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Guidance

Has Australia landed on the best way to finance infrastructure?

Has Australia landed on the best way to finance infrastructure?

Australia has some iconic infrastructure and world-class engineering and construction capability but does it have the best infrastructure financing model?

The Snowy Mountains hydro-electric project is one of the modern civil engineering wonders of the world,[1] Sydney’s harbour bridge is the largest steel arch bridge on earth[2] and Melbourne boasts the world’s largest urban tramway network.[3]

And thanks to the government articulating a pipeline of projects, offshore contractors have established offices here. This brings best practice in engineering and construction, increased competition and better value for money.

Taxes, tolls and PPPs

Australia has used various models to finance infrastructure. Traditionally much was financed entirely on the government’s balance sheet.  Sydney Harbour Bridge was one exception, drawing on value-capture (properties benefiting from the new bridge paid a betterment tax for a period)[4] and user-pays (bridge tolls).[5]

Value capture models are still a fledgling concept in Australia but they have become part of the current infrastructure funding dialogue.  Under this model, private sector beneficiaries of new infrastructure contribute part of the additional asset value appreciation towards funding the project that produced that value uplift. We should expect to see this as a partial funding mechanism in the near future, particularly for public transport projects such as light rail.

The toll road experience

Efficient provision of infrastructure isn’t about who has the lowest cost of capital. Rather, it relies on allocating risk to those best able to manage it. One way to conceptualise this is as a continuum of risk with a pendulum moving between the public and private sectors.

The evolution of financing toll roads illustrates what happens when the pendulum swings from one extreme of the risk continuum to the other. Prior to PPPs, government took the majority of the risk. However, for a period, the private sector bore greenfield patronage risk in PPPs, sometimes with unfortunate outcomes for private sector, but not necessarily for the state. The private sector subsequently withdrew for a period, leaving the government to once again fund roads on a pure availability basis.

Now the pendulum seems to have found a more balanced risk-sharing regime between the private and public sectors. WestConnex is a good example.

Learn from mistakes

The lesson from toll roads is that the pendulum shouldn’t swing so wildly along the risk continuum because policy inefficiency results. It is incumbent on the private sector and public sector to keep the pendulum in a narrower band to ensure Australia’s productivity and competitiveness.

It is also critical that the lessons on optimal risk-sharing in economic infrastructure are applied to the provision of social infrastructure.  If infrastructure provision is used to deliver social outcomes, the private sector must be disciplined in the risks it accepts. With the pipeline of infrastructure moving more towards social infrastructure like hospitals and prisons, it is hoped that PPPs will play a larger role.

Learn more www.commbank.com.au/infrastructure

[1] http://www.snowyhydro.com.au/energy/hydro/engineering-facts/

[2] http://www.australia.gov.au/about-australia/australian-story/sydney-harbour-bridge

[3] http://yarratrams.com.au/about-us/who-we-are/facts-figures/

[4] https://bitre.gov.au/publications/2015/files/is_069.pdf

[5] http://www.nfsa.gov.au/digitallearning/constructingaustralia/thebridge/century.htm

Michael Thorpe
Michael Thorpe

Managing Director, Global Head of Infrastructure & Utilities

Michael Thorpe is the Managing Director, Global Head of Infrastructure and Utilities, for the Commonwealth Bank. He is responsible for strategic advice, client relationships and financing across the utilities sector globally. This includes operations in Australia, Asia, Europe, the United Kingdom and the United States. Prior to CommBank, Michael held various executive and analyst roles in project finance at Lloyds Banking Group, Bank of Scotland and Westpac. He has worked in Sydney, Perth, Brisbane and London.