonds and would construct and operate the asset with appropriate tolls for the first one or two years to establish the business case.

The government then has the option to sell the asset to the private sector as a 'brownfield' development with the construction risk removed and the operational risk substantially reduced. Any difference in the cost of procurement and the selling price can be construed as the public benefit that flows from the delivery of the infrastructure system. In other words, the sale price reflects the commercial and direct benefits, while the price difference reflects the intangible benefits flowing from the project to the wider community.

What is needed to facilitate this 'asset recycling' approach and break the national paralysis in infrastructure investment is a single national infrastructure fund that can be used to affordably finance the $700 billion infrastructure deficit that exists in the country. This fund could be supplemented with contributions from the state and the private sector on a project by project basis.

If Abbott truly wants to be known as 'the infrastructure prime minister' then the federal government needs to take leadership in establishing this infrastructure fund. 

Written by Professor John Wilson, Swinburne University of Technology. This opinion piece was orginally published in Engineers Australia.