21 Nov 2013

Productivity Commission to look for answers to Australia's infrastructure funding conundrum

by Brad Vann, Angus Foley, Owen Hayford, Alan Maguire

The Productivity Commission will look at costs, competitiveness and productivity in the provision of nationally significant economic infrastructure.

Could a solution to Australia's infrastructure funding woes be on the way? The new Federal Government has asked the Productivity Commission to look at ways to encourage private financing and funding for major infrastructure projects, and what causes their high cost and long lead times.

For those who have long wanted a proper inquiry into the funding of nationally significant economic infrastructure – and there are many – this might seem an early Christmas present. Treasurer Joe Hockey asked the Commission to look at costs, competitiveness and productivity, and examine ways to:

  • reduce infrastructure construction costs;
  • address any barriers to private sector financing, including assessing the role and efficacy of alternative infrastructure funding and financing mechanisms, and recommending mechanisms and operating principles that may be applied to overcome these barriers; and,
  • without limiting the generality of this reference, outline options to reduce construction costs.

The terms of reference for the Productivity Commission

The Commission has six main areas and tasks:

1. How infrastructure is currently funded and financed in Australia, including by the Commonwealth, the States and the private sector.

2. The rationale, role and objectives of alternative funding and financing mechanisms, including:

a. the full range of costs and benefits of different models

b. the issues and costs associated with the allocation of project risks, availability of finance, contracting arrangements and delivery models for construction projects

c. the disincentives to private sector investment

d. broad principles for the use of these funding and financing mechanisms

e. the roles of the Australian Government, the States and Territories, Local Government and the Private Sector in the implementation of these mechanisms, and the relationship between each of the parties

f. creation of revenue streams to attract private sector finance; for example, through user charging, availability payments etc.

3. Consider the financial risks to the Commonwealth posed by alternative funding and financing mechanisms, as well as their possible impact on the Budget and fiscal consolidation goals.

4. Examine the cost structure of major infrastructure projects in Australia, including where infrastructure project costs have increased considerably, compared with other countries.

5. Provide advice on ways to improve decision-making and implementation processes to facilitate a reduction in the cost of public infrastructure projects, including in relation to:

a. measures to improve flexibility and reduce complexity, costs and time for all parties

b. access to the market for domestic and international constructors, including barriers to entry, and what effect this has on construction costs

c. greenfield infrastructure projects.

6. Comment on other relevant policy measures, including any non-legislative approaches, which would help ensure effective delivery of infrastructure services over both the short and long term.

Next steps for the public infrastructure inquiry

The Commission will seek public views, both through hearings and submissions, and then produce a draft report in March 2014. The final version will be produced in May 2014, and the Government says it will respond as soon as possible.

It's commendable that the Government is moving swiftly on this issue, but the Commission has been given a very broad brief, and not much time in which to work. The Commission has already announced it will be running two teams in tandem, however, which should expedite matters. In addition, if any area in public policy has generated solutions over the last few years, it would be this one. We therefore expect participants will be able to give their views to the Commission quickly, clearly, and comprehensively.

We'll be monitoring the Inquiry and will keep you informed. Given the importance of infrastructure funding to the nation, and the tight timeframes, we urge all projects participants to make their views known to the Government.

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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.