There is plenty of private capital available to help meet Australia’s future infrastructure needs – estimated to be at least $760 billion over the next 10 years – provided governments can get the regulatory and reform settings right, the Business Council of Australia says.
Eight areas for reform have been highlighted in a new report for the Business Council by PwC looking at funding and financing options to secure the significant investment required in roads, railways, ports and utilities in the decade ahead.
“With our population set to grow to 38 million and our cities to almost double in size by 2050, and with the freight task to almost double by 2030, Australia has a significant infrastructure challenge in front of it,” Business Council Chief Executive Jennifer Westacott said.
“The problem we are facing is budget deficits and debt across the Commonwealth have reduced the capacity of governments to pay for the infrastructure needed to keep pace with projected growth, so new funding and financing options for public projects will need to be considered.
“Policy settings must also continue to support the shift to a market-based approach to infrastructure provision where infrastructure businesses, rather than governments, undertake long-term planning and investment and charge the users an efficient price.
“With Prime Minister Abbott wanting to be an infrastructure prime minister, and with governments, business, unions and the community all agreed we need better infrastructure, we must focus on how to make that investment happen.
“Australia’s infrastructure deficiencies have been talked about for a long time. With the Commission of Audit process and Productivity Commission inquiry into infrastructure funding and costs underway, and a need for new sources of growth to offset a looming drop in resources investment, we need to focus on policy actions now that will get the job done.
“There is ample private capital available to meet our infrastructure investment needs, including a pool of superannuation funds expected to total $6 trillion by 2037, provided barriers to investment are removed and a pipeline of suitable projects is identified.
“The challenge for governments is to unleash the private sector investment. All projects should be designed with private investment in mind, be that up front or over time. This might require governments to provide a stream of funding, or share in the early stage risks, with government’s optimal role decided on a case-by-case basis.
“Governments should increase their capacity to fund new projects by prioritising the sale of public assets, with the proceeds reinvested into new projects which will leave the community better off.”
The PwC report highlights that there has been a significant increase in private infrastructure spending, from around 15 per cent of total investment in the 1980s to almost 50 per cent today, and private investment on behalf of the public sector has also risen.
Private infrastructure spending would need to increase to 60 per cent, or $400 billion, of the $760 billion total spending estimated to be required in the next 10 years to meet our infrastructure needs. The rest will be a mix of spending by public corporations and by governments from their budgets.
The report recommends eight areas for reform:
1. Produce a consistent pipeline of high-quality projects initiated by governments
2. Step up asset sales and recycle the funds into infrastructure which benefits the community
3. Implement an intergovernmental agreement to define a stronger Commonwealth funding role
4. More innovative and flexible matching of funding and financing models to new projects, for example by reducing risks for private investors
5. Improve and make greater use of public–private partnerships
6. Develop capital markets by supporting demand for project debt
7. Improve the taxation treatment of long-run infrastructure investment
8. Continue reforms to develop efficient infrastructure markets that enable full cost recovery.
“A lot of attention is focused on how difficult it will be to fund the scale of infrastructure investment needed to respond to population growth and support higher productivity, but the reality is there are only two ways of paying for what we need. Either governments can do more heavy lifting with spending from their budgets, asset sales or increased debt, or the community directly pays more through user charges,” Ms Westacott said.
“How to pay for infrastructure is straightforward, but where the real challenge lies is in creating the right policy and regulatory environment, including a rolling pipeline of ready projects, to unlock the full potential investment capital which is available.
“With spending seriously constrained across the Commonwealth, now is the time for leadership and policy action, including an honest conversation with the community about how we pay for the infrastructure we will need in the next decade.
“While there are important new infrastructure projects that Australia will need in coming years, governments must not lose sight of making better use of existing infrastructure, which defers the need for spending on additional capacity and maximises the productivity potential of existing assets.
“In addition, we must continue to pull out all stops to reduce Australia’s high project costs, which are eroding the value of public and private investment and becoming a major barrier to attracting global investment.
“Australia’s infrastructure challenges are not insurmountable but there is no quick fix either – action is required on a number of fronts and it will take time to complete.
“The Commonwealth and state governments need a renewed commitment to infrastructure that includes an agreement for a greater role for the Commonwealth in meeting our infrastructure needs and a shared long-term plan for infrastructure delivery.
“Having a well-functioning infrastructure system that meets the needs of a growing population is among the most fundamental requirements to support improved lifestyles and a stronger and more competitive nation in the years ahead,” Ms Westacott said.