Infrastructure Australia’s recently released National Infrastructure Plan for 2013 outlines the actions necessary to facilitate investment in, and the delivery of, infrastructure in order to “take advantage of the opportunities offered by the growth of the Asian economies over the next half century”.
The Plan suggests that the private sector can and should have a bigger role in funding infrastructure if the right environment is created to facilitate this investment. The Plan identifies a Priority List of required infrastructure. The focus and priority is encouraging investment in public and freight infrastructure, but also in energy, water and transport.
The Plan has the potential to attract significant private sector investment, both Australian and international, particularly in social infrastructure and freight infrastructure projects (the Priority List of projects alone represents about A$27bn). However, as recent Australian PPPs have shown, care needs to be taken in developing appropriate funding models and creating the right opportunities for investment.
Innovative funding models
The Plan recommends Government can and should be more innovative with how it uses its budget to get infrastructure projects off the ground, and to make its infrastructure budget go further. This means moving away from the grant-based model for funding infrastructure projects and instead looking for ways to encourage private sector investment through, for example:
- providing seed funding "to bridge the gap that prevents an otherwise commercially attractive project with strong economic benefits from proceeding";
- taking on some project risk or providing project guarantees. For example, guaranteeing patronage risk, establishing an insurance provider or guaranteeing portion of prive sector debt for a private public partnership;
- providing lower ranked debt to reduce the risk and cost of the remaining private debt; or
- establishing an "ongoing broker capability" to bring together the public and private sectors.
The Plan encourages increased involvement by the private sector in the ownership and management of assets which were traditionally publicly owned to free up capital to fund new infrastructure rather than paying off debt. It recommends certain types of assets be transferred to the private sector, including:
- electricity generators and retailers as the state-owned electricity networks and generation assets already operate in competitive markets;
- port and freight rail assets, electricity distribution and transmission and regional airport assets (although these assets still have some monopoly characteristics and will require suitable regulation before being transferred); and
- water assets (although further work is required before these assets can be transferred to the private sector).
To date, most of Australia’s public infrastructure has been largely funded by taxes with minimal recovery from direct users. Infrastructure Australia is suggesting a move to a user pays system whereby Australians need to accept that they will have to pay more as direct users to get the infrastructure they want. A private investor will only finance a project that can deliver a commercial return that reflects the investment risks the private investor will bear. Therefore by way of example, the Plan recommends that user charging (tolls and congestion charges) for urban transport should be the norm as should time of use charging be introduced for electricity. Similarly, freight sector stands to benefit from investment in freight - it should pay for it. By aligning infrastructure decisions with the needs of the sector, this will relieve the government of the funding burden and deliver to the end user.
Opportunities for the private sector
The clear focus of the Plan is on public infrastructure and freight infrastructure to provide certainty for major projects. The action items proposed by Infrastructure Australia include:
- establishing a long term plan for inbound and outbound freight and creating a national freight network; and
- transferring key electricity, port and rail and water assets to the private sector.
The Plan’s “Infrastructure Priority List” sets out the priorities for investment in Australia. The immediate “ready to proceed” projects are Brisbane Cross River Rail, the Victorian Managed Motorways Project 1 and 2 and the Pacific Highway Corridor Upgrade.
The Plan is part of a broader narrative developing across Australia whereby Government is looking for ways to develop an economic and regulatory environment that will stimulate and draw private sector investment to do some of the heavy lifting in funding the necessary infrastructure pipeline.
It follows increased interest by superannuation funds in infrastructure assets (as demonstrated by the successful ‘recycling’ of Port Botany and Port Kembla), who have for some time been seen as of central importance to delivering Australia’s infrastructure needs, and the recent recommendations of the Business Council of Australia that large scale infrastructure investment (funded in part by the private sector) could be used to replace resource sector investment. It is also consistent with the Productivity Commission’s report into Electricity Network Regulator Frameworks which includes recommendations for privatisation and "user pays" (time of use) charges for electricity.
One thing seems certain (and the Plan acknowledges this) - if private investment is to be enticed, more appropriate funding models need to be developed.
The Plan has been released just as political leaders prepare for a general election in which infrastructure is likely to be a key battleground. The events of the coming months are therefore likely to shape the timing and format of many of these proposed projects.