In Australia, we spend a lot of time talking about infrastructure. We’re passionate about our ports and roads. We are committed to our local hospitals and communities. We believe we have a fairly good grasp of the link between infrastructure and quality of life.
Yet even in Australia, we have allowed our economy to outpace our infrastructure. We are the world’s 12th largest economy, yet the World Economic Forum ranks our infrastructure at 35th out of 144 countries. We ranked 32nd for our railways, 38th for our ports and 43rd for the quality of our roads. And — much like any other market around the world — analysts have attached a massive figure to the infrastructure “deficit” in Australia: $770 billion.
Clearly, more can be done to ensure that Australia’s infrastructure is creating a more productive and competitive economy. But we also recognise there are limitations on how fast and how much new infrastructure we can build — financial limitations, resource limitations and capacity limitations to name a few.
That is why we believe that governments should be balancing their attention between building new infrastructure and driving efficiency across all aspects of the infrastructure lifecycle to drive incremental and valuable improvements.
Rethinking our priorities
In part, this will require governments to reassess the way they prioritise infrastructure investments to better reflect societal welfare and real economic impacts. The current approach used by governments to appraise and prioritise projects is generally not on the basis of the economic value they add, but on other factors.
For example, the benefit to cost analysis typically adopted on transport projects tends to focus on the value to transport users — primarily measured in direct benefits such as improved journey time, less congestion, improved safety and reductions in environmental externalities. It does not however, capture all of the benefits to the economy such as increased land valuations near the transport terminals, improved economic activity and access to jobs, and all of the tax revenues that are created as a result.
Rather than centering their assessments on conventional benefits, governments should be strengthening their approach by measuring real economy impacts of infrastructure projects and prioritising projects that deliver broader productivity impacts. This could work side-by-side with the current appraisal approach to provide a more robust consideration of the value created by competing investments.
Governments must also focus on ensuring they are making best use of — and responding appropriately to — technological change. New technologies are set to change the way governments plan, fund, deliver and operate infrastructure. Simply put, technology changes everything: it has the potential to enhance the productivity of our current infrastructure, leading to a lower long-term investment requirement; it impacts what infrastructure we will require for the future; and it impacts all of our funding and regulatory frameworks into the future.
Consider, for example, how the adoption of solar and the development of solar batteries for energy storage has the potential to radically reshape the power sector and the related infrastructure investment requirements. Or how — by embedding sensors and navigation technology — Patrick Ports in Brisbane has enabled driverless container handling, which has increased capacity and delayed the need for new infrastructure investment.
Clearly, technology has the potential to drive a radical shift in the way governments plan, develop, maintain, fund and regulate infrastructure and, ultimately, can deliver massive productivity improvements.
Turning old assets into new
Another, equally holistic, approach governments can take to maximising investment is to “recycle” their assets in order to fund new infrastructure development. In New South Wales, the government has created a Rebuilding NSW infrastructure plan that includes an asset recycling initiative that is expected to add some $20 billion in funding to deliver road, rail and social infrastructure across the state.
We recently sat down with Premier Mike Baird to talk about the initiative and the drivers behind it. “We had nothing near the funds we needed to address the infrastructure backlog we inherited,” he explained. “So we had to take a new approach. We looked at the balance sheet and asked ourselves, ‘can we turn our old assets into new assets?’. The $20 billion program is a once-in-a-generation opportunity to get ahead of the infrastructure curve.”
As with most new infrastructure initiatives, the impact of the NSW asset recycling approach will only be known in hindsight. The shorter-term impact of the construction stimulus will be observable over the next five years, but the greater (and arguably more important) outcome of improved productivity will only be known in 10 to 20 years.
What can governments do?
With this in mind, here are a few steps that governments can start taking in order to unlock greater value from their infrastructure investments …
- Create a clearer narrative around project outcomes. Place a deeper focus on the range of outcomes to be enabled by a project at the strategic assessment phase to help ensure project solutions are robust and aligned with the public policy settings. Placing particular focus on the key drivers for a project at the very early stages will ensure a strong foundation before moving into business cases.
- Building new infrastructure is not always the best answer — we need to build better business cases. Create more effective business cases by succinctly defining and understanding the problems government is trying to solve, and the suite of solutions available to them. For example, instead of building a new road, the same outcome (and often a more cost-effective solution) could be achieved through extensive traffic light sequencing to increase road productivity. Too quickly we’re deciding to build new infrastructure instead of looking at all the options to address our infrastructure needs, including getting the most out of our existing infrastructure.
- Embrace technology. Embed technology in current infrastructure and/or to manage a suite of infrastructure assets to drive efficiency and cost improvements. For example, transport management systems are used to effectively manage traffic flow across a road network, which drives productivity by reducing congestion and increasing safety.
- Encourage and adopt innovation. Innovation provides an opportunity to improve outcomes and productivity. Infrastructure payment mechanisms, for example, can better reflect a fairer funding paradigm by encouraging greater user pays and outcomes-based payments. Innovation also means introducing greater competition to the delivery of public services to increase performance and drive efficiencies.
All governments now recognise they can’t increase national productivity without improving their infrastructure. Those governments that can get the most out of their infrastructure, existing and new assets, will have a powerful equation for growth.
This article was originally published in the KPMG Infrastructure Insight Magazine