Sep 4, 2015

Speech to Infrastructure Partnerships Australia Conference – Investing in Infrastructure – Sydney

A few weeks ago in Canberra, the Minister for Infrastructure outlined progress on major road projects in Western Australia.

With an eye on the forthcoming Canning by-election, the Minister spoke about projects under construction, including Gateway WA – the biggest road project in the state’s history.

There was also the North West Coastal Highway, the Great Northern Highway and NorthLink, known previously as the Swan Valley Bypass.

These are all great projects.

They will all boost the WA economy, driving productivity gains that will create jobs growth and boost prosperity.

But there’s a problem.

None of these projects are new.

They all date from the days of the previous Labor Government. It’s great that they are underway.

But I see little evidence that the government is working up the next wave of Nation Building projects to be rolled out in this and coming years.

At a time when our economy needs extra activity to make up for the drop-off in investment associated with mining, our nation needs to invest in infrastructure to drive productivity growth.

However, something is going wrong with the process of identifying, developing and funding major infrastructure projects in this country.

Australian Bureau of Statistics figures show that infrastructure work conducted for the public sector has declined by 19 per cent since the 2013 election.

This year’s Budget included a $2 billion cut in infrastructure spending over the next two years over the allocation in the 2014 Budget.

This makes no sense.

Interest rates are at record lows.

Private sector investors are looking for opportunities.

The amount of money held by superannuation funds in this country is approaching $2 trillion.

Despite these factors, investment is not happening at the pace required.

My starting point to address this problem is consistent with the approach I have raised at this critical forum over many years.

We need to adhere to a proper process when it comes to selecting which infrastructure projects receive government funding.

We also need the Commonwealth to work with state governments on delivering the infrastructure projects that have the greatest potential to lift our economy.

That means investing in roads.

It also means investing in urban rail to properly address worsening traffic congestion.

We also need to get more serious about facilitating private investment. However, let me stress one point.

There’s no need to reinvent the wheel here. We don’t need a new system.

We just need to extract the politics from the existing system.

But we need to do this strategically and urgently – especially at a time when our economy has grown below-trend for 12 straight quarters and when the domestic economy has been consistently weak since 2013.

 

DEFICIT

Despite all the talk of record spending on infrastructure, investment is falling.

Respected business commentator Alan Kohler noted last week that while the value of construction had increased slightly in the second quarter of this year, public investment had collapsed.

Kohler was blunt.

Governments are basically out of it.

Another example of the way in which the rhetoric of our times flouts reality relates to asset recycling.

There is no additional Commonwealth funding associated with asset recycling.

The money the Federal Government says it has made available was in itself recycled

– taken out of the Building Australia Fund and the Education Investment Fund.

What is being presented as some kind of increase in funding is in fact a means for the Commonwealth to raise more revenue.

That’s because when a public asset is sold, the instrumentality stops paying dividends to the state government and begins paying tax to the Commonwealth.

There is no new money.

And indeed, on projects like the Pacific Highway and the Bruce Highway, the Federal Government has actually put in place arrangements that have reduced state investment in these important upgrades.

Every project under construction on the Pacific Highway right now, including the Frederickton to Eungai, Worrell Creek to Nambucca Heads and Nambucca to Urunga is funded 50-50 between the Commonwealth and the states.

Because the Commonwealth is now saying states need only contribute 20 per cent to road projects, and NSW is already above that much reduced threshold across the project.

That means NSW can minimise its contribution to the rest of the upgrade of the Pacific Highway.

And far from filling the gap, the Abbott Government is slowly shifting its funding to future years for the remainder of the Woolgoolga to Ballina sections.

LABOR’S RECORD

In 2007 the former Labor Government created Infrastructure Australia as an independent adviser to government tasked with assessing the merits of major projects seeking Commonwealth funding.

Infrastructure Australia used cost-benefit analysis to give decision makers clear evidence about which projects had the greatest potential to add to national economic productivity.

The aim was simple – to break the link between the infrastructure cycle, which, by its nature, is long term, and the political cycle, which is shorter.

We also lifted infrastructure spending to record levels.

When we took office, Australia was 20th among OECD nations when it came to infrastructure investment as a proportion of GDP.

When we left office, Australia was 1st.

We doubled the roads Budget and we allocated more investment to public transport than all other governments combined since federation.

EROSION OF PROCESS

By 2013, the Infrastructure Australia model was up and running.

Based on its research, the organisation was producing the annually updated Infrastructure Priority List.

Of the 15 major projects recommended by Infrastructure Australia on the basis of its independent analysis, Labor funded all 15.

Among those projects were major urban public transport projects including the Melbourne Metro and Brisbane’s Cross-River Rail project, both assessed positively by Infrastructure Australia.

But two years later, I am deeply concerned that the current government has abandoned the Infrastructure Australia model.

The Infrastructure Priority List has not been updated since 2013

Only a handful of new project assessments have been completed in the past two years.

Prior to the 2013 election, the Coalition backed Infrastructure Australia.

It promised it would not fund any project worth more than $100 million without a full, published cost-benefit analysis.

But after the election, it withdrew all funding for public transport projects, including the Infrastructure Australia-approved Melbourne Metro and the Cross River Rail project.

It reallocated that money to a range of road projects which had not been analysed by Infrastructure Australia.

Part of the reason for creating Infrastructure Australia was to establish a pipeline of projects already assessed as worthy to which both sides of politics could commit.

I know that if I was an investor looking at the possibility of investing in public infrastructure, I’d want to be certain that projects coming forward stacked up.

If I couldn’t satisfy myself that that a project stacked up, I’d take my money elsewhere.

I fear that is what is happening right now.

That great fictional detective Sherlock Holmes once highlighted the folly of acting without evidence.

It is a capital mistake to theorize before one has data.

Insensibly, one begins to twist facts to suit theories, instead of theories to suit facts.

There’s a fair bit of fact twisting going on right now in Canberra.

PUBLIC TRANSPORT

I suspect that if Sherlock Holmes had a chance to examine the current state of Australia’s transport infrastructure, he would argue for significant investment in public transport.

The recently produced update of Infrastructure Australia’s National Infrastructure Audit said traffic congestion was costing this nation $13 billion this year and that the figure would climb to more than $50 billion by 2031.

Yet our national government refuses to invest in public transport; only roads.

Our nation will never defeat traffic congestion unless we invest in a properly integrated transport system that includes rail and roads.

If traffic congestion, or indeed any other problem, was costing the nation more than

$50 billion a year, I would have thought any competent Commonwealth government would feel compelled to act in the public interest.

But on public transport, we are seeing the opposite – a withdrawal of funding and a return to the soul-destroying blame game that dominated the dying days of the former Howard Government.

Frighteningly, congestion is getting worse.

In previous decades, jobs growth was at its strongest in the outer suburbs of our cities in sectors like manufacturing.

Average workers could find work in the suburbs near their homes.

But the Digital Age has changed the equation and jobs growth is now accelerating in the inner suburbs of our cities in the services sector.

Many Australians, therefore, are being forced to work in the city and commute to drive-in, drive-out suburbs where they can find a house but can’t find a job.

This is a problem affecting millions of Australians who are literally watching their quality of life go down the drain on a daily basis.

DEBT

One of the downsides of the strongly partisan nature of Australian politics in recent years has been the irrational demonization of debt.

After years of scaremongering about an alleged debt and deficit crisis, the current government has convinced many Australians that all government debt is bad.

While we do need to keep debt low, it’s time for an honest conversation about the significant difference between debt raised for capital expenditure and debt raised for recurrent expenditure.

Capital expenditure that increases revenue and national economic activity over time can be fiscally responsible.

Making investments to support future sources of growth and drive productivity improvements is as much a part of a business development strategy as it is part of smart management of the national economy.

Indeed, it can be argued that such spending is economically and fiscally necessary, even though it imposes short-term costs on the Budget.

This applies across the spectrum of Commonwealth expenditure – from public investments in human capital such as education, to investments in physical capital such as productivity-enhancing infrastructure projects.

If a project delivers significant productivity benefits, we should factor that productivity gain into the equation when considering funding options.

If a project drives gains that produce jobs and economic growth, we should factor the value of those jobs into our evaluation.

Governments should be prepared to have the argument about borrowing to invest in productivity-enhancing infrastructure.

The first step toward having that discussion is an acceptance that the nature of the expenditure and investment needs to be assessed and considered differently.

However, if we are to take such an approach, we need to be doubly sure that we identify projects that have genuine community benefit.

Once again, that brings us back to the Infrastructure Australia model. It stresses research.

It allows for rational decision-making.

Australian families borrow money all the time – usually to buy their homes.

They don’t decide that because they have to borrow money to buy a home, they won’t bother and will rent for the rest of their lives.

But before they borrow, they do their research and ensure that they pay the right amount for their home, that it meets their family needs and that, over time, it will appreciate in value.

There is no reason the situation should be different when it comes to government investment in infrastructure.

FINANCING

In July, 2013, I released a suite of policies aimed directly at facilitating new private sector investment in infrastructure.

These arrangements were developed by the Infrastructure Financing Working Group, which included Infrastructure Partnerships Australia’s CEO, Brendan Lyon, along with senior public servants and representatives of the infrastructure, banking, superannuation and taxation sectors.

Let me take the time to explain those arrangements today because they will be the starting point for a future Labor Government.

The proposals included:

  • Australian Government guarantees for private debt relating to major projects to improve their overall creditworthiness;
  • Phased payments and availability payments allowing government injections of capital at critical stages during projects, including once a project is operational;
  • Commonwealth seed funding to get projects off the ground;
  • Capital recycling, whereby the Commonwealth provides concessional loans to industry and uses the repayments to fund other infrastructure projects; and
  • Infrastructure tax incentives such as allowing the uplift of carry-forward losses determined by the 10-year government bond rate to remove tax system impediments that work against investment.

Building on these, in May this year, Labor announced that if elected we would ensure that Infrastructure Australia’s mandate be extended so that it plays a key leadership role in facilitating new major infrastructure projects.

It will work with the states and private sector financiers, super funds and constructors to broker deals, get more projects underway, get them financed and have them delivered.

To take the politics out and restore faith and confidence in the infrastructure process, we also undertook to consult the Coalition on all board appointments.

FLEXIBILITY IN PRACTICE

In 2013, as Transport Minister, I reached an agreement with the NSW Government and Transurban for construction of the F3 to M2, later renamed Northconnex.

It’s an example of an unsolicited bid that will produce Nation Building infrastructure with little or perhaps even no impact on the Budget in the short term and a positive impact in the medium and longer term through enhanced growth, increased productivity and a reduction in urban congestion.

Under the project arrangements, the Commonwealth and the NSW Government are each providing a guarantee of $405 million to ensure a project which had been talked about for decades but not progressed could occur.

Another example of working with the private sector is the Moorebank Intermodal Terminal in western Sydney, which will provide major productivity benefits as well as taking 3300 trucks off the road network every day.

This required the establishment of a government-owned company to invest in the site and do the early work prior to it being leased to a private operator.

The former Labor Government also reached a deal with the Queensland Government to provide $715 million in seed funding for the Cross River-Rail Project.

The money was to have been paid over five years.

We also agreed to pay half of the capital cost portion of the availability payment stream for a PPP component over about 30 years and to provide a debt guarantee in relation to the private debt raised for the project by the PPP consortium.

I am very disappointed that the current government abandoned this project.

But what is truly stunning is that the government has not taken advantage of the great work of the Infrastructure Financing Working Group in informing its subsequent decisions.

AIRPORT

To its credit, the current government has committed to developing a Second Sydney Airport.

The Badgerys Creek Airport will boost national economic productivity and provide much-needed jobs for residents of western Sydney.

A project like an airport, with all of its accompanying issues, can’t get off the ground without bipartisan support.

That is why Labor is backing this project.

However, there’s one aspect of the current plan that makes no sense whatsoever – the Government’s failure to commit to linking the Badgerys Creek Airport to a railway line linked to the existing passenger network.

Some have rightly observed that without a proper rail connection, the airport risks not fulfilling its objectives.

The Commonwealth needs to broaden its thinking.

The Badgerys Creek Airport can be an airtropolis that drives economic development and jobs growth throughout western Sydney for decades to come.

It should be more than just a runway and a terminal.

It should be surrounded by businesses in industries like logistics, tourism, engineering and aviation services. It should facilitate high value jobs like the Macquarie Park precinct has for the area around Ryde.

It should be linked from day one to the south-west line at Leppington and the main western line, which would benefit not just commuters to the airport and employment precinct, but also create a loop line around western Sydney that will have enormous wider benefits.

If we are smart, we can deliver on this ambition without a significant public cost for the railway line.

The cost of this rail line should be factored into the lease price for the operation of the airport, whether it is operated by the Sydney Airport Corporation or some other operator.

The existence of a railway line will increase the value of the airport and the lands around it.

That’s an uplift factor the government can include in the contract price and the operator can include in sub-lease arrangements over surrounding land.

CONCLUSION

Infrastructure development is about more than building roads.

It’s about Nation Building and positioning our economy to create the jobs of the future.

It’s also about thinking about how different pieces of infrastructure fit together. Most of all, it’s about having a long-term view.

It’s hard to take a long-term view if decisions about infrastructure are compromised by short-term political considerations.

That’s why the former Labor Government created the Infrastructure Australia system to reduce the influence of politics in decisions about infrastructure.

After two years on the current government, it’s now clear that there has been more infrastructure talking than infrastructure building.

As the mining boom moves from the construction to the production phase, this is the very last thing we need.

Australia must invest scarce public resources wisely.

And the Commonwealth and states must work together in the public interest.

There must be a genuine partnership with business based on flexibility and upon ensuring the projects that are put forward produce decent returns.

The basis of good decision making in infrastructure is proper research.

That is why Infrastructure Australia needs to be the centre of government, where it belongs.

 

Contact Anthony

(02) 9564 3588 Electorate Office

Email: A.Albanese.MP@aph.gov.au

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