Mike Mrdak: reforming Australia's infrastructure agenda

By Mike Mrdak

August 18, 2014

Mike Mrdak
Mike Mrdak

Infrastructure has become a something of a buzzword for governments and the community about dealing with the issues that ail us as a country — in many ways as the only solution. It’s far from that, but it is a critical part of how we take our economy forward and the productivity challenge we face for the future.

The infrastructure gap, which is what its being called, is a curious term. There’s certainly no shortage of experts who argue that we face a significant gap. Various business groups argue that the infrastructure gap we face ranges from $80 billion to $770 billion right now. The recently completed B20 group on infrastructure that reported last month suggest there’s a $60 trillion to $70 trillion immediate gap that needs to be funded by governments over the next 20 years. I’m not sure how anyone comes up with such large numbers.

The Australian government commissioned the Productivity Commission recently to do a review of infrastructure policy recently particularly funding and financing of infrastructure, which has been a very sensible piece a of work that Peter Harris has lead. The commission recently noted that many interested parties argue there is an infrastructure deficit, but none seem to agree what the deficit or what sectors it supposedly covers. It went as far to say infrastructure deficit doesn’t have a clear evidence base: “A true infrastructure deficit would exist only where infrastructure was efficiently utilised and priced and unmet demand remained and the reliance on infrastructure gap can lead to poor investment decisions.”

I’m not convinced anyone has proved the gap and more importantly when you talk about a gap you instantly reach for a solution, which is we need more money to spend on projects. I know I say that as the head of an infrastructure department that should be arguing for more money but it’s important we get some balance into the debate around what is the real reform agenda around infrastructure.

We need to think about what infrastructure do we need and when do we need it by. It’s not just about more money but good public policy. That requires detailed evidence based analysis which needs to integrate spatial, demographic, land use planning with an analysis of how our transport, energy and communications need to look now and into the future. It’s not an area in which Australia has been the leader, in fact as a nation we lag. We don’t value enough long term investment planning and rational decision-making as a nation. If you think about infrastructure in Australia we’re not bad at building infrastructure, although our cost base has been creeping up in the last couple of years, we do some good innovation in building infrastructure given out conditions. We are world leaders in financing infrastructure, in fact many of our banks and institutions have lead the world and that became quite evident during the B20 process. What we’re not good at and where we lag is in long term investment planning and the way in which we make decisions on investment.

If we’re going to be improve our investment planning as the commission suggests we’ve got to give better consideration to issues like population growth, how many people, where will they be, what jobs will they have, where will they live, what are some of the spatial dimensions of our urban growth.

We need to look more seriously at our freight demand, our port, rail, airport, the type of freight, recognising that our freight demand is generally about half of one percent above GDP growth, consistently.

We need to look more closely at the capacity of our existing infrastructure, what we can do with that infrastructure.

We face in Australia, over the next 20-30 years a unique challenge, a growth challenge, a challenge that some other countries in the world don’t have. It’s a growth challenge driven by our demography and our changing economic structure, but in the medium term we can be confident of the fact we can expect a doubling of our aviation demand, a 60% increase in our road freight traffic demand, a 90% increase in our demand for rail freight, and a 100% increase in bulk movements in our ports. How do we know this? That’s simply based on quite sensible demand forecasts of the future, and what we’ve experienced in the last 20 years.

We need to ask in the context of that growth, what infrastructure do we currently have and how will we meet this future demand. We’ve essentially locked in our demographics for the next 20-30 years. We will be a nation of 36 million people by the middle of this century. Melbourne, Sydney will be cities of seven million people by the 2060s. Brisbane will be a city of four million people by 2060s, and increasingly 80-90% of our GDP will be in those major urban environments. We know the future in many ways, it’s not inconsistent with what we’ve seen in the past, so why aren’t we planning for it better.

In that context, it’s not just filling the gap, but the right investment in the right places.

Integrated planning and investment selection is critical. The key finding of the commission is that as a nation we under invest in long term planning and we under invest in the importance of having good investment choices and good analytical frameworks for that to take place. That’s quite a critical challenge for us in public policy.

In April the government took the decision an airport would be developed in Badgerys Creek to serve the long-term needs of Sydney. This has been long debated, and people do wonder why it’s taken us 60 years to reach a decision on a second airport. In my view the wait has been the right decision, but the decision that is there now is also the right decision because there are worse things than building the wrong infrastructure, and that’s building the infrastructure at the wrong time and at the wrong place. The reality is now we’ve got to the right decision probably around the right time, and probably just in time.

In 2009 my department was commissioned to lead a joint study with the NSW government of Sydney’s aviation needs. Why was this different from every other study done? We started from a different base; we didn’t start from the premise that we had a capacity problem at Kingsford Smith airport, which had to be solved by building a new airport. We started from a premise that if Sydney is going to be a city of 7.5 million people by the middle of this century, what are the spatial growth patterns that are taking place, where will the land release taking place, where will people be housed, where will they be working. Then you look at what’s the infrastructure needed to support that. We looked at the spatial growth, access to aviation, road and rail infrastructure, how people would get to the airport, it’s not just about aviation, it’s part of a transport system and importantly part of an economic system.

We identity that Sydney needed the second airport site, not just because of the capacity constraints of Kingsford Smith, but also that Sydney needed to plan for the massive expansion of Western Sydney. Western Sydney today is the fourth largest economy in Australia. Western Sydney today has 2.5 million people, and by the 2040s there will be four million people west of Parramatta. What we found was they have income levels of air travel, but aren’t accessing that because they have to access an airport 50-60km away from their home and work. The average commute time to work in Western Sydney is 35 minutes each way. We’ve created some of the longest commute times in the OECD by the way we’ve spatially grown Sydney and the disconnection between where they live in Sydney to where they go to work.

The decision in April by the commonwealth government is very much based on serving the aviation needs of that fourth largest economy, which is Western Sydney. That’s quite a shift. We haven’t been as sophisticated as a nation as we should have been in the way we narrow our federal and state planning processes and start to apply a different approach for how we plan for the future in terms of long-term infrastructure.

Starting the ‘long-term planning analysis’

Over the last 6-12 months, infrastructure has been the talk of the town. What we’ve been trying to do as public officials is start the long-term planning analysis which we need to have. Part of that has been some of the governance changes that the government has recently also made to Infrastructure Australia, which was formed in 2008 to try and provide national leadership on infrastructure. It’s been tasked to produce an audit of Australia’s infrastructure asset base and develop a 15-year rolling infrastructure plans and priorities for the nation. That’s designed to try to give us some of that long-term strategic thinking that sits across all the nine national governments. It’s designed to allow for government and industry to plan for industry infrastructure to identify the best way to meet those needs.

We’ve also got to do much better on project selection. As a nation we’ve missed opportunities while the answer to the question “did we blow the boom”, is no, we’ve invested in some good infrastructure as a nation over the last 10 years, both public and private. But we could have made better choices about some of the investment we have made and certainly we could make some better choices in the future like we’ve done with Sydney aviation.

So critical to the second part of my reform agenda, getting more transparency and information to decision-making around large projects is quite critical.

The third area in the reform agenda is how we finance and fund infrastructure. It requires us as public policy makers to get the questions right. Often people start from the premise, particularly those who work in the financial community or those who lobby government, lets create a pool of money and then we’ll work out what to spend it on. It’s got to be the other way around. Fundamentally, the right way is that the right project is identified and then governments and the private sector work out the best way to fund it.

Choosing the right funding or financing model should always come after the project has been selected. While the financing engineering industry will tell us otherwise, you get the best decisions when you’ve already worked out what are right projects. Funding and finance is relatively easy once you’ve worked out the right projects and who should deliver those projects, whether public or private. To do that you’ve got to have a range of options in the government’s toolbox. There are many ways to finance infrastructure, but the challenge is funding. Either governments have to create space in their balance sheets and their budgets, or user charges where users of the infrastructure are going to have to pay. You can’t get away from those two funding methods.

The commonwealth has two initiatives under way, one is with the states and territories to sell their assets into private hands, where appropriate, and to provide an incentive for that money to be reinvested into new infrastructure that is agreed to be of national importance. The second part, which gives us a glimpse into the difficulties of the government at the moment, is the decision to re-introduce indexation of fuel excise. The government was taking a conscious decision to make revenue streams for funding new infrastructure because the proposal is that the excise indexation will be fully hypothecated to transport infrastructure projects.

The political debate around that and in the Senate over the last few weeks has highlighted that we don’t really have an honest debate in Australia about our infrastructure challenges. When people simply revert to “this is a tax” when in fact it’s trying to find way through some of our most difficult area of how we create space in our balance sheet.

The final reform agenda is proper asset management. We chronically undervalue the importance of asset management and maintenance. As a nation we forge that we’ve got a well developed infrastructure system, and it’s hard to get the political processes to recognise that as a nation we often get much better value in protecting the existing asset base than we do with new projects. That’s a really hard discussion for public officials. I’ve yet to meet a minister that was happy to cut the ribbon on a train signalling system or to talk about that last two inches of sealant on the bitumen road. We know in public policy that proper asset management is better value for money.

Infrastructure is terrific when you can cut the ribbon, but it’s hard to get to that stage. The reform agenda in Australia will revolve around better planning and analysis, long term investment and better project selection; balance sheet reform, introducing pricing and charging mechanism as part of our thinking; and importantly managing our asset management and regulation of infrastructure. These will be the determinants of our success in the future of providing the infrastructure we need for growth.

This is an edited transcript of a speech given by Mike Mrdak at the ANZSOG conference on August 6.

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