Delivering infrastructure priorities to boost productivity and economic growth

26 October 2016, Doltone House, Sydney

Adrian Dwyer, Executive Director, Policy and Research, Infrastructure Australia

Introduction

Good morning ladies and gentlemen. I would like to thank the Public Sector Network for inviting me to take part in today's event.

I am the Executive Director of Policy and Research at Infrastructure Australia.

Rarely a day goes by without a new infrastructure announcement, sod-turning or ribbon cutting. Building new infrastructure is important, but often what is missing from the public debate is how we make better use of what we already have and how we find smarter ways to deliver what we need.

Doing that will require a frank discussion about changing the way we do things.

So, this morning I am going to talk about the infrastructure reform agenda we should pursue to drive long-term productivity growth.

That agenda includes:

• the importance of getting long-term planning right;
• mechanisms to drive better use our existing assets;
• and the opportunities for infrastructure market reform and why this is the real key to driving growth in Australia's productivity.

But first, for those who are not familiar with what we do, Infrastructure Australia is an independent advisor to Australian governments and the community on the reforms and investments needed to meet the challenges of the future.

We publically advocate for reforms on key issues including funding, delivering and operating infrastructure and how to better plan and utilise Australia's infrastructure networks.

Over the past 18 months we have been busy delivering three major reports:

• The Australian Infrastructure Audit—a comprehensive review of the current state of Australia's infrastructure and our future needs;
• The Australian Infrastructure Plan—Launched in Brisbane with the Prime Minister back in February, which is a reform based document, providing a road map to address Australia's infrastructure challenges—and
• The Infrastructure Priority List—an independent list of nationally-significant investments to guide decision makers on where they should direct funding.

Together these reports provide guidance on the investments and reforms needed to address Australia's current infrastructure gaps and setting us up to meet the challenges of tomorrow.

Before I get into what those documents said, I want to take a few moments to set the scene on the challenges and opportunities facing Australian infrastructure.

Growth in Asian middle class

Many of these statistics are well known to the people in this room, so I won't dwell for too long on the detail.

Australia's recent economic success story is a proud badge of honour. As of last month, we notched up an astonishing 25 years of uninterrupted economic growth.

Despite a recent downturn in mining construction we continue to have one of the highest rates of growth in the developed world.

We are also seeing a continuing shift in global power towards Asia. And since the mid-1980s, the pace of that shifting centre of gravity has accelerated.

By 2031, Asia will represent around two-thirds of the world's middle class population, potentially providing a huge increase in demand for our goods and services.

Population growth

We are also set to benefit from significant population growth of our own. The Australian Infrastructure Audit projected that by 2031, Australia's population would grow to more than 30 million people.

Indeed, our population growth now exceeds that of our major peers—outstripping the UK, Canada and New Zealand. Australia now has the fastest growing population of any major economy in the OECD.

The population of Australia's four largest cities—Sydney, Melbourne, Brisbane and Perth—will increase by close to 50 per cent over the next 20 years.

Growth like this provides a larger domestic market for businesses and increases the size of the labour force, but it also puts additional pressure on existing infrastructure.

Australia's rising cost of congestion

If we don't adequately plan for this significant rise in demand for infrastructure services, Australia could face a future of congestion and constraint.

Already, over 2 million Australians, or a quarter of public transport users, spend over 45 minutes commuting each way, every day.

I was astonished by the structure and shape of our cities when I moved to Australia a decade ago.

I grew up in Cambridge, you might know it. Cambridge has its own identity as a City. It has a fast train to London and there is plenty of countryside between the two. Cambridge is about 80km as the crow flies from the centre of London.

If you travel in a straight line to Sydney's South West, eventually you'll come to Picton—Picton is about the same distance from the centre of Sydney as Cambridge is from London. And it is still part of Sydney.

In fact, the Western tip of Wollondilly council, which is part of the Greater Sydney Commissions remit, is some 113 kilometres from where we are today.

I make this point not to complain, but to highlight the sheer scale of the challenge of delivering infrastructure and of delivering aspirations like a 30-minute city in the Australian context.

This structure and the growing pains in our cities have a significant economic impact. Without action, road congestion alone is projected to cost the Australian economy $53 billion a year by 2031.

Australia, of course, has the right ingredients for sustainable growth and development—vast natural resources, a highly educated workforce and a dynamic and innovative culture. But to make the most of these opportunities, we need to adapt.

And that adaptation can't simply focus on building our way to success, as a country we need to do the heavy lifting on infrastructure reform.

Many of the things we need to do aren't new, most aren't sexy, but they are the practical foundations to deliver things like 30 minute cities, higher quality density and reliable, affordable infrastructure.

The Plan

That's why the Australian Infrastructure Plan focussed so heavily on reform.

I won't trail through each of the 78 recommendations today, but it is worth highlighting that all but a handful of those recommendations are about changing the way we do things—not simply doing more of what we have done in the past.

Building new infrastructure is important, there will continue to be a need for new and enhanced assets to meet the challenges of growth.

But there is a functional limit to what we can efficiently build.

And with a changing country and economy, infrastructure services will also need to change.

To give a practical example, as a city like Sydney becomes home to 7 or 8 million people, todays expectation of a single mode and a single seat all the way to work will expire. Unless we want to journey to get much longer, we will have to take a combination of modes, change services and even stand where we once sat.

There is, of course, also a fiscal limitation on our infrastructure aspirations. Infrastructure isn't the only game in town and a dollar spent on a road is a dollar that can't be spent on schools, hospitals and payments to support the vulnerable in our society.

In that competition for finite funding it is crucial that we have squeezed every drop of value from what we have, before we ask for more.

Better use

The first way we can do this, as recommended in the Plan, is to make better use of existing infrastructure.

In practice, this means embracing technologies that drive greater efficiency across assets and networks.

In areas like public transport, technologies that allow operators to generate, collect and use data are already fundamental to driving real improvements in customer experience and network performance.

The next evolution will be to use this rich data and the insights it provides to change the structure, operation and use of our infrastructure.

And the theme of data and innovation also apply in markets like energy, where technologies such as smart meters allow new opportunities for consumers to understand their own use, but also provide new avenues for different charging and demand management options.

The importance of long-term infrastructure planning

In addition to making better use of existing infrastructure, we need to better integrate long-term, strategic land use planning across all levels of Australia government.

Planning must remain a priority so governments can better prepare for shifts in demand, identify emerging issues and construct the right projects at the right time, for the right price.

Long-term infrastructure planning must also go hand in hand with a robust process for selecting projects that deliver the best outcomes for the community—and this is where Infrastructure Australia comes in.

Our Infrastructure Priority List reflects a consensus of submissions provided from State and Territory governments, peak bodies and the community, all of which are independently assessed by Infrastructure Australia's Board.

This year, the Board has assessed a record number of business cases for priority and high priority projects.

As a country we've made significant headway on getting better at how we evaluate and interrogate infrastructure options since Infrastructure Australia was established in 2008.

But there remains room for improvement to better align project proposals with an identified problem, and ensuring a full range of potential solutions are considered before a decision is taken.

Efficient infrastructure markets

Relative to our peers, Australia is a very strong performer on infrastructure—indeed in some areas we are world leading.

But as I mentioned earlier, reform is the key to improving further, and in particular the biggest prizes lie in creating efficient infrastructure markets.

Productivity-enhancing reforms are, by their nature, difficult.

They often require considerable changes to the way existing entities function, while the disruption of familiar processes often conflicts with entrenched interests.

But we shouldn't be discouraged, because the opportunities are substantial.

A guiding principle of the Plan is that infrastructure delivers the best outcomes for users and taxpayers when it is delivered through a well-structured, well-regulated market.

In Energy and Telecommunications, we need to refine the market, that means:

• Transferring remaining legacy publicly owned businesses to private ownership;
• Removing unnecessary retail price regulation—letting the market work; and
• Privatising the NBN when the rollout is complete.

In Water a combination of market completion and market creation is required, in particular establishing genuinely independent economic regulation and ultimately setting up metropolitan water utilities so they could be transferred to private ownership

In Transport, we need to move to a more sustainable model of charging for road use and routinely exposing delivery of public transport to contestable supply.

These reforms alone, just seven from the 78 recommendations in the Australian Infrastructure Plan, would deliver an enduring 1 per cent increase in GDP, or the equivalent of around $40 billion a year by 2040.

A more sustainable system of road funding

I will briefly expand on one of the key reforms in that portfolio—overhaul of the way we charge for and invest in roads.

The link between usage and charging in our current system of road funding is very weak.

Road users do not receive price signals to minimise their impact on other users and the broader network. The result is a network which is chronically congested for portions of the day, but with excess capacity across most of the 24-hour cycle.

Funding for maintenance and expansion of our road networks is at the mercy of the annual budget cycle, and revenue collected from fuel excise is on the decline.

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.

That's why Infrastructure Australia has recommended that the Australian Government initiates a public process to understand the flaws in the existing funding framework and the development of a fairer road user charging reform pathway.

In short, we need to take the community with us, or reform will fall at the first hurdle.

The role of the public sector in driving reform

This reform, along with the others I have discussed today, will not spontaneously materialise.

Many of these ideas are not new. Some have been around for decades, and have received strong support through major work like the Henry Tax Review and the Harper Competition Policy Review.

But there are clear and simple reasons why reform has been slow to materialise: because largescale reforms like this are complex, challenging beasts.

Many of the benefits of reform will be enjoyed over the long-term, while the short-term process of engaging the community requires courage. This courage can—understandably—be in short supply where the political environment is challenging in its own right.

Clearly, furious agreement in policy circles on what should be done will only get us so far. Without strong leadership from within the public sector, these consensus ideas will continue to remain just that: ideas.

The opportunity and responsibility lies with the public sector to prosecute the case for reform and provide our political leaders with confidence in not just the eventual benefits, but also the strength of the process to get there.

Conclusion

With our proximity to the booming economies of Asia and a growing population, Australia has an incredible opportunity to thrive.

Without a doubt, we need to be more strategic about preparing for changes in infrastructure demand, and we need to invest in the projects that deliver the best outcomes for the community.

But we must also embrace reform, and work towards delivering our infrastructure services through well structured, well regulated markets.

If Australia can get this right—the right planning, projects and reforms—we will all secure the social and economic benefits that come from great infrastructure.

Thank you.