Jun 21, 2011

Keynote address to the Patronage Forecasting Symposium

Keynote address to the Patronage Forecasting Symposium – Managing Patronage Forecasting & Risk

Hyatt Hotel, Canberra

The Hon Anthony Albanese MP

Minister for Infrastructure & Transport

Leader of the House

Member for Grayndler

21 June 2011

INTRODUCTION

I begin by wishing you all a warm welcome to a cold Canberra.

A particular welcome to Professor Bain, who has joined us from the UK today.

I am also pleased to see a few of my colleagues from the Infrastructure Working Group here. The Group, which I chair, had a lead role developing the first ever national PPP policy, and will continue to lead on a national response on managing patronage forecasting and risk.

Today’s event kick-starts an important discussion between the public and private sectors, one that has been overlooked, and which sits at the heart of investor confidence in Australian infrastructure.

We do face significant challenges in tackling the infrastructure backlog in Australia. At risk of being dramatic, there has also been on the back of the GFC, a crisis of confidence in PPPs in Australia.

But we do need the private sector to step up when it comes to delivering the infrastructure this country needs.

Over-optimistic patronage forecasts for certain toll road projects have been a scourge on investor confidence broadly.

They also have had the perverse consequence of directing scarce resources towards underperforming investments.

The outcome has been lost opportunities to increase the productivity of the Australian economy.

For these reasons, both governments and the private sector need to respond to this issue, and share responsibility for how best to do so.

Today’s symposium shines a bright light on this complex issue, and I acknowledge the diligent and farsighted work of the Bureau of Infrastructure, Transport and Regional Economics in my Department, for organising this event.

Having set out the reasons why we are holding this conference today, I want to engage head-on with the issue of risk transfer.

Today is not an admission that governments must assume demand risk in order to attract private sector investment. Demand risk transfer can provide value and protection for the Australian taxpayer.

Today is an acceptance that procurement processes, for example, could be improved to provide greater protection for investors.

And it is an acceptance that projects should be viewed case by case, with flexibility around how risks are managed for specific projects.

The Government does not bring an ideological presumption to the best finance model – it must be based on what is the best value for money.

Likewise, the Commonwealth is not undertaking to intervene in State Public-Private Partnerships (PPPs).

Instead, we can work with States and Territories to develop a more nationally sophisticated approach that promotes private investment, while delivering value to taxpayers.

Today is an opportunity to look at where errors begin – at the modelling and source data stage – and where they are compounded, in the tendering process.

Understanding these two issues will have a range of benefits across the infrastructure sector, and not just to the narrow subset of PPPs.

Ultimately, we want to avoid a situation where investor losses see taxpayers pay a higher price for critical infrastructure in the long term.

In short, we want to get the planning of projects right.

 

2011 BUDGET MEASURES

The Government announced in the 2011 Budget a package designed to improve the planning of infrastructure projects in Australia, and encourage investor confidence in nationally significant projects.

The package came about through consultation with the private sector, as part of the Prime Minister’s productivity agenda, which has three pillars:

  • A nation-wide improvement in our human capital from the bottom up — from early childhood education to tertiary education;
  • Health care, with reform to make our health system world-class and sustainable; and
  • Infrastructure, urban planning, and regulatory and financing reform, to improve foster a seamless national economy.

There is no one panacea for long term infrastructure investment.

The package we announced on Budget night has multiple lines of attack, including measures to deepen the pipeline of potential projects, improve transparency, and get the governance and planning of projects right.

We also announced a new Infrastructure Investment Incentive, designed to attract up to $25 billion of superannuation and private investment into nationally significant infrastructure.

Like today’s work on forecasting, these tax reforms go to the heart of any investment decision – the relationship between risk and return.

In the case of infrastructure, the current tax treatment of early stage losses lowers the incentive to undertake risky long term investments.

We’ve heard this clearly from industry, and through the Henry review.

Under the Government’s new changes, a project assessed as nationally significant by Infrastructure Australia, may be eligible to have the value of its early stage losses uplifted over time, and exempted from tax rules which prevent losses being used where there is a change of ownership.

Overall, the result will be a lower weighted average cost of capital for eligible projects, lower compliance costs, and greater certainty especially for brownfield investors, like super funds.

Our aim is to make productive projects for the nation even better investments for the private sector – to encourage the sector to plan around worthwhile infrastructure projects in Australia into the future.

This is part of a broad program by this Government to tackle prolonged under-investment in Australia’s infrastructure and to drive a long-term agenda on infrastructure through Infrastructure Australia.

Since it was established three years ago, IA has run the first ever national audit of infrastructure, established an annual priority list of projects, and begun productivity strategies for our ports and freight network.

In addition, this Government is investing in a record nation building program, which has doubled the roads budget to $27 billion over six years.

All of this work has clearly been a game-changer in Australia – shifting the debate from the short to long-term, and entrenching new standards by which public infrastructure is judged by.

 

INFRASTRUCTURE FINANCING GROUP

The work of reform is never done.

In the 2011 Budget package, we announced a new advisory group of senior private and public sector advisers to continue these reforms.

The Infrastructure Finance Working Group will advise Infrastructure Australia and the Government on implementing the 2011 Budget reforms, identifying:

  • Where projects on the infrastructure priority list could be privately financed;
  • The role of user charges and applicability of alternative financing models;
  • Further PPP process and procurement reforms;
  • Potential reforms to the Commonwealth grant process, and ways to better utilise the Commonwealth balance sheet; and
  • Further reforms to develop the commercial debt market and develop the infrastructure projects pipeline further.

I am pleased to announce today the members of the Infrastructure Finance Working Group:

  • Mr Jim Murphy – Chair, Executive Director of Markets Group in the Australian Treasury.
  • Mr Ross Rolfe – Deputy Chair, CEO and Managing Director of Alinta Energy.
  • Mr Mike Mrdak – Secretary of the Department of Infrastructure and Transport.
  • Dr Paul Schreier – Acting Deputy Secretary at Department of the Prime Minister and Cabinet.
  • Mr Stephen Williams – Head of Australian Operations at the Royal Bank of Scotland.
  • Mr David Byrne – an executive of ANZ, with extensive experience across utilities, infrastructure, defence and higher education.
  • Mr Julian Vella – National Leader of the Infrastructure Projects Group with global advisory firm KPMG.
  • Ms Pauline Vamos – Chief Executive of the Association of Super Funds of Australia.
  • Mr Brendan Lyon – CEO of Infrastructure Partnerships Australia.

It truly is an all stars team, and I look forward to working with all members of the new Group.

 

CONCLUSION

Today’s Symposium is a key step towards finding solutions.

Your collective wisdom and experience will no doubt provide unique insights.

I am very keen to hear your practical suggestions for governments and industry.

This is essential if we are to see more private investment in public infrastructure, and if we are to make Australian infrastructure more competitive.

I appreciate your taking time out of your busy schedules to attend. I am keen to see the outcomes and I wish you well in your discussions.

[ENDS]