Clayton Utz Insights

21 June 2012

Reforms to funding arrangements needed for public infrastructure

By Owen Hayford.

Key Points:

We need a mature debate on reforms to funding arrangements for public infrastructure, if we are to address Australia's infrastructure deficit.

If I had to list the three most significant challenges to the development of public infrastructure in Australia, they would be (1) funding; (2) funding; and (3) funding.

That’s not to say that there are not other significant challenges facing the development of public infrastructure in Australia. For example, PPPs clearly have a role to play in relation to the financing and efficient delivery of infrastructure projects, and means by which we can further improve the efficiency of the PPP model, and expand its application, need to be continuously explored. However, such challenges pale into insignificance compared to the funding challenge.

By funding, I am not referring to the ability of private sector or government to raise debt or equity finance for investment in public infrastructure. Rather, I'm referring to the sources of money which can be used to actually repay that debt and equity finance. There are basically two sources of funding for public infrastructure: an allocation from the government budget, or via direct user charges.

The government budget available for infrastructure can be boosted by:

  • increasing taxes, 
  • reducing government spending in other areas; or
  • by selling government assets.

Direct user charges can be applied in relation to some forms of "economic" infrastructure, such as roads which can be tolled, but they have limited application to "social" infrastructure such as schools, hospitals and prisons.

The criticality of this funding issue features prominently in Infrastructure Australia's most recent report to COAG.

That report refers to our infrastructure deficit and the widely held view that our current infrastructure is barely adequate for our current needs and is beginning to impose significant long-term costs on our economy through its impact on our productivity and our global competitiveness.

Infrastructure Australia says that there is a "powerful need for change" in the way we fund our infrastructure, and that we need to bridge the gap between expectations and reality, that is between the unrealistic notion that governments should fund more infrastructure while at the same time cutting taxes, reducing debt, avoiding asset sales and opposing the application of user charges.

However, if Australia is to truly confront the lack of funding available for public infrastructure, we need to look at significant reforms to the way in which public infrastructure is funded in Australia. In particular, we need informed and mature public debates about the application of user charges to infrastructure. For example, the levying of user charges on motorists who use public roads as a mechanism for raising the funds needed to invest in our roads and other public transport infrastructure needs to be properly considered and debated.

We also need more mature debate in relation to the merits of recycling government capital, that is selling government infrastructure assets that could be better managed by the private sector, and using the proceeds of those sales to fund other infrastructure.

Finally, we need to look at how the government can improve the budget available for spending on infrastructure. Productivity and efficiency improvements in the planning, procurement and delivery of projects can only go so far in creating financial capacity to fund new infrastructure, however, such efficiency improvements alone will not bridge the funding gap.

Absent reform in relation to user charges and sales of government assets, additional government expenditure on infrastructure can only occur by reducing government spending elsewhere or increasing taxes.

The reforms which are needed will be challenging for both government and the community. However, these are challenges which we must encourage our political, business and community leaders to confront and overcome if we are to maintain Australia's global competitiveness and living standards.



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For more information, contact...
Email: Owen Hayford, Partner
Tel: +61 2 9353 4604
Disclaimer
Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.
Owen Hayford
Owen Hayford