The Infrastructure Dilemma in Regional Australia

Regional development activities in Europe or the USA are often referred to as a guide to how Australia might resolve its developmental challenges. This is a questionable benchmark given population and developmental differences.

As former ALP Finance Minister and man of the land, Peter Walsh, has often intoned in his newspaper columns, rural and regional Australia is very much a victim of the global pressures, technological advances and productivity gains of the commodity sectors it supports. The agricultural and resource sectors are now reshaping their operations to engage a more competitive world. They will ultimately benefit from lower input costs, achieved through taxation reform and successful implementation of competition policy.

Flawed though aspects of its implementation may have been so far, competition policy is the castor oil needed to purge from the national economy decades of sectoral featherbedding. The challenge is to ensure that the patient does not succumb to the medicine while it does its job. Therein lies the most appropriate role for governments - sustain the reforms needed for a competitive Australia while providing safety nets where most needed during the transition.

The Australian Council for Infrastructure Development (AusCID) managed the Institutional Investor Information Service (IIIS) during 1997 and 1998 in an effort to identify infrastructure opportunities in regional Australia suited to private investment. It also sought to build an information bridge to bring these to the notice of institutional investors. At the same time it sought to educate and inform regional sponsors about the needs of private investors to ensure that opportunities offered appropriate risk-reward profiles suited to infrastructure investment - that is, sort out the wheat from the chaff.

From the IIIS project AusCID identified 68 potential infrastructure and related project opportunities in rural and regional Australia. Few, however, possessed characteristics which would label them as "investor ready". A range of deficiencies was evident, either as characteristics of the projects themselves or as a result of insufficient working up by proponents. Here are some of the deficiencies encountered.

There was a lack of coherent information about the quality and quantity of existing infrastructure and inadequate methodology to distinguish between "needs" and "wants" - infrastructure audits and greater pooling of information are desirable.

Benefit-Cost processes were often suspect and did not always adequately assess social benefits or integrate these with other policy outcomes. For example, is Sydney's second airport decision about air transport or is it really about development patterns and integrated transport planning along the eastern coast for the twenty-first century? Further, this type of decision process needs to be integrated more seamlessly among several governments.

Critical mass is absent in many Australian regional infrastructure markets. Economically attractive projects often fall short of financial viability due to insufficient customers to provide a secure revenue base. This can be reinforced by high and relatively inflexible front-end project structuring costs, though the recent Review of Business Tax offers hope of reform in this respect.

Risk profiles of many rural and regional infrastructure services are linked less to local population factors and more to outcomes such as metals or agricultural prices (if key customers are predominantly mines or farms/agribusinesses).

Social and environmental benefits known also as Community (or Universal) Service Obligations may also be high relative to project size. Governments have not applied effective or consistent means to value these objectively or to reimburse private investors through co-payments, subsidies, incentives or grants to meet them. Instead, projects with high social returns currently must be funded exclusively through government budgets. This leads to a "drip-feed" approach and a long wait for many deserving projects. This is changing, however, following the privatisation of telecommunications and a number of public transport systems allowing for faster capital investment. Technology and innovation may also assist in resolving this challenge (eg, gas turbine electricity generation, cogeneration, new water filtration) by offering smaller viable production units.

Marketing and financial skills are often lacking in rural and regional infrastructure project proponents, either through inability or inexperience in conducting relevant market studies and in developing appropriate market strategies. This limits opportunities to stimulate demand growth by developing existing markets or by identifying new markets. Many project proponents also appear unable to address issues such as financial modelling, feasibility studies or business plans.

Politics and Project Sponsorship do not mix well as political pragmatism often distorts perspectives on regional development. The conflict is most noticeable when governments support projects having a direct influence on their political survival. Thus investment that may have an obvious benefit to a particular region can be distorted through sub-optimal timing and location decisions dictated by a political agenda rather than objective development criteria.