Australia's Infrastructure Future
28 November 2013
Infrastructure Partnerships Australia:
Industry Leaders' Luncheon Series,
Four Seasons Hotel, Sydney
It is great to be here today talking to Australia's pre-eminent infrastructure think tank and ideas incubator.
It has been just over two months since I was asked by the Prime Minister to serve in this vital portfolio.
My task, as explained by the Prime Minister during that phone call, is to ensure:
- That we deliver on our ambitious infrastructure election commitments, including leading the negotiations with states;
- To drive more investment, both from public and private sources, working closely with the Treasurer on alternative financing arrangements;
- That we develop an agenda to get more for less and more quickly.
- And finally, but very importantly that I ensure that he is remembered as the Infrastructure Prime Minister.
A pretty simple set of KPIs!
This, in practice, means ensuring the delivery of not just our ambitious election commitments, but also to build a framework that plans and funds, in a far more comprehensive manner, the delivery of economically productive infrastructure.
While I understand the re-introduction of the more traditional title of ‘Assistant Minister’ has created some confusion about the exact structure of my role, simply put, I am the Minister for Roads, but realistically in the Prime Minister's mind, the Minister for getting the infrastructure job done.
To make a fast start in achieving our lofty goals, I have spent the first two months travelling from state to state to see for myself our infrastructure needs, the unacceptable bottlenecks and the plans we are working on to improve our productivity.
I have spoken to state governments and industry participants to gauge their views and to work on a shared vision for a better way to plan and fund infrastructure investments.
The new Australian Government doesn't pretend to know it all, or to be the owner of all good ideas.
Given the knowledge, wisdom and drive of so many in this room, it would be arrogant to ignore your views.
In fact, worse, it would mean the same mistakes being made, resulting in the same failures.
What I have learned from you thus far is that there is much to be done, there is great opportunity, and the time is right.
It is indeed a unique time, where the long held ambitions of many in the infrastructure space have run into the economic and political realities of our time.
Our people want better roads.
Our economy needs better output.
And the private sector wants better investment opportunities.
A sign of how serious the new Australian Government is about getting on with the job was on display yesterday with discussion at the meeting of Treasurers, focusing on developing generous incentive payments for the states to use their balance sheets more effectively, freeing up capital to use for new major productive infrastructure projects.
I am sure the Prime Minister and the Treasurer will have much more to say about this subject in the coming weeks.
But further today, I want to talk to you about the economic and fiscal challenge we face, the commitments we have made, some early steps, and our direction to achieve our ambitious aims.
The Economic Challenge
The new Australian Government is committed to fostering a stable, productive national economy.
Since Australia embarked on the economic reform journey, some 30 years ago, our people have enjoyed substantially improved living standards, with higher wages, more jobs and greater freedom.
The reforms of the Hawke and Keating and Howard and Costello governments have ensured not just continuous growth, but they cyclone proofed the Australian economy, evidenced by the fact that we entered the global financial crisis in a far stronger condition than any of our competitors.
But the endless years of growth are being challenged by a new and more difficult economic circumstance, meaning we need to increase our productivity, reduce our costs and look to new and more innovative ways to drive investment to ensure future growth.
Unfortunately, we enter these choppy waters with far weaker economic foundations than in 2008.
Six years of public policy chaos and economic backsliding has reversed years of hard won economic gains.
In a global economy, the race for global capital means that we forever have to be vigilant and forward thinking.
It was Prime Minister John Howard who warned in 2006 and 2007, that economic reform was like a long endless foot race.
A race that you never win, but rather, a race that you must always stay ahead of the field in to ensure our ongoing prosperity.
So while the Australian Government remains optimistic about the future, we cannot ignore the emerging economic trends, most recently identified in an OECD report on the Australian economy.
Both the OECD and the Reserve Bank have made timely warnings in the last few days about the challenges we face as Australia's terms of trade slow.
As the RBA warns, our slowing terms of trade will expose our underperforming productivity performance and threaten the living standards of all Australians.
Deputy Governor, Philip Lowe said earlier this week, and I quote:
‘We will need to lift our rate of productivity growth substantially if we are to continue to enjoy the type of living standards that we have become used to.’
The OECD forecasts that on the basis of these structural changes, unemployment could rise above 6pc in 2014 and 2015, which is in line with Treasury forecasts.
To get a sense of the structural shift, the first slide shows how changing terms of trade and falling commodity prices might impact national income per person in the decade ahead of us.
This is something that the Government must respond to, and the only way we can protect our living standards is to lift our productivity.
Disappointingly, over the last decade, our productivity has lagged.
Productivity growth measured across a range of factors has slowed to 1.4%, compared with 2.1% in the 1990s.
To continue Mr Howard's foot race analogy, we have stumbled over our own shoe laces.
On that basis, I believe an important policy solution will be to boost domestic investment in infrastructure that can help enable productivity benefits and ensure we continue to prosper.
However, the fiscal challenges facing all governments means the traditional public investment model in infrastructure has to be redeveloped.
Increasing and growing social welfare expenditure, at the same time as we grow older and live longer, will mean that the ability for governments to invest more in infrastructure will increasingly become more difficult.
Simply put, major infrastructure projects have gone beyond the capacity for governments to deliver on their own.
This is made worse by the Labor debt legacy.
All of this means we have to find a new and better way.
Despite these economic and fiscal challenges, the Coalition has a very significant platform of projects to get underway.
Over the next four years, the Australian Government is committed to spending some thirty billion dollars on projects that will deliver strong productivity uplifts to our major cities and to our regional areas.
Some of these investments include:
- $1.5 billion to get Melbourne's East-West Link underway, including $500 million in this financial year to get an early start to that project;
- $1.5 billion to get Sydney's Westconnex project, a project twenty years overdue;
- $1 billion to upgrade the Gateway motorway in Brisbane;
- $615 million to build the Swan Valley bypass in Perth and $500 million to finish the Perth Gateway project, which is such an impressive project in our economic powerhouse Perth;
- $400 million to upgrade the Midland Highway in Tasmania; and
- $500 million to begin a full upgrade of South Road, aiming to achieve the complete upgrade, with work well underway, within a decade.
In addition to these commitments, the Australian Government will invest record amounts in major regional roads such as the Bruce and Pacific highways.
Add to this the significant investment in the Roads to Recovery and Black Spots programmes, along with investments in other regional freight routes and our regional bridges programme, and you can see that our agenda is ambitious, because we are ambitious about Australia's future.
As is normal practice, the Australian Government will now undertake negotiations with the state governments to lock in the next funding programme.
This is a process I will lead on behalf of the Australian Government.
This will be a programme that will show our clear intention to fund the infrastructure of the 21st century.
We will have much more to say about this in the weeks and months ahead.
More for Less and More Quickly
So friends, while we have big plans to address our economic and productivity challenges, we need to have an honest discussion about a major constraint on getting more done and that is the cost and time.
We all know it is costing too much to deliver projects.
We all know it is taking too long.
We all share some of the responsibility.
And to fix it, we are all going to need some honesty and some political bravery.
The truth is that the cost of doing business in Australia is too expensive.
As a South Australian, I have seen the consequences of this with the Olympic Dam project, being the most high profile example of a country that has recklessly and carelessly, created an economy that is missing out on investment opportunities in the competition for global capital.
Again, with the Howard analogy, in the economic foot race, we are trying to compete with our laces tied together.
Logically, spending more than we should on infrastructure projects not just costs taxpayers more, but it prevents us from doing more.
This reduces our productivity, means higher taxes and reduces employment opportunity.
On the contrary, if we can bring down costs and deliver projects more quickly, we will bring substantial economic and social benefits for our people.
Worse still, the time projects are taking to deliver have reached absurd levels, for instance, even simple road upgrades are being held up by laws that favour professional objectors, with governments seemingly held hostage by the few, against the benefit of the many.
It is fair to say that the punters are over these delays.
That is why the Prime Minister, the Treasurer and I have asked the Productivity Commission to conduct a thorough inquiry into this issue with a report due in May next year.
So significant is this inquiry, that I am delighted to announce today that the Commissioner himself, Peter Harris, will conduct the inquiry.
It has a wide brief to examine the issues and costs associated with:
- Project risks and the time taken to deliver;
- Availability of finance;
- Contracting arrangements;
- Labour costs and delivery models for construction projects;
- The disincentives to private sector investment; and
- The creation of revenue streams to attract private sector finance.
But for this inquiry to arm us with an agenda that can achieve the aim of more for less, more quickly; I need you to participate, and in participating, to be brutally honest.
The stronger and deeper the submissions, the stronger and deeper the recommendations will be.
Unlike the previous government, we are not intending this report to serve as a nice addition to the government library.
We want this to be an action plan that will help us work with state governments and the private sector to drive down costs and deliver projects more quickly.
While identifying this as an issue may be simple, fixing it will not be as simple.
But fix this challenge we must.
While I don't want to pre-empt the Productivity Commission, there are several consistent issues that are raised wherever I travel.
I want to particularly focus on one of these issues today.
I believe that markets operate best when there is strong competitive tension driving the best price through innovation.
And while there has been some increased interest in Australia from overseas constructors very recently, it is true to say that we have two dominant construction players.
This has undoubtedly at times meant projects have been more expensive than they need to be.
It seems clear to me that there are three major factors that need to be addressed to encourage international players to establish more permanent presence in Australia, to create a more competitive market and therefore reduce costs.
The first is that there are too many barriers to entry which we need to work together as governments to address.
Again, recent examples of participation in key projects by new international entrants are encouraging, but it is relatively early days.
Second, we need to create a clear and long term pipeline of projects, to make a longer term investment worthwhile for major international players.
This is being addressed by our reforms to Infrastructure Australia which I will speak to shortly.
Third, and possibly most importantly, is the issue of ‘boom and bust’, not just in a project pipeline, but in project finance.
Having infrastructure investment that is unpredictable and variable, depending on yearly fiscal challenges, clearly escalates costs due to the disruptions caused to planning and resourcing of major projects.
And worse still, it acts as a major barrier for international competitors to enter our market reducing competitive tension.
On that basis, I believe it is important that we consider the need to set an investment target for our ongoing infrastructure pipeline.
While the role of infrastructure in lifting our nation's wealth and prosperity is well understood, too often our infrastructure investment has been sacrificed when budgets have come under pressure.
If we were to set economy wide investment targets, this could deliver more certainty and with it, a pipeline of projects where through greater planning and competition, we could deliver better project delivery outcomes for both investors and taxpayers.
I think this is an important debate and this is why today I am announcing that my Department will be submitting to the Productivity Commission inquiry a paper that canvasses options on whether we should work towards a target or a benchmark, for combined public and private infrastructure investment.
This would be designed to send a very clear message to the market that not only is there a project pipeline, but it's backed by financial certainty.
While addressing costs and timeliness is vital, the fiscal restrictions of federal and state budgets are very real and they restrict our ability to move.
Labor has left a debt anvil that will weigh governments down for many years to come.
Add to that the increasing challenge, highlighted earlier, of massive growing social expenditure commitments at both the federal and state level and you see the ability of the governments to deliver major infrastructure on its own is much reduced.
There is an absolute need for us to find a way to get more private sector resources into public infrastructure.
This is hardly a new idea and Australia's experience has been mixed with some markets more prepared than others.
But we are serious when we say we are open for business and to show how serious we are in driving this investment, we are taking several active steps.
Firstly, the Productivity Commission is looking at options and will report on recommended preferred options.
Secondly, we are proudly working with the Victorian and NSW Governments on ground breaking investments that are examples of the public and private sector delivering much needed productivity enhancing projects.
I am very confident we can still do more in this respect.
Thirdly, and as I said earlier, the Treasurer is working on ways to incentivise state governments to proactively use their balance sheet to tip more money into economically productive infrastructure.
And we want to do more.
The Need for More Private Sector Investment
A key to this will be driving more private sector investment in our infrastructure.
This is an area where the public and private sectors must work together.
In my discussions with the business community, the strong message I am receiving is that funds are available and there is a strong appetite to invest in infrastructure, but only if we get the structure right.
This takes in a range of factors including construction risk, and patronage and tolling risks that have led to some projects failing investors.
However, despite these difficulties, and I note that the RBA has backed this view; we will increasingly need to establish projects that generate a flow of revenue from the infrastructure.
This is what investors are looking for.
We know that many global banking and financial institutions have been major supporters of projects.
But what I would like to see is greater involvement by our locally based super funds which manage billions of dollars of Australians retirement savings.
To do this, we have to develop projects where there are clear incentives for investment in greenfield projects, and not just brownfield assets.
I know that our super funds would like to invest in nation building projects.
But these investments must be based on the rate of return, not just patriotism.
It's important that we structure these projects to deliver greater certainty to attract investment. In particular, taking on reforms that reduce the construction and patronage risk involved with these projects.
Westconnex and East-West Link are examples of where states are already working with the private sector.
We need to see more of this.
The New Infrastructure Australia
Another step forward was taken last week with the introduction of legislation that will reform the operations of Infrastructure Australia.
The reforms are designed to:
- Improve planning;
- Ensure long-term projects are better co-ordinated; and
- Give greater certainty to investors and the construction sector.
Under the new Australian Government, Infrastructure Australia will have a chief executive officer responsible to the Board â€“ operating like other Government boards.
The previous government's model, with the position of Infrastructure Coordinator, answering directly to the Minister, created concern about a lack of independence with many state governments and industry players. We will address this.
We will also ask Infrastructure Australia to undertake a full audit of our infrastructure asset base, in collaboration with states and territories, and develop a 15 year pipeline of major infrastructure projects, which will be revised every five years.
We believe these reforms will be welcomed by the business community and we expect these to pass the Parliament.
If the Labor Party stands in the way of these reforms, it will be yet another example of their failure to learn from the lessons of the 7th September.
In conclusion, let me be clear, the new Australian Government is proud of its thirty billion dollar package of infrastructure commitments that demonstrates we understand the strong case for infrastructure investments that lift productivity.
What will be vitally important is that future Australian Government investments are increasingly leveraged.
Everyone in this room will realise just how vulnerable infrastructure spending is when public sector budgets are burdened with high levels of Labor debt.
The Government's capacity to continue to fund infrastructure through traditional mechanisms, such as solely through grants, will be challenged with an ageing population and falling taxation revenues.
This is not to say the Australian Government is shying away from its part, but that it's imperative we find and establish arrangements for alternative forms of financing.
As I've stated here today, the Australian Government has a very strong commitment to infrastructure and we are keen to work as closely as we can with the business community here and state governments across the nation.
We want a real partnership.
I hope many of you will welcome some of the reforms canvassed here today.
Because the Australian Government needs your support in achieving the outcomes that will deliver greater certainty and consistency to the infrastructure industry.
And, importantly to me, I need you to help ensure that my KPI of ensuring the Prime Minister achieves his much desired Infrastructure Prime Minister title is indeed delivered.
Thank you for attending today.