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30 May 2011

Time to rethink infrastructure approach

by Brad Vann

Australia's infrastructure backlog is well-documented. According to recent media reports, The Business Council of Australia and Infrastructure Partnerships Australia estimate Australia's current infrastructure deficit at anywhere between $450 and $700 billion. The critical need for infrastructure building – and re-building, following recent natural disasters around the country – is clear.

Identifying a need, and the ability to meet that need, are two very different things however. Australia's ability to meet its current and future infrastructure needs will depend on a number of factors. Most critical of these is funding. Potential long-term future sources of funding such as superannuation funds have gone on the record as to their willingness to invest in projects, with the right investment framework and allocation of risk. But without a pipeline of projects, they can only sit on their hands.

Creating a pipeline of projects out of the current backlog is the next major challenge for our governments in tackling our infrastructure deficit. It is no easy challenge. However, some positive steps are being taken. The announcement in the Federal budget of tax breaks to encourage private sector investment in infrastructure is a welcome first step. So to is the Federal Government's commitment to increasing funding to Infrastructure Australia, and giving it increased independence. Although the tax breaks are restricted to projects of national significance as determined by an unspecified decision-maker, it would significantly enhance IA's independence to become that decision-maker. We need to take infrastructure investment decisions out of the political cycle.

Creating an environment in which superannuation funds are comfortable investing in Australian infrastructure will be a more difficult – but not impossible – task. It will require a better understanding of what the superannuation industry sees as the key barriers to investment, and a willingness on the part of all players to compromise. We need to become more sophisticated in the way we allocate patronage risk on economic infrastructure, like toll roads for example.

Governments also need think longer term and more broadly about the way they fund projects. Past thinking has often misguidedly linked assets which have a long-term life with the short-term impact on budgets. Does it make sense to think about the forward estimate impact of a significant piece of infrastructure which will have a useful life in excess of 100 years – one which significantly improves the business efficiency of the economy? Instead, governments need to look at the budgetary impact of an asset over the longer term. For example, longer concession periods should apply to assets with a long life expectancy to eliminate the economic cycle risks most recently experienced overseas in the credit crunch. Governments should arguably kick start the pipeline by creating seed funding through the sale of brownfields assets where the revenue flows are known and predictable and would be attractive to long term investors like superannuation funds – witness the investors in the recent Port of Brisbane sale.

Governments also need to consider how to break down barriers to competition to encourage greater foreign participation in projects. This will have the benefit of driving down project costs because it will open up our economy to greater competition from international players, who will bring different ideas to the table. Making procurement processes more efficient will also go some way towards encouraging greater private sector interest / investment.

It is time to move away from the short-termism that has arguably hampered the approach to infrastructure delivery in Australia in recent years and adopt a long-term outlook. The proposals outlined in the Federal Budget are a welcome start towards this. Only by lifting our eyes to the horizon and recognising that nation-building is a long-term goal can we start to create a pipeline of projects of which the country's future generations will be grateful.

 

This article was originally published in The Australian, 17 May 2011

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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 communication. Persons listed may not be admitted in all States and Territories.