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Speech to CEDA May 2012: “The Intensifying Public Policy Debate About Infrastructure”
All of us I am sure have had the experience of travelling through a modern, large, well planned airport in Asia. I could mention Hong Kong Airport (opened in 1998), Bangkok (opened in 2006), Singapore’s Changi or numerous airports in China.
It is somewhat depressing to return to Australia and disembark at Kingsford Smith Airport, with its rabbit warren of successively added gates and the unedifying experience of being forced through the duty free perfume and cigarettes before reaching the overcrowded immigration control area.
The unflattering comparisons do not stop at airports, as anyone who has used either urban or long distance railways in Japan or China or Singapore knows only too well.
It is no wonder that one of the common themes of public policy commentary in Australia today is the poor state of our infrastructure – and what we need to do to fix it. I am therefore very pleased to have the opportunity today to speak to you on the topic of the intensifying public policy debate over infrastructure.
Indeed, as one piece of evidence of how this debate is intensifying, at the same time as I am speaking to you, the Leader of the Opposition Tony Abbott is speaking about infrastructure at another lunch in this city. While he will have some things to say about our formal policy in this area, I intend to exercise the backbencher’s privilege of offering some speculative thoughts and proposals!
I want to start by reviewing the current evidence about Australia’s infrastructure shortfall and why it matters, before next turning to a consideration of the causes of the problem. In the final section of my remarks, I want to offer some thoughts and proposals.
Our infrastructure shortfall – and why it matters
Let me turn firstly then to the magnitude of the problem we have. A recent report by Infrastructure Partnerships Australia cites estimates of Australia’s ‘infrastructure investment task’, ranging from $455 billion in a 2008 report by ABN Amro, to $770 billion estimated by Citigroup.
According to the OECD:
A similar conclusion comes from Engineers Australia, which prepares a comprehensive annual scorecard of our infrastructure position. This scorecard ranks some critical sectors as ‘poor’ and the overall position in Australia as merely ‘adequate.’
There is a consensus that the cause of the shortfall is underinvestment over a number of years. The consequences of this underinvestment are being felt in many areas of our economy:
- our growth in exports placing strain on our ports;
- congestion in our cities exacerbated by population growth and changing demographics;
- decaying electricity infrastructure;
- investment needed to support our mining industry, and;
One indicator of our poor performance in infrastructure is in the international comparisons. The World Economic Forum’s 2010-11 Global Competitiveness Index ranked Australia’s infrastructure at twenty second out of 139 countries. However, as Infrastructure Australia pointed out, when you look at measures more relevant to Australia our ranking is in the 30s and 40s.
Our total capital stock (expressed as a proportion of our GDP) is below the average of OECD countries. The position has been getting worse, with public investment in infrastructure as a proportion of our GDP declining in recent years.
The figures confirm the anecdotal impressions from the shiny new airports and railways of many Asian countries: we are being eclipsed by the infrastructure spending of many developing countries such as China and the Middle East.
There is a direct link between our infrastructure and our poor productivity performance. To update Paul Keating’s aphorism, every pet shop galah is talking about productivity.
The link between infrastructure and productivity is well understood. One of the classic examples is the investment made by the US Government in the interstate freeway system in the nineteen fifties. This had a huge productivity spin off, for example because it reduced delivery times and expanded the geographic area within which any one company could cost effectively supply customers, in turn increasing the intensity of competition.
One US study found that interstate highway investments lowered production and distribution costs in virtually every sector. The productivity benefits were particularly large in the nineteen fifties when investment first began, with highway investments contributing 31 per cent of US productivity growth in the 1950s; this fell to 7 per cent by the eighties.
As the Chairman of Infrastructure Australia, Sir Rod Eddington has noted:
Australia in the 1990’s enjoyed a productivity boom, with a sustained microeconomic reform process supported by both sides of politics.
I think it is worth making one more point about why infrastructure matters.
The economic case is important - but there is also a strong equity and quality of life case.
John Kenneth Galbraith in the fifties coined the term 'Private Affluence, Public Squalor' to convey the idea of a rich society which underinvests in its public infrastructure. His point was that this harms social cohesion and results in a society which fails to meet its full potential.
If congested roads mean you face a longer travel time to work, you are wasting time sitting in traffic rather than being with your family, or in pursuing other activities meaningful to you. Certainly that wasted time has a substantial economic cost - particularly when multiplied by the millions of people in the same position - but it has a very real social cost as well.
One of the most important things governments can do, to improve the quality of life of the people they serve, is deliver good quality infrastructure. Indeed there is a powerful illustration of that principle in the life’s work of Dr JJC Bradfield – the man after whom the seat I represent is named.
He is one of the most brilliant engineers and planners Australia has ever known, responsible for the Sydney Harbour Bridge and many other outstanding pieces of infrastructure.
Causes of our poor performance
I want to turn next to some of the causes for our underperformance in infrastructure.
Poor long term planning and co-ordination
The first issue is that we do a poor job of co-ordinated long term planning.
Look for example at the record of the NSW Labor Government in the 16 years to 2011. A report prepared for the O’Farrell Government highlights inefficient resource allocation; failures to undertake proper capital planning and appraisal processes; and lots of money spent in the exploratory stages of projects which were later abandoned. 
The consequences were summarised in a report by Infrastructure Partnerships Australia, in the dying days of the NSW Labor government:
- A backlog of $150 billion in transport projects in the unreleased transport blueprint
- $17 billion needed to be invested in energy distribution networks
- 10,000 power outages in 2010 in NSW
- Congestion was estimated to cost $5 billion per annum
- Overcrowding of public transport in peak period sometimes exceeded 130 per cent.
The OECD has commented on Australia's poor strategic planning in its recent report Strategic Transport Infrastructure Needs to 2030:
Some countries have begun linking strategic infrastructure planning to long-term infrastructure funds, as is the case in Canada, Denmark, Switzerland and the United Kingdom.
Coordination issues between layers of government
If we can do a bad job at just one level of government, when you add three levels into the mix we can really make a mess. Let me quote from an OECD paper about transport planning in Australia:
Management of transport networks involves a multiplicity of government responsibilities shares between the federal government (for roads and interstate railways) the states (for roads, intrastate railways and most ports) and local governments (for roads). Regulatory measures for road, rail and maritime transport differ from state to state. 
There is a good example of this coordination problem affecting my own electorate: the much needed link between the F3 and M2 motorways. While a solution has been recommended in two very comprehensive studies in the last decade, little progress has been made.
Both state and federal levels of Government have been involved, with agreements based on tied funding. The most recent agreement was not honoured by Federal Labor: in last year’s budget they reversed a $150 million commitment for initial planning work on this project.
One manifestation of the coordination problem is the complexity of the present system requiring both state and Commonwealth environmental approvals for major projects. For this reason Shadow Environment Minister Greg Hunt has recently announced a significant reform proposal: the Coalition will set up a one stop shop for environmental approvals and applications, with existing environmental standards retained and rolled into a single process. States would be able to voluntarily opt in to the scheme.
Policy by press release and photo opportunity
The heady political temptations of infrastructure are another cause of poor planning. Politicians get more excited about the press release and photo opportunity today than about the steady implementation of a long term plan which will deliver most of its benefits tomorrow.
Again, the hapless NSW Labor Government offers many examples. NSW Labor announced the CBD Rail Link in 2005, then cancelled it and announced the North West Metro in 2008, then changed the North West Metro to the CBD Metro, before cancelling the CBD Metro in 2010 and announcing the CBD Relief Line. Construction companies are estimated to have lost up to $60 million tendering for work on the cancelled CBD Metro. 
Federal Labor has played this game too. In fact, the National Broadband Network, regularly described as Australia's largest infrastructure project, was announced in April 2009 for entirely political reasons.
Labor's previous policy - taken to the 2007 election - was to spend $4.7 billion on a fibre to the node network, to be built jointly with a private sector partner. But when that policy ran into fatal implementation difficulties, Labor chose to distract attention from its failure with a ‘shock and awe’ political strategy, announcing a new policy to spend $43 billion on a fibre to the home network. There was little planning done in advance, and there was certainly no cost benefit study done – despite the Rudd Government’s stated policy of requiring such a study for major infrastructure projects.
Another example is federal Labor’s 2010 announcement that it would fund a rail link from Epping to Parramatta. The principal - albeit unsuccessful - motivation was to save Maxine McKew in Bennelong. The policy is not supported by the NSW Government, which would prefer to reallocate the money to projects it regards as having a higher priority, such as the Northwest Rail Link.
The biggest problem of all, though, is not politics or poor planning or conflict between different levels of government – it is finding the money to fund infrastructure projects.
It is state governments which are responsible for most infrastructure – and state governments are chronically short of money. They have only a limited capacity to raise their own revenue, and depend upon transfers from federal government for much of what they spend. At the same time they face ever growing claims on expenditure, not least from the explosion in health budgets.
As one example of the constraints facing governments, consider the NSW government. It has identified four major road projects in the Sydney metropolitan area: M5 East duplication, M4 East, F6 Extension and the F3-M2 missing link. The total cost of these four projects is likely to exceed $22 billion. Yet the NSW Government at the last budget had total expenditure of $59.7 billion and revenues of slightly less. There is not a lot of fat in the budget – and certainly not enough to fund all of these projects simultaneously.
That is why the O’Farrell Government’s policy is that it will have commenced work on one of the four by 2015. In other words, it will be some time before work even starts on the other three. That is not a criticism of the O’Farrell Government – it is a recognition of the fiscal realities facing state governments, particularly when they are very reluctant to incur increased debt and jeopardise their credit rating.
Some thoughts and proposals
Let me turn now to the question of what we could do differently, in three areas: how we plan infrastructure; how we finance infrastructure; and how we handle the politics of infrastructure.
Just as we are all in favour of motherhood, we are all in favour of better long term planning of our infrastructure.
It is not just that it makes sense from first principles; there are examples of this approach being use in other countries. Canada is presently developing a new long term infrastructure plan, with the current Building Canada Plan due to expire in 2014. In Sweden, there is a rolling ten year national infrastructure plan, which is refreshed every four years.
But as we have seen with Infrastructure Australia, it is often hard to live up to good intentions. The Rudd Government’s decision to establish this organisation was a good idea in principle. It got off to a reasonable start: conducting an initial audit and developing a list of priority needs, and assessing submitted projects in light of those needs.
But the initial promise has not yet been fulfilled. For one thing, some big decisions have bypassed Infrastructure Australia. The $43 billion National Broadband Network decision was made without any examination by Infrastructure Australia, and without any cost benefit analysis. For another thing, after Labor in its first couple of budgets chewed through all the money the Coalition had carefully husbanded, it had little money left to spend on infrastructure projects – and hence Infrastructure Australia endorsement added little practical value to a state government’s project.
The Coalition has promised that we will revitalise Infrastructure Australia, and keep respected businessman Sir Ron Eddington as its head.
It will be tasked with preparing a detailed rolling 15 year infrastructure plan - with clear published cost benefit analyses for each major project and a priority list of projects based on these cost benefit analyses.
We have also committed that a Coalition Government will not fund projects valued at more than $100 million without a clear published cost benefit analysis.
There could be mechanisms to go further if you wanted to commit politicians to follow the plans which are developed. This might help address the problem of long term planning being undermined by politicians who act impetuously. Bob Carr as Premier of NSW released freeway corridors which had been painstakingly preserved since the nineteen fifties. I mentioned before the impulsive decision by Kevin Rudd and Stephen Conroy to proceed with the NBN.
Let me offer one suggestion, drawing an analogy from the interest rate setting process. Until the Howard Government took office, setting interest rates was a decision for politicians. As Treasurer, Peter Costello gave this power to the Reserve Bank of Australia – thus distancing the decision from short term political considerations.
Imagine if Infrastructure Australia had a similar power to set a long term infrastructure plan, with the government of the day having only the authority to either fund, or not fund, the work program. In other words, Infrastructure Australia would determine the projects and the order in which they would ‘come down the chute.’ Projects would proceed in the order specified by IA, to the extent that funding was available.
I am not sure it is necessary to go this far – and under a more businesslike government you should not see the kind of problems that this proposal is designed to solve. But it would certainly be one way of trying to lock in the outcomes of a planning process.
One area where we could do better, in my view, is in long term land planning, particularly for transport infrastructure. In Sydney, the 1951 Cumberland Plan laid out routes for future freeways. In the 1920s, JJC Bradfield developed a long term plan for Sydney’s railways – only some of which, sadly, was implemented.
The far sighted work of those long ago bureaucrats and politicians has delivered lasting benefits for later generations. It would make sense to pursue a similar long term land planning and reservation approach on a national scale.
For example, there is lots of talk about high speed rail. Transport Minister Anthony Albanese recently released a study looking at East Coast high speed rail. The key finding was that it would be massively expensive: between $61 billion and $108 billion.
Given Australia’s low population density, the economics of high speed rail is challenging. However, over time, as our population grows, the economic hurdles may become somewhat easier to overcome.
I was struck by the proposal in a recent joint report by Infrastructure Partnerships Australia and AECOM, which calls for action now to reserve the land corridors that will be needed for the high speed rail of the future. Reserving those corridors now would save significant costs in the long run and provide the platform and impetus for development.
The report argues that there is an 86 per cent chance of needing a very fast train in 2030 and a 93 per cent chance in 2050 – and that there are big savings from acquiring the land now rather than waiting twenty years to do so.
Now the idea of actually paying the full cost of acquisition now, only to sit on the land for twenty or more years, along the full length of a route from Brisbane to Melbourne, is not one that any Treasurer is likely to find attractive. The report estimated the 2010 cost as $13.7 billion.
Even so, the broad concept of reserving land corridors for national infrastructure – which goes beyond state or city boundaries – strikes me as having merit.
Let me turn to the challenge of how to find the money for new infrastructure projects. One way to think about this challenge comes from a recent observation by Infrastructure Australia, that governments are reluctant to take any of the steps necessary to fill the infrastructure funding gap:
- increase public debt
- increase taxes
- require a “user pays” approach – for example for tolls to fund roads
- sell poorly performing public assets to the private sector where they might be run more efficiently, and to use proceeds to fund other infrastructure. 
This is another way of saying these are all possible ‘levers’ that could be pulled to unblock the infrastructure backlog – but none of them is easy.
We have made some progress towards having the private sector take on more of the infrastructure task. Over time, private sector investment in infrastructure has risen as a proportion of GDP. This is a product of privatisation and competition reform, and the need for infrastructure associated with our commodities boom.
But the magnitude of our infrastructure backlog suggests that we are still missing opportunities for projects to be funded wholly or partly by the private sector.
It is not due to a shortage of money to invest in Australia. Our national savings pool is valued at around $1.8 trillion, with around $1.3 trillion in superannuation. As many have observed, the characteristics of returns on economic infrastructure projects – long term, stable returns, at reasonable rather than spectacular rates – are in many ways attractive to those saving to provide for their retirement.
Yet the proportion of superannuation funds invested in infrastructure is quite low. One reason is the lack of suitable business models under which the custodians of those funds can invest in infrastructure projects with an acceptable prospect of obtaining a satisfactory return.
Aspects of this problem include the fact that investing in single projects generally involves too much concentration of risk for smaller funds; and the reluctance of superannuation funds to bear the transaction costs involved in bidding for a project (typically one per cent of the project value), given that if the bid fails the money is lost.
Yale University Economics Professor Robert Shiller has recently written a book about the social value of economic and financial innovation. For example, he argues that there should be a market in futures contracts tied to an index of house prices, as this would allow people who did not own a house to hedge against the risk of house prices jumping sharply and locking them out of the market.
In my view there is a need for greater financial innovation in the area of financing infrastructure. The pay-off in terms of greater private sector investment in infrastructure could be substantial.
A recent example of such innovation is the auctioning of radiofrequency spectrum for use by telecommunications companies. Such auctions have raised many billions of dollars around the world in the last fifteen years. This is an idea that when first proposed seemed outlandish – who would ever imagine people willing to pay such vast amounts for the use of spectrum?
Could we take an analogous approach to infrastructure? After all, when you build a new freeway somewhere, you are offering a right that could be auctioned: the right to congestion free travel. Could you hold an auction of a certain number of ‘slots’ on the freeway, with a view to capturing a premium from those who value their time sufficiently to pay for this right?
It is somewhat analogous to the way new stadium developments are sometimes financed, by selling long term membership entitlements (giving you access to a certain number of games each year at no extra charge.)
This might be a way to capture up front payments towards the capital cost of the freeway – instead of charging a stream of tolls over the years.
More generally, I think there is untapped potential to generate more revenue from infrastructure – and thus increase the scope for funding projects with private capital rather than by government.
I support making more extensive use of road pricing. With the advance of technology there are possibilities using wireless communications or GPS which did not exist even a few years ago.
Imagine if you designated a national highway between two capital cities for an upgrade from two lanes to four, and set up a tolling system to pay for it. You could use the technology to set different tolls for cars and trucks, and also to exclude those travelling less than, say, 100 kilometres a day (that is, local commuters). None of this would have been practical twenty years ago.
As any economist will tell you, the virtue of road pricing is that it not only raises revenue – it also manages demand on the system. With pricing that varies at different times of day, it is possible to use the price signal to relieve congestion and reduce traffic load at peak times.
A variant of road charging is congestion charging – when you pay to enter congested areas such as the CBD. The politics of this are challenging – but in cities like London and Oslo it has been introduced successfully.
While I am wading merrily into areas that raise political challenges, let me mention a few other thoughts in the area of infrastructure financing.
The question of asset utilisation seems to get much less focus in the public sector than the private sector. We have billions of dollars of capital tied up in schools – yet they lie idle for many months of the year, and many hours of the day. Are there ways to utilise this public capital more efficiently?
Is there a way to share facilities between schools so that school halls, ovals and sports centres are shared between two or more schools? Is there a way to contract out the physical management of high school sites to private sector companies, on the basis that they are allowed to hire out the rooms and sports fields when the school does not need them? Would such operators find other sources of revenue or other ways to cut costs or even to fund the construction of new multi-use sports facilities?
One topic which is talked about quite frequently in this area is how governments could fund infrastructure through harnessing the value which is generated by infrastructure projects.
The best example is the increase in land values surrounding new transport infrastructure. If the builder of the infrastructure can capture a share of the increased value, this can contribute towards the cost of the project.
It is not a new idea: many of the nineteenth century railway builds in the US were funded because the railway companies received large grants of land along the route of the track which they developed and sold off as the railway became operational.
There are many ways you could do this. The precise implementation would need to be thought through very carefully so that it generated political support rather than political resistance.
I spoke earlier about the idea of reserving a corridor of land for future high speed rail links. You could zone some of the land along such a corridor as being potentially subject to resumption, with a mechanism setting the resumption price to equal the current price plus a share of the value uplift the land would experience if the railway was built.
In other words, you would calculate the value uplift received as a result of the new line going through. Some of this would go to the current owner, with the balance to go into the pot to help finance the new build.
Potentially, you could phase the payment to be received by the current owner, so that the first payment would be received based upon the value without any new infrastructure – and the second payment would be received after the new infrastructure was built.
Alternatively, you could leave affected land in the hands of its current owner, but with it being subject to an additional tax upon being sold. The tax would be set as a percentage of the increase in the value of the land due to the new infrastructure having been built.
I’ve run through a few ideas, some of them more feasible than others. Let me hasten to add that they are not the policy of the Coalition – they are the musings of a backbencher. But in my view they do indicate that there is scope for some fresh thinking.
In some ways the blue sky thinking is the easy part. In the last part of my remarks I want to touch briefly on the most binding constraint of all: how do you sell new ideas politically?
If we take the question of toll roads, for example, the conventional political wisdom is that people will accept a toll on a new road – but they will not be happy to pay a toll on a road which was previously free. Similarly, there are obvious political risks in imposing a congestion charge if people think they are getting nothing in return.
A less crowded city centre, which you can move through more freely if you pay the charge, is one benefit. If the revenues from the charge are paid into a fund which is specifically used to improve public transport, that would be another perceived political benefit. The point is that we are more likely to overcome our infrastructure backlog if politicians can think creatively about how to introduce new infrastructure which is paid for with user charges.
I have argued previously that one possible approach to this problem is to grant every resident a certain endowment of road usage capacity. For example, you might get (at no cost) two slots a week to travel inwards from your home along the freeway into town.
If you did not need this capacity you would be free to sell it into a marketplace. You would also be free, in the same marketplace, to purchase additional capacity. There would be a tax on each sale and purchase of capacity, the proceeds of which would go towards the infrastructure funding task.
This could allow you to build some political buy in, because people who did not use the roads would now have a valuable asset which they could sell and realise a return; and those who did use the roads would get some capacity at no charge.
The right would be revalued every year and would tend to rise as the city’s population rose. In turn, this would help communicate the idea of capacity being finite and congestion (or being free from it) having a value.
A quite different way of building political support for infrastructure development – including the associated financing of it – would be to put your national infrastructure plan (together with the proposed financing mechanisms) to a referendum, with citizens entitled to a ‘yes-no’ vote on the entire plan. This has some similarities to the approach in the US in which cities or states, for example, will go to the voters on a proposal to issue bonds to fund a new infrastructure project.
A project which had been included in a plan which had passed a referendum might obtain certain practical benefits such as a streamlined planning approval process. More generally, if a plan were passed at a referendum, there would be an impetus for politicians to implement it. It could also help to overcome NIMBY issues.
Infrastructure is very much on the national agenda. There is widespread agreement that our infrastructure is deficient and there is a backlog of projects which need to be commenced.
However, we face several constraints when it comes to picking up the pace on infrastructure. Money is one; the planning process is another.
In my remarks today, I have sought to suggest some additional approaches we could take to the task of renewing Australia’s infrastructure. I hope that we will see a continuing and vigorous marketplace of policy ideas in this area. There are great economic and social benefits to be captured for our nation if we can find the best ways to fund and build the world class infrastructure we need.
 Infrastructure Partnerships Australia, “The Role of Superannuation in Building Australia’s Future” p 9
 OECD (2010), Economic Survey of Australia (Paris, November)
 Engineers Australia (2010), “Infrastructure Report Card 2010”
 See Giorno, C (2011), “Meeting Infrastructure Needs in Australia”, OECD Economics Department Working Papers, No 851, OECD Publishing
 Infrastructure Australia (2011), “Communicating the Imperative for Action – A Report to the Council of Australian Governments” (June) p.14
 Cited by Infrastructure Australia (2011), “Communicating the Imperative for Action – A Report to the Council of Australian Governments” (June) p.16
 Infrastructure Australia (2011), “Communicating the Imperative for Action – A Report to the Council of Australian Governments” (June) p.15
 Nadiri, M and Mamuneas, T, “Contribution of Highway Capital to Industry and National Productivity Growth, 1996”, Report prepared by Apogee Research, Inc for Federal Highway Administration, Office of Policy Development
 Infrastructure Australia Press Release (2011), Infrastructure Australia Pushes for Better Projects and Private Funding (4 July 2011)
 Cited in Grattan Institute (2011) “Australia’s Productivity Challenge”, p.16
 NSW Government (2011),” NSW Financial Audit 2011” (The Lambert Report), September, 3-1 to 3-18
 Infrastructure Partnerships Australia (2011), “NSW Election 2011: Getting the Fundamentals Rights”, March, p.8
 OECD News Release on Report: http://www.oecd.org/document/41/0,3746,en_21571361_44315115_49821929_1_1_1_1,00.html, downloaded 2/5/2012
 See Giorno, C (2011), “Meeting Infrastructure Needs in Australia”, OECD Economics Department Working Papers, No 851, OECD Publishing, p.8
 ‘Builders want money back if NSW scraps Metro’, Sydney Morning Herald, 12/2/2010, downloaded 7/3/12 from www.smh.com.au.
 ‘Government of Canada Invites Partners to Join in Developing a Long-Term Infrastructure Plan’, November 30, 2011, http://www.infrastructure.gc.ca/media/news-nouvelles/2011/
 Hon Anthony Albanese, Minister for Infrastructure and Transport Media Release (20110 “A Blueprint To Australia's Transport Future: First Stage Of High Speed Rail Study Released” 4 August 2011
 Infrastructure Partnerships Australia & AECOM , “East Coast High Capacity Infrastructure Corridors – A Realistic Pathway to Very Fast Trains”
 Infrastructure Australia (2011), “Communicating the Imperative for Action – A Report to the Council of Australian Governments” (June) p.16
 Infrastructure Partnerships Australia “Australia’s Infrastructure Priorities – Securing our Prosperity, p.19
 ‘Why finance is good for us: a new call to arms’, The Economist, April 7 2012.