MEDIA RELEASE: Speech by Paul Fletcher MP, Minister for Major Projects, Territories and Local Government

Paul Fletcher MP, Minister for Major Projects, Territories and Local Government

Speech to CENTRE FOR INDEPENDENT STUDIES LEADERSHIP LUNCHEON

“Is ‘Shovel-Ready’ the Right Test? Sensible Objectives for Commonwealth Infrastructure Policy”

SYDNEY, 5 APRIL 2016

I am very pleased to be here to speak to the Centre for Independent Studies — and particularly to speak at the first Leadership Lunch in your new offices.

Your office may have changed – but your mission has not. For forty years the CIS has been a voice for wise economic policy.

Today the economic policy issue I want to discuss is infrastructure. As Minister for Major Projects, it is my task to oversee and direct Commonwealth investment in major transport infrastructure projects around the country – where we are investing $50 billion between now and 2020.

When politicians talk about infrastructure policy, we typically default to doing what I have just done – cite dollar figures of infrastructure spending.

My argument today is that the economic policy lens through which we think about infrastructure needs to change.

I first want to argue that too often we think about infrastructure primarily as an instrument of macroeconomic, Keynesian demand stimulation policy. In my view it is just as important to think about infrastructure in microeconomic terms – as a tool to stimulate productivity, efficiency and competitiveness.

Secondly, I will look at how we want to change the way the Commonwealth works with the states and territories when it comes to infrastructure.

In the third part of my speech, I want to speak about some of key policy levers to secure better microeconomic policy outcomes: greater use of the private sector, greater use of markets and better planning.

The Right Economic Policy Objectives for Infrastructure

But let me turn first to the question of what the economic policy objective for infrastructure should be.

So often in this policy area the rationale for spending is short term demand stimulation. The economy is soft, it is argued, and so we should spend more money on infrastructure.

As Prime Minister and Treasurer, Kevin Rudd and Wayne Swan spoke endlessly of ‘shovel-ready projects’. For example, in a February 2009 press conference Mr Rudd spoke of the businesses and organisations which had come to him with projects suitable for his $42 billion Nation Building and Jobs Plan:

They all have projects which are shovel-ready…There are school halls and libraries, public housing, the insulation of home projects ready to go, ready to start, creating jobs and preparing for the future.[1]

In fact the Rudd Government is a case study of the problems you get when you see infrastructure spending as being primarily about demand stimulation.

First, it turns out that often the projects are not ‘shovel-ready.’ Infrastructure projects have long lead times. It takes time to prepare designs, to obtain planning and environmental approvals, to resume property from existing owners and to go through competitive selection processes and contractual negotiations to assemble the consortium that will build the project.

Secondly, where the primary objective of spending is short term demand stimulation, there is a pressure to rush. This can lead to compromises in design and safety.

Tragically, the Rudd Government’s home insulation program was so rushed that it was linked to over 200 fire incidents and four young men died. [2] As the Royal Commission into the Home Insulation Program observed:

There was an inevitable and predictable conflict or tension between the two aims of the HIP. One aim was to insulate 2.2 million homes and the other was to stimulate the economy. Both were doubtless admirable aims but there was an inherent conflict between them: the first required detailed and careful planning over time, and the other required speed.[3]

A third problem with seeing infrastructure policy as primarily about demand stimulation is that all thoughts of securing value for taxpayers’ money go out the window.

Now I want to be clear: I am not suggesting that there is no macroeconomic rationale for infrastructure investment. Today, with construction activity in the mining sector well down, it makes sense to increase spending on transport infrastructure.

As recent industry surveys of infrastructure spending show, this is exactly what is happening. Late last year, the Australian Industry Group and the Australian Constructors Association commented on their survey:

In particular, the value of road and rail projects is forecast to grow strongly in 2016/17 pointing to an emerging growth cycle in major urban transport infrastructure.^{^[4]}

There was a similar finding in the most recent issue of the ‘Australian Infrastructure Metric’ prepared by Infrastructure Partnerships Australia (IPA) and BIS Shrapnel, with transport spending expected to rise by $3.2 billion next year.[5] As IPA CEO Brendan Lyon said:

This is the biggest lift we’ve seen in infrastructure investment since the end of the mining boom.

Rather, I am arguing that demand stimulation alone is not a sufficient rationale for infrastructure spending; we need a greater focus on the microeconomic rationale.

Infrastructure is a key driver of productivity improvements.

According to the Productivity Commission, 2.5 per cent of growth in our GDP – or $20 billion – came from improvements in key infrastructure sectors in the 1990s.[6]

There are many examples, in Australia and globally, of the link between infrastructure and productivity growth. Consider for example the US interstate highway system, which commenced construction in the nineteen fifties.

One economic study found that it generated 31 per cent of the annual increase in US productivity in the 1950s – at a time when the US was enjoying remarkable productivity growth of 6 per cent per annum.

By reducing shipping costs, and helping to create a single US national market, the interstate highway system delivered substantial economic benefits.

It allowed more efficient companies to better serve the national market. It delivered sharp cost reductions in all but three of 35 industries as transport became cheaper and more efficient.[7]

A good local example of the productivity benefits from road infrastructure is the upgrading of the Pacific Highway.

This has been underway for a number of years, and about 60 per cent of the distance from Newcastle to the Queensland border is now a four-lane highway. This has delivered time savings of 90 minutes on a typical trip.

When the four-lane highway is completed in 2020 it will save 2.5 hours on a typical trip.

It is not hard to see the productivity benefits of this.

If a trip takes less time, then a given truck can do more trips per week, per month or per year. This means all the fixed costs – like the capital cost of the truck, and the driver’s pay – are spread across the greater amount of freight carried, and the cost per unit of freight correspondingly drops. That is a benefit which cascades through the economy; that is productivity improvement in action.

Because the Pacific Highway is of such importance to the nation, the Turnbull Government is contributing 80 per cent of the construction cost of the last remaining 155 kilometres between Woolgoolga and Ballina, with the NSW Government paying the balance.

In total, the Turnbull Government has committed $5.6 billion to complete the duplication of the Pacific Highway by the end of the decade.

It is not just in long distance travel where there are productivity benefits from road infrastructure.

Within cities and urban areas, wise investment can help address the growing problem of congestion.

Congestion in the eight Australian capital cities is estimated to cost $16.5 billion (in 2010 dollars) a year. Unless we take corrective action, these costs are projected to rise to around $30 billion by 2030.[8]

Another example of infrastructure investment to support productivity is the Moorebank Intermodal Terminal in Sydney. This will profoundly improve efficiency and freight throughput at Port Botany – delivering economic benefits to the nation estimated at $9 billion over 30 years.

It will significantly reduce truck traffic on Sydney’s roads – in fact, when the terminal is fully operational, one regularly operating port shuttle train will carry enough freight to replace 72,000 truck trips on Sydney’s roads each year.

RBA Deputy Governor Philip Lowe gave a speech about the relationship between productivity and infrastructure in 2013, expressing the view that:

…there are significant opportunities for additional investment in transportation infrastructure and for using the existing infrastructure more efficiently. Doing so would promote productivity growth in Australia and contribute to advancement of the overall welfare of our citizens.[9]

Lowe highlighted three challenges: selecting the right projects and using the right governance (including cost-benefit analysis) to do so; how infrastructure projects are to be funded and financed; and capacity constraints due to a shortage of skilled labour. As he presciently noted, the third issue would become less of a problem once we passed beyond the investment phase of the mining boom.

Commonwealth-State Relations and Infrastructure

Of these three challenges, the first two are very much linked to the question of how the federal government works with the states and territories on infrastructure. The Turnbull Government wants to change the way we do this.

Collectively governments face a growing task funding Australia’s infrastructure needs, as these increase with our growing economy and population. As Infrastructure Australia said in the 15 Year Australian Infrastructure Plan:

Australians currently enjoy access to many world-class infrastructure services…But Australia is undergoing a period of profound change…A growing population is a source of economic dynamism…But it also places additional demands on cities and regions – and ultimately government budgets.[10]

Partly in response to the trends identified by Infrastructure Australia, in recent decades the share of the national infrastructure funding task assumed by the Commonwealth has steadily risen.

In 1998-99, Commonwealth rail expenditure was 10.4 per cent of total government expenditure on rail; by 2013-14 it was 25.7 per cent.[11] Over the same period the Commonwealth share of road spending rose from 16.9 per cent to 22.4 per cent.[12]

In the past 15 years, the Commonwealth’s road related expenditure has increased by 113 per cent. This compares to an increase of 52 per cent by the states and territories, and a 12 per cent increase by local governments.[13]

Today Commonwealth spending on transport infrastructure typically tracks at around $7 billion a year. In fact in 2016-17 it will be at record levels of around $10 billion, particularly as we reach a peak in activity levels on projects such as the Bruce Highway in Queensland, the Pacific Highway in New South Wales, WestConnex in Sydney and the NorthLink WA – Swan Valley bypass project in Perth.

But the Commonwealth cannot carry all of the load itself. State governments need to improve their performance.

The New South Wales Government has taken the lead with a vigorous program to withdraw public capital from mature infrastructure assets such as the electricity distribution network and ports, to reinvest in new infrastructure.

Any state or territory government which takes such an approach has been able to receive a further financial contribution towards the new assets it builds under the Commonwealth Government’s Asset Recycling Initiative.

Other state governments, unfortunately, have taken a different approach to New South Wales. The Palaszczuk Government in Queensland refused to proceed with an asset sales program – even though the Newman Government had been well advanced down such a path when it lost office.

Another example is Victoria.

Just before midday on 23 February the Victorian Government sent the Commonwealth Government a copy of the business case for the Melbourne Metro rail project. Shortly after that Premier Andrews issued a media release with the heading: Time for Turnbull to Back Melbourne Metro.

The media release noted that the Victorian Government had that day sought a $4.5 billion commitment to the project from the Turnbull Government, and contained the following quote from Transport Minister Jacinta Allen: “The updated business case has been delivered as promised, now the only thing Victorians are waiting for is Malcolm Turnbull.”

This is a good example of what the Prime Minister has referred to as the states and territories treating the Commonwealth as an Automatic Teller Machine, expecting it to spit out cash.

Unsurprisingly, the Commonwealth will not be handing over $4.5 billion on the day it receives a business case. Instead, we have a more structured and principled approach to the way we will work with state and territory governments when it comes to infrastructure.

Earlier this year, to coincide with the release of the 15 Year Australian Infrastructure Plan by Infrastructure Australia, I issued a document entitled Principles for Innovative Financing. This sets out key principles we will apply in engaging with state governments.

Let me highlight some of them:

Transport projects are selected based on their capacity to meet identified national priorities and deliver the greatest benefit to the Australian community and economy
Assessment of proposals for public funding of transport projects should include consideration of what proportion of the project can be funded by the beneficiaries of the infrastructure through targeted contributions and what proportion of the project should be funded by the broader community.
The funding shares from the Commonwealth and the state and territory governments should be determined after taking into account contributions made by the beneficiaries.
Where the Commonwealth provides funds for a major infrastructure project it will reserve the right to impose conditions, including Commonwealth approval being required for key decisions in relation to the project.

I think you will see that these principles demonstrate the intent of the Turnbull Government to take a more active role in infrastructure policy. We want to work cooperatively with state and territory governments – but we also intend to take an active policy role rather than simply passively handing over money.

Policy levers to secure better microeconomic policy outcomes

I have been arguing today that we should have a greater focus on microeconomic policy considerations in making infrastructure decisions. One critical policy lever, as I have discussed, is improving the way the Commonwealth engages with the states and territories.

In the remaining portion of my remarks, I want to speak about three other policy levers: greater use of the private sector, greater use of markets and better planning.

Greater Use of the Private Sector

The transport infrastructure sector stands out as having a very high proportion of public ownership and service delivery. Roads remain almost entirely publicly owned, as is much of the rail system.

By contrast sectors such as telecommunications, electricity, gas and water have been steadily transferring into private ownership over the last thirty years – with consequent increases in efficiency and productivity.

In those parts of transport infrastructure now in private sector ownership, similar outcomes are occurring. One good example is Brisbane Airport, which is making a $1.35 billion investment in a new parallel runway.

This is the biggest aviation project currently underway in Australia – and it is privately funded by the owners of the airport. It will allow the airport to meet expected growth in passenger numbers – which are forecast to more than double in the next two decades, reaching over 48 million passengers in 2034.

With the airport in private ownership, capital investment of this kind can occur in response to market conditions – rather than waiting on a government decision.

Another example is Aurizon, the publicly listed company formed when Queensland Rail was privatised a few years ago. It is impressive to see the company’s improvements in safety, productivity and customer service – with $308 million in benefits realised since July 2013.[14] The reduction in lost time injury frequency rate – from 11.43 per million person hours worked in 2009 to zero in the first half of 2016 is particularly notable.

As the Productivity Commission observed in its recent report into Public Infrastructure:

over recent decades with the maturing of private markets, there has been an increasing recognition of the benefits that can come from greater private sector involvement in the provision of public infrastructure.[15]

When it comes to major transport infrastructure projects we are keen to draw on the private sector as much as possible – and use sensible procurement processes to get the best possible deal for taxpayers. One good example is the Moorebank Intermodal Terminal I mentioned earlier. Under the previous Labor Government’s plans, this project had very heavy public sector involvement.

Under the Turnbull Government the operating model has evolved. The investment of taxpayers’ money has been reduced; the bulk of the capital now comes from private sector investors, the Qube Aurizon joint venture known as SIMTA, and that joint venture now has a very large role in the operation of the terminal.

In my previous portfolio responsibilities for communications, I saw a compelling case study of two major infrastructure projects with a very different approach to private sector engagement: the New Zealand and Australian broadband rollouts.

In Australia, the NBN project we inherited from Labor took a public sector first approach. By contrast, the New Zealand project, known as ‘Ultra-Fast Broadband’ project, is being delivered by several private sector partners, following a market based procurement process carried out by a government established company, Crown Fibre Holdings.

Under this strategy, the Kiwis took a targeted amount of public funding – NZ $1.5 billion – and allocated it to existing telecommunications businesses through a competitive selection process. For this modest amount they are achieving a fibre to the premises rollout to 75 per cent of New Zealand premises.

Greater Use of Markets

A related but not identical issue is the greater use of markets in the transport sector, again as a means of securing productivity and efficiency gains.

In its 2014 inquiry into Public Infrastructure the Productivity Commission recommended that “Well-designed user charges should be used to the fullest extent that can be economically justified.”[16]

Let me mention two areas: road pricing and value capture.

In the public policy debate over recent years, there have been a number of calls to consider the introduction of road user charges or prices in Australia.

Last year the Government has received the report of the Harper Review into competition policy. One of its recommendations was:

Governments should introduce cost-reflective road pricing with the aid of new technologies, with pricing subject to independent oversight and revenues used for road construction, maintenance and safety…indirect charges and taxes on road users should be reduced as direct pricing is increased.[17]

In its recent 15-year Plan, Infrastructure Australia recommended that the Government should commit to the full implementation of a heavy vehicle road charging structure in the next five years. The Plan also spoke about a path towards road pricing for all vehicles over 10 to 15 years.

As well as voices from within the federal government, we have also seen state government advocacy. For example South Australian Premier Jay Wetherill last year had this to say in a speech to the National Press Club:

It’s getting harder for governments to meet the demands of road users from general taxation revenue, and roads remain a sector that relies heavily on taxpayers to fund new projects. I, therefore, propose that we establish a national heavy vehicle road-user charging system run by the Commonwealth in which State-based registration and Federal based fuel-excise charges are replaced by a charging system based on mass, distance and location.[18]

In our response to the Harper Review last year, the Federal Government indicated that we supported road pricing but as a long-term reform option.

This is because we will need to be satisfied that there is a reasonable degree of community acceptance and understanding of any reform in this area. In turn, this will require a demonstration that the benefits from a broader use of direct road user charging would exceed the costs.

In considering this issue, the Australian Government expects to partner with states and territories on reform and give careful thought to community service obligations, service level standards and how best to structure charges across road networks.

Partial market reform via road pricing for heavy vehicles is a logical first step in any exploration of pricing for all vehicles.

Another area where there is scope for greater application of market principles is the use of ‘value capture’ as a means for funding major transport infrastructure projects.

It is widely recognised that well designed and located transport infrastructure can sharply increase land values.

By taking the right approach to value capture we can create a win-win proposition – in which landowners contribute towards the cost of new infrastructure but in exchange receive an increase in value which greatly exceeds the amount of the contribution.

A great deal, of course, comes down to the design of the value capture mechanism.

In coming weeks we will issue a discussion paper calling for comment on how the Commonwealth could best encourage value capture as a means of contributing towards the cost of infrastructure projects. We need to move from the principle to a discussion of particular mechanisms.

Better Planning

Let me talk finally about planning. There may seem something of a tension between use of markets, and use of planning, as policy principles. In my view though finding the right balance between the two is key to good policy making.

There are clearly planning responsibilities in infrastructure which only government can undertake. Long term planning decisions, taken wisely, can deliver benefits for generations. One example is in reserving corridors or land for future projects.

Sydney’s M2 Motorway was constructed in the 1990s – but it was planned under the 1951 County of Cumberland Plan, and its corridors were reserved in the 1950s and 1960s.

Melbourne’s Eastern Freeway (known originally as the Scoresby Freeway) was constructed between 2003 and 2008 – but its corridor was protected in the 1960s.

Western Sydney Airport is another example. The Australian Government purchased land for an airport at Badgerys Creek in the mid-1980s and the NSW Government’s land-use planning around the site protected it from incompatible development.

With the recent release of the Infrastructure Australia 15 Year Plan, we are demonstrating a new commitment to increased long term national infrastructure planning. The need for planning is clear.

Lead times on major infrastructure projects are long; the capital sums involved are huge; and the stakes are very high.

Infrastructure is key to so many other outcomes which governments seek – economic productivity and efficiency; the liveability and economic capacity of our cities; and of course the safety of our citizens.

The 15 Year Plan sets out an ‘Infrastructure Priority List’ of 93 potential projects around the country at different stages of development – and offers an extensive set of recommendations about reforms to improve the delivery of infrastructure nation-wide.

The Infrastructure Priority List is based on extensive consultation by Infrastructure Australia with governments and other stakeholders, and draws on the Infrastructure Audit conducted by IA last year.

It will be a key tool to inform decisions by the Commonwealth Government and State and Territory Governments about which projects to progress, and over time which ones will be funded. Of course it will be updated regularly as some projects drop off and others are added.

A critical point about this kind of long term planning is that, once government identifies potential projects through a public policy process, this can stimulate the private sector to come forward with proposals about how to deliver the projects. This is what we saw for example on the NorthConnex project in Sydney – a 9 kilometre freeway standard tunnel joining the M1 at Wahroonga with the M2 at Pennant Hills.

The route for this project was identified through the Pearlman Review in 2007.[19] Following this public policy process, motorway company Transurban came forward under the NSW Government’s unsolicited proposal process with a proposal to build the project.

With a total budget of around $3 billion, NorthConnex is receiving public funding – $412 million from the Commonwealth Government and $412 million from the New South Wales Baird Government – with the balance coming from the private sector and to be recovered through tolls.[20]

Conclusion

Let me conclude, then, with the observation that the Commonwealth’s approach to infrastructure is a vital tool of economic policy.

While there is a sugar hit to be had by spending more money on more projects, the far greater reward comes from pursuing the longer term view: delivering the right infrastructure at the right time that will not only drive up productivity and living standards, but also create greater value in the customer because of the services it provides.

We have never had better access to data; information technology is becoming increasingly sophisticated and better connected; and we are seeing an appetite for change amongst governments and the private sector in the way our infrastructure projects are managed.

I am confident therefore that we will over time deliver better infrastructure services for Australians.

Endnotes

[1] Transcript of Joint Press Conference with Treasurer Wayne Swan Blue Room, Parliament House, 06/02/2009, https://pmtranscripts.dpmc.gov.au/release/transcript-16393

[2] Report of the Royal Commission into the Home Insulation Program, Para 12.9.25, http://www.homeinsulationroyalcommission.gov.au/Pages/default.html

[3] Report of the Royal Commission into the Home Insulation Program, Para 1.1.34.1, http://www.homeinsulationroyalcommission.gov.au/Pages/default.html

[4] Turnaround in Construction Outlook’, AI Group/Australian Constructors Association, Media Release, 30 October 2015

[5] Australian Infrastructure Metric Shows Transport-Led Construction Recovery Ahead: Latest Figures’, Infrastructure Partnerships Australia Media Release, 21 March 2016

[6] Productivity Commission 2005, Review of National Competition Policy Reforms, p. xvii, http://www.pc.gov.au/inquiries/completed/national-competition-policy/report/ncp.pdf

[7] Cited in P Fletcher, Wired Brown Land: Telstra’s Battle for Broadband, p. 168.

[8] BITRE, Traffic and congestion cost trends for Australian capital cities, Information Sheet No. 74, p.1.

[9] P Lowe, Speech, Productivity and Infrastructure, 2013, http://www.rba.gov.au/speeches/2013/sp-dg-261113.html

[10] Infrastructure Australia 15 Year Plan, Executive Summary, p 4

[11] Bureau of Infrastructure, Transport and Regional Economics, Yearbook 2015: Australian Infrastructure Statistics, Table T1.8a and Table T1.8c

[12] Bureau of Infrastructure, Transport and Regional Economics, Yearbook 2015: Australian Infrastructure Statistics, Table T1.2a and Table T1.2d

[13] 2015 Australian Infrastructure Statistics yearbook, Table T1.3, p. 41

[14] Aurizon, 1HFY2016 Results Presentation, p 7

[15] Productivity CommissionInquiry, Public Infrastructure, 2014, p 3

[16] Productivity Commission Report, Public Infrastructure, 2014, p 2.

[17] Competition Policy Review (Harper Review, 2015), Recommendation 3

[18] Speech by the Hon Jay Weatherill MP, Premier of South Australia, at the National Press Club, 8 July 2015

[19] Hon Marla Pearlman AO, Review of the F3 to M7 Corridor Selection, http://investment.infrastructure.gov.au/publications/reports/pdf/F3toM7_final.pdf

[20] http://minister.infrastructure.gov.au/pf/interviews/2015/pfi001_2015.aspx