The Infrastructure Dilemma in Regional Australia

A dependence culture is alive and well in many parts of rural and regional Australia. Experience by AusCID in the IIIS project demonstrated that many project proponents retain the expectation that government funds should be available for working-up their project concepts or for doing pre-feasibility studies. Although this view is changing slowly, it will take more time to comprehensively change the "handout" culture that currently prevails.

Governments have reinforced the new paradigm that private funding will be required but the gap between rhetoric and reality will not be bridged overnight.

The "Orphan" Syndrome describes projects which fall between economic and financial viability. Budget conscious governments point regional development agencies to private sector financing to take up new opportunities while private investors point to inadequate returns or unacceptable risk to decline them. The challenge is to identify new ways in which orphan projects can be carried forward through private funding, public funding or a mix of both. One possibility would be to bundle individual sub-optimal projects into one ownership or development entity to create a single project capable of offering a lower risk profile or lower structuring and financing costs per output unit. Related to this is the need to introduce institutional reforms to address the inflexibility inherent in certain ownership structures, especially by quasi-government trusts and agencies, and planning and approval mechanisms, including tendering processes. Australia needs to develop working models for public/private partnerships.

Taxation is also particularly inflexible and onerous in relation to private infrastructure investment and these impacts are magnified in smaller projects. Partly this is due to the country’s federal system. Business taxation reform may deliver improvements and open the way to co-funding by public and private sectors or to shadow payments by public agencies to underpin private investment. This would open the way to an Australian "Private Finance Initiative", a mechanism devised in the UK to bring private capital and expertise into public infrastructure projects.

Incentives, Grants, Subsidies or Patient Capital have a role to play in supporting private investment in rural and regional infrastructure with a high social or environmental return. However governments have not implemented transparent or consistent methods for assessing these externalities or for allocating limited government finances to deserving projects.

A useful adjunct to the recent Review of Business Taxation would be a formal analysis of the role and optimal design of these support mechanisms for infrastructure delivery into rural and regional Australia. Of particular importance is the desirability of not subsidising consumption of services but rather subsidising the means of delivery (pipes and rails).

Retention in specialised investment funds of a proportion of the savings generated in a region for reinvestment in that region's infrastructure may provide a source of suitably patient capital for such projects but would need to be voluntary. Streaming a proportion of resource royalties to such funds would be a useful start.