Australia’s virtuous cycle

Redistribution of tax proceeds from federal to state government should help drive more privatisations.

Voting for the Infrastructure Investor annual awards 2013 is in full swing (to register your own votes, please click here). With just over a week to go until the poll closes, it’s too early to identify winners – but it seems a fair bet that a few trophies will be heading Down Under.

Infrastructure Investor was recently in meetings with industry professionals in Sydney and found they had plenty to smile about. This could in part be attributed to Australia’s trouncing of England in the Ashes cricket series. But there was more to it than that – above all, they were delighted by an increase in infrastructure deal flow and by the innovation that was driving it.

In this column last year, we noted that the phrase “capital recycling” was becoming popular in Australia – referring to the process by which money raised from the sale of government assets to the private sector was being used to help fund new infrastructure. This undoubtedly served to bolster the image of private sector buyers, who could be viewed as part of a “virtuous cycle”.

Now comes a new form of recycling – this time in relation to tax. Towards the end of last year, the state governments reached an agreement with federal government by which corporation tax paid by private buyers to the federal government on the purchase of a state-owned asset will be “recycled” back to the states in the form of a so-called “tax equivalent incentive payment” – as long as the money is set aside to build new infrastructure.

New South Wales treasurer Mike Baird, who promoted the measure, had argued that the corporation tax was an undeserved windfall for federal government at the expense of the state which had sold the asset. In a way, therefore, it could be seen as simply righting a wrong rather than a dazzling new innovation.

Regardless, there are at least two welcome outcomes. Firstly, there is a clear incentive (or, rather, the removal of a disincentive) for states to get on with the job of selling off assets and providing some relief for their bruised budgets.

Secondly, given the productive talks between Baird and federal treasurer Joe Hockey, here is evidence that central and state governments can co-operate productively – something that infrastructure professionals were hoping for once Australia’s election last year delivered a federal government of the same political stripe as key states such as New South Wales and Queensland.

As you will discover from our Australia Report accompanying the February 2014 edition of Infrastructure Investor, not all is rosy. Familiar themes from other markets are present here too – a surplus of competition for larger assets and procurement processes that are too protracted, for example. But there is plenty of room for optimism – and it stems from the kind of innovation that other countries could do well to pay close attention to.

P.S. A very happy new year to all our readers, and may 2014 deliver whatever it is that tops your wish-list!