CEDA's 37th Annual Economic & Political Overview

Speech

PFS002/2018

13 March 2018

Shangri-La Hotel, Sydney

Thank you for the opportunity to speak to CEDA today as part of your economic and political overview for 2018.

CEDA has a long track record of advocating for policy reform designed to improve Australia's prosperity and economic performance.

Today I want to speak about the Turnbull Government's approach to infrastructure policy—as a key lever within the broader economic policy tool kit, and a lever which is important to the achievement of both macroeconomic and microeconomic policy objectives.

I want to start with the macroeconomic impact of our unprecedented infrastructure spend—which is playing a big role to stimulate economic growth and jobs.

Next I want to discuss the microeconomic consequences of infrastructure policy—particularly our work to enhance the productivity and efficiency of our cities.

In the final part of my remarks today, I am going to speak about the Turnbull Government's focus on being a more active, informed and strategic infrastructure investor—in turn enhancing the effectiveness of our infrastructure policy in achieving both macroeconomic and microeconomic outcomes.

The Macroeconomic Impact of Our Infrastructure Spend

Let me turn firstly to the Turnbull Government's unprecedented infrastructure spend—and its macroeconomic impact.

We are well on track to meeting our commitment to invest $50 billion in transport infrastructure over the period from 2014 to 2020.

This is a record level of spending.

Over the 2013-14 to 2020-21 period, the Commonwealth Budget Papers show infrastructure spending of $8 billion per year.

In contrast, over the six years of the Rudd-Gillard-Rudd government, average spending on infrastructure was just over $6 billion a year.

More than 100 projects have been funded by the Turnbull Government—and there are more than 150 projects in the pipeline.

The Australian Bureau of Statistics regularly reports on the value of “work yet to be done” for projects already commenced on transport infrastructure for the public sector. This is at near record highs—and around 30 per cent higher than the peak under Labor in fiscal 2011.

The Commonwealth is shouldering more of the load than ever before. The share of total public sector spending on infrastructure attributable to the Commonwealth is now 30 per cent—up from 24 per cent under the previous government.

As the International Monetary Fund observed last month in its annual assessment of the Australian economy, despite the economic shocks of the commodity price boom and mining investment boom ending, infrastructure investment has helped keep the economy performing well.

The recovery from these shocks has advanced further in 2017. Aggregate demand has been led by strong public investment growth amid a boost in infrastructure spending.[1]

Just last week, RBA Governor Philip Lowe highlighted the importance of government spending on transport infrastructure, saying:

Another important part of the investment story recently is strong growth in investment in public infrastructure. The pick-up has been particularly noticeable in spending on transport infrastructure in the eastern states and the pipeline of work to be completed is large. The extra investment is directly creating demand in the economy today and adding to tomorrow's productive capacity.[2]

Deloitte Access Economics, in its recent Investment Monitor, assessed the outlook for business investment in Australia as being healthier than it has been for some time—and notes that this comes at the same time “as state and federal governments are spending large amounts of money on transport projects”.[3]

The spending commitments are flowing through into very high levels of infrastructure construction activity—and in turn we are seeing a direct effect on jobs and economic growth.

According to the economics team at the Commonwealth Bank, the lift in public infrastructure spending in fiscal 2018 will directly add half a percentage point of GDP growth in fiscal 2018. Including the multiplier effect, it estimates the impact to be as high as 0.7 percentage points.[4]

And one more thing is clear—we are going to be feeling the benefits for quite some years to come.

In the 2018 budget, the Turnbull government committed $75 billion of infrastructure investment over the next 10 years.

NAB economist Tapas Strickland has observed that federal infrastructure projects are likely to be a continuing feature of economic growth over coming years.[5]

The economic and jobs benefits of these massive projects are being felt around the country. From the Pacific Highway in northern NSW, to the North South Corridor in Adelaide, to the Perth-to-Forrestfield Airport Rail Link, bulldozers are moving and concrete is being poured.

Infrastructure projects of this scale bring jobs in large numbers. Construction of WestConnex in Sydney will generate 10,000 direct and indirect jobs; there are 1350 jobs on the M80 ring road upgrade in Melbourne.

According to the Commonwealth Bank, the lift in public infrastructure spending in fiscal 2018 will generate an extra 36,000 jobs in Australia.

Importantly, such projects also allow jobs to be stimulated in specific locations where there is a particular need.

The Northern Connector in Adelaide for example—a 15.5 kilometre motorway being constructed at a cost of $885 million—is generating 480 jobs. Many of them are being filled by people who used to work in the car industry in that region of Adelaide.

Similarly, the new Western Sydney Airport will generate jobs in a region of Sydney where there is a jobs imbalance today—with around a third of the Western Sydney workforce needing to leave the area for work every day.

Last week we announced that WSA Co, the government-owned company that will build and own Western Sydney Airport, will formally commit to strong local employment targets.

From 2026 when the airport is fully operational, WSA Co will have a target that 50 per cent of employees will be residents of Western Sydney. There will be a separate target that 30 per cent of workers are residents of Western Sydney during the construction phase.

It is clear, then, that the Turnbull Government's record spending on infrastructure is having a big impact on aggregate demand, economic activity and jobs.

The Microeconomic Consequences of Infrastructure Spending

But the Turnbull Government does not see demand stimulation as a sufficient reason for this spending.

In this we are very different from the previous Labor government—which was happy to splash money around on such ill-designed policy shockers such as $900 cheques for backpackers, a pink batts subsidy scheme which became a magnet for fraudsters, and cash for clunkers.

By contrast, if infrastructure spending is done wisely, it results in projects with efficiency and productivity benefits—which last long after the in-year macroeconomic growth benefits have faded. Let me mention three examples drawn from across the projects the Turnbull Government is funding around Australia.

Consider NorthConnex—a 9 kilometre freeway standard connection between the M1 at Wahroonga and the M2 at Pennant Hills. This is a three-billion-dollar project, with a $412 million investment from the Commonwealth and $412 million from the New South Wales Government.

Once NorthConnex opens, trucks and cars will save 15 minutes and avoid 21 sets of traffic lights compared to using Pennant Hills Road. I recently visited the Erskine Park distribution hub of freight company TNT, where they explained that NorthConnex will offer considerable time savings for trucks leaving Erskine Park and heading to northern NSW and Brisbane.

Another example is opening up more roads for high productivity freight vehicles such as B-doubles. For example, last week I announced the award of a $14 million contract to upgrade a freight route through the Adelaide Hills to the town of Lobethal.

This will allow B-doubles to connect businesses such as the Thomas Foods International facility in Lobethal to export gateways like Port Adelaide, and to the state and national highway network.

We are also seeing productivity benefits from upgrades to our airports. Two weeks ago I had the pleasure of officially opening the 500 metre extension to the runway at Hobart Airport.

This $40 million project means that larger aircraft can now use the airport—including the Boeing 777 and 787 and the Airbus A350—and they can take off with a full load of fuel to fly non-stop to Asia. In turn this will allow better access to new markets—such as Asian tourists flying directly to Hobart and exports of fine Tasmanian produce directly to Asian cities.

A particular priority for the Turnbull Government is maintaining and improving the liveability and productivity of our cities. Around three quarters of economic activity is generated in our eight capital cities and they account for two thirds of employment.[6]

The structure of Australia's economy is changing and becoming increasingly services oriented. As this trend continues, so too will the growth of our major cities.

The rather unattractive piece of jargon used to describe the forces at work in our big cities is ‘economies of agglomeration.’ How to get more of them was a major theme of the Productivity Commission's Five Year Productivity Report released last year.[7]

Recently I was having a weekend family lunch at Barangaroo. I was struck by the vibrancy of the area. People love to be there.

The area's success and popularity reflects some very clever design—including careful attention to the shops and restaurants located on the ground floor, the extensive use of public spaces, and good transport connections including a ferry terminal and a walkway to Wynyard station.

Precincts like Barangaroo are about utilising scarce land more productively, minimising frictions associated with concentrations of people and activity and in turn allowing people to engage with other people—which is what economists are talking about when they say ‘agglomeration.’

In its review last year, the Productivity Commission set out cities policies which would deliver big economic benefits—lifting GDP to the tune of $30 billion. The recommended policies include better planning and governance; enhanced land use policies and addressing road funding and investment.

This work by the PC and others underlines the economic rationale for the policy agenda the Turnbull Government has been pursuing for Australia's cities. To advance that agenda, we have been using ‘City Deals’ as a critical policy tool. In a City Deal all three levels of government commit to a set of shared objectives—and each level commits to actions towards meeting those objectives.

Just a few days ago the Western Sydney City Deal was signed by Prime Minister Turnbull, Premier Berejiklian and the mayors of eight Western Sydney councils—and I will say a bit more about this in a moment.

Since the 2016 election we have entered into City Deals for Townsville and Launceston. We have also committed to negotiate city deals for Hobart, Geelong and Darwin—and I was in Darwin just yesterday for discussions with the Chief Minister and other community leaders.

More Active, Informed and Strategic Infrastructure Investor

In the final part of my speech I want to turn to how the Turnbull Government is seeking to be a more active, informed and strategic infrastructure investor.

Our objective is to get more bang for buck from the substantial public dollars we spend on infrastructure—so that in turn we can do a better job delivering on both the macroeconomic and microeconomic objectives of infrastructure policy.

Let me highlight three priorities that we are pursuing.

The first is to move away from the model preferred by Labor Premiers such as Victoria's Daniel Andrews, in which the Commonwealth's infrastructure policy largely comprises handing over grants to state governments.

Instead we are making greater use of debt and equity finance, and also approaches designed to attract funding contributions from other parties.

The second priority is to increase the Commonwealth's skills and capacity in making the decision about how we support a particular project—whether we use grants, debt, equity or a combination—through the establishment of a specialist agency, the Infrastructure and Project Financing Agency.

A third priority is leveraging our infrastructure spend for broader policy outcomes—particularly to improve the shape and functioning of our cities.

Greater use of debt and equity investment

To start with our first priority, let me point out that over the next ten years, some $16.5 billion of our over $75 billion transport infrastructure investment is projected to be delivered through financial assets.

This includes the $5.3 billion equity investment in Western Sydney Airport, and an $8.4 billion equity investment to fund the Inland Rail project.

It is not surprising that many Labor state premiers would prefer the Commonwealth continues to function like an ATM, handing over large sums of taxpayers' money but having little policy engagement.Of course grant funding will always make up a significant proportion of the Commonwealth's infrastructure funding. But as prudent stewards of public funds, the Turnbull Government will ensure that when the Commonwealth considers investing in a project, we ask whether there is an opportunity to secure a financial return for taxpayers.

This does not necessarily mean a financial return on terms that a private sector investor would expect. For example, the Commonwealth is providing a $2 billion concessional loan to Sydney Motorway Corporation, the NSW Government owned company established to build and operate the transformational WestConnex motorway project.

This loan is at a lower interest rate, and with repayment deferred to a later stage, than a private sector investor would require. But it does mean the $2 billion will eventually be recovered—rather than being foregone by the Commonwealth's taxpayers forever.

At the same time, it is the foundation to build a capital structure for the project which allows the rest of the finance to be obtained from private sector investors.

Similarly, the Commonwealth is investing $5.3 billion in Western Sydney Airport. Over the very long horizon that a government can use for its investments, this is prudent investment for taxpayers—even though a private sector investor with shorter time horizons would struggle to make the investment.

It is not just the prospect of a financial return which underpins the Turnbull Government's interest in making debt or equity investments. Another factor is that when the Commonwealth hands over grant funding to a state government, it has virtually no control over how the money is spent. By contrast, as an equity or debt holder, the Commonwealth has well defined legal rights.

Inevitably if state governments think there is free money from the Commonwealth for infrastructure projects, they will not try very hard to find other sources of funding. But if we are to drive finite Commonwealth funds to deliver as many projects as possible, then leveraging that funding with contributions from other sources is highly desirable.

This is one reason why the Turnbull Government has been pressing for a more extensive 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.

Increasing the Commonwealth's Capacity

As the Commonwealth considers whether, and if so how, it will support a proposed infrastructure project, it is important that we have the capacity to think through these questions in a rigorous and systematic way, so the Commonwealth can do a better job of being an ‘informed investor.’

For this reason, we have established a new in house capability to advise on how we should finance projects. The Infrastructure and Project Financing Agency was set up in 2017, and has been staffed with a mix of people with suitable commercial and financial skills. Many of them have significant private sector experience.

The idea here is to have a dedicated unit that has expertise in, and is specifically focused on, the question of ‘what is the right financial structure to use?’ for particular infrastructure projects.

IPFA will work closely with Commonwealth agencies, the states and the private sector to develop funding and financing solutions for landmark projects.

IPFA has an important role to play as we work to make greater use of innovative financing solutions such as value capture. For example, IPFA is closely involved in work underway between the Commonwealth and NSW Governments on the north-south rail link to the new Western Sydney Airport.

As we announced recently, the two governments have kicked off a market sounding process to test private sector interest in station developments and explore innovative financing solutions.

Influencing the Shape and Functioning of our Cities

Our recent announcement concerning this rail link forms part of the Western Sydney City Deal—which in turn is a good example of the way that the Turnbull Government is seeking to use the Commonwealth's infrastructure investments to influence the shape and functioning of our cities.

Over the next twenty years an extra half million people are expected to live in the areas served by the eight Western Sydney councils which are signatories to the City Deal. Over 180,000 new homes will need to be built.

The City Deal is a long term plan for the development of Western Sydney—with a particular focus on how to maximise the business-attracting, jobs-generating power of the Commonwealth's $5.3 billion investment in Western Sydney Airport.

The deal has a big focus on land use planning, with the Commonwealth and NSW Governments to work together to plan the Badgerys Creek ‘aerotropolis’ near the airport.

The aerotropolis will be a hub for sectors such as advanced manufacturing, aerospace and defence and education and skills—and together with the airport it will form the economic core of a thriving and highly liveable city to be built around it.

Importantly, the Western Sydney councils which are parties to the City Deal have committed to develop a new planning compact. This is intended to provide for consistent, streamlined urban planning throughout these council areas.

As part of the City Deal the Commonwealth and NSW Governments have committed to progressing a North South rail line. We have announced a ‘preferred network’ which is likely to be built in stages and ultimately is planned to extend from Campbelltown in the south to Schofields in the north, with a connection to the Cudgegong Road terminus of the Sydney Metro Northwest which is presently under construction.

We have also announced a commitment to construct stage one of the North-South rail line—from St Marys to the Badgerys Creek Aerotropolis via Western Sydney Airport—with a shared objective to have rail to the airport by the time it opens.

The North-South Rail will shape the new Western Parkland City as development is drawn to the rail corridor—indeed it has been described as the steel spine of the new city. Timely, quality infrastructure will enable the amplification of investment from the private sector and grow new communities and employment precincts.

The importance of rail corridors to urban development is well established. In Sydney for example, around 46 per cent of new dwelling growth between 2001 and 2016 occurred within one kilometre of a train station.[8]

As Australia's population grows, more Australians are choosing to live in our biggest cities—in the business jargon, they are ‘winning share’. As last night's ABC Four Corners story shows, some see this as very concerning.

We see arguments like those of former NSW Premier Bob Carr who once famously said, ‘Sydney is full.’

But, Bob Carr's attempt to pull the doona over our collective heads did not work. It simply meant that from 1995 to 2011 we had sixteen lost years where the NSW Labor Government failed to plan adequately for the growth Sydney was experiencing.

The Turnbull Government's approach, by contrast, is to work with state and local governments to build longer term plans for our large cities, integrating new transport links, new urban development and housing release, and attracting new jobs into growth areas.

These are certainly central themes of the Western Sydney City Deal—and they underpin our approach to urban infrastructure around Australia.

Conclusion

Let me conclude, then, with the observation that the Turnbull Government sees infrastructure policy as an important arm of economic policy.

Our infrastructure spending has important demand stimulation and jobs generation outcomes as I have demonstrated. It also has important microeconomic rationales—particularly to improve the efficiency and productivity of our economy.

The Turnbull Government is determined to be an active and strategic infrastructure investor—and for that reason we are pursuing significant reforms.

The economic benefits of our infrastructure agenda are very substantial—and they will be felt for many years to come.


[1] International Monetary Fund, http://www.imf.org/en/News/Articles/2018/02/20/pr1860-australia-imf-executive-board-concludes-2017-article-iv-consultation

[2] http://rba.gov.au/speeches/2018/sp-gov-2018-03-07.html

[3] Deloitte Access Economics ‘Investment Monitor; A Strengthening Investment Outlook’ September 2017

[5] https://www.theaustralian.com.au/business/economics/infrastructure-spending-surpasses-building-as-major-economic-driver/news-story/8b25a4e300687938abd6e595dc709fa0

[6] Department of Infrastructure and Regional Development 2015, State of Australian Cities 2014-15.

[7] https://www.pc.gov.au/inquiries/completed/productivity-review/report/productivity-review.pdf

[8] SGS Phase 1 Report: Impact of Rail on Housing Supply