A way forward: Higher volume, smaller scale projects?

A conundrum for governments the world over is the increasing demand for infrastructure investment. Unfortunately, insufficient treasury funds are a common hurdle when trying to meet such a growing demand. At the same time, private finance investment markets are experiencing an increasing need to find additional infrastructure investment opportunities.

Common economic theory would dictate that combining these two issues should close the infrastructure investment gap. That has been achieved somewhat by the introduction of the Private Finance Initiative (PFI) and Public-Private Partnership (PPP) investment models, but unfortunately the gap still remains. Closing this gap requires more pipeline opportunities to be presented to the private investment market, but it is not as simple as it sounds.

The combination of complex contractual arrangements, long procurement timeframes, high bidding costs and specialised resourcing overheads has meant only large-scale infrastructure projects are financially feasible to the private investment market. But not all of Australia’s infrastructure demand can be met by large-scale infrastructure projects. Maybe one way of addressing this demand is to introduce a higher volume of smaller-scale infrastructure projects to the market?

Assuming financial feasibility issues for both government and the private sector could be addressed, the advent of an additional infrastructure project pipeline market with a higher volume of smaller market-cap projects would have many benefits. Increased competition from a bigger pool of credentialed tier 2-type service providers would bring even better value for money to government.

As smaller-scale projects would be procured and delivered quicker, the potential economies of scale should result in lower overhead costs for the respective infrastructure stakeholders. Politicians could even proclaim more tangible agendas have been realised over their short election timeframes. It sounds promising, but how can the current barriers to entry be lowered to enable these smaller projects to be financially feasible?

One option would be to initiate “less complex” infrastructure projects. Complexity covers many risk areas such as capital expenditure, contractual and financial arrangements, technical design and construction, whole-of-life abatement regimes, environmental issues and political sensitivity. Reduction in the complexity for each of these areas correspondingly reduces the related barriers to entry.

Some examples of complexity reduction could be embracing the use of “availability” revenue models in lieu of “economic/patronage” revenue models for transport sector projects, or fast-tracking less technical infrastructure projects (such as primary schools) to enable easier and quicker delivery to be achieved. By instigating complexity reduction strategies, government procurement agencies could propagate an increasing number of infrastructure opportunities to the Australian market.

In addition to the traditional large-scale infrastructure project opportunities already undertaken, the mature UK PPP market has also progressed down the road of developing a small-scale infrastructure project pipeline. This has subsequently opened up more opportunities within the UK infrastructure market, which has led to a greater number of active, competitive players in the respective infrastructure sectors. The result of more primary infrastructure activity leads to the current point of time where both secondary and tertiary infrastructure markets are now active within the UK economy.

To head down this road in Australia, confidence is needed by both government and private infrastructure stakeholders to reform existing infrastructure delivery methodologies to enable an increase in the infrastructure pipeline opportunities. Only time will tell if this ultimately occurs, but if it does, greater investment opportunities will be available within the Australian infrastructure sector.

Greg Boyer is head of capital projects & infrastructure at Infralink in Sydney