Increasing population and ever tightening budgets present huge challenges for Australian governments under pressure to deliver much-needed infrastructure. Wells Haslem Special Counsel, Julie Sibraa, examines some of the solutions.
Back in 2007 it seemed infrastructure was on everyone’s lips. It was the centrepiece of Kevin Rudd’s federal election campaign speech and inextricably tied to the need to improve the nation’s flagging productivity. State Governments across the country were announcing record capital spending in their budgets along with ambitious infrastructure plans for new rail lines, toll roads and port expansions. The creation of Infrastructure Australia (IA) in early 2008, backed by a healthy federal budget surplus including the “Building Australia Fund”, heralded a new way forward for the planning and prioritisation of major public infrastructure projects to get people, goods and the economy moving.
Then the global financial crisis arrived. The federal surplus was deployed towards a huge program of quick cash handouts and capital spending across the nation to keep the retail and construction sectors (and therefore the economy) ticking over. But it virtually spelled the end of any significant Federal Government funding support for much needed, multi-billion dollar infrastructure projects sitting on state government books.
At the same time, international credit rating agencies, their reputations badly damaged in the GFC, began to warn the States their much coveted triple-A ratings were under threat and their capital spending not sustainable unless they reduced expenditure and increased revenues. Queensland flouted the warnings in its 2009/10 budget by maintaining its capital spending and announcing a significant deficit. The Sunshine State was immediately downgraded to double-A status. Across the country, the brakes were applied to ambitious new plans, capital spending started to fall again and quietly infrastructure went into the too hard basket once more.
In 2013, infrastructure may no longer be the word of the day, but the challenges are greater than ever. By the middle of the century, Australia’s population is expected to exceed 40 million people and the national freight task set to triple. The majority of this population and transport burden is felt in the largest capital cities. The most recent ‘State of the Cities’ Report released by IA stated that in the decade between 2001 and 2011, Australia’s population grew by 15 per cent, with 40 per cent of this growth being accommodated in Sydney and Melbourne. The Report also indicates the country is experiencing a protracted period of static or falling productivity growth.
Additionally, a Citigroup report from 2008 estimated the investment in economic infrastructure investment task in the decade ahead is more than a$770 billion (2007 dollars) if the quality of capital stock is to return to a level that will sustain Australia’s ongoing prosperity. Several other studies report similar findings.
While there’s little argument about the need for investment in infrastructure, particularly public infrastructure such as road and rail projects, the means of funding that infrastructure remains the major hurdle.
With governments unable to fund the investment alone, private financing is critical. Of the $770 billion investment required in the Citigroup Report, $360 billion was estimated to need to come from the private sector.
And while private sector investment in resources – mines, roads and ports – is proceeding apace, investment in public sector infrastructure is a different story. So given this environment, how can government meet the infrastructure needs of their growing populations and deliver major public infrastructure projects? While there is no single, silver bullet solution to this problem, the following list briefly describes the suite of options available to government.
There is a strong argument around recycling capital based on a “rationale for continuing ownership” test.
Governments across Australia at all levels hold mature assets, such as ports and toll roads, which can generate long-term stable returns for investors, particularly superannuation funds. Revenue from the sale or lease of these assets can then be used to fund new infrastructure.
Public private partnerships (PPPs)
With far more knowledge and experience with these complex structures, and putting aside ideologically-based opposition, PPPs offer an effective and timely vehicle for private investment in large public projects.
In particular, the availability-based PPP, in which the private sector builds, maintains and sometimes operates the asset over a fixed year term and the government pays an “availability” fee, is a very attractive option for social infrastructure such as hospitals, schools, stadiums and social housing.
The fact that maintenance costs are built into the annual fee means that when the asset is handed back to government, it is in a well-maintained state. Despite its somewhat infamous reputation, the toll road PPP is also still a viable procurement model, particularly where traffic forecasts are known.
Reducing operating expenditure to increase capacity to take on more debt
Finding structural ongoing efficiencies in the delivery of public services will free up resources that can be invested into productivity boosting economic and social infrastructure. It will also allow government to take on “good” debt that can be used to fund projects.
Greater incentives for private investment in infrastructure can be achieved through taxation measures such as the treatment of tax losses and Managed Investment Trusts (MITs) and infrastructure bonds.
Stamp duty also remains an impediment to greater investment in brownfield infrastructure projects.
User charges and additional revenue streams to directly fund infrastructure
The toll road is the most well-known method of governments directly raising funds to pay for infrastructure.
An Ernst & Young paper commissioned by the Federal Government and released in 2012 describes how Tax Increment Finance can create a revenue stream for local government from increases in the value of property benefitting from new infrastructure.
With an estimated superannuation pool of funds at $1.3 trillion, Australian superannuation is often seen as the answer to the infrastructure financing question. However only about one third of funds invest in infrastructure and of that number, the investment in infrastructure makes up 2-10%. Like any investor, superannuation funds have an obligation to invest based on their assessment of return versus risks. A well-structured project of scale with a large degree of certainty around the government funding commitment as well as regulatory certainty will be an attractive investment.
Extracting or leveraging better use or value from existing assets
Some assets are simply underutilised or have greater value that can be extracted. For example there have been strong arguments that, in the medium term, there would not be the need for a second Sydney Airport for if the curfew were lifted or more landings were permitted per hour. In the case of roads, measures such as HOT lanes, allow road users the option of paying more for a less congested lane, thus raising funds for road upgrades or new roads. Several reports have also recommended governments introduce measures such as road pricing and congestion charging to pay for new or improved road facilities.
10. The infrastructure challenge, Julie Sibraa