Why the Coalition is pouring money into road infrastructure.
From the Australian Financial Review AFR Sept 18 2013 By Mathew Dunckley and Matthew Drummond
Promising infrastructure wins votes. It is a road to power. It is tangible. Voters can see it and touch it, feel their taxes at work. Politicians tour their projects endlessly for the cameras or simply to “inspect works” in visits that are justified by confected milestones.
The truth is that Australia has singularly failed to meet the infrastructure challenges it faces. A multitude of studies has shown we have lived long on the spending of past generations. And the true costs of the spending we have avoided are now becoming painfully apparent, particularly in our cities.
This is why Tony Abbott pitched himself to the electorate as the “infrastructure prime minister”. Solving a problem is good politics.
So what will change? With one exception it is hard at this point to be sure. The exception is there will almost certainly be little federal government investment in commuter rail. This means that the largest and hardest to fund infrastructure has lost one of its greatest sources of finance.
Instead, the Coalition argues it will plough more than Labor into roads – freeing up the states to fund railways. This, say critics, simply does not add up, but the stance should be no surprise. In Abbott’s book, Battlelines, he writes glowingly of the freedom that motorists embrace in choosing the time of their travel, the music they listen to and the people they travel alongside.
“The humblest person is king in his own car,” he writes ,before branding public transport wasteful.
“In Australia’s big cities, public transport is generally slow, expensive, not especially reliable and still a hideous drain on the public purse. Mostly, there just aren’t enough people wanting to go from a particular place to a particular destination at a particular time to justify any vehicle larger than a car, and cars need roads,” he writes.
Infrastructure Australia chairman Rod Eddington would most likely disagree with this reasoning, but is philosophical about a government deciding on its own priorities.
“It’s up to premiers to champion the case for their state. My view is there are rail projects that make sense,” says Eddington.
“Whether or not the federal government wants to contribute capital to those projects is a matter for the federal government.”
So what exactly is the Coalition promising for roads? It has identified projects worth around $11 billion scattered around the county. These commitments represent a shandy of new projects and those announced under Labor. Much of the money comes from scrapping pledged funding for rail.
The actual value of infrastructure built will exceed this contribution, as it is leveraged through state contributions and private sector delivery models. For example, the $1.5 billion the Coalition will put towards the East West Link in Melbourne will produce a $6 billion plus road tunnel.
The Australian Financial Review revealed recently that the Coalition may also look to speed up its infrastructure spending as a way to do some economic priming. Abbott’s book foreshadows this standpoint: “Provided they were built at competitive cost major new roads would be a very good policy response to the economic downturn.”
Despite these commitments and the prospect of haste, many are agitating for yet more spending, more projects and more creativity in the sourcing of funds. In this regard infrastructure is a bit like health – a government can never spend enough. The system could always be better and will never be good enough to satisfy everyone. The NSW and Victorian premiers wrote to Abbott wanting to talk infrastructure funding even before the federal cabinet was sworn in.
DEBT DEBATE NEEDED
At the same time governments at federal and state level are more constrained in their ability to fund projects without breaching their financial promises in the first instance and their credit ratings in the latter. Despite those hurdles, many experts argue the role of debt must be reconsidered, particularly at the federal level, at a time when Australian sovereign debt is relatively cheap.
“There needs to be a debate about quality of debt. If that debt is used for building infrastructure like what we’re standing on now then that’s a positive thing. If they’re borrowing to pay social services that’s different,” says Rick Sawers from National Australia Bank.
“Borrowing to improve roads and infrastructure – that’s valuable and more high-quality debt,” Sawers says.
But the Coalition made hay out of a debt “crisis” in opposition so is unlikely to reconsider that position any time soon.
That has put the role of the private sector and superannuation funds in particular at the forefront.
The high-profile failures of fully private toll roads have effectively scuppered the model of vanilla toll roads being constructed with risk borne outside the public sector. Sydney’s Cross City Tunnel has just been stricken for a second time.
In response Victoria and NSW are both hoping to prove traffic flows for their road projects – respectively East West Link and WestConnex – before offering them as fully operational toll roads to the private sector.
Eddington says it’s true that the private sector has had its fingers burnt on toll roads and might be more cautious.
“You need to be quite careful about the economic analysis you put into those projects before you proceed with them,” he told the Financial Review Sunday program recently.
“I worry that because some of these public-private partnerships don’t work out that the private sector will be more cautious about their investment. They should be; they should choose projects more carefully.”
Eddington says it is up to governments to design projects that attract investment, particularly if they want to tap some of the $1.6 trillion in savings managed in the sector.
“The onus is on the sponsors of the projects to construct them in a way that makes our super funds want to invest in them,” he says.
“If we want superannuation money to flow into big infrastructure projects then the projects have to be structured in such a way that makes them attractive.”
Damian Hill, chief of REST Super, which has $28 billion of funds, says existing assets are more attractive than punting on construction risk, although his fund is bidding on the East West Link.
“We’re prepared to take on some greenfield risk but we’d also be looking to take on some mature assets,” Hill says.
“There’s a great opportunity here for governments to recycle capital by potentially selling off some of the brownfield assets to bring long-term holders such as ourselves who are aligned to the community and then recycle it into greenfield.”
Eddington agrees, saying governments should be more open to building assets and then selling them like the NSW government did in the recent ports privatisation.
“For me that was a textbook project that was well-managed. There’s a lot to learn from that approach,” he says.
“There’s no prizes for building bridges over puddles and roads to nowhere, that are economically irrelevant. All that does is push debt up. It’s very important we take an evidence-based approach to these projects.”
To this end, Abbott has also pledged a published business case for every project his government contributes more than $100 million towards. But this is a commitment stretched from the outset. He promised $1.5 billion for East West Link long before the Victorian government produced its flimsy pamphlet spruiking $1.40¢ in benefits for every dollar spent on the project.
Abbott has since indicated he believes that is sufficient.
It is worth remembering there are two business constituencies in infrastructure delivery. One is the clique of builders, bankers, lawyers and consultants engaged in the extremely complex bids for public-private partnerships. They have welcomed Abbott’s promise to get on with building.
“Obviously any increase in infrastructure spending is of interest to us and hopefully we will be a participant,” says Bob Humphris, chairman of Leighton Holdings.
The other constituency is made up of those businesses which rely on the infrastructure to do their job and increase the productivity of our cities.
They will be hoping Abbott lifts the bar in project selection.
“Too often in the past, some projects have inappropriately been given greater priority for political, sectional or geographic reasons,” said Michael Kilgariff, managing director of the Australian Logistics Council, in a recent speech.
“Other more deserving projects have been pushed down the list to the detriment of our overall economic performance.”
Many feel too that governments need to be more inventive if they are to rise above their balance sheet constraints. Congestion charges, time of use pricing and smarter traffic lights are being talked about as a ways to get more out of existing infrastructure.
Some of the ideas in circulation are in fact those from a time before fast money business models. One example is value capture. Under this way of thinking those who benefit from a piece of infrastructure should help pay for it alongside those who actually use it.
A classic example of this is the City Loop rail tunnel system beneath Melbourne which was partly funded by a levy of CBD property owners.
In an age where every public dollar is a prisoner, politicians will have to work harder, smarter and more closely with the private sector for their vote-magnet photo opportunities.