As the Funding Australia’s Infrastructure project has identified, one of the big challenges facing the Australian economy is overcoming our infrastructure deficit.

As many commuters in our larger cities can attest – whether stuck on freeways or sandwiched in beside fellow passengers on trains or trams – infrastructure bottlenecks are growing.  Productivity is the key to economic growth and bottlenecks simply won’t do. Significant investment in infrastructure is fundamental to our nation’s continued economic prosperity, particularly given expected levels of population growth and the high costs associated with congestion.

In 2011, the OECD found that Australia “suffers from an infrastructure deficit” and that our transport infrastructure ranked 34th overall and our ports 46th.   If this was the Olympics, there would be an immediate inquiry.

Yet Australia has just experienced an unprecedented resources infrastructure investment boom.  Mining investment increased from under 2% of GDP in 2004 to over 8% in 2012/13, peaking at over $100 billion that year.  So how can it be that public sector infrastructure investment is a problem?

Like all advanced economies, the dilemma we face is the need to build greenfield public sector infrastructure.  This includes new roads, public transport and ports and is critical to boosting productivity.  There are three main challenges: funding; financing; and coordination.

First, there is the funding challenge.  Just like our parents told us, money doesn’t grown on trees – well neither does infrastructure. It ultimately has to be paid for by people, whether by taxpayers in general or by individuals who benefit directly or indirectly from the investment.

Taxpayer funding means allocating money from current spending or borrowing money and making repayments out of future spending.  With Federal and state governments committed to the goal of a balanced budget for the foreseeable future, large scale government funding for greenfield infrastructure becomes less likely.

In undertaking such projects the onus is on governments to convince communities that new infrastructure will be worth the cost, in terms of increased productivity and improved quality of life.  This will also help to improve the viability of more innovative indirect funding mechanisms, such as land tax uplift and targeted business taxes paid by employers who benefit from improved access to the CBD.  The latter were voluntarily agreed to by business in London to partly fund the City’s Crossrail project.

Asset recycling is another means by which governments can fund new infrastructure.  This was successfully demonstrated recently when NSW sold long-term leases over Port Botany and Port Kembla and committed the proceeds to new infrastructure.

With the right delivery model in place, there is significant private capital available to finance infrastructure in partnership with public sector bodies.  Although risk and returns can be shared with the private sector through PPPs which look to cost recovery through the public paying directly through tolls on roads, tickets levies on public transport and user charges on ports or intermodal terminals, the risk allocation mechanisms in such models have often been found wanting, creating high levels of political risk.  For example, projects such as the Airport Link, the Cross City Tunnel and the Sydney Harbour Tunnel in New South Wales; the Southern Cross Station redevelopment in Victoria; and the Clem Jones Tunnel in Queensland.

Second, there is the financing challenge.  International investors are lining up to invest in Australia.  Major pension and infrastructure funds from Canada, Japan, China and other countries have invested heavily in Australia in recent years – including in ports, roads and airports. And indeed, Australian funds have amongst the highest commitment to infrastructure funding in the world.

Obviously, there is no shortage of demand under the right conditions.  In Australia’s resources sector, megaprojects of $40 billion or more have secured financing. But what are the right conditions?

In the post-GFC world, risk allocation has become a significant challenge to financing infrastructure.  Protecting long-term investors from at least part of the construction and patronage risk on greenfield projects is essential.  These are at the forefront of investors’ minds following a series of high profile losses on toll roads, some of which are identified above.

There are a number of mechanisms that could work, including: Build Operate Own Transfer (BOOT) arrangements, converting infrastructure bonds (similar to BOOT, but where the government has more protection in relation to sales proceeds) and amendments to the bidding process recently proposed by ISN.  At their heart, all of these mechanisms aim to better match risks with those parties best able to bear them.  That usually means that risks are borne by the party with the most control over or information about the risk.

Finally, there is the coordination challenge.  Infrastructure projects should be sequenced to reflect logistical considerations.  In addition, more certainty and regularity is needed in the national infrastructure pipeline so that investors maintain the teams of experts that are required for undertaking due diligence, participating in bidding processes and arranging financing.  If the pipeline is too patchy, these teams will move to other countries reducing, competitive tension to the taxpayers’ disadvantage. The creation of Infrastructure Australia has significantly boosted the capacity of government to assess and prioritise projects and there is potential to strengthen its role further.

All three of the Funding Australia’s Future project papers, which undertake a stocktake of Australia’s financial system, identified greenfield infrastructure as an issue that warrants further attention. This is one of the major issues that will be discussed at the Funding Australia’s Future Forum on August 7th in Sydney,

The investment environment for productive infrastructure is positive.  First, there is a global pool of hundreds of billions of dollars that large pension funds and infrastructure funds are looking to invest in projects with returns that are predictable over the long term.  Second, interest rates are at historically low levels, meaning that projects can be funded on very favourable terms.  And third, Australia is attractive compared with most other advanced economies: our growth prospects are strong and our economy and political situation is relatively stable.  If we can adopt new approaches that address the funding, financing and coordination challenges, there is no reason that we cannot build the infrastructure needed to allow us to fulfil our potential.

Dr Daniel Mulino, director policy, Pottinger


Join the discussion