Sep 5, 2007

Investing in Infrastructure Assets – Terrapin Conference

INVESTING IN INFRASTRUCTURE ASSETS

TERRAPIN CONFERENCE

INFRASTRUCTURE: INVESTING IN THE FUTURE

5 September 2007 – Swissotel, Sydney

Keynote Address by Anthony Albanese MP

Click here for a pdf of this speech.

We are in an era of unprecedented economic prosperity.

The market is booming but lying beneath the rosy surface is a worrying trend of slowing productivity.

And, over reliance on the commodity boom is jeopardising our future prosperity.

The 31 March edition of The Economist put it this way: “without further policy reform the Australian kangaroo risks turning into a sleepy koala”.

The opportunities presented by a once-in-a-generation mining boom have been squandered.

We have become a resource based economy with no long term plan to reduce our dependency on commodity prices.

Declining productivity undermines our long term prosperity and our living standards.

Indeed, today there is rising public resentment about infrastructure shortcomings in critical areas such as telecommunications, housing, and water.

Things could be different – consider the productivity gains that come with a robust telecommunications network.

Increased output and improved international competitiveness result from information networks that are not constrained by low bandwidth.

Like few other areas, development of infrastructure has the capacity to boost the productive economy, improve our living standards, and lock in our long term prosperity.

But to achieve infrastructure development and to overcome our crippling backlogs, our national infrastructure policy framework requires a major overhaul.

Infrastructure policy under a Rudd Labor Government will not be business as usual.

Because “the usual” way of doing things is clearly failing us.

The BCA estimates that Australia has an infrastructure deficit of a conservative $90 billion.

And CEDA estimates that the infrastructure backlog is costing us around $6.4 billion dollars a year in lost production.

As a nation, we are ill prepared to meet the key challenges of the future like climate change and our burgeoning water shortages.

Despite Australia’s infrastructure deficit, investors, like many attending this conference, are forced to direct capital offshore that could otherwise be invested locally.

The process of bring national infrastructure projects to market is fundamentally flawed.

The development of the market has been sporadic, and the lack of a steady flow of new projects to be developed has meant that we have not made best use of skills and resources in the construction, development and financing sectors.

Long term policy uncertainty has limited business decisions.

Meanwhile, population growth and distribution and climate change are increasingly putting strain on critical infrastructure and community services.

Ultimately, Australians are poorer for it.

Our diminished quality of life means hours wasted in traffic jams, water restrictions, power surges when the mercury rises, and slow internet speeds when we need to be connected the most.

In infrastructure terms, this means we need to sort out our transport networks, secure our water supply, get our energy markets right, and make sure we have world class telecommunication networks.

The “business as usual” scenario under the Howard Government has indeed failed us, and without change we do risk becoming a “dormant koala”.

Australia’s infrastructure policy framework requires re-crafting so we can recharge productivity growth and raise livings standards.

In a few months Australians will vote to determine who will govern Australia for the next three years.

Elections provide a valuable opportunity to focus Australians on ideas, policies, and outcomes.

Election campaigns also reveal a weakness in our system of Government.

That is, they often focus on the next three years rather than the next decade and beyond.

For the great challenges facing the nation – climate change and the water crisis, education and skills, and addressing our infrastructure deficit – a focus on the electoral cycle of 3 years is completely inadequate.

Infrastructure development needs vision and long term planning.

Comprehensive, coordinated and integrated planning is at the very heart of successful infrastructure development.

And this can only be delivered through leadership at the national level.

Federal Infrastructure Minister

Under a Rudd Labor Government there will be a Federal Infrastructure Minister.

The federal government is best placed to create the right policy framework and governance structure to solve infrastructure problems that so often cross different infrastructure types and jurisdictional borders.

Rather than adding another layer of bureaucracy, the Federal Infrastructure Minister will add value in his/her capacity as a coordinator.

We can no longer afford to work in silos where road and rail infrastructure is considered separately to port infrastructure.

Over a decade of blame shifting and a silo approach has left us unprepared to meet the nation’s long term infrastructure needs.

Even the COAG process has broken down.

Once COAG was driven by cooperation. Today it is paralysed by the blame game.

A systems approach is needed to make sure the entire supply chain runs efficiently.

This requires effective communication and collaboration between agencies and industries and between all levels of government which can only be achieved through national coordination and leadership.

National leadership is also required to match our infrastructure priorities with available infrastructure investment capital.

We can no longer let the margin of a seat shape the nation’s infrastructure budget spreadsheet.

The current scattering of responsibility over a plethora of government departments is a recipe for inaction and confusion.

If we weren’t working in silos we would be building the infrastructure of the future as well as building the skills of Australians who will operate or occupy that infrastructure.

Instead we now find ourselves short of workers as well as infrastructure.

In the future, I think it will be hard to imagine a time that there was no Federal Infrastructure Minister.

Just as it is difficult today to imagine there was no Federal Minister for Water before January this year.

Like water, infrastructure problems don’t stop at State borders or when freight moves from a truck to a train to a ship.

National coordination and leadership are therefore essential.

 

Infrastructure Australia

The central plank of Labor’s infrastructure policy is the creation of an independent, Commonwealth Statutory Authority called Infrastructure Australia.

Infrastructure Australia will be established within the first 100 days of the election of a Rudd Labor Government and will bring national leadership to infrastructure development in Australia.

Infrastructure Australia will be comprised of representatives from all levels of government and key stakeholders.

If we are to move forward, it is critical that we have a clear understanding of the adequacy, capacity and condition of our current infrastructure assets.

Therefore one of the divisions of Infrastructure Australia will deal with auditing the adequacy of the nation’s infrastructure, identifying weaknesses and prioritising projects. Based on this audit of the state of the nation’s infrastructure and our future needs, Infrastructure Australia will have a deadline of 12 months from the election of a Rudd Labor Government to produce its first National Infrastructure Priority List.

This will include existing infrastructure assets that need improvement and new assets that need to be built.

By operating at arm’s length from Ministers, Infrastructure Australia will ensure decisions are no longer based purely on political interests or the margin of a particular seat.

We believe important infrastructure decisions that shape our nation’s future must be taken fairly and objectively.

They must take into account economic, social and environmental objectives.

And they must be sensitive to long term challenges such as climate change, and the age and distribution of our population.

Importantly, in assessing infrastructure proposals, Infrastructure Australia will be well positioned to identify any barriers to implementation and refer these to the Federal Infrastructure Minister.

Another division of Infrastructure Australia will deal with regulatory issues, driving reform on legal, tax, planning, and infrastructure finance matters.

And the last will evaluate the business cases of project proposals, look into project financing options, and manage the probity process.

This division will be tasked to provide a one-stop-shop for business in working though the various approval processes that exist across government for infrastructure projects of national significance.

Infrastructure Australia is precisely what is missing in current government practice and what remains missing in current government proposals – a driver of coordination and reform.

It will deliver more than just a series of projects.

It will deliver a coordinated infrastructure network.

Long term planning means that infrastructure can be scheduled and rolled out in a coordinated way.

It creates the certainty of a continuous flow of projects to market so that all involved can plan ahead and deliver with confidence.

Long term investment certainty also leads to a more competitive market.

It means we can avoid overloading the construction market and exacerbating skills shortages.

It means that different projects do not unnecessarily compete for the same resources at the same time.

With coordination we can share bright ideas between different government agencies and across sectors.

When done well, planning infrastructure enables us to build vibrant, healthy and sustainable communities.

Effective planning helps prepare for the future and its challenges, it boosts international competitiveness, creates jobs and thereby creates prosperity.

The economy benefits.

Consumers benefit.

Investors benefit.

Australia benefits.

Infrastructure financing – matching priorities with investment capital

Today, Australia is faced with a situation where we have a strong demand for infrastructure development and a substantial supply of capital.

With the right leadership we can put these together.

When it comes to infrastructure financing, Federal Labor views long term infrastructure spending as an investment and not just a cost.

Funding considerations must be taken on a project-by-project basis so that any given project is financed by the most suitable funding vehicle.

This includes public or private funding or a combination of both.

Public Sector Financing – Labor’s “Building Australia Fund”

Australia’s investment in public infrastructure is in decline.

In 2004, Australia ranked 20th out of 25 OECD countries for its investment in public infrastructure.

While private investment in infrastructure is important and welcome, the Federal Government must accept its share of responsibility in developing the infrastructure that generates wealth for the entire nation.

To boost Commonwealth investment in our nation’s infrastructure, Federal Labor has already announced that we would allocate future surpluses to a Building Australia Fund, and use the income stream from that Fund to invest in infrastructure that strengthens our economy.

Under Labor, recommendations for infrastructure investment from the proceeds of the Building Australia Fund would be determined through Infrastructure Australia.

This will ensure infrastructure priorities are guided by economic, social and environmental interests, not narrow political interests.

Private sector financing

Federal Labor is in favour of private investment in infrastructure and PPPs when they are determined to be the best option for a particular project.

PPPs are an established procurement model in Australia and abroad.

According to ABN AMRO, over the next decade, total infrastructure spending in Australia could reach $400 billion.

Given the magnitude of the infrastructure needs in Australia, the private sector will play an important role in partnering government to plan and deliver infrastructure.

We will be most successful when we can draw on the expertise that currently exists across the public and private sectors.

We must strive to create an appropriate environment to encourage and accommodate investment.

This includes the correct fiscal environment, adoption of best practice procurement and tender processes, and minimisation of red tape.

Infrastructure Australia can expedite the standardisation of tender processes and contract documentation between Commonwealth and State jurisdictions for the use of PPPs and other relevant procurement options.

Everyone in this room would know that competition to invest in a new asset is stiff, and bid strategies are becoming more and more sophisticated.

Better data on asset performance also means that investment decisions are more informed than ever before.

This environment results in bidding costs so high that smaller and newer investors often can’t afford to compete.

To avoid this, Infrastructure Australia will adopt practices that ensure that companies whether they are large or small can legitimately compete for infrastructure projects on offer.

Best practice procurement processes will also be developed to maximise value for money, transparency and public accountability when evaluating differing procurement options.

Superannuation funds

One of the most significant changes to occur in the financial and investment markets in Australia over recent times has been the growth of superannuation funds.

Superannuation funds are now estimated to hold over $1 trillion in investments.

Today, Australia is faced with a situation where our infrastructure needs are at all time highs, and we have an abundant supply of capital.

Despite availability of capital, the flow of projects has not increased and fund managers continue to focus offshore.

Investors readily acknowledge that they would be willing to invest in the Australian market if the opportunity arises.

We might be the lucky country but we can’t afford to wait for this opportunity to knock at the door – it must be created.

With the right leadership and national coordination, this can be achieved.

Infrastructure Australia will ensure infrastructure priorities are matched with available capital.

Australia must create an investment environment that will allow superannuation funds to more readily finance infrastructure.

Superannuation funds are well suited to infrastructure investment that offer a long term, secure investment option with consistently good rates of return.

In superannuation funds we have an ever-expanding pool of money looking for somewhere to invest.

Policies which encourage superannuation funds to invest in infrastructure and thereby address Australia’s infrastructure deficit should be an absolute priority.

Conclusion

It’s time to approach infrastructure policy differently.

With a systemic approach to infrastructure development, we can sustainably manage growth and prepare for future challenges.

Australia urgently needs long term national leadership.

Reforming the way Australia responds to current and future infrastructure demands is critical.

And we urgently need a policy focus that is long term, not one dictated by the 3 year election timeframe.

The Federal Government must stop pointing the finger at the States and start working on the sort of reform that Infrastructure Australia will deliver.

Long term planning, coordination and national leadership will ensure infrastructure projects can be scoped, costed and scheduled irrespective of the infrastructure class or the jurisdiction(s) it is located in.

A steady pipeline of investment options will stimulate the productive economy and enhance our standard of living.

It will ultimately be the ability of our government to undertake infrastructure reform and coordinate infrastructure development that will determine whether Australia can boost productivity growth and lock in our long term prosperity.

A Rudd Labor Government is ready to provide the national leadership needed to drive reform and secure our long term future.