Australia’s creaking infrastructure will crimp economic growth in the future unless urgent action is taken, warns AICD Chief Economist Stephen Walters.

    AICD’s Blueprint for Growth: Infrastructure2:31

    Effective and efficient infrastructure is essential to support our nation’s productivity and growth. Australia’s national infrastructure is straining at the seams, particularly in transportation and in power generation. Productivity has lagged behind long-term averages in recent years, partly owing to inefficiencies and inadequacies in national infrastructure.

    Productivity is a fundamental element of the nation’s potential growth rate – the economy’s effective speed limit. Failure to address the inadequacies in the nation’s infrastructure means lower economic growth in the future. As the Australian Infrastructure Audit from 2015 highlights, without action on infrastructure increasing congestion and bottlenecks will test Australia’s productivity and quality of life.

    The AICD is proposing four key steps Australia should take to fix Australia’s infrastructure.

    1. COAG commitment to a 15-year infrastructure plan

    The AICD encourages Australian governments to develop consistent and strong governance standards for nationally-significant infrastructure projects, increase the transparency of forecasts of the costs and benefits of infrastructure investments, and develop nationally consistent measures of infrastructure performance to aid benchmarking and review.

    The AICD recommends that Infrastructure Australia’s list of priority projects be adopted as the ‘to-do’ list for infrastructure investment. There is no need for governments to reinvent the wheel – some of these projects are “shovel-ready” and have been assessed for their economic and financial viability. The services of the various state infrastructure bodies should also be better utilised.

    The AICD also recommends the adoption of standardised cost benefit analysis for project assessment, with oversight by the established national body, Infrastructure Australia.

    While the AICD favours adoption of the national project priority list published by Infrastructure Australia, the latest Director Sentiment Index provided an interesting snapshot of our members’ priorities for government attention. In order of priority, the top ranked areas for government investment included renewable energy sources (44 per cent of members responding to the survey cited this as a priority), regional infrastructure (also 44 per cent), roads (40 per cent), telecommunications (36 per cent) and urban rail (29 per cent).

    Recent episodes of power shedding also highlight the importance of there being a fresh examination of the governance and security of the national energy grid. There is little point focusing on productivity, competitiveness and innovation if the lights can’t be kept on.

    2. Good versus bad government borrowing

    In principle, the AICD supports more essential public infrastructure being debt-financed, particularly given low levels of interest rates. Not all government debt is ‘bad’, provided additional borrowing is used to fund productive assets that ultimately boost the economy’s long run capacity. Previous debates that concluded that all government debt is ‘bad’ were unhelpful and unproductive.

    Any new government spending, of course, should always be assessed within a framework of rigorous project assessment. Construction of long-lived assets that generate a positive economic return over time allows government to service the additional debt, and the consistent revenue stream makes the asset attractive to private sector investors. International pension funds, for example, have a great appetite for investment in long-lived infrastructure assets, allowing government to recycle the sale proceeds into other productive assets, creating a virtuous cycle. The construction phase, for example, has clear benefits for national economic activity and employment.

    3. Funding of infrastructure

    The AICD recommends that government examine innovative ways of funding national infrastructure. Governments should examine the merits of infrastructure bonds, for example, which provide an alternative that already is being used in some jurisdictions. Again, there is a ready market for these bonds among offshore investors. Ongoing underinvestment by private businesses in Australia remains something of a puzzle. There is evidence that some firms maintain hurdle rates of return on investment that are too high, making it difficult to get board approval for new projects.

    The AICD encourages hurdle rates to be revised downwards to reflect the new world of lower inflation so that projects can be started. The current regime encourages risk aversion.

    4. Boosting private sector infrastructure investment

    Australia’s infrastructure needs cannot be funded by public investment alone. Expanding private sector engagement in infrastructure delivery and operation is critical if we are to avoid the forecast shortfall in capacity and service levels. Government should focus on private sector contributions enhancing public funding commitments, including via public-private partnerships, which have tended to fade from consideration. The AICD endorses the Australian Infrastructure Plan’s call for greater use of well-regulated, market-based solutions and increase engagement with the private sector to fund and deliver productive infrastructure.

    The AICD supports expansion of asset recycling as a means of maximising infrastructure use and investment. The recent strong performance of the New South Wales economy, fuelled in particular by extensive infrastructure spending and funded in part by an innovative asset recycling program, shows how effective such efforts can be. The AICD calls on state and territory governments to significantly increase asset recycling, supported over time by nationally consistent standards on governance, benchmarking and reporting metrics.

    This is an edited extract from the AICD’s Governance of the Nation – A Blueprint for Growth, which sets out the AICD’s comprehensive reform agenda.

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