CEDA report tips infrastructure deficit at $25bn

According to a Committee for Economic Development of Australia report Infrastructure: Getting on with the job , there is a serious backlog in infrastructure investment, in water, energy and land transport, estimated conservatively at $25 billion.

The report says, “Much of Australia's infrastructure is at a crossroads. Following two decades of under-investment, vital elements are in serious disrepair, if not crisis. Investment sunk in land, such as roads, railways, telecommunications, electric power, sea and airports, and the like – is struggling to cope with the cumulative demands of Australia's sustained period of economic growth and the vast new trade and investment opportunities emerging – particularly from China.”

Institutional structures – those of Commonwealth, state and local governments – which have served Australia well in decades past, “now appear unable, and ill-equipped, to grapple with infrastructure planning and delivery.”

However the report said Australia's private sector management skills and technical expertise are world class. “There is a mismatch between public and private-sector capability. Government fiscal policies of budget surpluses and debt reduction…have led to reduced public investment in infrastructure. Even with large increases in tax revenues and aggressive “dividend-stripping” of government trading enterprises, the infrastructure investment required to meet Australia's present and future needs has not materialised.”

Super reserves

Simultaneously, large capital resources are accumulating in the private sector, particularly in superannuation and managed funds, which could be increasingly tapped for infrastructure investment. Closing this circle should be a priority.

The expansion and rapid development of the Australian economy, particularly with the gold-rushes and pastoral boom after the 1850s, saw substantial infrastructure investment financed through the London capital market, with the public sector taking the lead role in promoting and progressing Australia's infrastructure investment and its institutions. This government-led development model remained largely unchanged in Australia until the 1980s, when infrastructure investment began to decline as governments increased the share of public consumption expenditure in their budgets, at the expense of public investment.

Fiscal policies of budget surpluses and debt reduction have reinforced this decline. Government capital expenditure as a share of GDP, which was around 7.2% in the 1970s and early 1980s, has now fallen to a low of 3.6% of GDP in 2003–04. Roads investment has fallen from 22% of GDP in the 1960s to 10%.

Engineers' thumbs down

Professional evaluation led by Engineers Australia, has revealed the very serious problems now facing Australia. Rating on a scale of “A” to “D”, the 13 sectors of ports, airports, telecommunications, electricity, national roads, potable water, gas, state roads, waste-water, local roads, storm water, irrigation and rail, revealed that no infrastructure class received an A, indicating it was sufficient for Australia's current and future needs. Only four sectors achieved B ratings, indicating a sufficiency to meet current needs but insufficient for the future, while the remaining nine sectors slipped into the C and D rankings.

New economic modelling of overcoming Australia's infrastructure backlog, but not of providing for future needs) in only five of the key sectors – electricity, gas, rail, roads and water – shows that substantial economic benefits would accrue. GDP would increase by 0.8%, business investment by 1.2%, housing investment by 1.8% and exports by 1.8%. Reduced costs – with CPI falling by 3.2% – and improved living standards of 0.4% would also flow.

The trend towards private provision of infrastructure has been reinforced by the emergence of significant capital availability for infrastructure investment resulting from financial deregulation and Australia's superannuation policies during the 1980s and 1990s. Superannuation funds have grown very rapidly from $95 billion, or 21% of GDP in June 1988, to $628 billion, or 80% of GDP in June 2004.

Private direct investment in new energy infrastructure has significant potential while governments continue to avoid or delay investment in new capacity, particularly in those states and territories that have retained public ownership. Water offers similar potential, especially if network access and pricing outcomes are resolved.

PPP possibilities

Supply of significant new infrastructure via PPP frameworks seems unlikely, other than for toll roads and key social infrastructure (a recent estimate limiting this to perhaps 15% of public capital expenditure).

Further innovation in infrastructure investment, including closing the circle between public and private-sector capital, is required. Complex issues of pricing, access, public policy and regulation, risk–sharing, tendering processes, taxation and governance, have arisen as key challenges that will influence whether private provision of infrastructure can grow as a viable new model in Australia.

The first task is to overcome the highly visible and well-documented backlog in existing infrastructure. The second task is to establish new, forward-looking and resilient institutional frameworks to facilitate timely infrastructure investment by integrating the full range of strategic planning, management and technical expertise.

For the full report go to www.ceda.com.au

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“Supply of significant new infrastructure via PPP frameworks seems unlikely, other than for toll roads and key social infrastructure.”