Why Labor is off the mark when it comes to infrastructure
20 June 2018
First published in the Australian Financial Review on June 20
The Turnbull government's record infrastructure commitment of $75 billion over 10 years in this year's budget has been widely welcomed.
Most observers have recognised the wisdom of developing a long-term pipeline of infrastructure projects to be funded by the Commonwealth. It offers greater certainty for both state governments and industry participants than the traditional approach of confining commitments to the four-year forward estimates period.
For example, the Andrews government in Victoria can now advance planning for the North East Link motorway project, confident in the knowledge that the Commonwealth will support the project with a $1.75 billion grant commitment. Infrastructure projects of this scale have a multi-year planning and approval process and construction often takes three to five years—so setting out a 10-year schedule of commitments as we have done makes very good sense.
The criticisms made by the Opposition are either foolish or ill-informed. The claim that the budget contains “no new money” is simply wrong—and nobody who understands the relevant public sector accounting treatment would advance it. To support our rolling 10-year infrastructure investment program, the Turnbull government has adopted an approach of appropriating a single multibillion-dollar amount each year for the program. Out of this, amounts are then allocated to individual projects, and sequenced over a number of years.
This means there is no need for a separate accounting entry in the budget for each project—but that is a very different thing from the fatuous claim from the Opposition that there is “no new money”. The claim that total infrastructure spending has dropped is also factually wrong. In fact, total infrastructure spending each year from 2013–14 to 2021–22 averages more than $8 billion a year—compared with just over $6 billion under the Rudd-Gillard-Rudd government.
The Opposition likes to focus, misleadingly, on just one component of the infrastructure spend, Payments to Support State Infrastructure Services. These direct grants to state and territory governments form part of infrastructure spending—but this line item is not the same thing as total infrastructure spending.
In particular, the Turnbull government has made a deliberate choice to increase the share of infrastructure spending that occurs in the form of debt or equity investment as opposed to a direct grant. Western Sydney Airport, for example, is funded with $5.3 billion of equity investment; Inland Rail with a $9 billion equity investment in the government-owned company ARTC; and the WestConnex motorway project with a $2 billion concessional loan. Grant, loan or equity—they all result in projects going ahead, people being employed, bulldozers moving dirt and concrete being poured, and ultimately new infrastructure facilities that make our economy more efficient and productive, and our cities more liveable.
Shadow minister Anthony Albanese at The Australian Financial Review Infrastructure Summit earlier this month called equity investment “funny money”—a view he did not apparently have as minister when he proposed that the Commonwealth make equity investments in Gold Coast Light Rail, Moorebank Intermodal Terminal and ARTC.
Some others have criticised Commonwealth equity investment in infrastructure projects, on the grounds that taxpayers may lose the money invested. This argument overlooks a fundamental point—when the Commonwealth funds infrastructure in the traditional way, through a grant to a state government or local council, the whole of the amount spent is immediately lost to the Commonwealth taxpayer. By contrast, if the Commonwealth takes up an equity investment, it does so with the aim of taxpayers' capital being returned, and of a return on that capital being received.
For example, in due course Western Sydney Airport is likely to be sold to private investors—and our aim is that the price received will incorporate a good rate of return on the taxpayers' capital invested.
Another argument we have heard since budget night is that it is unwise to contemplate an equity investment in a project such as Melbourne Airport Rail Link. This argument proceeds from the proposition that rail services in Australia typically do not generate fare revenues that cover operating costs, let alone provide for a return of capital. In fact, those who make this argument seem to have missed page 48 of Budget Paper Number 3, which shows that the Turnbull government has accounted for our $5 billion commitment to the Melbourne Airport Rail Link on the most conservative assumption, that we would provide a grant.
There are examples around the world where rail ventures have generated positive financial returns—such as the approach of Hong Kong's MRT, which combines construction of a new rail line with property development around stations, allowing the overall venture to be profitable even if the rail operations are not. So before settling on a final approach for Melbourne Airport Rail Link, we want to explore all options, including equity investment.
Perhaps the silliest criticism we have seen is that the Commonwealth is engaging in “off-balance-sheet financing” when it makes an equity or debt investment. This is precisely wrong: when the Commonwealth makes a financial investment in an infrastructure project, that investment is added to the Commonwealth's balance sheet as an asset. Of course, assuming the Commonwealth borrows to pay for the amount it invests, there is also an offsetting liability on the balance sheet—but if the Commonwealth has chosen wisely, the asset will grow in value over time, ahead of the liability. Again the contrast with traditional grant funding is instructive: the Commonwealth gets no asset on the balance sheet but its liabilities increase by the amount the Commonwealth has borrowed to pay for the grant.
Despite some misleading claims, the facts are clear: the Turnbull government is spending at record levels on infrastructure investment.