Addressing the infrastructure funding challenge

Markets Group
Jim Murphy
Executive Director

Good morning. Thank you for inviting me to speak with you today.

Infrastructure funding is an important issue, and I commend Infrastructure Australia for its work in arranging this conference - and leading the public debate on these kind of issues more broadly.

It's imperative that we, as a nation, come to grips with our infrastructure funding challenges.

As Infrastructure Australia pointed out in its June 2011 report to the Council of Australian Governments, there is a 'profound disconnect' in community attitudes towards paying for, and using, infrastructure.

The report also highlighted the fact that the Australian community is generally uncomfortable with the 'user pays' concept.

In my role as the Chair of the Government's Infrastructure Finance Working Group, I have a keen interest in these matters.

I'd like to share with you today some thoughts about the infrastructure challenges facing Australia. In particular, I'd like to outline the key themes we see as crucial to the future development of infrastructure in Australia.

These are:

  • better identification of priority projects;
  • the role of market mechanisms such as user pays in infrastructure; and
  • increased engagement with the private sector in the financing and delivery of infrastructure.

Let me begin, however, with a few observations about the state of our infrastructure in general.

State of play

We all appreciate that infrastructure makes an important contribution to national productivity, and helps to drive economic growth.

The Productivity Commission has estimated that improving productivity and efficiency to achieve best practice in energy, transport, infrastructure and other activities could, after a period of adjustment, increase GDP by nearly two per cent.

Recognising the importance of infrastructure investment, the Australian Government has allocated more than $36 billion to roads, rail, and ports over the six years to 2014.

The concept of 'infrastructure deficits' has been raised in the media, but I don't think this is a particularly useful way to guide investment decisions by governments.

Rather, I think we all recognise the signs that our transport systems may not be working as well as they could.

We can see this in the increasing level of traffic congestion in capital cities, and the infrastructure bottlenecks which occur from time to time in some of our major ports.

Unless we change our practices, these challenges will only compound in the future, driven by increasing levels of demand.

As highlighted in the Federal Government's Third Intergenerational Report, pressures are likely to come from:

  • population growth;
  • demographic change;
  • greater urbanisation; and
  • climate change.

In relation to population growth alone, the resulting likely congestion impacts are sobering.

The National Transport Commission has noted that future population growth is expected to have major flow-on implications for transport in this country.

The Bureau of Infrastructure, Transport and Regional Economics predicts the avoidable cost of congestion to the Australian economy will increase from around $9billion a year in 2005 to around $20 billion a year by 2020.

These are complex problems with no simple solutions. Effectively addressing these challenges requires action on many fronts.

Approaches such as simply building more roads - as has been done in the past - would be neither effective nor sustainable.

Not only would this be extremely costly for the community, but in many highly-developed cities like Melbourne and Sydney, infinite supply-side options are simply not feasible.

The way forward...

So how can governments address the infrastructure challenges we face in a practical way?

We think the focus should be in three main areas.

First, we need to do a better job of identifying priority infrastructure projects.

Second, we need to explore ways to improve the operation of markets across our transport systems.

And third, we need to find ways to encourage the private sector to play a more significant role in helping to meet the challenge.

I'll address each of these areas in turn.

Better prioritisation of infrastructure projects

Dealing with Australia's infrastructure challenges will obviously require ongoing investment by governments and it is important to ensure that we focus on supporting the right projects- that is, the ones that target problem areas and can deliver the highest net public benefits.

Historically, governments across Australia have tended to invest in new transport infrastructure on a largely ad-hoc basis, with a few notable exceptions.

Moreover, planning for investment has often failed to take into account important factors such as network effects, undermining the objective of addressing traffic congestion.

Recognising the need for more effective planning, the Government established Infrastructure Australia in 2008.

Infrastructure Australia's key role is to assist governments to better target the allocation of infrastructure spending towards the right projects.

It is also helping to drive the development of a long-term, coordinated national approach to infrastructure planning and investment.

The reform and investment framework used by Infrastructure Australia to assess projects considers the strategic alignment of projects, including network-wide considerations and cost-benefit analysis, as well as their deliverability.

Infrastructure Australia was initially tasked with identifying a list of priority infrastructure projects for consideration by governments.

After assessing over 600 submissions, Infrastructure Australia developed an initial priority list of nine projects that were considered capable of delivering the highest net public benefits.

Infrastructure Australia also recommended a further 28 'pipeline' projects which showed real potential, but required further analysis and consideration.

The Australian Government has announced funding from the Building Australia Fund for seven of the nine 'priority' projects, and six 'pipeline' projects on Infrastructure Australia's initial priority list- which I think is not a bad outcome.

This type of detailed analysis helps to build the case in favour of quality infrastructure investments and has arguably led to better decision-making by governments.

As Infrastructure Australia continues its work, it is guided by seven themes for action to address Australia's main infrastructure challenges.

One of the key themes is 'transforming our cities'. This includes considering ways to:

  • increase public transport capacity in our larger cities;
  • achieve the most efficient movement of people and freight; and
  • make better use of existing transport infrastructure, including road networks.

Acknowledging the vital role of Infrastructure Australia, in the 2011 Federal Budget the Government increased its funding by nearly 40 per cent to $36million over four years.

It did this to enhance its role in planning and advising governments and the community on infrastructure investment opportunities.

Infrastructure Australia's mandate has also been expanded to include the development of an enhanced priority list.

Infrastructure Australia will also only consider those projects that exceed $100 million, are flagship, or demonstrate unique national interest characteristics.

Work is also being undertaken to improve the effectiveness of planning. Infrastructure Australia is continuing to develop national strategies, such as the National Ports Strategy and the National Freight Strategy.

This type of planning and consideration of projects - such as intermodal terminals to improve the efficiency of the freight logist
ics task - will make an important contribution to improving Australia's productivity and prosperity.

It is also critical work in light of current projections about the likely doubling of freight volumes between now and 2030.

In all of these initiatives, the Australian Government is working cooperatively with State and Territory governments to ensure a nationally-consistent approach to produce the most effective outcomes.

Well-functioning infrastructure markets

I will now move on to the second area where I believe that governments should focus their efforts - better-functioning transport infrastructure markets.

Well-functioning, competitive markets are efficient at allocating resources, facilitating change, and as signals for investment.

Many transport markets are certainly imperfect, leading to problems in terms of pricing, overuse and limited ongoing involvement by the private sector.

These imperfections have led governments to traditionally take the lion's share of responsibility for making transport infrastructure investments around this country.

Arguably, as a community we have arrived at this point because governments and users have tended to view transport infrastructure as if it were a pure 'public good'.

In the face of competing demands for government expenditure, the traditional approach is proving to be unsustainable, and the community should be encouraged to reconsider its perception of the road network as being a pure public good.

One way to address congestion and improve economic efficiency is to consider expanding the scope of user charging.

User charging

It's a generally accepted proposition among economists that user charging can help to promote economic efficiency.

The idea is that those who use a piece of infrastructure - for instance, a road - pay for that usage. Under a user charging approach, ideally, the costs associated with the infrastructure would not generally be subsidised by non-users, through taxes or other means.

In light of the fiscal challenges facing governments, user charging is also an effective way that governments can create opportunities for increased private sector investment in infrastructure, because it leads to revenue streams that widen the scope of commercially attractive projects.

This can also help take some of the funding pressure off governments and allow them to focus their funding efforts on projects that may not be well suited to user charging arrangements.

Governments in some of our capital cities are already relying on user charges as a way to incorporate market signals into transport infrastructure.

This has helped to better balance supply and demand for transport infrastructure. Examples of this include Sydney's highly successful Westlink M7 motorway, and Citylink in Melbourne.

In addition to user charging and selecting high quality projects, we also need to consider opportunities to make better use of existing infrastructure.

One way this is being done at the moment is through the work being done on developing the COAG Road Reform Plan.

Australia's Future Tax System Review, perhaps better known as the Henry Review, noted that heavy vehicles should pay for their own specific road wear costs.

The COAG Reform Plan aims to provide better price signals for transport freight infrastructure providers and users - notably for heavy vehicles.

The reforms are designed to help us to more efficiently meet the forecast growth in the national freight task, which is projected to nearly double by 2030.

Another more finely calibrated way governments can introduce price signals is through congestion charging - which can be thought of as a type of user charging that involves variable tolling depending on the time of the day.

It is a mechanism that is already in place in some areas, such as on the Sydney Harbour Bridge.

The idea of peak period charging is not really a radical idea. It is common in many other areas of economic activity, such as in the energy, aviation, public transport and communications markets.

That said, I acknowledge that congestion charging is a particularly contentious issue in the community. This was clearly demonstrated by the wide range of views expressed on the topic at last year's Tax Forum.

In this regard, I note the important role that Infrastructure Australia plays through events such as this - and its next conference on 'user pays' - in encouraging community debate and engagement on problems such as how to deal with congestion - and the related tradeoffs.

As outlined in the Henry Tax Review, if appropriate congestion charging arrangements were in place, roads would be less congested during peak periods.

This can result in higher travel speeds and shorter travel times, which could save time for road users, reducing vehicle running costs and reducing greenhouse emissions.

Surely something worth further careful consideration, particularly in light of forecasts that suggest continued strong growth in the demand for transport infrastructure.

Network charging

I'd also like to make a few remarks about improving network efficiency.

A network charging regime could improve consistency and equity for users, as well as send appropriate price signals for users to facilitate more efficient outcomes.

The idea behind network charging is to set consistent user charges across an entire road network, to provide an incentive for road users to make the most efficient choices.

When user charges are levied on an ad hoc basis, as they are currently, the result can be a network with little apparent rationale for user charges, which sends contradictory signals for transport choices.

Sydney's road network provides a good example. A driver travelling from Sydney's West can enter from the F5, which is free, or the M7, which employs a distance-based tolling system.

That driver could then freely enter the M4 East, which leads to the flat-tolled Eastern Distributor, then cross the Harbour either by taking the Harbour Bridge or Tunnel, which utilises time-of-day tolling.

Clearly, depending on where you enter and exit the network, you can get a widely different tolling consequence.

This is an outcome that is confusing to users and one that can undermine the argument that some public benefit can be served by introducing user charges.

If user charges were introduced on the complete corridor in a consistent way, this would send a price signal which could also be expected to reduce the number of drivers as some would switch to other modes of transport.

In addition, such a pricing regime would generate additional income that could potentially be used for network maintenance and improvement.

However, there are impediments to implementing charging over an entire network. In the case of Sydney's network, different roads are managed by different private sector operators, constraining the ability of government to act unilaterally in this area.

I know that my colleagues from Infrastructure Australia have been doing a lot of thinking about how governments could implement network charging to improve the operation of these transport markets.

There will be ample opportunities I'm sure for you to speak with representatives from Infrastructure Australia about this in greater detail over the course of today.

It is important to recognise that there will be trade-offs - if the community wants to embrace public transport, we will need to find ways to further invest in it. Road pricing is just one way of achieving this.

Greater private
sector involvement

The third area where governments should focus is in relation to maximising opportunities for the private sector to contribute to meeting the infrastructure challenge where it can add value.

Governments will always be key players in transport infrastructure investment, particularly for projects that can deliver high net public benefits, but may not deliver acceptable commercial returns without some level of government involvement.

However, we need to recognise that there will often be cases where privately-provided infrastructure is necessary and desirable.

It is important to acknowledge that there are very real constraints on public sector spending, and obvious trade-offs that communities, through their governments, will need to make.

As you can see, the Australian Government is facing significant fiscal pressures in light of future demographic challenges.

If our demographic pressures are realised, then spending is projected to exceed revenue (the so-called 'fiscal gap') by 2¾per cent of GDP in 40 years' time and net debt is expected to grow to around 20 per cent of GDP by 2049-50.

Private sector involvement in public infrastructure can improve efficiency through greater accountability, cost effectiveness, financial discipline, competition and improved risk allocation.

In recent years, there have been increased opportunities for private investment in infrastructure - in particular, where the private sector can anticipate an acceptable return on its investment, for example, in airports and ports.

In such cases, government subsidies are not required, and can distort resource allocation.

A key challenge becomes the need to find ways for governments to work with the private sector and increase opportunities for their involvement.

The 2011 Federal Budget included several measures designed to address barriers to efficient private investment in nationally-significant public infrastructure by:

  • removing impediments to carrying forward losses in the taxation system; and
  • ensuring the value of those losses is maintained over time by indexing them at the Government bond rate.

These measures were an important first step.

The Government also established the Infrastructure Finance Working Group to explore ways to encourage greater private sector investment in infrastructure.

Significantly, the group brings together expertise from both the public and private sectors.

The group has been working to identify possible measures and make recommendations to government on ways to improve the infrastructure financing, particularly by looking at ways to encourage greater private sector investment.

The group has undertaken targeted consultation with industry experts, state governments and others to explore reforms to address some of the perceived barriers to greater private sector investment in infrastructure.

While we are still refining the recommendations, some broad themes have emerged.

The working group found that there is scope for governments to address barriers to the efficient operation of infrastructure markets - and to get the market moving.

Some of the recommendations are aimed at 'micro' reforms, such as:

  • improving the efficiency of Public-Private Partnership procurement processes; and
  • encouraging alternative, longer-term, sources of finance for the banks, such as the development of local bond markets and removal of barriers to consolidation by super funds so they can increase the size of their investments in infrastructure.

Other recommendations are more ambitious, such as:

  • increasing the size of the infrastructure pipeline through more comprehensive longer term planning by all levels of government;
  • State reviews of existing infrastructure for the purpose of selling assets - creating room on balance sheets - and investing proceeds into new projects;
  • improving efficiency and generating revenue streams by applying user charges to new and existing projects;
  • governments directly helping to get high net public benefit projects off the ground; and
  • creating a brokering role for the Commonwealth to bring market participants together to shift nationally significant high priority projects off the Infrastructure 'ready to proceed' list and into action.

The Australian Government, however, has not been alone in advancing infrastructure investment and reform. In a recent article in the Australian Financial Review, the NSW Treasurer flagged a need to more effectively utilise Public-Private Partnerships to help meet the infrastructure needs facing that State.

Significant work is also being undertaken on refining the Public-Private Partnership model under the National PPP Working Group. Indeed, PPPs continue to be an effective mechanism through which governments and the private sector can work together to deliver significant infrastructure projects.

Conclusion: the need for a public debate

In conclusion, Infrastructure Australia's 2011 report to COAG, Communicating the Imperative for Action, made a strong case for a far more open public debate about infrastructure funding.

The report argued that it's not possible to boost infrastructure investment without increasing taxes or asset sales, or by expanding user pays pricing.

I think the community is ready to engage in a more meaningful way with government about what we want our infrastructure to achieve.

Once we have had that discussion, it will be far easier to make sustainable progress into problems such as growing congestion in our cities.

While there is no 'silver bullet' solution, and work is needed on several fronts, the bottom line is that we need to ensure that we focus on projects that offer the greatest net public benefits - the projects that will enhance productivity and ultimately lead to improved living standards for all Australians.

Once again, thank you for the invitation to speak with you today, and I hope you enjoy the rest of the conference.