Productivity Commission Inquiry into Infrastructure Costs

Media Release

JB008/2013

13 November 2013

Joint release with:

The Hon. Tony Abbott, MP

Prime Minister

The Hon. Joe Hockey, MP

Treasurer

The Government will commence a thorough examination of infrastructure costs and financing in Australia with a new Productivity Commission inquiry.

This inquiry delivers on a key Coalition commitment and forms part of the Government's ambitious infrastructure agenda.

The Terms of Reference for the inquiry provide scope for the Productivity Commission to analyse and report on the following areas:

  • How infrastructure is currently funded and financed in Australia, including by the Commonwealth, the States and the private sector;
  • The rationale, role and objectives of alternative funding and financing mechanisms;
  • Examine the cost structure of major infrastructure projects in Australia, including where infrastructure project costs have increased considerably, compared with other countries;
  • Provide advice on ways to improve decision-making and implementation processes to facilitate a reduction in the cost of public infrastructure projects; and
  • Comment on other relevant policy measures, including any non-legislative approaches, which would help ensure effective delivery of infrastructure services over both the short and long term.

The Government is mindful of the financial risks posed by alternative funding and financing mechanisms. In this respect, the Terms of Reference also ask the Productivity Commission to consider these risks to the Commonwealth, as well as their possible impact on the Budget and fiscal consolidation goals.

The Productivity Commission will also have regard to work already underway by the Commission of Audit.

The overall cost of infrastructure and engagement with the private sector on infrastructure financing are key economic challenges faced by Australia and other countries in our region.

Australia must ensure that private investment is as attractive as possible by reducing the cost of building infrastructure by driving efficiency and removing red tape.

This inquiry will be crucial in identifying how we can lower construction costs and develop a partnership with the private sector to build the infrastructure of the 21st century that Australia needs.

The Productivity Commission will hold public hearings and release a draft report for public comment before delivering a final report to the Government within the next six months, with a draft report to be released in March 2014.

The Terms of Reference for the inquiry are attached.

More information is available at www.pc.gov.au

Public Infrastructure: Provision, Funding, Financing and Costs

Terms of reference

I, Joseph Benedict Hockey, Treasurer, pursuant to Parts 2 and 3 of the Productivity Commission Act 1998, hereby request that the Productivity Commission (Commission) undertake an inquiry into ways to encourage private financing and funding for major infrastructure projects, including issues relating to the high cost and the long lead times associated with these projects.

Through this inquiry, the Commission is to conduct a broad ranging investigation into costs, competitiveness and productivity in the provision of nationally significant economic infrastructure and examine ways to: reduce infrastructure construction costs; address any barriers to private sector financing, including assessing the role and efficacy of alternative infrastructure funding and financing mechanisms, and recommending mechanisms and operating principles that may be applied to overcome these barriers; and, without limiting the generality of this reference, outline options to reduce construction costs.

Background

Efficient public infrastructure plays a key role in a competitive and productive economy and the ongoing funding and financing of infrastructure development in Australia is therefore of critical importance.

The capacity of government to meet expectations for improved infrastructure services is always limited, and the use of financing options involving the private sector can reduce the call on government resources, allowing scarce public funds to be targeted in a more effective manner.

While alternative financing and funding models offer opportunities to reduce the immediate call on governments, it should be noted that the application of new models is not a panacea. Ultimately infrastructure can only be funded through taxation, borrowings or direct user charges. There are difficult trade-offs to consider given increasing demand and competing priorities.

Scope of the Inquiry

In reporting on funding and financing and the scope for reducing costs for public infrastructure projects, the Commission is to analyse and develop findings on the following:

  1. How infrastructure is currently funded and financed in Australia, including by the Commonwealth, the States and the private sector.
  2. The rationale, role and objectives of alternative funding and financing mechanisms, including:
    1. the full range of costs and benefits of different models;
    2. the issues and costs associated with the allocation of project risks, availability of finance, contracting arrangements and delivery models for construction projects;
    3. the disincentives to private sector investment;
    4. broad principles for the use of these funding and financing mechanisms;
    5. the roles of the Australian Government, the States and Territories, Local
    6. Government and the Private Sector in the implementation of these mechanisms, and the relationship between each of the parties; and
    7. creation of revenue streams to attract private sector finance; for example, through user charging, availability payments etc.
  3. Consider the financial risks to the Commonwealth posed by alternative funding and financing mechanisms, as well as their possible impact on the Budget and fiscal consolidation goals.
  4. Examine the cost structure of major infrastructure projects in Australia, including where infrastructure project costs have increased considerably, compared with other countries.
  5. Provide advice on ways to improve decision-making and implementation processes to facilitate a reduction in the cost of public infrastructure projects, including in relation to:
    1. measures to improve flexibility and reduce complexity, costs and time for all parties;
    2. access to the market for domestic and international constructors, including barriers to entry, and what effect this has on construction costs; and
    3. ‘greenfield’ infrastructure projects.
  6. Comment on other relevant policy measures, including any non-legislative approaches, which would help ensure effective delivery of infrastructure services over both the short and long term.

Process

In undertaking this Inquiry, the Commission should take into account the work being led by the National Commission of Audit to examine the scope for efficiency and productivity improvements across all areas of Commonwealth expenditure.

The Commission is to undertake an appropriate public consultation process including holding hearings and inviting public submissions. It will consult with the State and Territory Governments in undertaking this Inquiry.

The Commission should release a draft report in March 2014.

The final report should be provided within six months of the receipt of these terms of reference.

The Government will consider the Commission's recommendations, and the Government's response will be announced as soon as possible after the receipt of the Commission's final report.

J. B. HOCKEY Treasurer