How Can Australia Fund its Growing Infrastructure Needs? 2

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Tuesday, March 22nd, 2016
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Australia is projected to grow to a population of 30 million by 2031, up from 24 million today. Our major cities, satellite cities, regional cities and rural and regional towns are experiencing significant demographic, economic and environmental changes.

The South-East Asia region is also experiencing significant shifts in these same dimensions, and Australia is well-placed to make a significant contribution to the economic, social and policy frameworks within which the country operates in SEA region.

Building on our stable political and financial systems, resources and agricultural sectors, and heavily regulated infrastructure and land development sectors, Australia has the capacity to develop a highly efficient infrastructure system that meets the opportunities and demands of both the domestic and international markets.

This cannot be said enough: Australia needs a long-term plan for infrastructure reform and investment.

Very few Australians want to pay extra tax, though they expect world-class infrastructure and services and many reject privatisation of public assets. This makes for a complicated and often toxic combination for policymakers. Public-private partnerships are one of the keys to finding much-needed funds to stimulate economic growth and build the facilities for an Australia that has the capacity to lead the world in infrastructure investment, management and sustainability with minimal additional burden to taxpayers.

Building on the 2015 Infrastructure Australia (IA) Northern Australia Audit and the Australian Infrastructure Audit, February 2016 saw the release of IA’s Australia Infrastructure Plan – Priorities and reforms for our nation’s future (AIP). Broadly speaking, the 204-page AIP focuses on energy, telecommunications, water and transport sectors.

Via a presentation based around the themes of productive cities, productive regions; efficient infrastructure markets; sustainable and equitable infrastructure; and better decisions and better delivery, the AIP focuses on these sector participations in the four major cities – Sydney, Melbourne, Brisbane and Perth. This was supplemented with discussion on satellite and regional cities, and with a chapter dedicated to Remote and Indigenous Communities.

Unfortunately, there was no discussion on the two largest infrastructure sectors that affect most countries, including Australia – health and education infrastructure – where many more billions of dollars are spent on tertiary and secondary health facilities, and new schools in greenfield spaces and upgrades of existing schools. This is a missed opportunity in this vital discussion of the future of Australia.

Population growth

Between 2011 and  2031, almost three-quarters of our population  growth will occur in  Sydney, Melbourne, Brisbane and Perth – a combined population growth of 5.9 million. This growth presents challenges and opportunities for our transport sectors – road, rail (passenger, freight and resources) and ports (air and sea). Decisions regarding infrastructure should anticipate the long-term implications on the Australian economy, society and environment.

Decisions need to provide solutions that meet the needs of Australians (and our international customers) today without compromising our future, helping Australia meet our 2030 target of reducing national emissions by 26 to 28 per cent below 2005 levels. Governments should set long-term reduction targets and maintain consistent regulatory frameworks to encourage industries to innovate and plan for a reduction in emissions.

Our infrastructure should promote and incentivise behaviours that are in the best interests of the nation and the states over the long term. Given that infrastructure delivery is primarily the domain of state governments, who have limited funding and extensive demands, decisions need to be made that are in the best interests of the state as a whole before the needs of individual cities or communities. This is particularly true if a lower-cost, less iconic piece of infrastructure can be delivered to meet the needs of an individual city and savings spent elsewhere.

Transport infrastructure

The increasing automation of transport related infrastructure services will fundamentally change our built environment. Data is providing regulators, enterprise and consumers with real-time information on the movement of people and goods. These evolving technologies are rapidly changing how consumers interact with businesses and have the potential to profoundly change how we live and work. Minimising social and environmental impacts into the future will be a priority, as will the need to find innovative means to fund, build, own and operate transport infrastructure.

Medium to high-density development within established urban areas provides a viable mechanism to meet the needs of rapidly growing urban populations. Workers need multi-modal transportation models that facilitate journeys combining walking, cars, buses, bikes, and trains—as well as shared transportation services to move them efficiently and comfortably, complemented by:

  • The adoption and adaptation of technological advances and commercialization that makes these opportunities affordable to the greatest number of people in each community
  • The funding (taxpayer and user-pays), intelligent policies, and business-model innovations to realise productivity improvements and create more sustainable environments in our cities
  • The adoption of new and updated traffic laws (in a penalty-free environment), planning laws and policy and a change in attitude by consumers, community members and regulators to these “disruptive” mobility opportunities
  • Very long-term urban and infrastructure planning and acquisition programs to ensure corridors are established and maintained
  • The most effective governance of all our cities and at the state and federal levels
  • The development of a National Population Policy to guide decisions on how to best manage and capitalize on our growing population over coming decades
  • Maximising the productivity of all our cities through making better use of existing infrastructure, utilising technologies and integrated systems that drive greater efficiency across networks
  • Investing in the right infrastructure that delivers the highest productivity gains and quality services to customers, both domestically and internationally. New ways of generating, collecting, sharing and analysing data will help determine where investment is most required while connecting users with operators and ensuring the customer is at the centre of every decision on infrastructure (at least in theory)
  • The building of an asset resilience instrument that provides a consistent format and performance measures to ascertain which infrastructure requires upgrade/replacement to minimise economic, social and environmental disruptions, and ensure infrastructure can continue operating through minor disruptions and recover quickly from major disruptions. Regulators should ensure that responses to threats are proportionate and efficient. The costs of managing risks should reflect consumer preferences, balancing pricing and reliability considerations
  • The development of a National Freight and Supply Chain Strategy which would map nationally significant supply chains and their access to supporting infrastructure and recommend a series of reforms and investments to enable the more efficient movement of freight

Efficient transport infrastructure markets

Transport infrastructure is generally characterised by long-dated assets that have operational costs that far exceed the cost to construct in the planning and building phase. While IA states that “infrastructure provides the best outcomes (for society) when it is delivered within robust, well-regulated market structures and funded through an efficient and equitable balance of user and taxpayer dollars,” the  project planning and development of the rail system is rarely considered in parallel to significant motorway and related infrastructure development (the exception being Perth in the Australian context).

For the road system to capture the full costs of provision from the users of the network, a reformed approach would provide the foundation for a sustainable funding base with revenue linked to usage and supply, through “time and location fees” and/or “distance charging” (road user charging) that reflect actual usage of new infrastructure. The existing fuel excise revenue collected per kilometre travelled will continue to decline as vehicles become more fuel-efficient and electric vehicles become more prevalent.

Under a renewed approach with a distance-based charging component, revenue would grow in line with travel demand, providing a more sustainable funding base. Responses to peak demand may include building additional capacity, or at least improving pinch points to streamline movement, and user charging would provide the additional funding stream to add that capacity. Alternatively, demand could be managed through changes to pricing, such as creating incentives for off-peak use of roads and/or charging a premium to use congested roads during peak periods. Road user charging would provide levers for both these responses as well as provide data to inform decision makers.

Treasury Secretary John Fraser has declared that directly charging motorists for their total roads use is inevitable as governments seek more stable ways of funding the constant improvements in the road network required to meet the needs of the future. The Australian Automobile Association, in a submission to Infrastructure Australia has cautioned that:

“A road user charge should only be implemented as a part of genuine reform of taxation on motorists and must not be imposed on top of the existing fuel excise charges.”

To fully implement such initiatives, however, would require funding for the monitoring systems to be installed, maintained and secured to ensure privacy of road users. Road users will need to be provided with regular (monthly) reports detailing more than just “toll booth” costs to ensure the fees are reflective of use, working like “smart meters” in the electricity market. This would allow changes in behaviours and usage to be implemented.

The “disruptive mobility” sector may be a bright point for regulators as autonomous driving vehicles and car sharing operators facilitate the need for fewer parking spaces and smart fleet management techniques in cities and vehicles are accessing the road network more frequently, this providing an increased revenue stream.

“An average vehicle in the US is parked for a staggering 95 per cent of the time,” Carlo Ratti, director of the Sensible City laboratory at the Massachusetts Institute of Technology (MIT), told Curbed. “Car sharing is already reducing the need for parking spaces: it has been estimated that every shared car removes between 10 and 30 privately owned cars from the street.

“Self-driving vehicles will reinforce this trend and promise to have a dramatic impact on urban life, because they will blur the distinction between private and public modes of transportation.

“‘Your’ car could give you a life to work in the morning and then, rather than sitting idle in a parking lot, give a lift to someone else in your neighbourhood, social media community, or city.”

As the chart below, developed by Audi below and presented at the Smart City Expo in Barcelona last November shows, the potential impact of autonomous vehicles on urban land uses and infrastructure could substantially reduce the need for significant new road infrastructure spending in the medium to long term, where parking garages can be moved to secondary locations and will no linger occupy inner-city sites.

transport

Funding

There is a significant conversation to be had with the Australian public around the language used in this debate, with an emphasis on how regulators use all monetary and fiscal levers to more accurately reflect time and place utilisation of  transport  infrastructure, and  not  just  focus  on  the  implications  of changing  “user  charges”  on individuals and families on lower incomes. The income measure of families is absolutely not an accurate measure of individual or family use of roads.

As the current tax debate has shown, gross and net income levels of individuals, families and corporations (as reported to the Australian Taxation Office) are not necessarily reflective of economic activity, and therefore by extension, not reflective of volume/frequency of transport infrastructure use. For example, a tradesperson with a $80,000 annual gross income and who frequents the road on a daily basis will, by definition, have a very different impact on the transport system than a home business-based entrepreneur with the same gross income. Should both parties be charged the same for their road use through the current registration and excise regimes?

There is a need to diversify the pool of funding applied to infrastructure to meet the needs of the Australian economy. The ability of taxation and excise collections to fund all transport infrastructure beyond that supplied by land developers is limited to the ability of the State to distribute these collections across all demands from the community.

Regulators must develop new policy settings across the transport infrastructure sector and between the transport modes. Making heavy and light rail systems, bus and other transit systems more effective and efficient in their operations will encourage people and corporations to change from road usage to public transport modes through options such as value-capture (through bonds and other means), increased cost recovery in public transport, and better use of governments’ borrowing capacity. Achieving the right balance of user pays, reforming our infrastructure markets and continually refining our approach is necessary. The reforms are complex, but the rewards are substantial and the imperative for change is clear.

Using a new approach known as a comprehensive balance sheet, the New Zealand Government is using detailed modelling to assess the net present value of both future tax flows and ‘forward liabilities’ (spending needs), and therefore the ability to sustainably provide services. This modelling and decision making framework provides the New Zealand Government the capacity to make defensible, informed decisions regarding hard and soft infrastructure investment on both capital expenditure (CAPEX) and operational expenditure (OPEX) measures.

In 2012, the New South Wales government commenced a reform program to subject Sydney’s seven-year road maintenance contestable stewardship contracts, allowing private contractors to bid for road maintenance responsibility over defined areas of the network which include specified performance outcomes. This ensures risks and responsibilities are allocated to the private sector maintenance provider, allowing government to focus on strategic management.

Should heavy rail operators seek new funds for CAPEX and OPEX liabilities, another readily available value-capture activity is allowing the building of new commercial and residential developments over and around rail stations and rail lines, such as Sydney’s Midtown Project and New York’s Hudson Yards. The value of the volumetric airspace above rail stations should be assessed for future collection. Such forms of development:

  • Assist cities in building more transit-oriented developments
  • Potentially reduces the traffic volume to the stations if quality end-of-trip facilities are provided to cyclists and pedestrians, which is likely to increase the land values of neighbouring properties
  • Will provide valuable income in the immediate and long term from developers and property owners through body-corporate fees

Similar opportunities could be implemented in the planning and design of future light rail and intermodal stations by local and state governments.

Infrastructure Australia and the state-based infrastructure advisory bodies such as Infrastructure NSW, Infrastructure Tasmania, Building Queensland and Infrastructure Victoria have moved to strengthen strategic infrastructure planning and decision-making processes. The issues facing all levels of government are complex, expensive and require very long-term thinking. Bi-partisanship is required. Models of assessing infrastructure feasibility needs to be agreed at least within each jurisdiction, if not nationally.

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2
  1. Lynne Edol

    Great, detailed piece Brett and a timely call for improvement to Australian infrastructure – we are lagging badly behind the Eurozone and Asia-Pacific when it comes to things as fundamental and basic as telecommunications and public ransit.

  2. Rick Rybeck

    Excellent article. I am particularly impressed by the notion that achieving an appropriate balance between user fees and value capture can help make infrastructure finance more equitable and sustainable. Equally important (although I did not see it mentioned), user fees and value capture, if properly designed and implemented, can help create more compact, efficient, affordable and environmentally benign development patterns.