President Trump’s infrastructure plan last week is pitched in the language of the can do. Not only does it aim to unleash over a trillion dollars of investment, it promises a major project bonanza that will have Prime Minster Turnbull’s business delegation salivating at the prospect of getting a cut of ‘Making America Great Again’.
Massive tax cuts, surging military spending and now an unfunded infrastructure plan is a potent Manhattan cocktail for US economy to digest.
Despite a decade of best endeavours from the US Federal Reserve, President Trump has managed to do what quantitative easing never did, rekindle inflationary and animal spirits.
Observers of the Australian delegation visit must see through diplomatic pleasantries, and recognise the unique opportunities from the heightened interest of the US in Australian infrastructure. Deep superannuation pockets and policy experience can assure the nation a place at the President’s table, but we must be open that the lessons are two way.
The US outperforms Australia on innovation, productivity and finding better use for existing infrastructure. It has achieved this because of many reasons including the harsh reality that money for public infrastructure has been very scarce.
‘Necessity is the mother of invention’ simply rings true when it comes to US infrastructure. But there is no doubt the US has sweated its infrastructure to within an inch of its life. The time for renewal is overdue. Australia on the other hand is the mirror image of the US, where availability of big dollars has breed a cavalier build first mindset.
It will not be a day too soon, when strong investment and robust economic growth is the reason that Australia can jettison its low inflation, low bond yield economy. We must be sober to the reality that a decade of cheap money has not resolved any fundamental infrastructure challenges.
The hollowness of big project proponents that over promise and under deliver has contributed to higher costs and lower service quality. Meanwhile, declining liveability in cities and regional centres reflect the neglect of community infrastructure that is in a permanent state of disrepair.
Inflation heightens investor sensitivity to the time value of money especially when it is locked up for decades in big infrastructure projects. Higher inflationary risks will be critical in reawakening institutional investors to greater diligence in the scrutiny of investments so they are well placed for the long term.
Australia continues to choose projects that are not accretive to long-term economic growth or improved liveability, despite independent infrastructure agencies giving assurances the problem is fixed.
Government led NBN is an unfolding case study about what is wrong in Australia, while inland rail, Snowy 2.0 and Western Sydney Airport might be well intentioned projects but rightly trigger taxpayer anxiety.
Getting the global economy back on track to economic normality with moderate inflation and presence of future inflationary risk will help discipline infrastructure decision-making and invite stronger long-term stewardship.
That is where asset owners and operators continuously lift their game, develop new services, and secure revenues through better services with less reliance on automatic CPI plus increases in prices.
Owners and operators must be better incentivised to innovate, work towards earning customer loyalty and trust that lowers risks of operation, opens new investment opportunities and strengthens financial performance for investors. Governments can do more in ensuring project concession deeds and regulation enable operators to innovate and meet long-term customer needs.
While the promised benefits of President Trump’s infrastructure plan may dazzle some, Australia needs to play the long game in US where exemplarily customer led infrastructure is what distinguishes us, not just deep superannuation pockets.
If infrastructure investors and owners in US and Australia fail this 21st century balancing act between debt obligations, equity returns and keeping customers happy then the alternative is readily apparent. Jeremy Corbyn’s agenda to renationalise large chunks of UK infrastructure is a timely reminder of what is at stake.
*Published in the Australian Financial Review 21 February, 2018.