What is needed for an infrastructure boom?

Posted: July 11, 2013 in Transport, Urban planning
Tags: , , , , ,

Discussion on the need for and how to achieve an infrastructure boom, particularly in light of a fading mining boom, is continuing.

The need for an infrastructure boom was outlined here on this blog last week, and a few days after in an article on The Conversation, by Peter Sheehan from the University of Victoria. In it, Prof Sheehan explains that the mining boom has three phases: (1) rising resources export prices relative to import prices, (2) an expansion in mining capacity via investment in the resources sector, and (3) an increase in the quantity of resources exported. Each of the three leads to the next, later dropping back due to cause and effect. For example, rising prices of iron ore eventually lead to a greater quantity of iron ore exports, which brings iron ore prices back down again. It is the first two phases which have peaked and beginning to drop back down to normal, while the third is starting to pick up steam.

Prof Sheehan predicts that mining investment, the second of the three phases, has just recently peaked at $100 billion in 2012-13, but could fall to about half that in the next two years. Demand management is therefore needed to maintain investment and employment, thus preventing a recession. Given Australia’s infrastructure deficit, which he estimates at $700 billion; he calls for finding ways to commit to $200 billion in infrastructure projects over the next few years, thus filling the expected $50 billion a year hole left by falling mining investment. With state governments lacking significant revenue generating opportunities, he calls for federal government involvement; if not through direct funding then via guarantees. Other funding options include the sale of existing assets to build new ones, known as “recycling assets”; or through the private sector.

The requirements for private sector involvement in building infrastructure was recently discussed by Garry Weaven, Chairman of the investment company Industry Funds Management (the relevant part begins 3 minutes into the 10 minute interview). Mr Weaven’s main concern is about how much risk the private sector bears in relation to infrastructure projects. Recent financial failures such as the Cross City and Lane Cove Tunnels in Sydney or the CLEM7 and Airport Tunnels in Brisbane have made the private sector wary of new toll road projects. He points out that “[these deals have] been put together by syndicates who are only concerned to extract value out of making the deal happen, not out of the long term value of the project”. However, the value he refers to appears to be value to the private investors, rather than to the community. While such projects were a financial failure from the investor’s perspective, the community obtained brand new pieces of infrastructure in each case, often at no cost to the taxpayer due to funding coming from user access fees.

However, Mr Weaven suggests that there are around $50 billion in Australian super funds and foreign pension funds available over the next 5-10 years which could be used for infrastructure in Australia. This would go a long way towards the $200 billion target that Prof Sheehan called for in The Conversation article above. But much of this can only be accessed if investor concerns about risk are addressed.

When asked what could be done to reduce investor risk, Mr Weavan provided a number of possibilities; such as guarantees, cash, equity, or loans. But his focus was on having governments build a project first in order to prove traffic levels with a given toll level, then selling it to the private sector. This is the model that is being used for the NSW Government’s WestConnex toll road, a project that Mr Weaven also praised for being funded by the sale of Port Botany (an example of the asset recycling mentioned earlier).

Map of the proposed WestConnex alignment showing it connecting to the City West Link. (Source: WestConnex – Sydney’s next motorway priority, Infrastructure NSW, p. 17)

Map of the proposed WestConnex. Click to enlarge. (Source: WestConnex –
Sydney’s next motorway priority, Infrastructure NSW, p. 17)

Such proposals are not magic bullets to every infrastructure project, the devil is in the detail. Indeed, the inability of public transport to operate at a profit means those projects will almost certainly have to be entirely built and owned by the government, though franchising of their operations to the private sector is an option, as currently exists with buses and ferries in Sydney. With this in mind, $50 billion would put a serious dent in the infrastructure Australia needs in coming years.

But it will not pay for all Australia’s infrastructure needs. Nor can state governments pay for the remaining shortfall on their own. The federal government, with its superior revenue raising powers, needs to play a key role in paying for infrastructure. And here it is disappointing to see that Opposition Leader Tony Abbott continue to refuse to fund any urban rail infrastructure projects.

Mr Abbott originally claimed on April 4 that the Commonwealth has “no history of funding urban rail”. This was soon proven to be incorrect, as while the Federal Coalition may have had no history of funding urban rail the Commonwealth Government absolutely did. When asked about it at a press conference in Western Australia last week, Mr Abbott accepted that the current Federal Government had funded urban rail, but that this was the first time a Commonwealth Government had done so. This is also inaccurate, given that Commonwealth funding for urban rail dates back to the early 1990s, when the Building Better Cities program funded such rail projects as the Pyrmont Light Rail or the Y-Link for the Cumberland Line, both in Sydney. Urban planning and public transport were so neglected during the inbetween years of the Howard Government that when the Rudd Government took power in 2007, Infrastructure Minister Anthony Albanese claimed that he had found “not a single urban planner in the entire Commonwealth Public Service – not one”.

The federal Liberal Party's transport policy consists exclusively of road projects, with no committments to public transport. Click to enlarge. (Source: Our Plan Real Solutions For All Australians, Liberal Party, page 32)

The federal Liberal Party’s transport policy consists exclusively of road projects, with no committments to public transport. Click to enlarge. (Source: Our Plan Real Solutions For All Australians, Liberal Party, p. 32)

Mr Abbott has previously outlined the need for additional infrastructure, and he should be commended for recognising this problem. He also stated his view on Infrastructure Australia’s (IA) role:

“Under the Coalition, Infrastructure Australia would assess all these projects, publish cost benefit analyses for them, and provide a recommended order of priority for Commonwealth funding. If the government varied Infrastructure Australia’s priorities it would need to argue a national interest case for doing so against the yardstick of what makes the most economic sense.”Tony Abbott (April 2011)

However, by failing to argue the national interest in both promising to fund road projects that are not on IA’s priority list and then ruling out the funding of urban rail projects that are on its priority list, Mr Abbott has not lived up to his earlier commitment to lessen Australia’s infrastructure deficit with an apolitical and evidence based approach. This is disappointing, and should be revisited by the Federal Coalition with a view to funding urban rail projects.

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