How best to invest the proceeds of the great mining boom

Australia needs better schools, universties, roads and hospitals - now.

DEBATE about a sovereign wealth fund has the potential to distract us from the real issue: Australia's need to increase investment in the infrastructure that will drive future growth.

The mining boom is generating more investment, jobs and prosperity than at any time since the gold rush of the 1850s. With income pouring in, many Australians are rightly concerned to ensure the proceeds of the boom are spent properly and not frittered away on short-term cash handouts.

This healthy concern has generated calls for a sovereign wealth fund. There are strong arguments on both sides of this debate. Proponents point to the importance of increasing national savings, the effective use of sovereign funds by other countries, and the need to hedge against future domestic volatility.

Opponents reply that Australia already has an effective savings tool in the form of the 8 million compulsory superannuation accounts of working Australians. They also point to the $75 billion Future Fund, as well as other smaller funds such as the Building Australia Fund, the Health and Hospitals Fund and the Education Investment Fund.

The argument about superannuation is a powerful one. Compulsory super was a great reform which has left us with $1.3 trillion locked up in personal assets. That is, relative to the size of our economy, almost as big as Norway's sovereign fund. There is great value in having our national savings widely diversified rather than centrally controlled by the director of a sovereign wealth fund.

But this is not the strongest argument against such a fund. In my view, both sides of the debate are failing to pay sufficient attention to Australia's most pressing economic imperative: the urgent need for massive investment in economic and social infrastructure.

Calls for a sovereign fund are driven primarily by concern for the future - so let's think about what we know for certain the future holds: a growing and ageing population strong competition for jobs from overseas, necessitating even better education here and the need for continuous improvement in productivity.

These challenges require dramatically increased investment in infrastructure. There's no way around it: we will need more and better roads, ports, high-speed rail lines, higher education facilities, medical research centres, schools, hospitals, and much, much more.

Think of the enormous infrastructure needs coming out of the resources boom in Western Australia and northern Queensland, and the need for major new public transport infrastructure to tackle increasing congestion in Melbourne, Sydney and Brisbane - and the exciting possibility of a high speed rail link between these three cities.

Estimates of the size of our ''infrastructure deficit'' range from $250 billion to $700 billion. This is not to say that governments, state and federal, have not been acting to respond to the problem. The former Labor government in Victoria delivered the Regional Fast Rail Project, built the new $1 billion Royal Children's Hospital, deepened the Port Phillip Bay channel, completed the Geelong Ring Road and secured Australia's most significant piece of scientific infrastructure - the Australian Synchrotron. The Gillard government has invested more than $36 billion in transport infrastructure, and there is the national broadband network, which will transform the way we live and do business.

So action is being taken - but there is much more to be done.

With every future budget surplus come three main choices: do we pay down debt, invest in capital works, or simply transfer the funds into a sovereign wealth fund?

Infrastructure Australia's latest report to the Council of Australian Governments points out that while Australians recognise the need to improve our infrastructure, we are often reluctant to increase government debt, raise taxes, or pay more for utilities. This is a political conundrum, but surely a good first step would be to channel future federal budget surpluses directly into meeting our infrastructure needs.

A sovereign wealth fund would not achieve this aim. Instead it would invest in a broad portfolio of assets including Australian and foreign equities, long-term bonds, direct investment overseas, and possibly also some direct investment in Australia. But it would do little if anything to tackle our health and education needs, or the backlog of critical economic infrastructure.

Compare this with the option of direct, nation-building investment in the capital works Australia so badly needs. This would stimulate the Australian economy and provide jobs. It would build the schools and hospitals, roads and research institutes, that we need to meet the nation's challenges.

It would - like a sovereign wealth fund - be an investment in assets passed on to future generations. And it would help drive productivity improvements, without which Australians will suffer a drop in living standards.

Increased government investment in infrastructure would - as we've seen often in Victoria - also have the potential to attract extra private investment in the form of public-private partnerships.

The desire to invest the proceeds of Australia's unprecedented mining boom in the right way is shared by those on both sides of the sovereign wealth fund debate. Everyone is motivated by concern for our future prosperity.

But in my view, the best way to ensure such prosperity is to build the structures on which growth can be achieved. And that means more investment in infrastructure, not less. We should be taking advantage of this era of growth by creating the foundations of the next.

John Brumby, former treasurer and premier of Victoria, is a vice-chancellor's professorial fellow at the University of Melbourne and Monash University.