Abbott's do or die infrastructure play

Economists and business agree Australia desperately needs the productivity gains of better infrastructure. Can a fiscally-sensitive Coalition deliver the big projects?

Each June, Infrastructure Australia publishes its annual advice, which includes a list of costed and assessed infrastructure projects – most put forward by state governments – that the federal government can tip money into at will.

It’s a bit like a corral around the politicians to prevent them getting out into the electorate and promising voters all kinds of pork-barreling, money-wasting projects that will help them get re-elected. Something to keep the swine at bay, so to speak.

But the list is also getting longer. When Infrastructure Australia was set up by the Rudd government in 2008, it was given a $12 billion fund to help start paying for some of the projects IA approved.

Around $4 billion of that was set aside for the NBN (then a $4.7 billion project) and the remaining $8 billion quickly found a home with various projects.

Then the river ran dry. IA still carries out its meticulous cost-benefit analysis process, but the Building Australia fund badly needs replenishing.

That’s not to say that the Rudd and Gillard governments have not spent heavily and, overwhelmingly, followed IA’s advice – the most notable exceptions being the Epping train line in Sydney during the last election campaign, and the biggest infrastructure project in our history, the NBN. More on that another day.

But IA itself has functioned well, and both sides of politics are committed to supporting its work into 2014.

The big question for those who care about road, rail, ports and utilities (and few voters do until they start to fail to cope with population growth or movements) is what difference an Abbott versus a Gillard government would make to infrastructure spending.

Past performance may not be an accurate guide to future performance, but the Coalition’s past performance was pretty grim compared to present levels – though shadow infrastructure minister Warren Truss points out that the Howard government spent more that did the previous Labor government.

But Labor did raise the stakes again. Anthony Albanese reeled off a few stats, with obvious glee, when I spoke to him yesterday. When IA was formed, he says, Australia ranked 17th out of 20 on an OECD infrastructure spending index.

Labor has, says Albanese, doubled spending on roads in nominal terms, spent more on urban public transport projects than all other commonwealth governments since Federation put together, upgraded a third of interstate rail, reduced the number of rail regulators from 23 to three nationally (saving $30 billion in red tape over 20 years), launched a National Ports Strategy and underwritten major intermodal terminals (where freight switches between rail and road transport) to take thousands of trucks off Sydney and Melbourne roads.

The list is much longer than that, and Albanese enjoys comparisons such as the $7 billion Labor has spent on the Pacific Highway compared to the $1.7 billion spent over the 11 years of the Howard era, and $3 billion for the Bruce Highway which also got only $1.3 billion over that time.

There is no doubt Labor has dramatically increased federal support for (mostly) projects with full cost-benefit studies that confirm they’re a good idea. The corollary, of course, is that the zero public debt left behind by Howard has grown to around $300 billion in gross debt under Labor.

Is that a bad thing? The Business Council of Australia and notables such as Saul Eslake and Heather Ridout don’t think so. All have called in recent weeks for the next government to borrow and spend to help stop our woeful infrastructure shortfalls from getting worse.

Eslake, for instance, told me recently that as long as projects had a full cost-benefit analysis, he’d be comfortable seeing the federal debt to GDP ratio rise from a current 10 per cent of GDP, to 13 to 15 per cent. That is, we need the productivity gains of better infrastructure more than a clean national credit card.

Given that the polls currently overwhelmingly say Tony Abbott will form the next government, what kind of infrastructure environment can we expect?

Truss says that bringing the federal budget back to surplus will be a priority, and that topping up funds such as the Building Australia Fund can only be discussed when that process is underway.

The bits of news we have had, via Abbott, is that IA will be retained and that urban rail projects won’t be funded.

That’s a move hard to justify. IA is, essentially, a ‘modally agnostic’ body that does not care whether a project is rail or road-based. Abbott says the feds don’t have a role in rail, but do in road.

Truss qualifies this statement, however. The Coalition may still be building rail in metro areas, but not primarily to support public transport. Rather, the emphasis will be on freight upgrades.

Existing projects such as the $4 billion Regional Rail Link in Melbourne’s west are safe, says Truss, but new projects will be left to be funded exclusively by the states.

Or will they? Rumour has it that state premiers of all stripes will simply not accept this apparently arbitrary decision.

The Abbott government will have a more substantial cost-cutting task if it forms government in September. Revenue from the mining and carbon taxes will be gone and the Coalition has made repeated assertions that it would bring the budget back to surplus more quickly that Labor.

Remember, however, that Labor has all but given up on surpluses right through the out-years of the budget forward estimates. Abbott is yet to climb down from the high horse and admit that his government may not be able to do much better.

That means that infrastructure will have to take its share of cuts, and that will put more pressure on the government to find more innovative ways to fund projects using private money.

A string of public-private partnerships have collapsed in the past couple of year – BrisConnections’ Brisbane Airport Link toll road/tunnel, Sydney’s Lane Cove and Cross City tunnels and Brisbane’s Clem7 project.

As Monash economics professor Stephen King wrote recently this “does not spell the end of PPPs. If we want infrastructure investment and government budget surpluses, then PPPs are a must. But it does spell the end of naïve PPPs and it signals the need for research in order to design better PPPs”.

An Abbott government working with a federal budget substantially smaller than Labor’s (though we’ll believe this when we see it), will have to do some really imaginative work coming up with PPP structures that do not tip private money down the drain as quickly as public money.

Truss confirms that this is the approach an Abbott government will take. He say IA will be central to finding new models of PPP investment that are more attractive to private sector money, particularly super funds.

There are massive amounts of capital washing about in the super system. Unlocking that, by leveraging government guarantees to provide better management of risk in infrastructure PPPs, is Abbott’s big hope in this area.

If he can’t pull that off, there will be precious little in the federal coffers to carry on Labor’s work of unlocking productivity by preventing IA's annual wish-list getting any longer than it already is.

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