Spend-up needed to spark growth

WHEN Kevin McCann, the chairman of Macquarie Group and Origin Energy, called for renewed micro-economic reform in the energy sector, he should have included other sectors of the economy.

With the gap between the mining sector and the rest of the industry widening, and inflation on the rise, the need for productivity improvements is reaching a critical point. The best way to do that is by selling government assets, investing the money in critical infrastructure and restarting competition reforms.

It is a position that hasn't gone unnoticed by Reserve Bank governor Glenn Stevens, who said recently: "It is now just about impossible to avoid the conclusion that productivity growth performance has been quite poor since at least the mid-2000s."

It also explains why Australia ranked No. 34 in a World Economic Forum report on infrastructure quality in 2010-11, which is two spots behind Slovenia and one spot ahead of Jordan. The brutal reality is Australia is suffering from an infrastructure backlog that grew to about $35 billion last year, and requires more than $700 billion to be spent in the next decade to return the quality of infrastructure to a point that will sustain national prosperity.

Speaking at an annual gathering of infrastructure executives for Infrastructure Partnerships Australia, McCann made the point that it was almost 25 years since Australia's strong period of national competition policy reform.

For most of that period the country had strong productivity gains, but the statistics show that outside of mining, productivity has been stuck in the mud for the past five years.

The country is now at a critical point in the infrastructure debate, with worsening congestion, bottlenecks and electricity outages. The question is what to do. As Brendan Lyon, CEO of IPA argues, getting competition and efficiency into government operating expenses will be important to close the gap between the infrastructure that Australia needs and what it can afford.

But that won't be easy. Max Moore-Wilton, chairman of Sydney Airport, made the salient point during the debate that the infrastructure challenge is not just about new infrastructure but also about the existing infrastructure, which is old. "Replacement is a challenge, particularly in regional Australia, where there are huge infrastructure problems looming," he said.

A COAG advisory group has estimated that privatisation and associated regulatory reform in energy would increase Australia's real GDP by about $400 million a year, and would reduce retail prices by 2 per cent.

McCann gave a compelling argument for reform, comparing energy prices in the competitive fully privatised Victorian electricity sector with that in New South Wales. Between 1980 and 1995 electricity prices in NSW and Victoria rose 35 per cent and 34 per cent, respectively. From 1995 to 2010, prices in Victoria rose by 35 per cent, which is about the same pace as the increase over the preceding 15-year period, while NSW prices rose a whopping 70 per cent.

The point is Australia is in desperate need of a new round of reforms to stimulate productivity. But the sorts of reforms the Gillard government is embarking on, which include introducing a carbon tax and then compensating certain sectors of the population, distort price signals.

In the words of Transfield Services chairman Tony Shepherd: "It is voodoo economics. People don't value things they don't pay for. We don't have a magic pudding."

Part of the answer lies in providing a constant pipeline of projects for global financial markets to consider, as well as finding ways for the superannuation industry to tap into brownfields infrastructure projects.

Project financing has recovered rapidly from global financial crisis-induced lows last year, and is set to boom in the next few years, driven by infrastructure, mining and energy.

In the case of public-private partnerships, which will fund part of the growing list of infrastructure projects, as the infrastructure project catastrophes of recent months show, if Australia is to spend hundreds of billions of dollars in the next few years on projects that are going to be given the green light based on inaccurate costings whether privately financed, publicly financed or a combination of both there needs to be a radical overhaul of the way project costs are calculated.

The sad reality is some PPPs, including the Leighton Holdings Victorian desalination plant and the collapsed RiverCity Motorways, are part of a growing list of public private partnerships that have torched billions of dollars of private sector money in the past decade due to cost overruns and poor risk management.

It is not hard to see why: certain big projects get up because there are a lot of people with vested interests. To make the project look viable these people underestimate costs, overestimate revenue, undervalue environmental effects and overvalue regional development effects.

Right now the average super fund allocates 5 per cent to infrastructure projects, and most of these are brownfields investments, where the infrastructure project is already complete, with most of the risks stripped out of them.

The last word should go to Max Moore-Wilton: "We have a significant pool of superannuation funds, we have a framework that encourages savings but there needs to be a change in the model. You can't have a model where the first round of investors in a toll road project take a haircut. Things have to change."