Transport Infrastructure Needs More Funds

We know the key role that continued infrastructure investment plays in sustaining Australia’s level of economic growth. It underpins economic activity and helps to provide opportunities for growth and employment.

I believe infrastructure investment is one of the major challenges facing this nation. There has been some preliminary commentary about what the government might do with future hard-won budget surpluses. Tax cuts are one option that the Government will consider; investment in defence is another.

I believe a strong case can also be made for higher infrastructure investment in the future both as our economy grows, and to facilitate that growth. For example, it is worth noting that the Bureau of Transport Economics estimates that the total transport task in Australia will double over the next two decades.

I am an advocate for strategic investment in the future of our nation.

Government has traditionally provided and operated ‘public’ infrastructure in Australia. The Federal Government invests heavily in roads – some $800 million annually, directly, in addition to significant identified but untied grants to State and local government worth another $800 million per year.

We are investing $250 million in upgrading the interstate rail track, as well as investing in a range of specific rail projects such as the much anticipated Alice Springs to Darwin line.

But governments cannot carry the burden of infrastructure investment alone – and they should not reasonably be expected to. This means we have to get a whole lot smarter in how we go about investing in infrastructure. Today, more than ever, we need private sector involvement in order to meet the infrastructure needs of all Australians.

Private ownership of infrastructure (through privatisation and greenfields investment) has become increasingly possible in the past decade. With more private sector investment now possible, the role of government is changing, although it is no less substantial. Government will always be required to ensure there is efficient infrastructure development by providing network planning, safety and technical regulation and standards enforcement.

And as most of our road network has very low traffic volumes, a large proportion of the network will never be able to operate commercially. These roads are critical to our national and regional development and highlight the need for ongoing government funding.

But there have been changes even in these areas. In the past construction and maintenance work was largely done by government authorities. Today, private firms undertake a large proportion of government funded construction and maintenance work after winning competitive tenders.

Increasingly, private firms are also financing major road projects. Over the last decade, Build, Own, Operate and Transfer – or BOOT – contracts have been used in many infrastructure projects.

Most private road investments have occurred under BOOT arrangements and some have been very large by Australian standards. For example, Sydney’s M2 Tollway, built at a cost of $600 million, is a successful BOOT arrangement.

Another way of facilitating investment currently under consideration by the Commonwealth is the application of public/private partnership models to parts of our arterial road system.

My Department has been examining whether the experiences of other countries are transferable to the Australian situation. One of the options put forward which I consider worth exploring further is what has been called a Public Private Partnership – or PPP. The specific form of PPP I feel may be most applicable to the Australian situation is an adaptation of the United Kingdom experience, also known as the Private Finance Initiative.

Under PPPs the private sector could finance, build, own, operate and maintain a road for a defined term – basically the BOOT arrangement I have already mentioned. One possible adaptation for Australia is that the Government might provide the revenue stream to the private operator through a shadow toll, based for example on a charge per vehicle. Recent developments in the UK include such payments being made on the basis of serviceability and safety of the road over time.

A key factor for the Federal Government in focussing on the PPP approach would be that the primary road network for which we are responsible – the National Highway – has very few sections where the traffic volumes could sustain the traditional form of private sector participation – that is a user toll.

Use of a PPP mechanism could potentially involve dedicating a significant portion of existing Commonwealth roads program funds over the longer term to bring forward important road projects that would otherwise remain on the drip feeder.

The UK experience is that PPP projects deliver savings through the private sector being able to use innovation in the design, operation and maintenance of the road project.

Combine this with the general lowering of overall costs because of the significant transfer of risk from the Government to the private sector proponents and you have the capacity to get a much better outcome with the federal roads budget.

The National Highway and Roads of National Importance programs have built and will continue to build vital transport infrastructure for Australia. But we will be straining to go anywhere near delivering on key projects in the near future that the community has an understandable and legitimate expectation will be built.

Examples include the Toowoomba range crossing; the Western Sydney Orbital, the upgrading of the F3 north of Sydney, the Craigieburn deviation of the Hume Highway into Melbourne and the new connection of the Western Highway to the Western Ring Road also in Melbourne.

Clearly the job is not done. The question is can it be done without the private sector becoming a senior player on the team.

The potential tax treatment of this form of PPP will need to be worked through and therefore the Government will need to finalise its consideration of business tax reform before consideration of any PPP initiative can be taken further.

And I would point out that the Government has indicated its in principle support for the Ralph Report and the vast majority of its recommendations. There are very few exceptions.

The key tax provisions relevant to this type of infrastructure investment are Section 51 AD and Division 16D.

The Ralph Committee recommended that if accelerated depreciation was replaced by an effective life depreciation regime, simpler tax arrangements could be applied to leases over major depreciable assets such as infrastructure. Accelerated depreciation would be replaced by a more appropriate depreciation regime and this would therefore pave the way for repeal of section 51AD.

In addition to the major reforms of the company tax rate and the capital gains tax regime, the Government has announced that rules would be developed for the treatment of leases now caught by Section 51AD and Division 16D.

I expect these to be legislated in the second tranche of business tax reform commencing on 1 July 2001. The Treasurer has already said that the decisions on these second tranche reforms could be made as early as November.

As we work through these issues, I will be focussing on two considerations – firstly, that while it is right and proper for the Tax Office to have a role in clearing the financing arrangements of private sector infrastructure projects, the Tax Office should not be the ultimate determinant of the Government’s transport policy objectives.

And secondly, that in pursuing the sort of PPP approach I have outlined, it would also be necessary to include safeguards to ensure that the mechanism is not used as a vehicle for tax avoidance or abuse.

The Federal Government has also offered a series of tax based concession schemes for major projects. The current program, the Infrastructure Borrowings Tax Offset Scheme (IBTOS) commenced last year.

This scheme falls somewhere between an industry assistance program and the Mansfield project facilitation model.

I am currently reviewing the IBTO scheme in light of the reform of business tax.

The Treasurer also announced as part of our initial response to Ralph that the Government will consider providing investment allowances, along with an expanded strategic investment coordination process, for major projects. Decisions will be taken in due course on how this targeted assistance will be provided, and what form it will take.

I recognise the need for government to play an important role in facilitating infrastructure investment in Australia, be this through partnerships between the private and public sectors or with direct government funding where appropriate. The Government has a wealth of experience in infrastructure investment that is of value to any new project it is involved in.

The continuing availability of quality infrastructure throughout Australia is vital for our continued growth and prosperity. In particular, the availability of quality infrastructure to our regional communities can be significant in providing new opportunities for sustainable economic growth.

Government and the private sector need to work together to provide for all of Australia’s infrastructure needs, with the long-term goal of better services and facilities for the community.