A fine balance needed to grow infrastructure investment

Bruce Lloyd
24 Nov 2023
Time to read: 3 min

Australian governments and the private sector have an impressive track record of collaborating to prioritise and fund infrastructure of national significance over the past decade.

As part of a broader economic stimulus policy, the benefits of these investments became increasingly apparent post-pandemic, when infrastructure projects helped maintain economic growth and support employment. The Albanese government has demonstrated a willingness to keep investing in infrastructure of national significance as the economy  transitions to a lower-growth, higher-inflation era.

Now, macroeconomic and geopolitical challenges are weighing on Australia’s ambitious infrastructure agenda. From rising interest rates and tight labour markets to supply chain constraints and price increases for materials, the cost of executing infrastructure projects has grown considerably. Capital is no longer as cheap and easy to come by as it was 18 months ago. Public and private infrastructure investors alike must grapple with these new market conditions.

In response, the federal government is reassessing which nationally significant infrastructure projects it will prioritise. Despite previous capital commitments, continued Commonwealth support is uncertain for many announced projects.

Whittling down the list of projects to continue funding—which span ports, freight, rail, airports and telecommunications—is not an easy job. All of these are productivity-focused undertakings intended to provide a foundation for future growth in Australia’s economy. Although capital-intensive, the high upfront costs of these projects nonetheless stand to produce  long-term economic benefits.

Some investors argue that the link between inflation and revenues means that essential infrastructure is an asset class that often benefits from higher interest rates in the long term.

Let’s hope this type of long-term thinking prevails when the Federal Government shares the findings of its May 2023 infrastructure review.

There is an understandable temptation to reduce public investment into infrastructure during periods of macroeconomic volatility, but to do so now may shortchange our long term future. There is a great deal of private sector interest, both locally and from international sources, in deploying capital into Australian infrastructure. Public funding can play a vital confidence-building and de-risking role, turning interest into investment.

As policymakers work to optimise public infrastructure spending, it is worth considering the valuable lever regulation offers to help strengthen the sector. Since the 1990s, Australia’s carefully calibrated approach to privatisation and competition has unleashed enormous quantities of private capital into infrastructure. This has boosted our economy and fostered domestic growth and exports.

Today, we see a steady flow of public and private spending into infrastructure in the United States, where the government has traditionally been more hands-off concerning regulation. The rise of industry policies like the Inflation Reduction Act and the Bipartisan Infrastructure Law have attracted a flood of private investment into new infrastructure projects, from roads and airports to broadband and green energy.

As a result, private equity investors are shifting their view of government in the US from just a regulator to a limited partner in their investments, says Bain's head of Macro Trends, Karen Harris. This is quite a coup in a market under the same inflationary global cost pressures as Australia.

Public- and private-sector investments are more deeply intertwined than ever before. A US-style subsidy surge may not be a realistic option for Australia, but public-sector funders at home would do well to recognise the potential of smart, targeted investments in areas that will stimulate the broader market. On this point, we can follow parts of the new US playbook.

The Federal Government's determination to rationalise its lists of priority projects presents a significant opportunity for an open exchange between public- and private-sector infrastructure funders about the right balance between regulation and market participation in nationally significant infrastructure priority projects.

If we’re serious about delivering the best outcomes with the most efficient use of resources, whether public or private, we should embrace the most promising growth-enhancing solutions and take a balanced approach to regulation to spur investment.

Public- and private collaboration to optimise long term growth would be preferable to turning off the public funding tap too much during during the current period of economic volatility.

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