Why we must diversify the pool of funding available for Australian infrastructure investment

24 March 2017, Sydney

• Good afternoon ladies and gentlemen. Thank you Colin for that warm introduction, and to CEDA for hosting today’s event.
• It’s great to be here this afternoon to talk about how we will pay for the transport infrastructure Australia needs. This is a critical issue affecting Australians in every state and territory and something that is really at the heart of Infrastructure Australia’s reform agenda.
• As Colin said, Infrastructure Australia provides 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.
• We also provide leadership on the over-arching issues facing our infrastructure sector—and that includes Australia’s urgent need to diversify the pool of funding available for infrastructure investment. For new and existing assets.

• Australia is undergoing a period of profound change and in 15 years’ time will be a very different country from the one it is today.
• We are seeing significant population growth. Australia’s population will grow to more than 30 million people by 2031, with the number of people living in Australia’s four largest cities—Sydney, Melbourne, Brisbane and Perth—increasing by close to 50 per cent.
• If we don’t take action to increase capacity and better manage demand on our transport networks, congestion in our capital cities could cost the economy $53 billion each year by 2031. We are moving to turn up and go mass transit, similar to those systems we are familiar with when we visit New York or London.
• Additional investment is also needed to make better use of existing infrastructure, and progress the projects that will genuinely move the dial on congestion in our cities.
• And just to reinforce that point, we must also make better use of existing infrastructure, using real time data and technology to provide the services users need and want.

• We recently released a revised version of our Infrastructure Priority List—identifying 100 projects and initiatives as national priorities. This is the infrastructure Australia needs over the next 15 years to maintain our quality of life and grow our economy
• The revised Priority List includes transformational, city-shaping projects like Sydney's 66km Metro rail, Melbourne's Metro Tunnel and Brisbane's Cross River Rail project, turn up and go transport services.
• And to ensure that our cities remain great places to live and work, and some of the most liveable in the World today, we need a focus on long-term, integrated land use and infrastructure planning that actively anticipates changes in demand. We need the right infrastructure services in the right place at the right time and cost.

• For example, our revised Priority List identifies additional public transport capacity between Parramatta and the Sydney CBD as a high priority. The Australian Infrastructure Audit found that demand for transport services along this corridor will increase by 50% between 2011 and 2031.
• We also need to connect our regions which are also growing and our producers to their domestic and overseas markets. That is why the List also highlights investments that will support growth in our national connectivity such as Inland Rail and the progressive upgrade of Queensland’s Bruce Highway.
• But of course these kinds of large-scale transport projects, and indeed any investments in new or existing infrastructure to meet the needs of our growing population, 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.
• The investments we need are multi-decade in nature. 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 in Australia—and if we are to meet our growth challenges, we need it sooner rather than later.

• 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 so what I am referring to is….
• Financing being 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.

• 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.

• We are seeing some progress on the important issue of road market reform since we published our Australian Infrastructure Plan.
• As a reminder, currently fuel excise raises less than half of what Australian governments of all levels spend on roads, and this fall in revenue will accelerate over coming decades as we shift towards more fuel efficient and alternately fuelled vehicles.
• This means we will be collecting less from users while the costs to build and maintain the roads continue to grow.
• Another weakness in the current system is that road users do not receive price signals to minimise their impact on other users and the broader network.
• A fairer, user-pays approach for road would address all of these problems, but of course deep public consultation to gain community support for a new approach is absolutely essential. We need to take the community with us on that journey.
• The good news is that the Government has moved to do just that in its response to the Plan, by adopting our recommendation of a public inquiry into the potential benefits of road market reform.
• The significance of this commitment from the Government cannot be understated—and perhaps even more importantly, it is a commitment that has bipartisan support in the Parliament.
• This will be a long-term process, but we certainly look forward to making further contributions on the potential models for road market reform in coming months.

• 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 taken 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.
• Franchising services, where the operation of our public transport services is exposed to a competitive tender process, can deliver savings for taxpayers and better services for commuters.
• Experience has shown that franchising public transport can cut operating costs by between 20 and 30 per cent and as much as 50 per cent in some circumstances, mostly due to the incentives for franchised operators to deliver services more efficiently.
• There is a significant opportunity here to improve cost efficiency across our public transport networks, while also delivering a better customer experience—and it’s something that state and territory governments must explore.

• 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.
• Some of you may know that Infrastructure Australia recently released the first tranche of work in our infrastructure Reform Series on this very topic—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.

• In the longer term, Australia needs to look seriously at the most efficient way to capture value uplift around major infrastructure investment—and by that I mean implementing a broad-based land tax.  
• Each state and territory currently has some form of land tax in place, with the exception of the Northern Territory. However, the present system includes significant exemptions, including on owner-occupied properties which alone reduces the total value of the land tax base by around 60%.
• Broadening the land tax system, while also removing other inefficient charges such as stamp duties, would provide a fairer and more efficient way of capturing land value uplift.
• A broad-based land tax could provide governments with a reliable stream of funding that efficiently and fairly reflects the productive value of land. And the potential benefits don’t end there.
• If stamp duties are abolished at the same time, the benefits of introducing a broad-based land tax reform would be wide-reaching. It could improve housing availability and affordability by reducing some of the upfront costs of home ownership, which is of course a major issue in cities like Sydney and Melbourne.
• Of course, Infrastructure Australia is not the first to recommend this. Land tax reform has been supported by the Bureau of Infrastructure, Transport and Regional Economics, and the Henry Tax Review, and with good reason—which is that it is in Australia’s best interest.
• While this reform comes with its own challenges, Australia’s governments need only to look the ACT for leadership, where land tax reform is well underway.
• In 2012, the ACT Government commenced a 20-year period of phasing out residential property transaction taxes, while phasing in a broad-based land tax.
• The effect of this reform process has been to reduce the volatility of government revenues from duties to a more reliable and stable land tax revenue stream, while also providing greater incentives for private investment in buildings, improving property market liquidity and reducing barriers to mobility. 
• By introducing this reform alongside the removal of inefficient charges such as stamp duties, governments would have an opportunity to improve national productivity, and to provide a better way to pay for the infrastructure we need.

• There is no doubt that the reforms I’ve described today are challenging.
• Increasing cost recovery in transport, introducing contestability in transport service delivery and broadening the land tax system to create a fairer and more sustainable way of funding our infrastructure will not be easy.
• Many of the benefits of reform will be enjoyed over the long-term while the short-term process of engaging the community will be challenging.
• However, this is what is needed to fund Australia’s transport infrastructure pipeline.
• We need to take the community and the business community on the journey. If we can shift towards a user or beneficiary pays model, we will all share in the social and economic benefits that come from world-class transport infrastructure.