Address by The Hon Lindsay Tanner MP
Minister for Finance and Deregulation
Address to Australian Financial Review National
28 April 2010, Sydney
Investing in Infrastructure
Good morning, it’s a pleasure to be able to join you here today.
I am pleased to see such a variety of industries represented this morning because the topic we are all here to discuss is one that is of truly enormous importance to the future of this country.
Over the past five or so years I have been on a personal campaign to raise awareness of the need to lift our productivity performance in Australia. It’s a campaign that many of my parliamentary colleagues have also embarked on. The importance of that journey was underscored in the recent Intergenerational Report.
The report the Treasurer released in February shows that productivity growth in the 1990s averaged 2.1 per cent. During the first decade of this century it has fallen to an average of 1.4 per cent and is trending down to barely above 1 per cent.
To achieve the economic growth required to meet the challenges an ageing population presents us, it is absolutely essential we improve productivity performance in this country. The development of quality productivity-enhancing infrastructure is obviously paramount to improving that performance.
But there is another, even more fundamental reason for the need to invest in infrastructure in this country; future population growth.
Since the Government released the Treasury’s projections that Australia would have a population of 35 million by mid-way through this century, the debate around population growth has increased.
Earlier this month the Prime Minister appointed Tony Burke as the country’s first ever Minister for Population. It will be Tony’s duty to assess all sides of the issue and develop a population strategy for Australia.
No matter how you view the issue though, there are two fundamental points in the population debate.
The first is that Australia’s population will grow over the next forty years. To what extent depends on a range of factors, but Australia will have a population greater than 22 million in 2050.
The second truth is that, to cater for an increased population, Australia will need to make significant investments in infrastructure.
It is for that reason the Prime Minister has repeatedly stated that he wants this decade to be “The Building Decade” for Australia.
This morning I would like to talk to you about how the Rudd Government sees the Commonwealth's role in this infrastructure development, and how we plan to facilitate private sector investment in the future.
The global recession we have experienced in the last 18 months has not impacted economic growth in Australia as much as we initially feared, but government revenue has suffered, resulting in debt that will need to be repaid in coming years.
A number of comparable countries have experienced such rapid growth in their level of public debt that their ability to support economic recovery through government spending will be significantly constrained. Australia, thankfully, is not in that situation, but the period of profligate Government spending that characterised the earlier part of this century is definitely at an end.
The fact the Rudd Government has committed to strong fiscal rules such as keeping growth in spending to 2 per cent while the economy recovers is a sign the Government won’t be throwing cash around lavishly.
The Commonwealth’s financial contributions to infrastructure predominantly take one of two forms.
The first is a grant - that is we provide money and expect nothing in return. This sort of spending hits the bottom line like most other spending. These decisions are clear-cut, every dollar spent on grants to infrastructure projects is a dollar less to spend on other priorities.
Our fiscal strategy, which requires us to offset all new spending with savings until we get back to surplus, makes these tradeoffs acute.
The second form of Commonwealth infrastructure investment is through equity injections. In broad terms, we do this where we expect to get a financial return on our investment. These investments have a different accounting treatment. They don’t show up on the budget bottom line, but they do show up on the Commonwealth’s balance sheet.
One of my fundamental responsibilities is making sure that our balance sheet remains strong. I am sure I don’t need to tell anyone in this room that maintaining a strong range of assets on our balance sheet is fundamental. It’s therefore pretty obvious that we wouldn’t want to be unnecessarily involved in high risk projects. We also want to make sure we are investing in projects the private sector wouldn’t do without Commonwealth involvement.
Whilst I have spoken exclusively about the financial considerations we take when thinking about investing in infrastructure, we do of course also take into account the wider economic and social return. I’m hoping that there is more we can do in this area to improve the cost-benefit analysis of infrastructure projects.
Federal public sector involvement in infrastructure development has been significantly inadequate until recently. I understand Anthony Albanese spoke to the conference yesterday about Australia’s infrastructure deficit. A deficit estimated to be as high as three quarters of a trillion dollars.
We are committed to making inroads into that deficit - the $22 billion we committed to infrastructure investment in the 2009/10 Budget is evidence of that - but we need to be realistic about what the Government can afford.
This is where the private sector comes in.
Much of the heavy lifting on infrastructure provision needs to fall to states, and even more so, the private sector.
This doesn’t absolve the Commonwealth from getting the policy settings right to facilitate investment by others. There are three areas I want to talk about where I think we should help leverage greater infrastructure provision by others:
The Rudd Government recognises that we need to provide national leadership on infrastructure provision.
In 2008, the Government established Infrastructure Australia to improve the evaluation and selection of national infrastructure projects. This body has proven itself to be a thorough analyst of infrastructure project proposals, providing advice to the Government on which projects to allocate funding to. In the 2009-10 Budget a host of projects from Infrastructure Australia’s list of national priority projects were funded.
A few weeks ago I spoke at a gathering of superannuation fund managers in Melbourne. They were quite emphatic in stating that there is money waiting to be invested in infrastructure projects. What is lacking is enough quality Australian infrastructure projects to invest in.
Building a robust pipeline of projects gives investors the incentive to develop skills to invest in infrastructure. There are examples in other countries where groups with substantial sums to invest are developing better expertise in infrastructure investment. We should aim to develop greater infrastructure investment capability in Australia.
The Federal Government is continually looking for better ways to harness the resources within our economy to increase long-term sustainable growth. Greater use of Public-Private Partnerships is one of the key possibilities.
The development of national PPP policy and guidelines is an important step in developing a national PPP market. The guidelines are extremely comprehensive, covering project assessment, affordability and procurement strategies.
Infrastructure Australia is also developing two sets of commercial principles for infrastructure delivery.
The first applies to social infrastructure, which are generally core services and accommodation projects. In these instances Government payments are based on the availability of the infrastructure, and the facility reverts to Government ownership, at no cost, at the end of the concession term.
Building on the guidelines, these principles are intended to achieve a consistent and efficient risk allocation framework for the delivery of social infrastructure PPPs across jurisdictions.
The second set of principles applies to economic infrastructure projects. In such projects the private sector bears the market, or demand-side, risk and revenues are often derived from third parties.
The draft commercial principles for economic infrastructure are under development. Similar to the commercial principles for social infrastructure, they are intended to apply to the Commonwealth and State and Territory Governments in order to achieve a consistent and efficient risk allocation framework for the delivery of PPPs across jurisdictions.
Early feedback suggests that these guidelines, complemented by the commercial principles for social and economic infrastructure, have been helpful in educating potential private sector participants in Australia's PPP market.
Greater consistency and more transparency surrounding the PPP model and its use across jurisdictions is an important way to lower transaction costs for potential market participants.
At the same time, it builds greater awareness and confidence in the processes Governments apply to PPP procurement.
The size and complexity of major infrastructure projects means that the timeframe from conception to delivery is obviously very long. I have no doubt that you are all acutely aware of the additional costs any delay can result in. It is important that Governments improve this process to reduce the overall costs to society and speed up the delivery of major projects.
The Rudd Government’s deregulation agenda aims to do exactly that by removing regulatory barriers to the construction of infrastructure.
Through the COAG process we are working on removing the regulatory inconsistencies that exist in various jurisdictions. This is happening in the area of environmental assessments where Commonwealth, State and Territory approval processes have been streamlined. What this means is projects need only go through one assessment process, significantly reducing development costs.
We are also working on reforms to the Development Assessment (DA) processes, creating national planning principles and harmonised code-based assessment. Code-based DA systems mean that simple development proposals can be assessed more quickly and free-up planning resources to assess more complex proposals expeditiously.
A further reform of interest to the sector involves consolidation of the Plumbing Code of Australia and the Building Code of Australia into a new National Construction Code by December 2010.
The NCC will resolve overlap and inconsistencies, making it simpler and less costly for architects and builders to identify necessary requirements. Allen Consulting conducted an independent assessment of the reforms and estimated that the benefits would be in the order of two to three percent of the value of construction for the non‑residential sector.
Finally, the national trade licences reform will enable tradespeople in occupations such as building, electrical and plumbing, to obtain national licences that will enable them to practise their trade in any State or Territory of Australia. This will enhance labour mobility and boost productivity by making it easier for employers to source skilled workers from interstate.
The Commonwealth Government has for a long period been almost completely absent from the urban policy arena. The subsequent shortcomings in our nation's infrastructure planning and development are evident.
Almost 90 per cent of Australia’s population currently resides in urban areas. Expected population growth is predicted to predominantly occur in urban areas and above all in our major cities.
With this in mind it’s vital we take a holistic approach to meeting the infrastructure needs of these regions and their inhabitants. We need to make sure infrastructure investment takes place in carefully designed and planned networks.
Last year the Prime Minister announced the development of national criteria for the future strategic planning of our major cities - the first in this country's history. The focus of these criteria will include; balancing in-fill and greenfield development; implementing credible plans to reduce greenhouse gas emissions; and emphasising world-class design and architectural integrity.
Future infrastructure funding to the States and Territories will be reliant on compliance with these criteria and on the development of long-term strategy plans for capital cities.
Australia’s major cities are in the early stages of transition from mono-centric cities with radial infrastructure frameworks to multi-centric urban agglomerations. They are too big to function efficiently around a single central activity district.
Reconfiguring our urban infrastructure to enable a more balanced and sustainable pattern of urban growth is critically important. Planning the future distribution of economic activity is equally important. The principal source of stress on our urban infrastructure and housing market is a growing mismatch between the location of residence and the location of work.
The Rudd Government is committed to addressing these very difficult issues. They are central to improving our productivity and quality of life. Mobilising the resources and expertise of the private sector to help drive positive change is at the heart of our vision.
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