Ensuring Australia’s economic sustainability

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National goal: Australia needs to stay ahead of the infrastructure curve, so gaps and bottlenecks are not allowed to hinder our economic growth, our quality of life, and our ability to capitalise on the opportunities generated by the march forward of China, India and our other regional neighbours.

The incoming Government should take action to make sure nationally important projects go ahead, and mitigate the risk of delay or cancellation.

Issues for infrastructure

Australia’s demographics make it difficult to match our infrastructure supply to the needs of a constantly-changing population:

  • Declining revenue base (as a consequence of our ageing population) – this is creating a growing chasm between the need for new or improved infrastructure, and the actual level of current investment.
  • Urbanisation – around 90% of people in Australia live in urban areas, and about half the population can be found in five state capitals. Of the immense population growth expected in the next 40 years, three quarters is anticipated to be in our capital cities. This will generate growing demand to expand city infrastructure, including: transport, sewerage, water and energy supply, telecommunications and waste disposal.

In addition, Australian political cycles are short when compared to the lengthy lead time for large infrastructure projects, making pipeline development problematic.

Role of Government

Broadly, the Federal Government should set priorities, influence State Governments to follow the national plan and strongly encourage private investment in infrastructure. Occasionally, it may have to partly fund essential projects that the market will not take on. For example, in the absence of Commonwealth support, some of the major transport schemes we so desperately need, such as the Melbourne Metro, will simply not proceed.

The reality is, the Federal Government has limited power to influence infrastructure unless it is prepared to invest in projects. At the very least, it should assist in establishing long-term finance for infrastructure projects.

In executing this overarching role, the Federal Government has several levers to pull:

  • Funding contributions to State projects – this is a very powerful lever, which can send a side-lined project to the top of a State’s list. However, the danger is that dual funding leads to inertia, with States delaying projects because they are ‘waiting for Federal funding’. The Federal Government needs to be clear on how much capital is available for infrastructure and how it will be applied. After that, the States should be certain that they’re on their own and need to harness private sector investment and expertise to execute projects.
“We have this inertia where everyone is pointing to each other. The Commonwealth is pointing to the States; the States are pointing to the Commonwealth. Meanwhile we haven’t achieved anything.”
Jim Miller, Macquarie Group Executive Director
  • National vision – it’s essential to develop and stick to a national plan for Australia’s infrastructure to ensure that State plans are properly focused and integrated. Infrastructure Australia (IA) has brought discipline to national infrastructure planning, helping to prioritise projects and create consistency across the States. Its contribution to the planning and execution of a pipeline has been one of the most positive developments of the last few years. However, the IA blueprint is only followed if projects are allocated Federal funding.
  • Certainty – private sector appetite is enormously high for infrastructure projects; the issue is the lack of certainty and the complexity of the procurement pipeline. To make infrastructure investment attractive, governments need to smooth out the boom/bust cycle and avoid the extremes of risk. For example, moving towards a more consistent and transparent deal flow would give institutional investors, such as superannuation funds, the certainty they require to take on the risk of bidding for and investing in infrastructure projects.
  • Funding solutions – finance is not a problem for brownfield infrastructure projects; the problem is funding greenfield projects with market risk. The Federal Government should provide long-term debt and equity underwriting for greenfield projects. Establishing a long-term corporate bond market would also assist.

    Traditional funding structures are no longer appropriate. Private investors need commercially-attractive projects. Government should work with them to ensure the risk and return profile or projects are structured to efficiently leverage the market’s appetite. This will include looking at new ways to partner with project beneficiaries in delivering infrastructure – both economic and social.
  • Approval process – projects can be accelerated by smoothing the approvals path, especially where there is a policy disconnect, such as in environmental impact mitigation, between the Commonwealth and the States.
  • Tax incentives – the Federal Government can get the infrastructure pipeline moving by allowing projects to monetise any tax losses today. Although this appears to be a loss to revenue, we believe the resulting GST and income tax receipts will make it revenue positive – not to mention the multiplier effects from investing in the project.

Infrastructure conclusion

The role of Government in funding projects directly has been forcibly reduced by falling available capital. At the same time, Government’s role in developing policies that create certainty, smooth the approvals path and attract private sector investment, has never been more important.

Even where the private sector bears a significant role in specific projects, infrastructure remains fundamentally a matter of public policy. But it is essential that the Federal and State Governments' priorities are aligned, to provide the market with certainty.