Regulation is also becoming a major influence in private investment in infrastructure. The Howard Government has made much of the recent congestion at the Dalrymple Bay coal terminal, blaming the Queensland Government for inadequate capacity. In fact, the barrier to further investment lies in a draft decision by the Queensland competition regulator regarding the regulated rate of return applicable to access arrangements for new terminal capacity. The long-term lessees of the terminal contend that the level required is too low to justify investing.
Competition regulatory issues are prominent in many infrastructure debates because of the widespread move away from monopoly public sector provision. Productivity Commission Chairman Gary Banks has described this new regulatory framework as “experimental”, and points out that price increases leading to more investment without excessive returns can be positive. The Productivity Commission has proposed substantial reforms to the national access regime for declared infrastructure, to remove inappropriate disincentives to investment.
The Productivity Commission’s recent review of National Competition Policy focused heavily on infrastructure. It concluded that in spite of improvements arising from competition reforms, “significant impediments to competition and efficiency remain evident in several infrastructure areas”.
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Other regulatory issues also affect investment in infrastructure. The absence of a uniform national regulatory regime on issues like safety and communications is often cited as a problem for investment in the rail industry.
Australia has a lengthy history of inappropriate infrastructure investment, driven by short-term political considerations. Although this is perhaps less of a problem than it was in the past, there are still instances of poorly directed investment more designed to build political support than economic development.
The Howard Government’s Auslink strategy has commendable features, such as integrating road and rail investment, but it is carefully designed to enable political considerations to prevail in decision-making. The strategy is built around the concept of a National Network and the notion of long-term transport corridor investment strategies, but it does not commit the federal government to funding any particular part of the network. The federal government has abandoned its obligation to fully fund the National Highway, and all future funding of road and rail will be based on one-off deals with the states.
Auslink renews funding for Roads to Recovery, a program of regional road funding which has funded roads overwhelmingly in Liberal and National electorates. It also dedicates $400 million over four years for strategic regional investments by local councils. The blatant pork-barrelling nature of this program is indicated by the statement that “the Government will give preference to funding applications that are supported by relevant stakeholders”, and the acknowledgment that in some cases benefit-cost ratios will be adjusted “to give greater weight to factors other than economic efficiency”.
The Liberal Opposition’s commitment at the 2005 Western Australian election to build a canal from the Kimberley region to Perth is a reminder of how easily politics can override rationality in infrastructure investment decisions.
Other difficulties for infrastructure investment include planning regulation, mixed public and private ownership across different jurisdictions, the uncertainty surrounding Australia’s approach to climate change, and the need to keep infrastructure operating while it is being upgraded. None of these problems is critical, but they all act to inhibit the process of renewing Australia’s economic infrastructure.
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The overall picture, therefore, is by no means clear-cut. The available evidence suggests that claims of chronic neglect of infrastructure by governments are exaggerated. There are, nevertheless, serious problems which need to be dealt with. Moreover, although recent investment levels may have been reasonably adequate, there are clear signs that higher levels of investment will be required in the near future. Aside from simply spending more money, there are four related initiatives which federal and state governments should pursue:
- increased government borrowing to help finance the renewal of Australia’s infrastructure;
- completion of taxation reform to make infrastructure investment more attractive to private investors;
- further reform of the national access regime; and
- a national Infrastructure Commission, independent of governments, to scrutinise and report on infrastructure projects and financing.
Australian infrastructure has always been funded by private investors, predominantly though government borrowing. The emergence of specific-purpose vehicles like PPPs has changed infrastructure investment, but the need for government borrowing is still substantial. The recent cycle of fiscal consolidation has reached a point where refusal to borrow for infrastructure investment is economically counter-productive.
This is an edited version of a speech to Australian Council for Infrastructure Development on March 21, 2005. The complete version can be found here (pdf file 84.4KB).
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