The recent NSW budget handed down by arguably the world’s nicest Treasurer, Mike Baird, was described by some in the media as “boring”. Mike Baird’s response was to say that boring was the new sexy. And for those in the infrastructure sector it was a pretty racy budget.
When the O’Farrell’ Government was elected in NSW in 2011 it did so on the promise of turning around the flagging state economy which included a significant infrastructure backlog and no ready source of funds to address it.
Short termism, vested interest, fear of debt and an aversion to risk acquired following intense media and public criticism of privately financed projects like the Cross City and Lane Cove Tunnels left the State with a number of much needed public infrastructure projects sitting on the shelf. And thanks to the increasing cost of building material and wages and the complexity of retrofitting infrastructure to an already heavily built Sydney environment, the projects were getting more expensive every year.
Although Labor Premier Morris Iemma understood that the lack of investment in productivity enhancing infrastructure over the previous decade was a long term problem for both the residents of the State coping with congestion and the economy’s ongoing competitiveness, his attempts to find a way to fund new infrastructure ultimately resulted in his political demise.
The sale of the State’s electricity sector, which had the potential to generate around $15 billion, challenged one of the Labor Party’s great shibboleths – the notion of the necessity of government ownership and operation of a range of utilities and functions.
The O’Farrell Government has no such constraints – apart from ones of its own political choosing - and the 2013/14 budget has continued to make solid and innovative headway towards funding much needed infrastructure at the same time as keeping the budget within credit rating agency imposed caps.
Making inroads into the backlog will not happen quickly, particularly given the challenges outlined above and the long lead times associated with major construction projects. But given the size of the O’Farrell Government’s parliamentary majority and the likelihood of them being in Government for three terms, a period of twelve years, they have a unique opportunity to actually see through the delivery of some much needed infrastructure projects.
From a standing start, the Government is making steady progress with the delivery of a substantial infrastructure program. With little resistance or negative media scrutiny, the Government has successfully divested themselves of a number of assets, including and most successfully, Port Botany and Port Kembla, which together raised $5.1 billion. This has allowed them to recycle a sizeable portion of the proceeds into Restart NSW set up to fund new infrastructure.
The 2013/14 Budget continues this process with the proposed lease of the Port of Newcastle – currently the world’s largest coal export terminal – expected to raise between $700 million to $1 billion, in addition to the continuation of savings measures aimed at reducing the Government’s operating expenses over the forward estimates, thereby creating room in the balance sheet to take on additional debt.
And whilst not overflowing with new infrastructure spending commitments, the Budget included funding and delivery details for a range of major transport projects including the $8.3 billion North West Rail Link – a single deck metro-style train line linking the North West Growth Centre just beyond Rouse Hill to Chatswood, the South West Rail link (an initiative of the previous Government), the Northern Sydney Freight Corridor program and two light rail projects.
But the centrepiece of the infrastructure budget was the announcement around the long awaited WestConnex - a monster of a road project in scale, complexity and cost (estimated at around $10-13 billion) that incorporates the completion and widening of the M4 motorway, duplication of the M5 east motorway and a link between them to include Sydney Airport and Port Botany.
The sheer cost and scale of the 33 km WestConnex project has presented a major funding challenge to Government. The most straightforward part of the project – the duplication of the M5 east – on its own would have required a substantial up-front financial contribution from Government even if it were procured as a public private partnership (PPP) with tolling. This is despite the fact traffic revenues are largely known, unlike previous greenfield road projects such as the tunnels mentioned earlier. The cost of the project simply cannot be covered by toll revenue.
The Budget allocated $1.8 billion over four years (in addition to Commonwealth commitments) to get the project started, but more importantly, the Government indicated how the project would be financed. This is the first indication as to how NSW Treasury’s new Infrastructure Financing Unit (IFU), tasked with “enhancing the State’s financing capabilities for PPPs and other infrastructure funding models,” has been working since it was established following last year’s budget.
A financing strategy has been designed to “minimise impact on the State’s balance sheet, encourage maximum involvement of the superannuation sector and provide the State the capacity to recycle its investment to new projects”.
Drawing from the San Francisco Bay Area Transit Authority, the Government will fund the first stage of the project, but will do so as an equity investment rather than a capital grant. It will then leverage the value of the tolls to attract private funding for the next part of the project. Government is effectively taking the risk for the traffic forecasting which will make it a more attractive investment for private equity. The business case and financing model will be tested with the private sector.
Some have claimed this new approach represents the end of the PPP, so reviled in recent years, but really it’s just the fact that the projects sitting on the shelf for so many years have simply gotten too big for even the most optimistic traffic forecasts and the post GFC financial sector simply won’t take on the risk.
Government understanding of PPPs and where they can best be applied to bring forward projects has also matured substantially since the days of the Sydney Airport Rail Line and Cross City Tunnel. The availability model PPP still offers enormous benefits for bringing forward infrastructure and the Government is using this model for the new Sydney Convention centre and the Northern Beaches Hospital which will also be operated by the private sector.
So while the progress on addressing NSW’s huge infrastructure backlog may not appear to be splashy or spectacular, many other governments would have baulked at the scale of the challenge.
Make no mistake, the WestConnex project on its own is colossal, not only in terms of cost and scale, but because it presents a major political challenge which will use a great deal of the O’Farrell Government’s political capital. The degree of risk and difficulty is extremely high as the Government, or its delivery agency, will have to manage the complexity and major inconvenience the construction will generate on well mobilised inner west local communities not known for their tolerance in regard to such matters.
However as is often said in politics these days when a government is doing something relatively unpopular “it’s the right thing to do”.
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