Mandate to perform a balancing act

Incoming prime minister Tony Abbott's pledge to be remembered as the infrastructure PM who raised productivity by cutting red and green tape and eliminating pork-barrelling will do wonders for the nation - if he can pull it off.
By · 10 Sep 2013
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10 Sep 2013
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Incoming prime minister Tony Abbott's pledge to be remembered as the infrastructure PM who raised productivity by cutting red and green tape and eliminating pork-barrelling will do wonders for the nation - if he can pull it off.

It is an important pledge as infrastructure is the backbone of the economy, providing jobs, efficiencies and the key to improving the country's flatlining productivity.

The new government is likely to sell assets to fund the projects. It has already announced it will sell Medibank Private but, according to industry sources, other asset sales could include Australian Rail Track Corporation and Snowy Hydro, which together could raise more than $10 billion.

The corporation manages 8500 kilometres of rail. It owns much of the track in South Australia and leases most of the track in NSW and Victoria. According to its annual report, at June 30, 2012 its total assets were $4.7 billion with a net debt position of $520 million.

Global interest in mature infrastructure such as the rail corporation or Snowy Hydro in a relatively stable economy can't be underestimated. It explains why pension funds have been at the front of the queue when infrastructure is put up for sale in Australia.

It is also worth remembering that the Coalition, specifically Andrew Robb, has discussed introducing tax-advantaged infrastructure bonds, not dissimilar to those introduced by the Howard government then axed in 1997.

For investment bank Morgan Stanley, lessons of the past in structuring both public-private partnerships and infrastructure bonds "should mean the origination hurdles can be cleared". In a report released on Monday, it says: "In turn with a pool of self-managed super funds totalling $505 billion, total superannuation assets of $1.6 trillion, and still-strong foreign appetite for AAA-rated yield - finding a funding base should not be difficult. And while innovative funding options are available, plain-vanilla Commonwealth government securities would do the job, and without needing to create a new market."

The new government has already announced big projects such as WestConnex in Sydney ($1.5 billion), east-west link in Melbourne ($1.5 billion) and the Gateway North Motorway in Brisbane ($1 billion).

The brutal reality is that Abbott will be looking for ways to avoid following in the footsteps of Kevin Rudd who came to power in 2007 with similar plans to rebuild the nation and raise productivity using infrastructure as the centrepiece.

Rudd's grand plan was to create an independent advisory body, Infrastructure Australia, to make a priority list of infrastructure projects based on a cost-benefit analysis.

By the end of Labor's second term its ambitions for sound infrastructure policy had been usurped by gaping deficits and pork-barrelling. From a dollar perspective, the government took the knife to infrastructure spending, giving less than $4 billion in its last federal budget to state infrastructure compared with $7.7 billion the previous year.

Given the nation's $35 billion infrastructure backlog and the need to spend more than $700 billion in the next decade to restore the quality of infrastructure, it can ill afford to cut infrastructure spending.

Against this backdrop, some projects selected for funding hadn't even made it to Infrastructure Australia's priority list but were blatant attempts to woo voters. This, coupled with the former government's biggest infrastructure project, the national broadband network, which was announced without its consultation, had the effect of neutering Infrastructure Australia.

In sharp contrast, the Abbott government has promised to increase national investment in big infrastructure projects by an estimated 26 per cent, or $4.67 billion, in the program outlined in the federal budget, according to detailed analysis by lobby group Infrastructure Partnerships Australia.

The spending rise comes at a time when he will battle to return the budget to surplus as many of the states prepare to pare back capital investment and the mining sector mothballs or reduces key projects.

Besides selling assets, the Abbott government has promised to overhaul Infrastructure Australia to give it more clout and independence. It intends to do this by eliminating some staff positions and creating a new job, that of chief executive, to report to the board.

It also proposes a financing advisory arm to work with state treasuries and the private sector to develop business cases for important projects. And it has given Infrastructure Australia the power to assess and provide advice on all Commonwealth capital investments valued at more than $100 million, outside of defence.

The end game for Infrastructure Australia is to identify "nationally significant projects and identify fiscal and procurement reforms to accelerate the funding and delivery of these projects".

It has also been charged with doing a fresh audit of the nation's infrastructure list within 12 months.

Besides this it has promised to remove the carbon tax and mineral resources rent tax and reduce green and red tape to increase mining investment.

Morgan Stanley's Chris Nicol sums it up well in his post-election report: "A more open and stable relationship between government and the corporate sector will enhance Australia's reputation as a stable jurisdiction to invest and operate in." Indeed.
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