The Economic Importance of National Infrastructure Policy

Speech

PFS003/2017

19 April 2017

Park Hyatt Melbourne

I am very pleased today to have the opportunity to speak at CEDA—an organisation which has long had an interest in the importance of infrastructure to our nation's economic development.

I want to speak today about the economic importance of national infrastructure policy—and I underline the word national because I want to focus particularly on the appropriate role for the Commonwealth Government when it comes to infrastructure.

In the first part of my remarks I want to argue that infrastructure has always been important for economic and social reasons—but key trends today make it more important than ever.

Next, I want to talk about how we are doing as a nation in planning our infrastructure—and some recent commentary on that approach.

In the final part of my remarks, I want to describe the national policy agenda the Turnbull Government is following, with the guidance of Infrastructure Australia.

Infrastructure matters more than ever

Let me turn first then to arguing that infrastructure matters more than ever.

Infrastructure investment is vital so that people can move about our cities and regional areas more quickly and efficiently, freight can get to market, and our cities and urban areas remain among the most liveable in the world.

It is vital for economic reasons—particularly as a driver of productivity growth. One historic example I like to cite is the US interstate freeway system in the nineteen fifties. One study found that in that decade—when US productivity was rising sharply—highway investments contributed 31 per cent of that productivity growth.[1]

Of course it is not just for economic reasons that infrastructure investment matters. There is also a strong equity and quality of life case.

The economist John Kenneth Galbraith coined the term 'Private Affluence, Public Squalor' to convey the idea of a rich society which underinvests in its public infrastructure.  His point was that this harms social cohesion and results in a society which fails to meet its full potential.  

If congested roads mean you face a longer travel time to work, you are wasting time sitting in traffic rather than being with your family, or in pursuing other activities meaningful to you.  

Infrastructure investment has always been important—but several factors make it more important than ever today.

First, Australia's population is growing rapidly.

As Infrastructure Australia commented in its 15 Year Australian Infrastructure Plan, issued last year:

Our population growth now exceeds that of our peers, outstripping countries like the UK, Canada and the United States. By 2031, more than 30 million people will call Australia home, and most of them will live in our four largest cities—Sydney, Melbourne, Brisbane and Perth.[2]

Secondly, as this comment highlights, our four biggest cities are growing at a faster rate than the national population.

This is creating growing congestion problems—with the estimated avoidable cost of congestion $16.5 billion dollars in 2015. Without corrective action, those costs will nearly double by 2030.[3]

A third factor driving our need for infrastructure improvements is the importance of boosting productivity growth in the Australian economy—which as we all know has slowed considerably since the nineteen nineties.  

As the then Chairman of Infrastructure Australia, Sir Rod Eddington, noted in 2011:

Productivity has slowed as a direct result of infrastructure shortfalls—time lost in travel, delay at ports, lost production due to water restrictions.[4]

We Need a Plan

Now all of these factors are regularly mentioned by commentators on Australia's infrastructure policy, as they highlight the need for a plan to deal with these challenges.

Listening to some of the commentators, you would be forgiven for thinking that the overall status of infrastructure policy setting in Australia is completely dismal and there is no plan.

Former Secretary of the Treasury Ken Henry asked in a recent speech to CEDA:

How will we fund the biggest infrastructure build in our history? And what about infrastructure planning?[5]

He went on to ask if you ever heard political leaders addressing these issues, and added,

Do you think anybody has a clue?[6]

Former head of the Productivity Commission Gary Banks offered a similar assessment recently in a speech to Infrastructure Partnerships Australia:

…public policy development in Australia over recent years has been a sorry spectacle.[7]

The Australian Institute of Company Directors recently argued that what we need is a 15 year plan for infrastructure.

That is a very good idea—and it turns out we have one. It was issued by the Australian Government's independent infrastructure advisor Infrastructure Australia last year.

I am certainly not here to argue that everything is perfect—but I do want to take issue with the argument that our big problem is a lack of planning for infrastructure.

Let me point to the role of the independent infrastructure advisory bodies—and the bipartisan support for their work.

The previous Labor Government established Infrastructure Australia to take a long-term perspective on infrastructure planning in Australia. The current Coalition Government has not only maintained but strengthened this body.

Subsequently state governments, both Liberal and Labor, have established their own state-based infrastructure bodies. That is a good thing—and I welcome the fact that the new WA Labor Government has a commitment to establish Infrastructure WA.

In fact I would argue that a bigger problem is not planning, but the capacity of governments to stay the course and deliver on the plan.

Take the East West Link here in Victoria. It took an extensive planning process to get this project to the point of construction commencing…beginning with a review conducted for the Bracks Labor Government in 2006 by businessman and transport expert Sir Rod Eddington.

Unfortunately for political reasons—centred on inner city seats in Melbourne—the Andrews Government decided to scrap this project, at the cost of $1.2 billion to the Victorian taxpayer.

A similar scenario has just played out in Perth. The Perth Freight Link project was developed and planned over several years, and it was rated a ‘High Priority Project’ by Infrastructure Australia. But the incoming McGowan Labor Government chose to cancel the project—and is now wrestling with how to extricate itself from a contract.

This project would have generated 2,400 jobs—but sadly that has now been lost. No doubt new projects will be developed over time—but infrastructure projects have long lead times and with the best will in the world it will be impossible to recover the lost time.

There are two drivers of this problem. One is the fundamental irresponsibility of the Greens. Whether it is East West Link in Melbourne, WestConnex in Sydney or Perth Freight Link in Perth, if there is a transport infrastructure project that will greatly benefit residents of middle and outer ring suburbs but is not supported by residents of expensive and well served inner city suburbs, you can always rely on the Greens to go with the privileged inner city elite. The second driver is that Labor is increasingly following the Greens line on these projects.

The Turnbull Government's Infrastructure Policy Agenda

I have argued that infrastructure is more important than ever, and the commentators are right to say we need a plan. What I now want to do is explain the elements of the plan the Turnbull Government is following.

Spending at Record Levels

The first element is that the Turnbull Government is investing at record levels in infrastructure projects all across Australia.

Infrastructure Partnerships Australia records infrastructure spending by all State and Federal Governments across fifteen years. IPA's online data shows spending across 2016–17 and 2017–18 to be the biggest years for Commonwealth infrastructure spending ever[8] .

Data compiled by respected research firm BIS Shrapnel shows a gathering tide of major infrastructure projects around the country, producing a year of record infrastructure spending in 2019.[9]

This is also seen in the Commonwealth budget figures. If you compare support for state infrastructure across the four-year forward estimates period of Labor's last three budgets and the Coalition's first three budgets, the average under the Coalition was $27.9 billion—a 54 percent increase on Labor.

This reflects a commitment carefully and deliberately made by the Coalition.

In the May 2014 budget, the Treasurer announced ‘…a package of measures that will significantly increase investment in infrastructure’, stating that the package would ‘…take the Government’s total investment to $50 billion by the end of the decade. [10]

Since coming to government in 2013 the Coalition has committed to a wide range of new projects.

In Victoria, for example, we provided $220 million for the Murray Basin Freight Rail Project and $350 million for the M80 Western Ring Road. Both projects are on the Infrastructure Priority List maintained by Infrastructure Australia.

The Turnbull Government is also committed to the $1 billion package to widen and upgrade the Monash Freeway. We are participating in the development of a comprehensive business case for the Monash Freeway upgrade to investigate and consider options to reduce congestion. This will be overseen by a joint Australian and Victorian government steering committee.

A clear focus on our cities

The second element of our approach is a very clear focus on Australia's cities.

The cities agenda, of course, extends well beyond the role of transport infrastructure. But it is clear that federal government decisions concerning transport infrastructure represent one of our most significant policy levers when it comes to securing outcomes in relation to cities.

Tullamarine Airport is a great example of a wise decision taken in the sixties that is paying dividends for Melbourne and Australia many decades later—and will continue to do so given the extensive expansion capacity at Tullamarine.

Kingsford Smith Airport in Sydney does not enjoy the same expansion capacity, which is why we have made a decision to proceed with the new Western Sydney Airport, to be operational by 2026. Our approach is very much to look at how we can leverage the airport for broader urban development and city shaping outcomes.

We have announced that there will be a ‘Western Sydney City Deal’ between the federal and state governments and local councils, with the airport as its centrepiece. The city deal will also allow us to work on employment, housing, economic development and other outcomes of interest to all levels of government.

We are also conducting a scoping study into the rail needs of Western Sydney and Western Sydney Airport: what is the right route, when should it be built, how much will it cost and how should it be funded.

Which does prompt an obvious question: if a scoping study on airport rail is worth doing in Sydney, wouldn't it also be worth doing in Melbourne?

Certainly it was encouraging to see comments from Victorian Public Transport Minister Jacinta Allan recently that the Victorian Government is eager to get moving with planning work on this important project.

As the Prime Minister has said, a rail line to Melbourne Airport has always been seen as somewhat of an omission—both for commuters to and from the airport and obviously all those areas in between.

Brent Toderian, the former chief planner in Vancouver, recently told 3AW's Neil Mitchell that:

‘One of the signs of a civilised city is that you can take a train from the airport and not a $50 taxi ride.[11]

He cannot be right of course, because, as everyone here knows and as has been specifically pointed out by the Prime Minister, Melbourne is one of the most civilised cities in the world.

He raises an important point however, about the growing emphasis on rail connectivity to airports.

Better Planning

The next theme of the Turnbull Government's approach to infrastructure is an emphasis on planning.

There is an ever-present risk in politics of making big announcements before the planning work is done. This is something Gary Banks highlighted in his recent speech to Infrastructure Partnerships Australia, wryly noting that the NBN, announced in a dramatic flourish by Kevin Rudd in 2009

…continues to affirm the wisdom of doing the numbers before announcing the policy.[12]

Let me highlight several ways in which we are seeking to build much better planning into the infrastructure decision making cycle.

The first is through the expanded role we have given to Infrastructure Australia. We now require that any commitment of $100 million or more by the Australian Government into an infrastructure project may not occur until the business case has been assessed by Infrastructure Australia.

Infrastructure Australia regularly produces the Infrastructure Priority List, which presently has 100 projects and initiatives on it. Fifteen of the 18 ‘high priority’ and ‘priority’ projects on its February 2017 list have received funding from the Turnbull Government.

The 15 Year Plan prepared last year by Infrastructure Australia is guiding key directions in our infrastructure policy, as we announced late last year in our response to the plan.

One such direction concerns urban rail. We said we would work with state governments to develop urban rail plans for Australia's five largest cities and surrounding regions.

Rail is key to the efficient functioning of our big cities. It has unparalleled capacity to move people quickly and in large numbers. The location of new rail lines will be instrumental in shaping the growth of our cities over the next fifty to one hundred years.

Yet until now our process for providing Commonwealth funding support for new rail projects has been rather ad hoc. The intention behind the urban rail plans is to develop an agreed view, with each state government, about the future shape of the urban rail network in that state's capital city—and to have that closely linked to urban planning.

We are also increasingly providing funding for the planning phase of projects, such as the $10 million provided for Cross River Rail in Brisbane. A similar offer for Melbourne Metro was rejected.

A more strategic approach as we engage with state and territory governments

This brings me to another important theme in the approach of the Turnbull Government to infrastructure: the way we work with state and territory governments.

As the Prime Minister has said, too often state and territory governments are treating the Commonwealth as an Automatic Teller Machine, expecting it to spit out cash.

We saw a good example of this with the Melbourne Metro project. The Andrews Government provided the business case to the Commonwealth on 23 February 2016. On the same day it demanded a $4.5 billion commitment to the project, in a media release from Premier Andrews headed Time for Turnbull to Back Melbourne Metro [13] .

The Turnbull Government wants to take a much more sensible approach—working with state governments towards jointly agreed outcomes, and making funding commitments accordingly.

I am pleased that we have had a much more constructive working relationship with the Victorian Government on the $1.5 billion Victorian infrastructure package we announced last year.

The role of Infrastructure Australia—and of the analogous state bodies like Infrastructure Victoria—is important here. The elements of that package—and other commitments we have made in Victoria—very much draw on the advice of those bodies.

We are also interested in linking transport infrastructure commitments to broader public policy outcomes including urban renewal, housing policy outcomes and economic outcomes.

I mentioned the Western Sydney city deal earlier. Another good example is the Townsville City Deal recently agreed between the Turnbull and Palasczuk Governments. This includes funding for the relocation of a freight rail line in Townsville, linked to a set of broader policy outcomes.

More extensive use of markets and the private sector

Clearly, as we work with the states and territories the Turnbull Government wishes to move away from a transport policy paradigm where we simply hand over large amounts of grant funding with no involvement in the policy outcomes.

This links to a broader objective: we want to make more extensive use of the markets and the private sector in funding transport infrastructure.

One priority is to make greater use of value capture. This is the idea that one source of funding for new infrastructure projects is to tap into the increase in value which is typically experienced by property owners and businesses located along the route of new infrastructure.

This is not a panacea: even the Crossrail project in London, often cited as a paradigm case of value capture, has only sourced 30 per cent of its budget from such measures. But it does have the potential to help address the demand for investment in new transport infrastructure projects.

There is a clear limit to what can be directly funded by governments, Commonwealth or state, given all the other claims on the budget. If value capture can provide an additional funding source to support at least part of the cost of a project, that could mean the difference between the project proceeding or not proceeding. 

We also see it as a means for the Commonwealth Government to be a more sophisticated investment partner. This year we will provide transport infrastructure funding of nearly $9 billion around Australia. That is a very significant amount—and we want to make sure it has the maximum possible impact.

We are interested in leveraging this spend to attract funding from other sources—such as other levels of government, the private sector, and project beneficiaries—and we see value capture as one very important tool to do this.

Already we have issued a set of funding and financing principles that will guide the Commonwealth Government's approach to supporting projects; the guidelines refer specifically to the need to test for value capture opportunities.

Another area where we see significant potential for greater use of market based approaches is in the operation of our roads. We signalled two important directions here late last year, in responding to the Infrastructure Australia 15 Year Plan.

The first was a commitment to reform the present system of heavy vehicle user charging. Today, heavy vehicles, those over 4.5 tonnes—which make up around three per cent of the national vehicle fleet—pay a charge to use our roads. But the charging system is pretty primitive, compared to the approach in other infrastructure markets such as energy and communications.

Therefore, we are working on establishing more of a market-based system that links heavy vehicle user needs with the level of service they receive. We will be working with states and territories to develop a forward looking cost base and consulting with industry to appoint an independent price regulator.

All of this sounds rather dry and esoteric. The basic idea though is that heavy vehicle operators should be treated as customers who are paying for the provision of a service—and as in any other market, what they get for what they pay is much more responsive to customer needs than is presently the case.

We also promised to establish a study, led by an eminent Australian, into the potential benefits and impacts of road user charging for light vehicles.

Many Australians erroneously think that roads are free. In fact as a nation we spend some $25 billion a year on them, and motorists pay a range of taxes and charges to use the roads, although these are not currently directly linked to investment in the network.

Our present system has some serious challenges, not least because the amount of money collected from fuel excise is likely to drop steadily as vehicles become more fuel efficient and as electric vehicles make up a growing proportion of the fleet.

As the Prime Minister and I have said on many occasions, it would be a ten to fifteen year journey if we were to decide to move to a road user charging system, and before any such decision was made, governments—state and federal—would need to be satisfied that we were moving to a fairer system which gave us better roads. But we have stated a willingness to have a thorough look at the issue, and in coming months we will announce more details about this study.

Conclusion

I have argued today that infrastructure matters more than ever. This is not a controversial proposition; many eminent Australians have made the same point in recent months. Where I would take issue with some of them is that, while we have challenges, we also have a clear plan to address those challenges.

I have pointed out today five elements of the Turnbull Government's infrastructure plan. We are spending at record levels; we have a particular focus on infrastructure's role in shaping our cities; we are putting much more effort into long term planning, drawing heavily on the work of Infrastructure Australia and the analogous state bodies; we are taking a more strategic approach to engaging with state and territory governments; and we are working to increase the role of the markets and the private sector in the provision of vitally needed infrastructure.

Through these actions, we are working to make sure that our prosperous, fast-growing, economically and socially successful country has the infrastructure it needs to support and reinforce our prosperity and growth for the future.

  1. Nadiri, M and Mamuneas, T, “Contribution of Highway Capital to Industry and National Productivity Growth, 1996”, Report prepared by Apogee Research, Inc for Federal Highway Administration, Office of Policy Development
  2. Infrastructure Australia (2016), 15 Year Plan, p 2.
  3. BITRE (2015), Traffic and congestion trends for Australian capital cities, https://bitre.gov.au/publications/2015/files/is_074.pdf
  4. Infrastructure Australia (2011), Press release: Infrastructure Australia Pushes for Better Projects and Private Funding
  5. Ken Henry (2017), Speech to CEDA, http://news.nab.com.au/nab-chairman-ken-henrys-speech-at-ceda/
  6. Ken Henry (2017), Speech to CEDA, http://news.nab.com.au/nab-chairman-ken-henrys-speech-at-ceda/
  7. Gary Banks (2017) Infrastructure Partnerships Australia Annual Infrastructure Oration,http://infrastructure.org.au/wp-content/uploads/2017/04/Gary-Banks-Oration-FINAL.pdf
  8. Infrastructure Partnerships Australia (2017) Australian Infrastructure Metric, http://infrastructure.org.au/chart-group/infrastructure-metric/
  9. BIS Oxford Economics (2017), Major Transport Projects—Wave, Tsunami or Higher Tide?, https://www.bis.com.au/im-major-transport-projects-feb17.html
  10. The Hon Joe Hockey MP (2014), 2014–15 Budget Night speech, http://budget.gov.au/2014–15/content/speech/html/speech.htm
  11. 3AW (2017) Interview with Brent Toderian, http://www.3aw.com.au/news/ideas-factory-improving-melbourne-with-international-planning-expert-brent-toderian-20170330-gv9ng7.html
  12. Gary Banks (2017) Infrastructure Partnerships Australia Annual Infrastructure Oration,http://infrastructure.org.au/wp-content/uploads/2017/04/Gary-Banks-Oration-FINAL.pdf
  13. Daniel Andrews (2016), Media Release: Time for Turnbull to back Melbourne Metro, http://www.premier.vic.gov.au/time-for-turnbull-to-back-melbourne-metro/