With another economic transition underway, there is an urgent need for infrastructure designed with growth in mind.
All levels of government seek landmark projects that can create new centres of economic growth. Some of these projects will be created within new policy devices, including the Smart Cities plan and the Northern Australia Infrastructure Facility. Other projects, of long standing, are now moving ahead. These include Badgery’s Creek Airport and the inland rail link from Brisbane to Melbourne.
Renewed focus on these opportunities recognises the link between high-quality infrastructure and growth, as well as an increased role for place-based economic development approaches.
However, we can’t rely on Australia’s traditional public private infrastructure approaches to meet this new imperative. To truly stimulate growth and jobs, new infrastructure must be linked to and powerfully increase the attractiveness of investment well outside the physical boundary of the asset.
This requires the relationship between government and the commercial sector to be much more dynamic and productive. Intelligent combination of the resources, capability, creativity and insights of all parties can create projects of greater value to direct participants and the Australian economy.
This new relationship requires three things.
A focus on business creation
First, a joint focus by government and corporates on business creation, rather than building an asset. The need for and value of this “business” should be considered against a set of sharply defined strategic and economic objectives.
These will go well beyond a narrow concept of price to include how infrastructure will deliver new economic opportunities to infrastructure users, investors and operators.
What are the true boundaries of the business that is being created? How would the commercial world develop that business, and what assistance would they require from government? Would another, broader definition of the “project” creates more opportunities for partnership and investment? Agencies need to take a view on these questions.
The Northern Territory government recognised the potential for infrastructure to be at the core of a new industry when it constructed its recent North East Gas Interconnector competitive process. The potential of the surrounding business opportunity led to a rapid and highly successful process.
From asset procurer to equal partner
Second, a move by agency leaders from asset procurer to equal partner, exploring alongside commercial entities how best to build value.
The payoff is large. Compared with a traditional purchaser-supplier arrangement, mutuality created through equality enables a much more productive approach. Equal partners enables an alignment of objectives which means all sides are committed to the success of the project. This change is even more a prerequisite when government balance sheets are involved.
This is not to claim commercial nous is somehow superior to policy smarts. But it is straightforward that commercial partnerships for policy goals are best with at least as much sophistication on the government side as on the commercial side.
The Smart Cities plan proposes an infrastructure financing unit to work with private firms on financing solutions for key projects. This is part of what is needed, but many infrastructure projects involve commercial issues that extend beyond financing.
At Badgery’s Creek, for example, who should make the tradeoff between economic growth, development principles and pace and the value of any associated transaction? How will these trade-offs be made? Who will negotiate conditions over the use of the land parcel on behalf of tenants yet to come? Who should decide how transport links will be designed to balance appropriate rents with affordable access?
Governments may choose to answer some of these questions themselves. At a minimum, they need to be in a position to rigorously evaluate solutions developed by private sector partners. Either way, a step up in commercial nous is needed.
Risk management to real design
Third, a shift in agency focus from risk mitigation and allocation to design of markets and incentives.
PPPs have been — and at times still are — mostly about allocating risk. This lens pushes important growth issues to the background. For multi-player logistics systems, for example, the way in which total system performance is improved can either slip through the cracks or, de facto, is left for one party to take responsibility.
This lens can also lead governments to over-specify processes to minimise risk. This approach leaves little space for the private sector to bring creativity to bear.
Smarter processes focus, from very early stages, on the delivery of the essential strategic objectives of a project. And it is best if these tied closely to the creation of the new “business” described above.
Finally, a risk focus can distract governments negotiating appropriately for “customers yet to be created”. These future users are the conduit to growth. At project conception, agencies have a role to ensure future users’ interests are appropriately considered.“High quality commercial actors can and do respond to opportunities created in this way.”
Markets beyond the project itself can be just as important as those directly connected to the asset. Investors in the prospective inland railway from Brisbane to Melbourne, for example, will want to assess the potential for long-discussed reforms for heavy vehicle road charging, key to a well-functioning freight market.
High quality commercial actors can and do respond to opportunities created in this way. Savvy private firms already blend financial metrics and assessments of strategic robustness when evaluating investments.
Sophisticated private sector investment committees understand that no financial model is a complete picture. Additional confidence comes from understanding how a new investment will bolster a well thought through strategy, including how it can catalyse additional activity around it.
These firms will also take confidence from robust strategy and policy work by agencies. The best government partners are those who have thought clearly about their role. The backing of a policy development process that is itself rigorous and evidence based helps build this confidence.
To form strong partnerships with the best firms, agencies will need to deploy clear reasoning, supported with facts and hard data.
For agency leaders charged with delivering growth through infrastructure, this requires more than establishing private sector-style governance over investments. These agencies must also understand how partners will seek to create value, and extract value, from a project.
Some governments may need to develop specialist units that have these skills — or that can source them, until agencies build skills and experience in new business creation.
Since the harbour tunnel, PPPs have helped build Australia’s most important infrastructure assets. Thirty years on, however, infrastructure must catalyse growth, not simply relieve congestion. This new game means new rules.