Taking on an infrastructure ideas bottleneck

Crikey

How governments fund major infrastructure projects is one of the most significant policy issues Australia faces, and one of the most difficult.

Infrastructure advocates, engineering groups and business want to see more spent on infrastructure. There’s an infrastructure backlog, they say, and it’s affecting productivity. So do voters in areas like western Sydney; the prime minister has acknowledged that issues such as commuting times are a major problem even when the economy is performing well. But governments say they lack the money to ramp up investment; the states are worried about their credit ratings, and the Commonwealth, which has a gold-plated rating and can access funds at very low rates, is politically paralysed by a fear of debt. Politicians want the private sector to pick up more of the funding burden.

New South Wales Treasurer Mike Baird has unveiled the latest attempt to address the problem, with a plan to construct the Westconnex toll road via a state-owned company, the debt and revenues of which will be off-budget. Tony Boyd has an excellent discussion of the proposal and some of the history of toll road funding in The Australian Financial Review.

Governments have been wrestling with the issue for decades. As a young graduate in the Department of Transport in the early 1990s, I noticed it was still common to include in ministers’ talking points reference to the success of allowing private contractors, rather than government agencies, to build roads. The advent of the Howard government, which slashed infrastructure spending and then had to face a backlash over its treatment of regional Australia, focused minds on how to fund them, not just build them. It became fashionable to laud public-private partnerships as the way of the future; as a speechwriter for John Anderson, I shoehorned acronyms like BOOT and BOT (Build-Own-Operate-Transfer models) into speeches about building stuff.

Early attempts at partnerships were marked by extraordinary government generosity. The Keating government had tried infrastructure bonds, a tax arrangement so absurdly generous it continued to generate windfalls for holders years after the program was closed or projects fell over. Individual projects saw big private sector windfalls as inexperienced bureaucrats sat down to negotiate deals with financial magicians from the likes of Macquarie Bank. After a time, however, the BOOT ended up being on the other foot (sorry). Burnt repeatedly, governments began insisting the private sector take more risk. The balance swung the other way, and the result was debacles like the Cross City Tunnel in Sydney and BrisConnections in Brisbane.

The irrational behaviour of motorists was partly to blame. For economists, the case for toll roads is obvious: unless the toll is ludicrously high, the time saving even for someone on average weekly earnings from using a toll road versus sitting on congested streets is worth more than the cost. But motorists don’t see it that way: toll payment is far more visible than time saved from not sitting in congestion. Instead, many motorists resentfully stick with existing, congested routes. Private operators, in turn, often demand that existing routes be blocked off — the private sector always prefers to minimise competition, particularly free competition. That in turn angers motorists, who resort to rat-running through ever more convoluted and inefficient routes to avoid both toll roads and blockages.

Good luck modelling patronage for your toll road in that environment.

Baird’s plan for Westconnex addresses that by waiting to establish the revenue case based on actual numbers before seeking funding from the private sector. In a way it’s a reversal of BOOT and BOT: the government, via a state-owned company, will build, own and operate, before approaching the private sector for off-budget funding.

The model, however, relies on government having seed money for the initial stage of the project.

The federal Coalition’s plan for infrastructure funding is understood to centre on retaining Andrew Robb’s 2010 election proposal to leverage private sector funding with a limited amount of Commonwealth funding, a kind of intelligent, capped version of infrastructure bonds. But the Coalition is also far less enthusiastic about urban public transport investment than Labor.

And neither side of politics is prepared to accept the logic of infrastructure advocates and even business peak bodies, that the federal government should be using its gold-plated credit rating to raise debt for infrastructure investment. While business would love to see more transport and logistics infrastructure, even a Commonwealth investment in urban transport solutions to reduce the cost of urban congestion – calculated to be around $20 billion per annum in coming years – would generate a significant return.

The experience of both Infrastructure New South Wales and Infrastructure Australia also suggests there is value in having an alternative centre of advice about infrastructure from existing ones within the bureaucracy. The quality of infrastructure debate has improved in recent years, albeit stymied by, for instance, the federal government’s reluctance to have full transparency about IA’s analyses of projects. A model in which independent bodies have more power and profile on infrastructure decision-making may be worth considering, on the basis that the issue is too important to be left to politicians (desalination plants, anyone?).

In NSW, at least, there’s some innovative thinking on the issue. But as the recent history of infrastructure investment shows, we won’t know the success of Baird’s model for many years.

This story first appeared on www.crikey.com.au on June 18. Republished with permission.