CEDA Trustee Dinner – Funding the infrastructure WA needs

Introduction

Good evening ladies and gentlemen. Thank you to CEDA for inviting me to take part in tonight's event.

It's great to be here in Perth to speak about Infrastructure Australia's investment and reform priorities and the how we pay for our infrastructure needs in Western Australian.

Funding is a critical issue affecting Australians in every state and territory and something that is really at the heart of our national reform agenda.

Before I begin today, I think it is worthwhile briefly explaining Infrastructure Australia's role.

We provide independent research and advice to governments and the community on the projects and reforms Australia needs to fill today's infrastructure gaps and meet the challenges of the future.

We are responsible for providing the evidence base for Australia's nationally significant infrastructure, and developing 15-year rolling Infrastructure Plans that specify national and state level priorities.

Meeting WA's infrastructure challenges

Like all states and territories, WA faces difficult revenue and expenditure decisions over the next 15 years.

The challenges WA faces as it transitions out of the mining construction boom are significant, but not insurmountable.

Investing in productivity-enhancing infrastructure can support WA during this transition.

This needs to be supported by the development of robust, evidence-based business cases, to direct investment towards projects that deliver the best outcomes for both industry and the community.

We are really pleased that the newly elected WA Government plans to replicate the Infrastructure Australia model in WA.

At the state level, we've seen a number of different iterations of the Infrastructure Australia model around the country.

The important thing is to establish a culture of long-term, integrated land use and infrastructure planning and to devote the necessary resources towards developing robust, evidence-based business cases for major projects.

Strategic infrastructure investment is critical not only to support WA's economic transition, but also to ensure growth is not constrained in the future.

When we completed our Infrastructure Audit back in 2015, we found that the cost of delays on the road transport network in Perth alone is projected to grow from $2 billion in 2011 to $16 billion in 2031. This is in the absence of additional capacity and demand management systems.

Now this projection was based on population growth projections back in 2015, and population growth has slowed since then. But it gives an indication of the cost of failing to provide the infrastructure that we will need in the future.

Addressing this congestion will require reform, to better manage demand and extract greater value from existing infrastructure, as well as significant new investments.

 WA's infrastructure priorities

For our part, Infrastructure Australia maintains the Infrastructure Priority List to support evidence-based decision making and guide investment decisions. We don't make funding decisions, that's a matter for governments.

We recently released a revised version of the Priority List, identifying 100 nationally-significant infrastructure priorities in each state and territory. This is the infrastructure Australia needs over the next 15 years to maintain our quality of life and grow our economy.

The revised List includes a number of initiatives and projects in WA, including the Perth CBD North Corridor Capacity Initiative, the third runway Initiative for Perth Airport, and the Perth Container Terminal Initiative to name a few.

 The Priority List also highlights the importance of investing in WA's regional and remote areas.

In the Infrastructure Audit we identified a clear need to improve freight connectivity and transport access across regional WA, and the need for a National Freight and Supply Chain Strategy.

That is why we have identified improving the service levels of roads from the Great Northern Highway in the north to the Eyre Highway in the south as a national priority.

But of course these kinds of large-scale projects, and indeed any investments in new or existing infrastructure will require more funding.

And the funding task extends beyond the substantial capital investments associated with building new infrastructure.

We also need to factor in the costs of operations and maintenance. We need to take a greater whole of life cycle focus when we plan these investments.

If we are serious about achieving better outcomes for infrastructure users—we need to prepare to fund assets throughout their whole lifecycle which includes operations, maintenance and renewal.

What we need then is sustainable sources of funding available for infrastructure investment—and if we are to meet our growth challenges, we need it sooner rather than later.

 The difference between financing and funding

I want to take a moment here to clarify some terminology: the difference between financing and funding. The two are often used in an interchangeable and confusing way.

Financing is about how the upfront costs of constructing infrastructure are met. It refers to the supply of capital, such as debt and equity, which is used to pay for the upfront investment costs of an infrastructure project.

Funding refers to how that infrastructure is actually paid for. And ultimately, there are only two sources of funding for infrastructure, either taxpayers through government spending or directly by users and beneficiaries through, for example, electricity charges or road tolls.\

In Australia, we don't have a problem financing our infrastructure, our challenge is actually in funding it.

Australia's ageing and growing population sees governments under pressure to fund health and welfare services, in turn placing pressure on funding of other infrastructure needs—even more important that we get the right projects.

This means we need to look seriously at how our infrastructure is paid for, and that begins with achieving the right balance of what comes from users and what comes from taxpayers.

Benefits of a user-pays approach

In the Infrastructure Plan, we recommend transitioning the balance towards a user or beneficiary pays model, because it is a fairer and more sustainable way of funding the infrastructure we need.

Already, most of Australia's infrastructure services are largely funded by user charging—that is, the charges levied on customers largely reflects what they use and typically reflect the long run cost of provision.

This is a good thing because we know from experience both here and abroad that where there is a clear link between usage and charging, the outcomes for infrastructure users are far better.

That means infrastructure that is well-maintained, customer-focused and responsive to shifts in demand—in other words, infrastructure that better meets the needs of our growing population.

Additionally, where there is a link between usage and charging, the infrastructure is paid for by those who benefit from it, so it is more equitable.

Unfortunately, when it comes to transport, this isn't the case. Australia's road networks and public transport systems have comparatively weak links between usage and charging, with the notable exception of urban toll roads.

In these cases, the absence of user pays means the taxpayer remains directly involved in funding infrastructure across inception, planning, delivery and operations.

While governments pay for this infrastructure through our taxes, this means that the vast majority of people and businesses who pay for a new or upgraded transport infrastructure will rarely—if ever—use it or directly benefit from it. This is both unfair and unsustainable.

Road market reform

We believe that we have a national opportunity in front of us to improve the way Australian governments fund infrastructure investment in our roads and address significant constraints on the economic growth and productivity of our urban centres.

 A key recommendation in the Australian Infrastructure Plan was that a public inquiry be established to help develop a fairer and more sustainable model for funding our roads and chart a potential pathway to reform.

The good news is we have seen real progress on this issue, with the Federal Government committing to an independent study on the potential benefits and impacts of road market reform.

This is an important first step, and an excellent opportunity to build consensus within government, industry and the community.

Although most of us who work in infrastructure understand that a user-pays approach can deliver better services for users, there must also be deep public consultation to gain community support for a new approach to paying for our roads.

The inquiry needs to engage directly with communities and lead public debate, to raise awareness of how we pay for roads and why this is unsustainable and unfair. By demonstrating the costs of inaction we can create a compelling case for reform.

We acknowledge that any inquiry and resultant reform process is likely to take several years at a minimum. Keeping up the momentum for reform then must be a key priority and joint responsibility of government and industry.

The case for Customer Focused Franchising

But while we are seeing progress in shifting to a user-pays approach to paying for our roads, taxpayers are still shouldering the bulk of the burden for public transport services.

This is increasingly unsustainable in the face of other budget pressures and further exacerbated by the fact that cost recovery in transport service delivery is low.

Around 20 to 25 per cent of the cost of public transport provision in Australia is typically collected from users. Or put another way; up to 80% of every public transport journey in Australia is paid for by taxpayers.

On this measure, we are far behind cities such as Hong Kong, London and Barcelona.

While there will likely be a continuing long-term case for partial taxpayer funding of public transport, we need to have an open discussion about the fairness, efficiency and sustainability of the current system.

Increasing cost recovery for public transport does not simply mean increasing fares to users. It's also about being more efficient in the way we operate our transport infrastructure.

There is significant opportunity for bus and rail networks across the country to lower the cost of provision and improve the quality of services, which is why we recommended in our Plan that we create contestable markets in our public transport system.

This brings me to franchising and the most recent paper in our infrastructure Reform Series, Improving Public Transport: Customer Focused Franchising.

The paper provides further evidence of how franchising more of Australia's government-owned public transport services can deliver better service outcomes for commuters and better value for taxpayers.

We commissioned PwC to conduct some modelling on the potential benefits of franchising public transport services traditionally operated by state, territory and some local governments across the country.

What that modelling found is that nationally, franchising could deliver up to $15.5 billion in taxpayer savings by 2040.

This is money that could be reinvested into new transport services that help our cities respond to future growth challenges.

In Western Australia, the savings available could make a substantial contribution to funding a project the scale of the Forrestfield to Airport rail line.

Delivered in a tightly regulated environment with clear performance targets, Customer Focused Franchising represents an opportunity to grow the provision of customer-focused public transport in our cities and deliver higher quality services.

It's something that every state and territory government must explore.

Establishing a realistic role for value capture

In terms of stretching public funding further to deliver more of the infrastructure Australians need, value capture also presents a compelling solution.

While governments can pay for infrastructure through the general tax base, this means that the vast majority of people and businesses who pay for a new or upgraded asset will rarely—if ever—use it or directly benefit from it.

Value capture can establish a fairer balance, where a portion of value uplift, previously captured by local beneficiaries, is used to reduce the call on taxpayer funds.

Effectively, those who benefit from the government's investment foot more of the bill, while those who live further away and may never use the infrastructure pay less.

Infrastructure Australia released another report in our Infrastructure Reform Series– in a paper entitled Capturing value: Advice on making value capture work.

What that report found is that value capture can work in Australia and it should be regularly considered for all public infrastructure projects, but it is important to be realistic about the role it can play.

Value capture cannot, on its own, fund the infrastructure we need. Even if governments could collect the full value uplift from those who directly benefit from a particular investment, this would still not cover the full cost of building and maintaining new infrastructure in most cases.

Value capture has the potential to be a powerful tool for governments to raise funds for infrastructure.

Value capture should be about making our infrastructure funding mix fairer and more sustainable, and delivering better infrastructure services for all Australians.

Conclusion—Funding the infrastructure WA needs

There is no doubt that the reforms I've described today are challenging.

Road market reform, introducing contestability in transport service delivery and establishing a realistic role for value capture will not be easy.

For that reason, it is incumbent on industry and the business community—those of you in this room—to be advocates for reform.

Business and industry must get on the front foot and begin pushing for reform in the halls and offices of our government.

We must prosecute the case in the streets of our cities and regions if we are to build a movement for real action.

Without these efforts we cannot hope to progress the investments md reforms that will secure our future prosperity or deliver on the outcomes taxpayers and users deserve.

Thank you.