Keynote Address to the Infrastructure Partnerships Australia Industry Leaders' Lunch
16 May 2014
Thank you for the invitation today.
I will explore our infrastructure agenda in more detail shortly, but before I do, I just want to touch on the budget generally.
Governments are often criticised for being too poll-focused; doing what is popular rather than doing what is right.
If you weren't convinced before, Tuesday's budget proves that this is a government that will make the tough decisions to get the budget under control and build a stronger Australia.
It's an extraordinary privilege to be a member of a Government that is determined to take the tough decisions for the future of our country.
This is why I entered politics, to be part of a government that's legacy is a stronger Australia for the next generation.
On Tuesday night, we reset Government parameters to achieve that goal.
The significance of the challenge we faced in putting this budget together should not be underestimated.
The International Monetary Fund recently confirmed that for the six years between 2012 and 2018, Australia was forecast to have the largest percentage increase in spending of the 17 IMF Advanced Economies profiled.
Under the former government, our spending was growing faster than the likes of Korea, Canada, Germany, France and Japan.
To continue down this path would mean more borrowing and more debt.
More debt means more money—dead money—wasted on interest repayments.
Australia's debt is already costing us billions of dollars in interest payment.
This year we are paying $13 billion dollars in interest.
This could fund the whole WestConnex project or complete the duplication of the Pacific Highway.
Furthermore, between 2010-11 and 2013-14, the Government will have paid over $46 billion dollars in interest on gross debt.
This could have nearly funded our entire infrastructure programme!
We inherited an unsustainable budget and unless we fix it, our economy will be weaker and our future more uncertain.
We were elected to make the budget sustainable and that's exactly what we are doing.
At the heart of this budget is our economic action plan to build a stronger Australia.
Australia is facing a number of new challenges.
As the Treasurer stated in his budget speech:
The decline in the nation's terms of trade will likely extend beyond the forecast period, while the rising proportion of older Australians is likely to generate lower labour force participation.
This will further constrain per capita income growth, so faster productivity growth is critical to confront these challenges.
A key component of lifting productivity growth is by investing in productive infrastructure.
As an OECD paper released 12 months ago stated:
Infrastructure investment is of key importance for productivity, given both its direct impact on the volume of capital stock and its indirect effects on efficiency (PC, 2009). Based on cross-country evidence, OECD (2009b) concludes that infrastructure investment can boost output in the longer term more than other types of investment.
This is why infrastructure is front and centre of the growth package in this budget.
Congestion is already clogging our cities.
It is costing our economy $15 billion dollars a year.
With over 70 per cent of all domestic passenger movements within Australia occurring on our roads, by either car or bus, this cost will only continue to rise.
That is why this Government is making a targeted and timely investment in Australia's future with the biggest ever commitment to infrastructure by any Australian Government.
Overall infrastructure agenda
This week the Australian Government outlined a record $50 billion dollar investment in productivity-enhancing infrastructure.
As you can see, the Coalition has committed $16 billion dollars more than what our opponents would have if they had been elected in September.
Yes, we have continued commitments that the former Government had made, which we also supported during the election.
But importantly, we have also allocated billions of dollars of more funding to accelerate key projects and fund new projects that utilise innovative or alternative ways of financing infrastructure.
And our infrastructure package is spread right across the country.
We are delivering more funding, in many cases billions of dollars more.
But our infrastructure agenda is about more than just handing out the cash.
Our policy agenda is:
- Targeting investment in productive infrastructure that will sustain the economy into the future;
- delivering projects faster or before the end of the decade; and
- Leveraging more private sector investment in these projects.
We are implementing this part of our agenda now.
In the future, we will consider findings from the Productivity Commission Review into public infrastructure, the taxation review, and the Federation Whitepaper, to drive longer term infrastructure financing reforms.
As you are aware, the new investments in our Budget include a $6.6 billion dollar Infrastructure Growth Package, and a five billion dollar incentive to support the recycling of state asset sales into critical infrastructure, which I will speak more about shortly.
Our Growth Package includes funding for:
- The critical road upgrades in Western Sydney to support the Western Sydney Airport;
- the North-South Corridor in Adelaide;
- the Perth Freight Link in Western Australia;
- the East-West Link in Melbourne;
- Westconnex Stage 2; and
- The Toowoomba Second Range Crossing in Queensland as well as other roads in the Northern Territory.
There is also an additional:
- $200 million for the Black Spot Programme;
- $350 million for the Roads to Recovery Programme; and
- $230 million for a National Highway Programme for safety and productivity improvements.
But this is only part of the story.
Coupled with State Governments and the private sector, there will be $80 billion dollars invested in Australian roads as a result of the infrastructure package outlined in this week's budget.
Furthermore, by adding investment in rail and ports, Treasury estimates that the Asset Recycling Initiative can generate over $38 billion dollars in new investment—making the total infrastructure spend over 10 years estimated to be $125 billion.
We have also secured additional funding for road infrastructure by reintroducing indexation on fuel excise.
The Government will amend the Excise Act 1901 to ensure the amount spent on road infrastructure is greater than net revenue raised by indexation.
This is a significant step towards guaranteeing a consistent funding commitment to infrastructure from the Australian Government, into the future.
In the longer term, other opportunities for private sector investment, such as appropriate use of user charging, and encouraging an unsolicited bid framework, will be considered.
Our challenge now is to turn these commitments into reality.
An element of this will be to ensure that the Australian Government's involvement in the new projects does not end after we deliver the cheques.
To ensure the projects are built as quickly as possible, I am announcing today that I will be overseeing the delivery of key projects in the growth package with my state ministerial counterparts.
I have tasked my department, led by the Deputy Secretary, with holding consultation with industry on how to accelerate and deliver these projects and to report back to me and relevant Ministers on a regular basis.
The Prime Minister has established an Infrastructure Cabinet Committee that will be seeking regular progress reports on the delivery of our infrastructure programme.
It will also determine the shape of our future policy agenda.
The Prime Minister will also make an annual statement to Parliament on our infrastructure achievements.
The first statement is due later this year.
It is vital that we all work together to ensure we deliver these projects on time and on budget.
And given the enormous amount of taxpayers' money being spent, Ministerial oversight is vital.
We know our investment alone will not be enough to deliver the infrastructure of the 21st century.
This is why we need to work closely with the states and the private sector.
In the first eight months of the Abbott Government, we have already been able to leverage additional private sector investment through negotiations with the states.
We are already forging ahead with the private sector to secure new streams of funding to get new projects underway sooner.
In our Budget there are two projects in particular that reflect this—Westconnex here in Sydney and the Perth Freight Link.
The WestConnex project is receiving the first ever concessional bridging loan from the Australian Government for a major road project so the project can be delivered faster.
This will mean that both stages one and two can be delivered together, bringing forward the delivery of stage 2 by around 18 months.
Before the election we promised to fast-track infrastructure investment through innovative financing so we can invest in more projects and build them faster.
Our commitment to Westconnex shows we are delivering on our promises.
WestConnex Loan Structure
The concessional loan will be classified as a subordinated loan.
In a capital structure, this means that the loan ranks higher than equity owners, but below senior debt—an important protection for taxpayers.
Up to $2 billion dollars will be available to be drawn down to fund construction costs, with the loan expected to be repaid in full by 2029.
Over the life of the loan, it is expected to achieve a return similar to the long term Australian Government bond rate.
The loan includes periods of capitalised interest (12 years) and interest only payments (2 years).
It is structured this way to acknowledge the fact that toll roads take some time to ramp up traffic numbers.
This extended interest capitalisation period allows for traffic growth, as well as the flow-on impacts once all stages of WestConnex are opened.
This form of financing will ensure maximum value is achieved from taxpayer dollars with minimal impact on the Federal Budget.
This was supported this week by PWC Managing Partner Sean Gregory when he said:
“â€¦the $2 billion subordinated loan from the Federal Government to the WestConnex Delivery Authority is an innovative step-change and a first for Australia.
He went on to say:
“Such a model is widely used in the United States â€¦ It fills market gaps and leverages private co-investment and enables raising non-recourse private debt and eventual sale of equity to superannuation funds by addressing the initial uncertainty of traffic forecasting during ramp up.”
The WestConnex project is one of the largest transport infrastructure projects in Australia.
By pursuing this innovative financing model, we are delivering WestConnex sooner—to the benefit of Sydney commuters and the Australian economy.
Can I congratulate Mike Baird, Duncan Gay and the NSW Government for the work we did together to achieve this.
Perth freight link
Another example of this government's commitment to get projects moving quicker through innovative financing is the Perth Freight Link.
We are involving the private sector in co-contributing with the Australian and Western Australian Governments to deliver a high standard freight connection to the Fremantle Port.
The project builds on related freight projects such as Gateway WA, Tonkin Highway Grade Separations, and the Swan Valley Bypass, and will establish the Roe Highway as the designated east-west freight route into the Port of Fremantle.
This will be the first ever road project in WA that will be secured by toll revenue.
Pending final design and the outcome of a competitive bid process, the project is expected to cost in the order of $1.6 billion dollars—with the Australian Government contributing $925 million, or 80 per cent, of the total government contribution.
This new project will boost productivity because it establishes a dedicated, free flowing freight corridor, removes big trucks from urban roads and will create thousands of construction jobs.
This new project is only happening because of the Australian Government's growth package, and our commitment to building a stronger Australia.
New projects/urban rail
This massive investment is not only delivering productivity lifting road projects across the country, but it is also allowing the states to get on with building urban rail.
In fact, since the federal election, State Governments have committed to investing in over $25 billion dollars worth of major public transport projects.
In addition to our direct investment in infrastructure, the Australian Government has established the $5 billion Asset Recycling initiative.
This initiative will generate new, productivity enhancing infrastructure projects across the country—in addition to the project we have announced this week.
As I said before, this initiative will drive Australia's infrastructure spend to $125 billion dollars over ten years.
Under this programme, the Australian Government will provide incentive payments of 15 per cent of the sale price of privatised assets to state and territory governments, on the condition that the proceeds of sales are reinvested in new productivity-enhancing assets, including public transport.
At the same time, the Asset Recycling Initiative will support governments in partnering with the private sector to provide efficient, critical infrastructure services.
As John Brogden, Financial Services Council CEO, said:
Australia's superannuation funds have a strong appetite for infrastructure. We are willing buyers of proven assets. We urge the States to take up Joe Hockey's funding offer. This initiative is the opportunity to give the superannuation sector the pipeline of assets we've been looking for.
Whilst the private sector has a large pool of capital available, and is willing to invest in the right infrastructure projects in Australia, there has been a limited appetite to invest in new greenfield projects with unproven commercial returns.
The Asset Recycling Initiative taps into private sector investor interest in established brownfield assets in order to fund new infrastructure projects that would not otherwise be able to access investment.
As part of the Budget this week, we have launched a new page on the National Infrastructure Construction Schedule (NICS) website showing state government assets that might be eligible for the incentive payment.
States are able to register their interest in the incentive payment on this website.
Indeed, as you can see, they have already begun.
Through innovative financing, cooperation with the states, and a record investment from the Commonwealth, we are delivering the infrastructure of the 21st century—just what we said we would do and exactly what the Australian people elected us to do.
But we also know that funding infrastructure is only half the story.
In March, the Productivity Commission released its draft report into Public Infrastructure.
It showed that the system is broken and in desperate need of reform.
Its opening key point was:
The overriding message of this draft report is the need for a comprehensive overhaul of processes in the assessment and development of public infrastructure projects.
The draft report shows that no single reform will address the infrastructure challenges facing Australia.
However, our plan to strengthen Infrastructure Australia is integral to fixing the system.
We are vastly improving the independence of IA—not reducing it.
Appointing a Chief Executive that is held to account by a board is more independent than the current system where the IA Coordinator reports directly to the Minister.
The Australian Government is also expanding the ability for IA to assess projects—not reducing it.
Under the changes, all projects over $100 million dollars will be subject to IA's assessment—including those announced in the budget.
And IA will be able to assess urban transport projects.
We will 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, to be revised every five years.
While the Australian Labor Party stands in the way of these important reforms, we are working with the states and territories to improve the delivery of infrastructure.
Since the election, COAG has already agreed to reforms across areas including:
- Early planning and streamlined approvals;
- Rigorous selection and prioritisation of projects; and
- Improving projects delivery and value for money.
Along with the Government's record investment in infrastructure, our reforms to improve project planning and implement more transparent project selections will ensure we deliver the infrastructure for the 21st century.
The Australian Government will receive the final PC Report at the end of the month.
We will study the report in detail before making a considered response.
In November last year to this forum, I spoke to you about how we would like to drive more private sector investment in public infrastructure.
Through Westconnex Stage 2, the Perth Freight Link, the Western Sydney airport and supporting infrastructure, plus a range of other projects across the country, we are delivering on this commitment.
And we will see more through the Asset Recycling initiative.
This is an exciting time in the infrastructure portfolio.
We are thinking outside the square to deliver more projects sooner.
And our reforms to improve project planning with the states and through our changes to IA will ensure we get the right projects built.
We are getting on with the job of delivering to boost productivity and lift our living standards.
What we have done this week is build a comprehensive programme.
Now we are utterly focused on delivering—led by an Infrastructure Prime Minister who is determined to ensure we build a stronger Australia.
 OECD Working Paper—Boosting Productivity in Australia, February 2013, p. 24
 Trends, Infrastructure and Transport to 2030, February 2014, Department of Infrastructure and Regional Development, p. 10
 Infrastructure sector wins in Hockey's first budget, Media Release, PwC, 14 May 2014
 John Brogden, Financial Services Council CEO, Media Release, 28 March 2014
 Productivity Commission Draft Report, Public Infrastructure, 13 March 2014, p. 3