Infrastructure Australia, the independent statutory body that advises the country’s government, has published a new report titled Making Reform Happen. In the paper, IA proposes that incentives could be used to catalyse reforms to the financing, building and operation of infrastructure in Australia.
Here are six of IA’s conclusions and recommendations that are most relevant for investors:
- A new system of infrastructure reform incentives
The structure of government in Australia – where states and territories are responsible for the regulation and delivery of most economic and social infrastructure services, while the federal government retains most of the revenue-raising capacity (including income, consumption and corporate taxation) – creates a unique opportunity, IA says, for the federal government to steer states and territories towards reform.
This “vertical fiscal imbalance” could be used to make federal government funding contingent on broader reform actions or policy outcomes, rather than just tied to specific projects as is often the case now. IA calls for the federal government to make additional investments in state and territory infrastructure – over and above existing allocations – in return for the delivery of agreed infrastructure reforms, boosting productivity in the process. The Asset Recycling Initiative was one recent example of this kind of incentive-based funding approach.
But what reforms should this approach be used to support?
- Reforming the urban water sector
One of the most significant potential moves for investors would see the government establish a national urban water reform pathway, with refinements to regulation and government in each state and private participation in the market encouraged “where there is potential for it to improve services and reduce costs”. Over time, IA suggests that further, more radical reforms, should be considered, including moving to a national regulator and fully privatising urban water assets.
Privatisation, it says, should be considered “after a series of no-regrets regulatory reforms that could unlock innovation and efficiency through greater private sector involvement in the short term”. This could lead to an estimated overall increase in GDP per annum of A$1.4 billion ($1.01 billion; €914.35 million) by 2031, and A$1.8 billion by 2047, stemming from outsourcing, public-private partnerships, more cost-effective digital solutions for billing and customer care, eliminating cross-subsidies, and achieving positive rates of return on investment.
The urban water sector is the last major utility to remain almost wholly in public hands in Australia. While privatisation of these assets is clearly some way off, if it happens at all, this potentially represents an exciting opportunity for investors.
- Continuing electricity privatisation
IA recommends furthering the privatisation of Australia’s electricity generation and transmission, arguing that many publicly owned electricity network assets, as well as retail and generation businesses, are “falling short of efficient investment and operational standards”.
In fact, it says that transitioning Australia’s remaining publicly owned electricity businesses to private ownership within a “well-structured, well-regulated market” is a “nationally significant opportunity” to improve the sector’s efficiency and the outcomes for customers.
The scale and scope of needed reform differs from state to state, but IA’s modelling suggests further privatisation, coupled with price deregulation, would generate additional GDP per annum of A$1.7 billion in 2031, and A$2.1 billion in 2047.
- Major changes to road funding
Rather than the current system of fuel taxes and registration fees, IA suggests implementing a direct road charging system to reflect each user’s own consumption of the network. This represents a fundamental change to how roads are funded in Australia.
If implemented, this would normalise the practice of directly charging users for the roads they drive on, perhaps presenting further opportunities for private capital to get involved in road construction and operation. Privately operated toll roads are not uncommon in Australia’s capital cities already, after all.
- More franchising of public transport services
Several public transport services in Australia’s capital cities are already let on a franchise basis, including Yarra Trams and Metro Trains in Melbourne, and numerous bus routes in the different cities – but the majority are still publicly operated, including most of the major rail systems such as Sydney Trains, TransPerth and Queensland Rail.
Under IA’s proposed approach, governments would save money by franchising these services, reinvesting a proportion of the savings into public transport. It estimates that the franchising of relevant public transport businesses could increase GDP per annum by A$268 million in 2031 and A$372 million in 2047.
Lessons from the past
IA argues that previous incentive-based funding approaches, such as the National Competition Policy and the Asset Recycling Initiative, should provide salient lessons for any future reform programmes.
In particular, experience has shown that decision-making regarding payments should be made as transparent as possible, with an objective and accurate assessment of states’ progress used. Deductions to payments due to non-compliance can also act as a powerful motivator, it says, provided they are “proportionate and transparently administered”. The federal government should also be accountable for its role in progressing reforms, which was not the case during the National Competition Policy in particular.
The full report, Making Reform Happen, can be read here.