774 ABC Melbourne Mornings

Interview

PFI07/2016

24 February 2016

Topics: Melbourne Metro Rail project

Jon Faine: Yesterday the Premier, Daniel Andrews, released the business case for the Melbourne Metro Rail Project, which is to basically run a second line under the city of Melbourne connecting the southeastern suburbs to the northern and western suburbs in order to take the pressure off Melbourne's underground rail loop and take our public transport and train system into the next generation.

It requires a $4.5 billion commitment from the state government, which they say they'll do; it relies on a $1.5 billion contribution from private investors, which they say is manageable; and then it all swings on $4.5 billion to come from the commonwealth.

Malcolm Turnbull, a big fan of public transport compared to Tony Abbott, is he going to cough up? Well, the Minister in charge is the Major Projects Minister, Paul Fletcher. Former boss of Optus and a key adviser on things like the national broadband strategy for the Coalition.

Paul Fletcher, good morning to you.

Paul Fletcher: Good morning Jon, good to be with you.

Jon Faine: Four and a half billion dollars, can we have that for Melbourne please?

Paul Fletcher: Well the Turnbull Government received the business case yesterday late morning, along with a letter from the Premier to the Prime Minister, and by 1:45 the Premier was out doing media and saying the Commonwealth needs to hand over a cheque for $4.5 billion.

Jon Faine: Sounds like a pretty good idea to us.

Paul Fletcher: Well, it's a little bit like if you're building a house and you need to borrow some money to finish it, you put in the application to the bank manager and then you go out and say what's he doing about it, why hasn't he given the money yet? Look, it's a slightly curious way to proceed. What we will do is go through a proper process of assessing this on its merits. It needs to go to Infrastructure Australia, which will weigh up the business case here, and there's a lot of detail to work through. We need to understand, for example, what's the benefit to the Melbourne metro area as opposed to the city? How is it to be financed?

Jon Faine: Sorry, let's go through these one by one. What's the benefit to Melbourne metro, to the whole metropolitan—you mean greater Melbourne compared to just in Melbourne?

Paul Fletcher: Yes that's right, that's right.

Jon Faine: Okay. Well we can answer that for you if you haven't already, for people to be able to effectively get any value out of Melbourne's crowded and congested and overloaded public transport system, you've—in particular for people in the outer Pakenham corridor and so on—you've got to take congestion off the inner lines.

Paul Fletcher: And these are all the questions we need to understand and work through. Also the question of what's called value capture. If you look at the way that major rail projects are typically funded around the world—so Hong Kong with the MTR for example, or London's big cross rail project—there's typically a significant element of value capture. That's to say when you build new stations and a new rail, that produces an uplift in the value of the land, and can you tap into any of that to contribute towards the cost of the project?

Jon Faine: Because it's a windfall for anyone within walking distance of a station—you're properties are worth much more, your retail space is worth more, it suddenly becomes a hub.

Paul Fletcher: That's right.

Jon Faine: Yep.

Paul Fletcher: And so these are some of the questions we need to work through. So Infrastructure Australia advises the Commonwealth Government on infrastructure projects, it will assess the business case. Bear in mind the Commonwealth is spending $50 billion around the country through to 2019–20 on a whole range of infrastructure projects, including in Victoria.

Jon Faine: Yep.

Paul Fletcher: We need to understand exactly what it is the Victorian Government is asking for, for example—well, actually, when you get into the detail Jon there's a lot to be sorted out. Because what they're saying is, as we understand it from what's in the media and from what we've had time to look at over the last few hours, they're talking about construction starting in 2017 and going through to 2025. So one of the questions is what's the timing of payments? But one of the other questions for us is how would support be provided if we take a decision to do that? So that's the threshold decision, but then does the Commonwealth provide a grant? Does it provide a loan? For example, in Sydney the big WestConnex project is supported by a $2 billion concessional loan from the Commonwealth, but that ultimately has to be repaid.

Jon Faine: Sure.

Paul Fletcher: Would the Commonwealth even take equity in a joint venture vehicle that would own and operate this? These are all questions to work through.

Jon Faine: Okay a little bit of history, this proposal was first formulated when John Brumby was Premier. That's how long it's been hanging around. Then Ted Baillieu came to office and killed it off despite promising that they would continue with it, and the replaced it with the now ill-fated east-west tunnel. Melbourne has been desperately needing this project for a decade, and nothing's been done.

Paul Fletcher: Well let's be clear John, there have been several different variants. One of the issues the Commonwealth needs to determine as we look at whether this is a good project to support and a good use of Commonwealth taxpayers' money, is what are the precise details of the project? Now, we've seen earlier versions of this, as you say, going back several years. We also need to then determine what's the benefit-cost ratio, and what's the benefit to the people of Melbourne, Victoria, Australia, of money here versus other projects. So every time a project comes to us from any state or territory government, these are the standard questions we go through, and we'll go through these questions with the Victorian Government.

We'll work constructively with the Victorian Government. I've asked, and Transport and Infrastructure Minister Darren Chester, my colleague, has asked Jacinta Allan, this morning—we've spoken to her and said to the State Minister, please can you come to Canberra next week and brief us on the proposal, because all we know about it so far is essentially what we've seen in the media.

Jon Faine: Okay, so some of the smartest guys in the room have got it wrong in the past, and we've seen there's the Clem Tunnel in Brisbane that's an absolute basket case, and Sydney's got its basket case road tunnel as well, but I'm not aware of anyone getting it as wrong on the public sector public transport front as have the private sector people on the road project front. Is that a fair call or not?

Paul Fletcher: Well you're right to say that some privately funded road infrastructure projects over the last ten years have ended up with traffic levels well below projections and private sector proponents have lost a lot of money. From the public sector point of view, as we look at putting public money into public transport projects, the question is, okay, does it deliver the benefit which is claimed, and then does it deliver the best value for taxpayer money as against other potential projects.

Jon Faine: Sure.

Paul Fletcher: Now, the Turnbull Government has certainly said we will assess projects on their merits, be they road or rail, but of course one of the other questions is the $3 billion that the Abbott and subsequently Turnbull Governments stood ready to commit to East West Link, that the Andrews Government chose to tear up the contracts on…

Jon Faine: [Interrupts] Oh let's not—let's not—we can go on about that forever, let's not get trapped in that cul-de-sac, so let's Minister…

Paul Fletcher: [Talks over] Well Jon, but the point I'm making is every dollar that goes into infrastructure, into one project, is a dollar that doesn't go into another.

Jon Faine: Totally agree with that.

Paul Fletcher: So $1.1 billion that got wasted because the contracts were torn up is $1.1 billion that is now not available to go into infrastructure in Victoria.

Jon Faine: You can argue, and I vigorously do, Paul Fletcher, that the reason that much money was wasted is because Michael O'Brien and Denis Napthine, your Liberal Victorian colleagues tried to stitch up the election by forcing people to vote for something by signing contracts and letters of comfort on the cusp of an election campaign that they never should have signed. But like I said, that's a cul-de-sac; let's not go down it, because you're one of few people in the Federal Parliament who has run a major business when you ran Optus. You do understand how these things work.

Paul Fletcher: Well just to be clear, I was a senior executive at Optus, I was not the chief executive. I would make the point that there's quite a lot of people on the Coalition side of politics who do have business experience, but you're right to say, whether it's public money we're spending or private money, we need to be careful to make sure we're getting the best value for money.

Jon Faine: Sure, but what we've got at the moment is we've got global interest rates lower than they've been in living memory. In fact, in some countries they're negative, in Japan and Sweden and other places. So why not just issue infrastructure bonds at 1.5 or 2 per cent? Why not just go to the global markets and borrow money while you have an extraordinary window of opportunity and just get this thing built?

Paul Fletcher: So Jon the challenge with infrastructure bonds is that you need to have a revenue stream to repay them out of. We need to understand what is built into this business plan, and those are the questions of detail we need to work through. That is the technical assessment that Infrastructure Australia will go through in providing its advice to the Commonwealth Government.

We'll engage constructively with the Victorian Government, but the questions we need to determine are will the Commonwealth support it; if so what money will we put in? What's the timing; what form would it take? Is it a grant, is it a loan, is it equity? These are all questions of detail; it needs to be worked through in a proper public policy process, not simply handing over a cheque for $4.5 billion because the Premier did a press conference yesterday at the same time as sending us a business case.

So look, we'll work through a sensible process, because ultimately what matters, as you rightly say, is the infrastructure needs of the people of Melbourne, the people of Victoria, the people of Australia, so that we have the infrastructure, so that our growing cities—and Melbourne is a very fast-growing city …

Jon Faine: [Interrupts] Oh, it's all words until something happens. Just finally, Minister, I had a conversation with someone the other day who's got a couple of billion dollars to spend, literally. They chair a superannuation fund. Super funds are awash with money and there are just not the opportunities for them to invest in Australia, and so they're investing offshore. They desperately want projects like this to invest in; all you have to do is give it the green light.

Paul Fletcher: Ah well no, Jon—what a super fund wants, understandably, is a return on its money, because those savings are needed to fund the retirement earnings and incomes of the members. So with a public transport project, typically public transport in Australia, what's called the farebox only covers 30 to 40 per cent of operating revenue. Now, would the property development aspects of a project like this mean that it is a profitable, a return-generating project and therefore attractive for superannuation funds to invest in? If so, that would be very interesting, but we need to look at the detail to understand that.

Jon Faine: Sure.

Paul Fletcher: We need to understand what the Victorian Government has done in terms of its so-called value capture strategy to address these sorts of issues. So you're raising exactly the right questions, Jon; these are the things we need to work through, through this process.

Jon Faine: Well the point was made, and it's a really good one, which was that if there's no infrastructure investment then there aren't people in any jobs, and then they're not earning incomes, and then they're not making any contributions to their super, and the super funds then don't have any money to invest. It just goes round and round. We've run out of time today, it's been absolutely fascinating, I'm sure the audience have learned a lot, but we'd very much like to get you in the studio taking calls when you're next in town. Give us a call.

Paul Fletcher: I'd been keen to do that, Jon, and thanks for the chance to chat today.

Jon Faine: Paul Fletcher, the recently appointed Minister in charge of Major Projects in the Turnbull Federal Liberal Government.