Speech: The 15-year Australian Infrastructure Plan

Publication Date

18 April 2016

Introduction

Good morning ladies and gentlemen, distinguished guests. Thanks to RAC WA for inviting me to join you today.
It's great to be back in Perth to talk to you about Infrastructure Australia's work. We have just emerged from a very intensive 18 month period—having delivered amongst other things:
- A Northern Australia Audit;
- A nationally focused, Australian Infrastructure Audit;
- A new Assessment Framework for analysing the projects and initiatives that are sent to us by proponents;
- The 15 year Australian Infrastructure Plan, and
- A refreshed Infrastructure Priority List,

I'll be focusing with you today on our most recent releases—the 15 year Australian Infrastructure Plan and the refreshed Infrastructure Priority List, that is backed by our new Assessment Framework.
Together, the Plan and the List provide for the first time, a rounded approach to solving Australia's infrastructure challenges—using both policy reform and evidence based investment together.
Of course, how we fund that investment is the proverbial $64,000 question. So, I'd like to finish today by focusing on the funding issues that we see going forward and the solutions that we think would best allow us to build the infrastructure we need.

The Audit

But first, a bit of background. Last May we released the Australian Infrastructure Audit.
The Audit identified that Australia will face significant population growth, particularly in our major cities, which will necessitate the delivery of both new and renewed infrastructure.
Australia's population is projected to grow from 22.3 million in 2011 to 30.5 million in 2031 − an increase of 8.2 million or 36.5 per cent. Indeed, we are one of the fastest growing countries in the OECD.
Almost three-quarters of this growth (72.0 per cent) is projected to be in the four largest capitals—Perth, Sydney, Melbourne and Brisbane.
If we don't plan for it, this level of growth will have profound impacts in our major capital cities.
This is a good problem to have as our wealth as a nation will also grow.

As part of the Audit we identified the most congested corridors in the country.
Of the top 5 most congested road corridors in Australia, we identified Perth as having one of them—the Mitchell Freeway—which came in at number 4. NSW had the other 4.
However, if we fast forward to 2031—this will switch, with Perth having the top 4 most congested road corridors in Australia. These are:
- The Mitchell Freeway
- Tonkin Highway
- The Graham Farmer/Orong Road/Welshpool Corridor and,
- The Marmion Ave / West Coast Hwy Corridor
- In fact 12 of the top 30 most congested road corridors in the country will be in Western Australia if we fail to act.
This congestion constrains productivity—The Audit found that transport delay costs in Perth are expected to grow from $2 billion in 2031 to $16 billion in 2031.
At a national level we found that the cost of congestion in our capital cities, estimated at $13 billion in 2011, is expected to increase to around $53 billion in 2031, in the absence of additional capacity or demand management.
But aside from the impact on the economy, this congestion also has real world consequences for real people. Travel to and from work will take up a larger and larger portion of most people's days, and there will be less time to spend with our friends and families.
This would impact the livability of our cities, one of the major criteria which attracts global talent and knowledge workers.

The Plan

Our 15 year infrastructure Plan responds to the issues identified in the Audit and recommends fundamental changes to the way we plan, fund, deliver and use our infrastructure.
It also provides broader solutions than just building new roads and rail infrastructure.

We have focused our 78 recommendations in the Plan under four major themes:
- Productive cities, productive regions
- Efficient markets
- Sustainable and equitable infrastructure, and
- Better decisions, better delivery.
I won't cover all of these areas today, but take one example which is most relevant.
We have a major focus on the good management of our cities.
Cities are the key drivers of national productivity and economic growth and are critical to our long term success as a country.
Currently, many of the planning and delivery functions for our cities are characterised by complex and overlapping processes, and lack clear lines of accountability.
Therefore, we have recommended that state, territory and local governments should aim to deliver effective whole-of-city governance to meet the needs of growing and changing metropolises.
At the state and territory level, we need to have more high quality medium to long-term metropolitan planning for Australia's cities.
And with the population growth we are projecting, there will be a clear need in the future to focus on high-quality, high-density accommodation in and around our major city CBD's. Infrastructure Priority List
Alongside the Plan is Infrastructure Australia's refreshed Infrastructure Priority List which identifies 93 projects and initiatives right around the country.
We worked closely with our state and territory colleagues to define the projects and initiatives that ultimately made the list, but also in improving the sophistication and strategic context for how they are developed and assessed.
It's a truism to say that the debate about projects or initiatives too often boils down to the Benefit Cost Ratio.
Benefit cost analysis is an extremely valuable tool, and the fact that decision makers routinely demand a BCR is welcome.
But the degree of focus on a BCR alone, means many now expect a single number to be the answer to everything about the merit of a project.
It is not the only measure, that comes out of a benefit cost analysis—we also need to consider other economic measures such as net present value, and internal rate of return.
And apart from economic measures, Benefit Cost Analysis does not, and cannot, reasonably be expected to capture crucially important factors such as deliverability, strategic merit, policy impact and many other features.
The practical result of this focus on a single number means decision makers are left to argue about the second decimal place of the BCR (is it 1.05 or 1.09) rather than the strategic merits or otherwise of a given investment decision.
It is critically important to understand behind the numbers provided by a BCR. By interrogating the individual costs and benefits, by challenging their veracity and resilience, by subjecting them to pressure tests we can better understand the fundamentals of a project and ultimately give decision makers better information.
That's why Infrastructure Australia has updated the Assessment Framework—the approach we take to evaluating proponents Business Cases seeking Commonwealth investment greater than $100m for nationally significant infrastructure.
The updated framework has a greater focus on;
- the definition of the problem;
- a broader understanding of the social and environmental impacts of an investment, in addition to the economic impacts; and
- finally, consideration of features such as strategic fit, deliverability and adherence to best practice.
By analysing a problem strategically and considering a solution broadly, we are able to provide governments with rigorous, high quality advice on infrastructure investments—as outlined in our Priority List.
But the List is only valuable if it leads to building the infrastructure we need as a nation… and, without change, it is the availability of funding which will restrict our ability to deliver more and better infrastructure.

Taxpayers vs Users

So, I'd like to finish my remarks today by spending some time talking about the changes we will need to make as a nation to pay for the infrastructure we need.

As I alluded to earlier, if we are to afford the investments required to ensure our major capital cities, like Perth, are able to grow and prosper, we simply must challenge the status quo of infrastructure funding.
But challenging the status quo does not mean abandoning logic and reason.
Fundamentally, there are only two ways to fund infrastructure—taxes and user charges. There is no third way, no magic pudding– there are taxpayers and there are users.
There has been some commentary recently that we can fund all the infrastructure we need if we just get “private sector investment”.
Private sector investors, of course expect a return on their investment—which means we still need users or taxpayers to provide the funding to support that return.
Private sector participation is crucial. It focuses commercial rigour and provides a powerful incentive for efficient delivery.
But we cannot reasonably expect superannuants, or any other investor, to simply donate their retirement nest-eggs toward infrastructure investment without a return.
The challenge for governments is to structure projects and deals such that they provide a revenue stream, be it tax dollars or usage charges, which can repay that investment plus a reasonable risk-weighted rate of return.
It is through this mechanism that we can align the powerful profit motive with the public interest—an outcome that will work to the benefit of all.
So, how can that revenue stream, or the return profile for the investor, be structured?
I said starkly earlier that there are two sources of funding—taxes and user charges.
Of course, there are many subsets of these. Too many to explore in detail today, but there are a couple I would like to highlight in a moment.
However, the overall point is simple—we need a diversity of funding, a balance of user and taxpayer contributions, tailored to the specific asset or service.

Value Capture

There is one form of user pays (or more accurately, beneficiary pays) which is currently attracting significant attention—Value Capture.

Value Capture can be an important revenue opportunity, and it should be routinely applied, but it will not fully finance all the infrastructure we need.
And, Value Capture is not a new way to pay for infrastructure.
It is a subset of user or beneficiary pays, and while not routinely and explicitly deployed in the Australian context, this is not exclusively a 21st century idea.
Indeed, the Sydney Harbour Bridge and the Melbourne City Rail loop both had types of Value Capture in the funding mix.
In the broadest sense, the Betterment Levy applied here in WA since the 1950s is a form of Value Capture.
So, the concept isn't new, but it can make the difference between a project progressing or not.
But there is also a more fundamental truth about Value Capture that is worth re-stating.
By definition, Value Capture does not create value. The value created by infrastructure investment exists irrespective of the presence (or otherwise) of a mechanism to capture it.
Value capture does not create wealth, it transfers wealth from a relatively small number of private beneficiaries to the broader taxpayer who funded the original investment.
And that point is crucial, because it places a series of downward pressures on the extent of value which can be captured.
For instance, it is possible to imagine the disquiet from those private beneficiaries if we sought to capture 100% of their windfall.
Equally, at some point between capturing no value and capturing some value the approach begins to erode incentives for developers. Get that calculation wrong, and the result can be one of value destruction.
So value capture is valuable and should be routinely applied, it can make the difference in making projects viable, but needs to be applied in a well-planned and thought through way.

Efficient markets

In a world without silver bullets, the prime focus for policy makers must be to structure our infrastructure markets so they strike the right balance of taxpayer and user funding.
The Plan was unambiguous in its finding that infrastructure is best delivered under a user pays structure in a well-functioning, well-regulated market.
The direct link between usage and supply delivers services that are efficient, responsive to consumer demands and financially-sustainable. These market structures provide price signals to users that reflect the cost of supply, and communicate the demand profile back to infrastructure providers.
But, what does that look like in the Transport sector?

- It means we should be:
  - Routinely exposing public transport services to contestable supply through franchising.
  - Establishing a corporatised investment model for roads, so they operate on a commercial footing;
  - Introducing heavy vehicle charging within five years; and
  - Extending it to light vehicles within 10 years;
The associated funding stream from this reform to roads should be hypothecated back into investment into our roads and transport systems.

Road Funding Reform

I know that RAC WA has advocated for a fairer approach to road funding.
And we see it as the biggest opportunity for funding reform out of any of our infrastructure sectors.
It's clear that the current approach to road funding is unfair, unsustainable and inefficient.
Since its introduction over 100 years ago, fuel excise has been an effective way of paying for roads. But this is no longer the case.
Today, fuel excise raises less than half of what Australian governments of all levels spend on roads. This fall in revenue will accelerate over coming decades given a shift towards more fuel efficient vehicles, the use of alternate fuels and/or not using liquid fuel at all. So we will be collecting less from users while the costs to build and maintain the roads continue to grow.
Under a fairer user pays system, fuel excise and registration fees would be abolished and road users would only pay for the kilometres they travel on the roads they use.
Under a fairer user pays approach to funding, most or all of the money required to plan, finance, build, operate and maintain infrastructure would be collected from the people and businesses that use it.
A fairer user pays approach would allow charging to be linked to funding and supply to be linked to demand.
This means secure, sustainable funding for roads—and better services for users. The imperative for change is clear.

Road User Charging

Changing how we pay for roads will not be easy. The existing structures are familiar and the reforms are complex, but the rewards are substantial. Some motorists may be concerned about what these changes will mean for them.
This is understandable, and it's why an open discussion about these proposals is as important as the reform itself. The pathway to reform is likely to stretch over the next decade, so we have the time to get things right.
That is why Infrastructure Australia has recommended that the Australian Government initiates a public inquiry into the existing funding framework for roads and the development of a fairer road user charging reform pathway. The inquiry should be supported by large-scale voluntary trials of road user charging options.
Road reform is already either underway or under serious consideration in many countries around the world, including New Zealand, many parts of Europe and the United States. Australia should act now, or risk being left behind.

Conclusion

With the release of the Plan and IPL: we are presenting a whole package that works together: the reforms we need to make, the investments we need to deliver.
The Plan provides the vision and roadmap to address our infrastructure gaps and ensure Australians have access to infrastructure that supports innovation and secures prosperity. It is a document designed to help solve the problems of today and set us up to meet the challenges of tomorrow.
But the Plan will only be as good as the commitments and leadership that follow. This strategic document must be turned into a well-led and carefully articulated action agenda.
We have a choice.
A choice between a future of congestion and constraint… with increasing bottlenecks and costly delays.
Or, a choice of a future of vibrant, liveable and efficient cities, productive regions, cheaper infrastructure services and sustainable and resilient infrastructure.
To me, the choice is clear.
Thankyou.