A new way to fund rail, roads and hospitals

The ADC Infrastructure Summit decided new projects should be structured so self-managed funds could be a key direct provider of infrastructure money. This would also transform retirement funding in Australia.

The Australian Infrastructure Summit has headed Australia into a new infrastructure funding direction -- a plan to directly harness self-managed funds.

And those preparing the funding plan have discovered that by involving city and regional communities in the funding process Australia is far more likely to gain infrastructure project outcomes that are supported by the community.

The finance workshop at ADC summit in Sydney last week challenged the idea that a greater proportion of infrastructure funding should be public/private partnerships between big governments and big institutions.

Not surprisingly these deals, remote from communities, have high failure rates and have led to considerable community opposition to higher charges to fund them.  

But almost certainly the plan that is being prepared as a result of the ADC Infrastructure Summit will be opposed by banks and large institutions who believe they should initially be the main infrastructure funders. Many plan to repackage infrastructure funding for self-managed funds and, of course, take a worthwhile clip of the ticket via fees on the way through.

Strangely the growth of self-managed funds in Australia, which is unique in the world, came out of community frustration with the large fees charged by the institutions. Australians were so unhappy at the level of institutional fees that they took superannuation into their own hands. Now close to one third of all superannuation and about half of superannuation funds that provide pensions are self-managed funds.

In more recent times lower bank term deposit rates and the uncertainty of the sharemarket have forced a greater proportion of self-managed funds into real estate. If the self-managed funds have efficient, well structured, low-fee access to infrastructure it will curb real estate investment and transform retirement funding in Australia.

For a long time I have advocated that governments should tailor infrastructure protects to self-managed funds and I went to the second day of the summit to advocate this. To my delight and surprise I found that on the first day not only had the summit embraced the concept but had begun developing it in far more detail than I had previously attempted.

The ADC Summit’s initial draft plan is that residents of our state capital cities plus smaller cities be offered securities (probably bonds) in projects like road, rail, education or health infrastructure.

Income for the infrastructure securities should be generated by a combination of revenue via tolls, fares or other charges plus a taxation revenue subsidy. A small portion of the revenue would go to an insurance fund in case individual projects do not meet expectations and there would also need to be some government income backing in the early stages of a project.

These two steps would prevent a large number of very small projects dominating the scene, although there would obviously be some small projects that communities are anxious to fund.  

In the follow-up meetings in coming weeks much more detail will be added. The summit agreed that the flaw in so many infrastructure projects is that the public does not always know where the money is being spent and exactly what benefits to expect as a result of the outlays. This makes them very cynical and fosters protests.  

In the new plan not only will the community have involvement but it will also make superannuation work much better in providing secure pension income at a rate above bank deposits. Almost certainly the returns will have an inflation adjustment.

Of course not all self-managed money will be invested this way but it will be an enormous help in providing annuities to older people and will make them less reliant on government pensions. This is work in progress. I will keep you informed when the detailed plan is prepared.

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