In Summary

  • In an opinion piece published in The Age, Swinburne's Professor John Wilson says we are now beginning to suffer the consequences of an infrastructure deficit with population growth, urban sprawl, congestion and reduced level of service. 

The importance of good infrastructure in underpinning a productive economy that contributes to a liveable and sustainable society is now accepted. But the question of who pays for it is vexed - we don't want higher taxes, we don't want user-pays, we don't want to sell assets and we don't want to borrow.

As Rod Eddington, chairman of Infrastructure Australia, remarked, ''There seems a profound disconnect between our aspirations and reality.'' There are only two  sources for funding of infrastructure projects: government and private funds.

We are now suffering the consequences of long-term underinvestment in infrastructure. The population is growing by about 2 per cent a year yet making do with ageing assets. This is resulting in congestion and a poorer level of service, evidenced by overcrowding on public transport and ever-increasing bottlenecks on the roads. Victoria's population has grown by more than 700,000 in the past decade, helping fuel the economy, but there has not been a comparative increase in infrastructure funding.

Victoria has had an abundance of transport plans in this period, but little in the way of new projects; we are ''planning rich but delivery poor''. Numerous projects are required - new metro rail lines, removal of level crossings and freeways connected. Infrastructure projects such as new metro lines can shape a city and leave a legacy for future generations, just as the Melbourne underground loop has done since its completion in the 1970s.

According to the Bureau of Statistics, government (state and federal) investment in infrastructure averaged about 4.5 per cent of GDP from the late 1950s to the late 1970s. This now stands at about 3 per cent.

Furthermore, governments are caught in a trap of circular logic that would make Joseph Heller, author of the classic novel Catch-22, proud. Such low levels of government debt attract a AAA rating, meaning government can borrow at very low interest rates, yet governments are reluctant to borrow, due to an obsession to protect this rating.

Unfortunately ''debt'' is simply a bad word for government in the current era - irrespective of whether one is talking about short-term or long-term debt. Clearly, short-term debt is ''bad debt''; one should not borrow to meet recurrent expenses. But long-term government investment is ''good debt'' since the investment will benefit future generations, with a rate of return in the order of 1.5 through improved productivity and liveability.

Total government debt in Australia is about $600 billion or 40 per cent of GDP, which compares favourably with most developed countries - the US (100 per cent), Japan (200 per cent) and the Britain (85 per cent).

The federal government has greater leverage to borrow compared with state and local governments, and many of the productivity benefits from improved infrastructure flow back to it in greater tax revenue. Consequently, Australia needs a national infrastructure fund that can be used to help finance the nation's $700 billion infrastructure deficit. This fund can be supplemented with contributions from the state and the private sector on a project-by-project basis.

Superannuation funds are hungry for long-term safe investments. About $1300 billion is invested, which is likely to triple over the next 20 years.

Super funds that are based on the contributions from the workforce are ideally suited to the long-term investment nature of infrastructure from which we all benefit, provided the risk profile is low and a fair and reasonable long-term return is secured.

Private sector funds can be used on projects that are more commercial in nature with a defined income stream, such as toll roads.

A recent trend has been for the government to borrow through the private sector for most major projects using the public private partnership (PPP) mechanism. While this ''off the books'' borrowing protects the AAA rating, it comes at a considerable cost, as the interest rates associated with private sector borrowings are significantly higher than government bonds.

Consider the desalination plant, which was procured as a PPP, and came at a considerable cost, with annual repayments of $679 million over 30 years, indicating the $5.7 billion plant was financed at effective interest rates of 11.5 per cent, with total payments in the order of $19.4 billion. All water users will pay in the form of higher water bills. In comparison, the use of government bonds could have secured the asset at long-term interest rates of about 4.5 per cent, leading to much lower water bills.

The private sector is hesitant to fund ''greenfield'' projects. Recent examples include EastLink and Brisbane's Airport Link. In both cases, traffic forecasts were more optimistic than the actual traffic generated, resulting in significant losses and a downgrading of the assets. In addition, most fund managers are not keen to put aside capital in ''greenfield'' sites for three or four years while a project is constructed.

One hybrid option is for the government to push for ''greenfield'' development with the aid of the private sector. The government would raise funds through long-term loans or infrastructure bonds and construct and operate the asset with tolls to establish the business case. Such infrastructure bonds would be an ideal investment for super funds, with a return around the official borrowing rate.

The government could either own and operate the asset, with the return being used to furnish the loan, or sell the asset to the private sector as a ''brownfield'' development. The decision would depend on the asset and the anticipated returns. The strength of this ''asset recycling'' approach is that the government absorbs the construction and operational risk. The annualised rate of return of the asset would determine the sale price. Any difference in the construction cost and the selling price is effectively the public benefit that flows from the delivery of the infrastructure.

Consider the EastLink toll road connecting Donvale with Frankston. It was completed on budget and ahead of schedule for $2.5 billion. Tolls were set at an average trip of $3.40 based on traffic forecasts of 258,000 vehicles a day.

After opening, the actual traffic flow averaged 186,000 vehicles, creating a $240,000 a day loss in revenue. At the same time, traffic volumes on the public Springvale and Blackburn roads dropped by 30 to 40 per cent, creating intangible benefits for the community.

The consortium of ConnectEast, which funded and procured EastLink, was subsequently sold at 55¢ a share, which probably reflected the true commercial value of the asset, given the traffic volumes. The 45¢ a share loss compared with the $1 float price could be considered the intangible public benefit that flowed from the development to the community.

Infrastructure underpins our city's productivity, liveability and sustainability - we either invest in infrastructure or suffer the consequences. We are now beginning to suffer the consequences of an infrastructure deficit with population growth, urban sprawl, congestion and reduced level of service. A bold response with greater investment is urgently needed.

John Wilson is Executive Dean of the Faculty of Engineering, Science and Technology at Swinburne University of Technology and Engineers Australia Victorian Infrastructure spokesman.