23 May 2013

Debt steps to an infrastructure renaissance

by Brad Vann

An infrastructure bank, funded by the Commonwealth with a mandate to invest in projects sanctioned by Infrastructure Australia, could be the solution.

Infrastructure – who should build it, maintain it and, ultimately, pay for it – continues to be a regular feature of political, industry and media commentary and debate.

From proposals that our roads should be generally funded on a "user-pays" basis, or more narrowly that government should impose tolls on existing roads and sell them, to the virtues or otherwise of public-private partnerships, infrastructure remains one of the focal points of the broad-ranging conversation over Australia's economic future, particularly its role in generating economic activity and bettering our productivity levels.

Governments want to encourage private sector investment in infrastructure and reduce reliance on government funding – and, in principle, private sector involvement in infrastructure projects makes sense. The private sector has proven time and again to be more efficient at delivering infrastructure, both in terms of timeliness of delivery and on a cost comparison. Independent studies conducted by institutions like the University of Melbourne have verified this.

But like any investment, the private sector expects a return. The challenge is not financing the infrastructure – there are plenty of investors willing to do so. The challenge is funding the cost of it. In other words, paying back the investment made by the private sector is where governments face both a political and an economic dilemma. Politically, governments struggle to impose a user charge for using assets where the public has previously been using them for free (so how can they impose a user charge to fund the private sector's investment in buying the asset).

Economically, the key deliverers of infrastructure – our State Governments – are constrained by their debt levels which limits their capacity to borrow for new infrastructure.

In my view the answer appears to be obvious. The Commonwealth Government's capacity to borrow to invest in infrastructure is better than it has ever been. It can borrow long-term at historically low interest rates. It can borrow in Australian dollars thus eliminating currency risk. It has a robust AAA rating and gearing which is tending to around 10-11 percent of GDP, according to last week's budget. If there has ever been a good time to go into debt to invest in infrastructure that time is now, when we need to start substituting for the resources investment cycle by investing in our major population centres. These will be the future drivers of our economic prosperity (Brisbane, Melbourne and Sydney account for about half of our population).

The problem is that debt continues to be a dirty word when it comes to governments' balance sheets; witness the outpouring of criticism over the Commonwealth budget deficit. Both Federal and State Governments seem to be averse to going into the red. They shouldn't be – not when it comes to borrowing to fund long-term, productive assets such as road, rail and other economic infrastructure. Historically, Australian Governments have done that to provide the infrastructure we enjoy today – and, of course, Australia would not have world-leading home ownership levels if we each took the same approach in our own lives.

So how best to ensure those borrowings are invested in productive infrastructure? How do we prevent governments spending those borrowings in consumption rather than investment? One idea is to set up an infrastructure bank, funded by the Commonwealth with a mandate to invest in projects sanctioned by Infrastructure Australia.

This idea has merit. Creating an independent bank (much like the Reserve Bank) would ideally take infrastructure investment decisions out of the political cycle, with key decisions made by people who understand the mechanics of long-term infrastructure financing. That bank would not be a competitor to the private sector. It would finance the more difficult marginal risk of the large projects we have to have as we are retrofitting infrastructure into complex urban environments which typically requires a direct government contribution anyway. Good examples of this model include the European Investment Bank and the European Bank for Reconstruction and Development as well as the United States TIFIA (Transportation Infrastructure Finance and Innovation Act) program. By borrowing to fund a bank there will be greater transparency and less likelihood of those funds being diverted or invested inappropriately.

By taking long-term investment decisions out of the short-term political cycle we maximise the opportunities for leaving a legacy for future generations of infrastructure at least equal to, and hopefully better than, what we inherited.

Of course, the appropriate checks and balances would be needed. The fundamental underpinning of democracy is that our elected representatives make investment and other political decisions as part of their electoral mandate. Their re-election depends on the electorate's view of those decisions. Still, we need to counteract the short-termism of the political cycle – it can't be beyond the wit of clever people to devise a solution.

This article was first published in The Business Spectator, 20 May 2013


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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.