Private Capital Missing in Action*

* As appeared in Australian Financial Review, 14 May 2018 authored by Garry Bowditch

Turnbull’s 2018 Budget is accelerating the shift to ‘equity’ as its preferred spending weapon in its war on infrastructure inadequacy. Securing a commercial rate of return on investments like Melbourne’s Rail Link, Snowy 2.0 enables government to spend up big without exacerbating budget deficits. But this magic pudding of political ambition and public accounting rules has its limits.

Lessons about big infrastructure projects like NBN are commonplace, aggressive spending followed by weak outcomes. Prospects of commerciality and off budget financing delivering good long-term outcomes do seem fanciful. Bad service, irrelevant products and gold plating are just a few of the modern trip-wires that can cause projects to be uncommercial causing debt and deficit blow ups for future budgets.

Being a monopoly was once a fail-safe inoculation against unhappy customers and competition. New technologies like 5G mobile telephony, batteries for energy storage and autonomous vehicles are creating alternatives to legacy infrastructure. They all point to a future where customers are no longer hostages to poor government decisions because they have other options.

The likelihood of stranded assets in infrastructure is much higher than ever before, so taxpayers need to be vigilant that off budget financing of infrastructure projects is prudent. Transparency is key along with ensuring these projects tap the enterprise and dynamism of private capital to do more heavy lifting in resolving the nations infrastructure challenges.

Too many projects in the Budget are all funded and orchestrated by government which sits oddly with the fact that superannuation funds have significant capacity to invest in infrastructure here and abroad.

This situation demands urgent redress so that the many sources of private capital can be put to work as equity and debt partners. Private capital should be given more of a chance to invest in areas that can earn commercial returns rather than blindly relying on taxpayers to fund infrastructure. Substituting private for public capital will free up government funds for budget repair and targeting community and social infrastructure in areas where commercial outcomes are less likely, but with high impact on liveability.

What is missing in Australia is a much richer and more authentic collaboration model for infrastructure where risk, innovation and customer outcomes are rewarded without the need for big capital spending. OFWAT, the UK utilities regulator no longer rules on capex and opex in respect of water, but leaves it up to the utility and customer to find the right mix. Gold plating is now a relic of history. In its place is a mindset to use capital effectively in the interest of customer and community outcomes.

Australia has lost its edge with world infrastructure leaders. To get back on track the nation needs to incentivise and reward more innovation solutions that are less capital intensive and deliver sooner big customer and community outcomes.

To do that, governments must step back from pulling the big dollar spending trigger and focus on governance reform enabling dynamic and innovative leadership of private capital and community sectors.

For example, there is no doubt the $400m Port Botany rail duplication project is critical but why does the taxpayer have to fund this? The problem is not the private operators, but the willingness of government to step in when other private capital options are possible with the right regulatory settings.

Major airports and now maritime ports that are mostly privately owned or leased along east coast need to increasingly look beyond their front gate and take responsibility and stewardship for the connectedness of their business to the broader economy. No doubt this is hard, especially with urban encroachment, a lack of long term planning make 24-hour operations difficult. But this is exactly the sort of innovation and enterprise challenge private owners and operators should embrace, and be rewarded when they succeed.

The scope for improvement in infrastructure governance is enormous. Creation last year of the Infrastructure and Project Financing Agency is a step in the right direction provided it is an instrument for collaborating with the many sources of private capital available for infrastructure. Equity financing by government can be legitimate provided there is plenty of room for private capital to play a big role in being accountable to customers to flex and adjust over the entire economic life of infrastructure.

Australia is much more likely to get back on the best practice frontier when it heeds the lessons of past reforms. Infrastructure businesses have proven to be far superior to that of projects. Fiduciary boards, light handed regulation and active private investors operating transparently and in concert with customers is what will make every dollar and every talent count towards securing prosperity and well being for all.


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