MAKE AUSTRALIA WORK: Unlocking infrastructure potential

In theory infrastructure is the go-to sector for jobs creation. Putting theory into practice, though, at the start of 2009 in Australia, is not so simple.

First the theory.

Infrastructure is the economic sector with the highest employment and income multipliers. In other words, spend a dollar on infrastructure and you get maximum flow-on effects. Moreover, the flow-on effects are not just captured within the national economy but can be targeted to the regions in need according to the location of the infrastructure or the location of the contracting firms involved.

In financial terms, theory tells us that even cash-strapped governments can undertake substantial infrastructure spending through direct borrowing, the issue of bonds or via public-private partnerships, and worry about paying off the bills at a later date.

Finally, the theory says that infrastructure spending is a double bunger. As we've just said, Infrastructure spending delivers substantial short term gains in employment and income. But, uniquely, infrastructure spending produces enduring long term benefits. Positive externalities flow to other economic sectors and to the household sector, and productivity rises across the board.

So what's holding us back? Why aren't governments – federal, state and local, all round Australia – accelerating their infrastructure spending to address stalling economic growth and rising unemployment?

Unfortunately there are problems in securing a ramp-up in infrastructure spending.

The first is that governments at all levels have diminished capacity to mount infrastructure projects in a hurry. While the feds have never had direct involvement in infrastructure procurement, let alone its construction – apart from the rare notables such as the Snowy Mountains Scheme and the Darwin to Alice Springs Railway – Australia's state governments allowed the infrastructure building capacity of their utilities to decline over the last three decades with the privatisation of existing infrastructure items and a dependence on private provision for new items.

Meanwhile, infrastructure controlled by local governments has been allowed to decay, with PriceWaterhouse Coopers estimating in that the unfunded maintenance bill for local infrastructure – basics like roads and bridges – had reached a startling $14 billion in 2006 with more than 30 per cent of Australian councils and shires technically bankrupt.

The second impediment to a ramp-up is that many private corporations involved in public-private partnerships in the infrastructure sector – financiers, constructors and operators – have been burned by poorly managed relationships with planning authorities and by disappointing returns on major urban projects. Confidence is low which now mitigates private sector willingness to be involved in costly projects at short notice at a time of unprecedented uncertainty.

The third impediment is Australia's clunky regulatory landscape. While there must always be room for contingencies requiring sensitive variations for local environments and cultures, there is no reason for major variations in the infrastructure sector between the states in financing structures, approval processes, operational regulations, and in the nature and level of fees and taxes. Australia has developed a small number of world class corporations in the infrastructure sector. It makes sense that Australia also develops best-practice regulatory approaches to infrastructure procurement.

Earlier this year I explored these issues in a four-part series in Business Spectator on infrastructure crisis in Australia (A bold vision curtailed, Why our infrastructure is failing, Smarter infrastructure, Building on what we've got). In these pieces I explained how the Rudd Labor government's laudable infrastructure spending plans had suffered a huge blow as the global financial crisis removed the budget surpluses on which spending plans depended.

The federal government now has a choice. One way for it to confront the crisis is to add dollops of spin to what remains of the infrastructure spending pot and hope the general public doesn't notice that the $40 billion Building Australia promise will have been largely abandoned.

The other way is to seize the opportunity to drive a new national approach to infrastructure procurement and operation. As I argue in my four-part series, exciting possibilities and challenges have emerged. One is the chance to build a national system of clever networks so that private and public providers, large and small, can deliver energy, water, transport and telecommunications services, and so on, in a genuinely competitive, sustainable framework.

There is also the opportunity to build ways of rewarding infrastructure providers for the positive externalities created across cities and other economic sectors; and to once again encourage infrastructure items to be integrated in bundled ways that align with the ways businesses run and people live.

So too, there is the chance to confront the regulatory system head on. Instead of fiscal power, the power of the federal government to affect the infrastructure sector can come from its capacity to create a nurturing and supportive regulatory landscape so that risk becomes once again an incentive to invest rather than a reason not to. The federal government alone has the wherewithal to entwine the interests of Australia's infrastructure corporations and Australian governments in long term partnerships to resolve Australia's infrastructure crisis

At this point of the economic crisis, then, the federal government must have the honesty to admit that its infrastructure spending capacity has been severely eroded. Simultaneously, though, it must seize the opportunity to announce a bold new approach to infrastructure provision nationally.

The opportunities and rewards are there, still. Do we have the foresight and courage to grasp them?

Phillip O'Neill writes Business Spectator's Critical mass infrastructure blog and is Foundation Professor and Director of the Urban Research Centre at the University of Western Sydney.