Infrastructure: the new hot topic

Similarly, ABS data on government engineering construction activity shows only modest signs of reductions in infrastructure investment.

Funding for infrastructure investment and operation comes from a variety of sources, including taxation, government debt, user charges, producer levies, and special purpose vehicles like PPPs. Across all forms of economic infrastructure, and all sources of investment capital, it is difficult to obtain an accurate picture of investment trends. It is particularly hard to quantify the level of need for future infrastructure investment, as cost estimates will inevitably be rubbery.

The overall picture, then, for economic infrastructure in Australia is a mixed one. There clearly are major problems, but these are not necessarily generic, and vary from sector to sector. It is by no means clear that any particular government or governments should be blamed for neglecting our economic infrastructure, but all governments need to face up to the major task which now confronts them. We need to identify the obstacles to increased infrastructure investment, and deal with them.

The most common popular explanation for recent infrastructure problems is the heavy emphasis on reducing government debt in recent years. Indebtedness of federal and state governments is at an extremely low level. By 2002-03, borrowings for the various states had reached very low, even negligible levels. Australian government debt is almost the lowest in the OECD.

However, available evidence does not indicate a pattern of shrinking government borrowing coupled with shrinking investment in infrastructure. Between 1996-97 and 2004-05, net debt of state public non-financial corporations has remained relatively stable, according to parliamentary library analysis of the relevant budget papers.

The primary rationale for government debt as a means of financing infrastructure is intergenerational equity. As future generations enjoy the benefits of infrastructure constructed now, it is appropriate that they contribute to the cost.

Moreover, economic modelling by the Allen Consulting Group indicates that of all the available methods of financing infrastructure, government debt is the most economically beneficial, followed by special purpose vehicles like PPPs. Allen Consulting concludes that “the objective of zero debt does not make economic sense”, and “by restricting infrastructure development in the name of fiscal conservatism, the approach of Australian governments has undermined our future economic potential.

In spite of respected economists making this argument, politicians have studiously avoided advocating government borrowing as an avenue to better infrastructure.

The use of PPPs for infrastructure financing is now well-entrenched in Australia, particularly in New South Wales and Victoria, although it is much more established in some sectors than others. Rating agency Fitch notes that in spite of some failures, this method of financing is “perhaps more advanced and more successful than in any other country”.

A vigorous debate has emerged around the appropriateness of PPPs, which are sometimes portrayed as an expensive mechanism for beautifying government balance sheets. The higher cost of capital involved supposedly reflects the assumption of risk by the private developers, which would previously have been hidden in government finances.

Private investment in infrastructure has long been complicated by the existence of s.51AD and Division 16D of the Income Tax Assessment Act. These provisions prevent private developers from claiming interest deductions on borrowings used to invest in infrastructure where they do not exert sufficient control to be deemed the genuine owners. Originally designed to prevent state governments circumventing Loan Council restrictions, these provisions make private investment in public infrastructure significantly less attractive.

Both Labor and Liberal governments have sought to ameliorate the impact of these provisions, through Infrastructure Bonds and the Infrastructure Borrowing Tax Offset Scheme respectively, by means of a rebate equivalent to interest that would otherwise be deductible. Private investors in infrastructure have campaigned for reform of these tax arrangements for many years.