A new infrastructure and financing agency, quietly being set up in the Prime Minister’s department, is worth paying attention to.
The agency brings investment banking to government and opens a new phase in infrastructure funding to Australia. It represents a major shift in thinking, with the federal government prepared to use its own not inconsiderable balance sheet to directly fund major projects, opening the prospect of Canberra taking equity in projects it deems bankable.
Canberra commercially funds some projects already through the Clean Energy Finance Corporation and for exporters through Efic. But until now the Commonwealth has typically taken a conservative view on infrastructure funding, preferring to bankroll projects directly through grants and tightly defined appropriations.
This contained risk for the taxpayer — and there have been plenty of infrastructure projects that have lost big money for their investors — but it also limited the capacity to take a more sophisticated investment approach to infrastructure funding. The broad aim is to take the billions Canberra disburses for infrastructure and use that to leverage private investors into a much larger funding pool.
The agency is modelled on the British Infrastructure and Projects Authority and will aim to take commercial funding models and apply them to what is expected to be mostly transport projects.
This model tries to capture the improvement in value that typically comes from new transport corridors, but in a more holistic fashion than the one-off payments developers typically pay. New transport links create major new economic zones and the aim is to try and structure funding around the broader economic value created, rather than the narrower value created by the project itself.
In the case of, say, the new Sydney airport, this means considering the economic benefits that will flow to broader western Sydney, rather than just the increase in development value that comes from land directly adjacent to airport. The task of the agency will be to try and define the investment scope around this broader economic entity, to make these large projects bankable with a mix of federal, state and private funding.
It is pure investment banking and corporate advisory — not capabilities readily found in government.
Planning for the new Sydney-based agency is well underway. The funding details for the agency and the pipeline of prospective projects are to be announced in the upcoming federal budget. The new funding agency is expected to be about thirteen people large and will be recruiting largely from Sydney’s investment banking community.
The concept of Canberra putting its own money at risk was quietly floated ahead of the election last year as part of Malcolm Turnbull’s cities policy. Federal Minister for Cities Angus Taylor has taken carriage of getting it up and running.
Taylor — who is also driving a rebooted approach to government digital transformation — is an alumnus of Port Jackson Partners, a bespoke Bridge Street strategic consultancy. Port Jackson’s alumni include ACCC chair Rod Sims and former management professor and competition guru Professor Fred Hilmer. The core of the new investment approach being championed by Taylor has been distilled among Port Jackson partners over the last couple of years.
The costs and benefits of nation-building
In what was not an auspicious beginning to the new packaged-equity funding approach, the model was given an earlier outing late in 2015. To shore up electoral support in North Queensland, the Commonwealth put $100 million of its own money into the politically inspired Townsville stadium. The deal included state funds of $140 million and $10 million from the local council, with further support from the National Rugby League.
The stadium is reportedly set to lose $170 million over its 30 year lifetime, with the normally rational Taylor reported as saying the Opera House would never have been built if it had to show a positive return.
“Everyone says the cost-benefit [of the stadium] is not high enough, at least in the way it was done, and I say, ‘so what was the cost-benefit on the Opera House? How did that go?’,” Taylor said.
“… It has been transformative, it has been absolutely transformative for the city of Sydney, because what it did was completely change the way the world thought about that city.”
It’s hard to argue with this, but whether Townsville’s new stadium proves to be the Opera House of the north (as one newspaper headline writer dubbed it) is to be seen.
The focus of the agency is going to be transport infrastructure — with Badgery’s Creek in Sydney, Melbourne Metro rail and Brisbane’s cross river rail project expected to be initial targets.
The instinct is that transport is ripe for alternative funding models. Until now funding has been a mix of tolls, fuel excise, motor vehicle licensing and fares. New options are being tested, like hot lanes on motorways that commuters pay a premium to use, which have been deployed on Washington DC’s beltway. Tolls change depending on congestion.
Ubiquitous GPS, widespread internet-connected beacons and driverless cars also offer opportunities to rethink user charges, although the likelihood that any government ever bites the bullet and actually charges trucks properly for the huge damage they cause to road tarmacs, is slim. (Road maintenance is about half the cost of our total annual road bill, and somewhere near abouts of 90 per cent of road damage comes from trucks.)
With capital cheap and the large super funds hungry for long-run projects there is a ready supply of funds the agency hopes to tap. A key to making infrastructure projects attractive is to take the political risk out of these often complex multi-stakeholder developments. The Thames tideway project in London became bankable once the political risks for multiple councils managing sewage were managed.
This implies a much more hands-on approach to project scope and design, in order to bring a far bigger investment pool to the large pipeline of projects waiting for funding — especially in the fast-growing east coast metros. Through various public-private partnerships, state governments have some experience in this type of bespoke development funding and packaging. Canberra has virtually none, so the execution of a model with none other than the Prime Minister’s department holding the keys will be closely watched.
The new agency also faces some resistance from the traditional infrastructure community, some who who are arguing the new funding agency is a solution looking for a problem. In a pre-budget submission on the new agency proposal, Infrastructure Partnerships argued there was plenty of finance and projects, but that the problem was how to generate on going funding to repay the finance.
According to CEO Brendan Lyon, the agency “solves the infrastructure problem we don’t have – and ignores the one we do – a lack of capacity to repay the costs of the infrastructure we need, in that it solves the infrastructure problem we don’t have – and ignores the one we do – a lack of capacity to repay the costs of the infrastructure we need.” The submission goes onto warn the Commonwealth could well end up being the lender of last resort on marginal (my words: politically inspired) projects and perversely could “crowd out” potential investors.
The selection of project candidates becomes critical and will need a much more rigorous and hard-headed approach by the relevant investment committees than has been evident to date (witness Townsville’s new home of rugby league). Nor can there be room for dewy-eyed nation building. How risk is managed, and who ends up wearing the risk, will ultimately determine if this approach can be a game changer to reduce the massive pipeline of mostly transport projects awaiting to be built.
The risk is not trivial. Transport is being heavily and rapidly disrupted — most notably by autonomous vehicles and the explosion in internet connected devices, known as the internet of things. Billions of IoT devices connected by low latency 5G wireless connectivity is a fundamental game changer and how IP-enabled infrastructure actually works is still being sorted — a major unknown that must be factored into typically multi-generational transport projects. That said, it offers real opportunities to manage congestion through dynamic pricing, and in some cases may even remove the need to build more hardware.
Similarly the massive corporate and national race now underway to deploy autonomous vehicles, offers the prospect of transport becoming very much mobility as a service, with fleets of driverless cars available for on-demand use. Some forecasters (eg London’s respected LEK Consulting group) have models showing an up-to-70% decrease in vehicle numbers if car ownership were to be socialised as a result of automation.
That would make a big difference to just how bankable many major road projects will be over, say, a thirty year period.