Speech to the Australia British Chamber of Commerce: The Paradox of Investment in Infrastructure

Introduction
The Australia Britain Chamber of Commerce works to foster the very special commercial relationship between our two countries.

In the field of infrastructure where I have portfolio responsibilities, there is extensive two way trade and investment. In Australia we also watch closely developments in infrastructure policy in Britain.

There is a lot to watch! For example, the massive CrossRail project in London is often cited as an example of the use of value capture – with some of the capital cost is being met by contributions from local businesses and property owners who will derive considerable economic benefit once the new rail line is operational.

We have also drawn heavily on the UK’s ‘City Deals’ model in the recent directions we have signalled on cities policy for Australia.

Now we often hear it said that infrastructure is a highly attractive investment class, particularly in these low interest rate times. Today though I want to speak about a paradox: there are lots of projects which can only proceed when government funding is provided.
I want to make three principal points today: first, to expand upon the attractiveness of infrastructure investments. Then I want to highlight some of the reasons why, despite this fact, much infrastructure still depends on government investment. Finally, I want to speak about the Turnbull Government’s agenda to build the infrastructure that Australia needs – as part of our plan for a strong new economy.
The Attractiveness of Infrastructure as an Asset Class

Let me turn, firstly, then, to the strong investment appetite for infrastructure. For example in 2013 the NSW Government raised $5.07 billion from selling 99 year leases of Port Botany and Port Kembla.1
Australian infrastructure investments are seen as attractive for many reasons: their regular and long-term income streams; the long life of infrastructure contracts; and the fact that any potential competitor typically faces high barriers to entry. 2
Many of these features make infrastructure assets particularly attractive to superannuation funds – which want to find assets that will generate secure returns over the long term. Their members’ capital must support retirement income streams to be paid out many years in the future.

In 2014, Ernst and Young calculated that Australian superannuation funds had invested around $45 billion in infrastructure projects, and that around one-third of Australian superannuation funds participated in infrastructure investments. 3
On average, Australian superannuation funds are estimated to have invested around 5 per cent of their total assets in infrastructure.4

It is not just local superannuation funds; international investors are also interested in Australian infrastructure assets. In August 2015, Sam Pollock, the CEO of Canada’s Brookfield Infrastructure Partners said that his firm will continue to look at opportunities in the Australian market – “this is a market we like”.5

Super funds and other investors have a particularly strong appetite for brownfields investments, where the revenue and other performance features of an asset are clearly established.

But they have also been willing to invest greenfields projects. For example, superannuation funds have invested through the Industry Funds Management consortium in major projects including the NSW M5 motorway, part of WestConnex. Industry Super Network recently estimated that super funds would invest between $5 and 15 billion in new infrastructure between 2013 and 2018.6

Why Much Infrastructure Still Depends on Government Investment

Given some of the factors I have mentioned, it is often suggested that the way to get more infrastructure built in Australia is to tap into our superannuation savings pool – which according to APRA now stands at $2 trillion.7
One example is the Labor Party’s proposal from late last year to establish a ‘Concrete Bank.’

Mr Shorten envisages that, under a Labor government, the government body Infrastructure Australia would administer a $10 billion financing facility
…to provide, if needed, a combination of guarantees, loans, or equity investment to get new projects underway.8

Now one problem with this idea is that it creates a fundamental conflict of interest for Infrastructure Australia. It would change the role of Infrastructure Australia from that of a ‘coach’ to a ‘player’: from a source of objective, independent advice to governments, infrastructure investors and owners to a very different mission.

But even more serious problems have become evident since the idea was announced.

To start with, the Concrete Bank is being asked to do much more work than it has the money to fund. According to Mr Shorten and Mr Albanese, Labor’s $10 billion fund will support some ten different projects – which conservatively have a total capital cost of at least thirty five billion dollars.

In the last few months Mr Albanese and Mr Shorten have been all around Australia spruiking their support for infrastructure projects – while carefully avoiding committing any actual dollar amount. Be it Melbourne Metro, Brisbane Cross River Rail, or other projects – they offer warm words but no dollars.

In February this year for example, Mr Albanese said in a media conference that Melbourne Metro was “the number one priority for federal Labor”. When a journalist asked “How much are you prepared to offer them” – being the Victorian Government – he declined to nominate a figure.

In April of this year, at a media conference in Brisbane, Mr Shorten was asked, “how much are you pledging to the Cross River Rail Project?”

His answer was to say he had previously announced that the way Labor “would break the deadlock in terms of funding for important public infrastructure, roads and rail, is that we would create what we called a concrete bank.”9 He declined to nominate a figure.
The same month, in Perth, Mr Shorten gave a media conference about another project, Perth MetroNet. When asked how much Labor would commit, he said that Labor had previously announced their approach to funding infrastructure and ‘how we could unlock the great wealth which exists in our superannuation funds.” This approach had three components, he said, including “setting up what some in the media call a concrete bank.” He declined to nominate a figure.10

The second problem is that the claimed $10 billion for Concrete Bank does not actually exist. According to Mr Shorten’s speech of 8 October 2015: This facility will be created through the existing $3.6 billion in the Building Australia Fund – and further capitalised with government borrowings, taking advantage of the historically low cost of government debt.11

I have some unfortunate news for Mr Shorten: the $3.6 billion has already been spent on other important infrastructure projects.

The Building Australia Fund is fully allocated to projects including Perth Freight Link, the Northern Australia Roads Programmes, the Western Sydney Infrastructure Fund, Adelaide’s North South Corridor - Darlington Interchange, and, through the Asset Recycling Initiative, Melbourne Metro and Sydney Metro.

This was made perfectly clear in the 2014 budget – so it is strange that Labor did not pick it up. Or perhaps Mr Shorten is proposing to cancel funding to all of the projects I have just mentioned so that he can capitalise his concrete bank? If so, he should come clean with the Australian people about his plans.

The balance of Mr Shorten’s concrete bank is to come from borrowing money. This is something that Labor is always keen to do – but he has failed to explain why it makes sense to borrow more money and set it aside in a fund. Unless of course you are keen to have a presentational gimmick which you can describe as a $10 billion fund.

This brings me to the third and most fundamental problem with what Mr Shorten and Mr Albanese propose to do with the Concrete Bank. The idea appears to be that you can borrow money from the Concrete Bank towards the cost of an infrastructure project – and then that project will generate returns to allow repayment of the loan.

Mr Shorten described it this way:
Labor will establish a $10 billion financing facility for Infrastructure Australia to provide, if needed, a combination of guarantees, loans or equity investment to get new projects underway….Once a project is underway and financeable, Infrastructure Australia could sell its equity or debt interests to long-term investors like super funds.12
In his enthusiasm for this concept, Mr Shorten gives an example: the NorthConnex project in Sydney, which received $405 million from the Commonwealth Government, $405 million from the NSW Government and the balance from private sector investors.
There is onebig problem here: the money provided by the Commonwealth Government on NorthConnex is not a loan or an equity investment – it is a grant.

That means the Government does not get any interest, and it does not get any principal back. So it is completely unattractive as an investment that a superannuation fund, or any other investor, may want to put money into.
The problem with Labor’s concrete bank proposal is that some infrastructure projects generate a revenue stream and a financial return – but most of the projects that Mr Shorten and Mr Albanese are talking about do not.
In particular, public transport projects – light rail and heavy rail – do not generate a financial return. In Australia, public transport typical covers around 30-40 per cent of operating costs from fare revenues. If you are not even covering operating costs, there is certainly nothing left over to contribute towards paying a return on capital – let alone a return of capital.
If we look down the list of projects that Mr Shorten and Mr Albanese claim are going to be funded from the Concrete Bank, not one of them has a revenue stream. Most are heavy rail or light rail projects: such as Melbourne Metro, Cross River Rail and the Gawler Line in Adelaide. The rest are road projects – on roads where there is no toll being charged, such as the Ipswich Motorway, Tasmania’s Midland Highway and the Pacific and Bruce Highway.
Let me hasten to make clear, before the Labor campaign machine seeks to distort my words: I am not for a second calling for tolls on these roads. Nor am I criticising light rail and heavy rail projects – far from it.
I am simply making the fundamental and obvious point – if the Concrete Bank is meant to catalyse private sector investment in infrastructure projects, it will be a complete failure in respect of the projects they have listed unless those projects generate a financial return.
Yet Labor is suggesting that superannuation funds should invest in these projects – and the Concrete Bank will act as a catalyst. Money in superannuation funds is invested with those
funds by working Australians - for the purpose of generating an income stream on which those members can live in retirement.
The suggestion that these funds should invest in infrastructure projects which produce no financial return is grossly irresponsible.
If these projects are not going to generate a financial return – then no superannuation fund trustee should touch them with a barge pole.
Mr Shorten and Mr Albanese must know that – which suggests that this Concrete Bank proposal is an exercise in breathtaking political cynicism.
Of course this is not the first time Labor has made such an irresponsible suggestion about investing in infrastructure. Announcing the National Broadband Network in April 2009, Kevin Rudd promised that it would be “operated on a commercial basis… and involve private sector investment.”
In fact, in one of the most spectacularly incompetent pieces of financial advice ever given by a politician, Kevin Rudd recommended that mums and dads should invest in the NBN, with his press release stating:
The Government’s investment in the company will be funded through the Building Australia Fund and the issuance of Aussie Infrastructure Bonds (AIBs), which will provide an opportunity for households and institutions to invest in the national broadband network.
Labor soon dumped the commitment to private sector investment – after receiving advice in the McKinsey-KPMG Implementation Study that private investors would regard the project as too risky and hence taxpayers would need to provide one hundred per cent of the equity.
Troublingly, though, Mr Shorten and Mr Albanese today are peddling the same fiction that Kevin Rudd tried to peddle with the NBN – that in some way through financing tricks they can deliver infrastructure which does not have to be funded by the taxpayer.
Building the Infrastructure that Australia Needs
Let me turn, then, to the work the Turnbull Government is doing to build the infrastructure that Australia needs.
I want to highlight the extensive number of projects we are funding; the success of our asset recycling initiative in encouraging state governments to withdraw taxpayers’ capital from existing assets to reinvest in vitally needed new infrastructure; and thirdly the policy work we are doing on value capture.
Projects we are funding
The Turnbull Government is funding infrastructure at record levels all around Australia. We are investing over $50 billion for the period 2013-14 to 2019-20 onwards, in critical road and rail infrastructure. In 2016-17 we will spend over $9 billion on transport infrastructure, a record for any Commonwealth Government.
In the recent budget, we made further commitments to the Ipswich Motorway and Perth Freight Link, and provided $115 million for preparatory work on Western Sydney Airport.
We announced a $1.5 billion Victorian Infrastructure Package, with funding conditional on the Victorian Government matching dollar for dollar, including $500 million to upgrade the Monash Freeway and $220 million for the Murray Basin Freight Rail network.
We committed $594 million in additional equity funding for Australian Rail Track Corporation to acquire land for the Inland Rail corridor and continue pre-construction works and due diligence activities.
Let me highlight just a few of the biggest projects around the country:
 $5.6 billion for Pacific Highway duplication from Sydney to the Queensland border, with $1.37 billion to be provided in 2016–17.
 1.5 billion plus a concessional loan of $2.0 billion for WestConnex in Sydney, with $300 million to be provided in 2016–17.
 $1.7 billion towards the Sydney Metro Project under the Asset Recycling Initiative
 $857.2 million towards the Melbourne Metro Project under the Asset Recycling Initiative
 Up to $6.7 billion to upgrade the Bruce Highway with $558.1 million to be provided in 2016–17.
 $518.4 million for the Moreton Bay Rail Link with final $100 million to be provided in 2016–17
 $1.2 billion for Perth Freight Link with $207.7 million to be provided in 2016–17
 $490 million towards the $2 billion Forrestfield Airport Link rail project in Western Australia
 $788 million for the Northern Connector in Adelaide with $84 million to be provided in 2016–17.
 $600 million for the Northern Australia Roads Package with $100 million to be provided in 2016–17.
Asset Recycling Initiative
I want to speak for a moment about the particular importance of the Asset Recycling Initiative.
All Australian governments are facing challenges in meeting the demand for infrastructure, particularly in the face of competing budget pressures.
In New South Wales Government the O’Farrell and Baird Governments showed great leadership with a vigorous program to withdraw public capital from mature infrastructure
assets such as electricity distribution networks and ports, to reinvest in vitally needed new productive infrastructure.
To encourage such approaches around Australia, the Commonwealth established the Asset Recycling Initiative, which offered any state or territory government taking such an approach a further financial contribution towards the new productive infrastructure in which it invests. The contribution was set at 15% of the total amount raised by the state or territory government through, for example, the proceeds of a sale or long term lease of an asset.
This has been a conscious and strategic effort to address the problem that many infrastructure assets do not generate a revenue stream and therefore cannot attract private sector finance.
Labor’s Concrete Bank proposal tries to pretend this distinction does not exist; the Coalition by contrast recognises the distinction and has taken action.
The Asset Recycling Initiative has been a creative and innovative approach to encourage state governments to source capital for new infrastructure from their existing pool of assets, by providing additional financial support to those which do so. The clear intention has been to incentive responsible behaviour by state and territory governments – and it has worked very effectively.
In the recent budget, substantial amounts were allocated to the governments of New South Wales, Victoria, the ACT and the Northern Territory under this program. For example, major new rail projects such as Sydney Metro and Melbourne Metro received commonwealth of $1.7 billion and $857.2 million respectively.
It was interesting to see the complaints from the Queensland Labor Government after the budget. Queensland received no funding from the asset recycling initiative because it failed
to recycle any assets. Queensland Treasurer Curtis Pitt said the Turnbull Government was trying to “blackmail” Queensland into selling assets.13
Let’s be clear: the Queensland Labor Government had a choice. It could have done as other state and territory governments, Labor and Liberal, have done, and withdraw taxpayers’ capital from mature infrastructure assets to reallocate to vitally needed new infrastructure. Indeed the Palaszczuk Labor Government did not need to do any new work to make this happen; it merely needed to continue the program that the previous Newman LNP Government had established.
Instead Queensland Labor followed the instructions of the union movement and tossed aside all the work the Newman Government had done. Queenslanders have been left worse off as a result.
Value Capture
I want to turn finally to another creative approach the Turnbull Government is pursuing to the question of how capital is to be sourced to fund infrastructure projects which do not generate a revenue stream – such as new rail projects.
Now few would dispute the proposition that well designed and located transport infrastructure can sharply increase land values.
By taking the right approach to value capture we can create a win-win proposition – in which landowners contribute towards the cost of new infrastructure but in exchange receive an increase in value which greatly exceeds the amount of the contribution.
But a great deal comes down to the design of the value capture mechanism.
Let me give one example. The Turnbull Government has committed to build the Western Sydney Airport at Badgery’s Creek. We have also announced, jointly with the New South Wales Government, a scoping study into the rail needs of Western Sydney and Western Sydney airport: what route should a rail connection take, when should it be built, and how should it be funded?
If you own land in Western Sydney, the value of that land will be greatly enhanced if there is a railway station close to your land. It will be enhanced even more if the land around the railway station is zoned to permit, for example, multi-story apartment blocks, commercial shopping areas and the like.
A mechanism under which land owners can contribute to the cost of a railway line and station, in this situation, could be a win-win outcome. This is not just a theoretical proposition: I know that people who own land around the airport are thinking this way because they have come to see me and other Ministers.
Nor is it just the Coalition which is considering these issues. Labor Infrastructure Spokesman Anthony Albanese has indicated his belief in the potential of value capture to support the funding of a potential rail line to Western Sydney Airport.
In a press release recently he called Western Sydney Airport a ‘golden opportunity to utilize value capture’ and proposed a specific mechanism.14 He wants to include the cost of the proposed rail connection to the airport in the capital cost of the airport and recover the cost through leasing out airport land to users at elevated lease prices which reflect the value generated by the rail line.
I am rather sceptical of this particular mechanism for a range of reasons, including that the Commonwealth owned land at the site is likely to be needed to a very large extent for
aviation related activities rather than being available to lease to other businesses. But it does illustrate one important point: the principle of value capture can be given effect to by a wide range of mechanisms.
Mr Albanese also likes the potential for value capture in other contexts. Here is what he said on Adelaide radio about a tram proposal in that city, in answer to the question of whether the private sector needed to be involved.
Of course it does, and one of the things that would happen with such a project is that you would have uplift value along the route, so you’d look at ways in which you could get some private sector financing into the project.15
Let me repeat what I said in a recent speech to the Property Council in Brisbane. If value capture simply ends up as the justification for more up front charges being levied on a lot – when there is no discernible benefit derived in exchange – then we will not have achieved very much when it comes to stimulating the provision of the infrastructure our country needs.
That is why there is plenty of work ahead to determine particular mechanisms which could be used to give effect to the principle of value capture. This is an important element in the Smart Cities paper we released recently.
Should we be returned to government, we will build on this work with a discussion paper seeking views on potential value capture mechanisms – and specifically the important question of what the Commonwealth might do to encourage the use of these mechanisms by state and local government. After all, it is generally these levels of government, not the Commonwealth, which holds the specific powers in relation to property, zoning and other matters.

Conclusion
Let me conclude, then, by returning to the observation that infrastructure is somewhat paradoxical. On the one hand there is strong investor demand for infrastructure; on the other hand there are many infrastructure projects, particularly road and rail, which do not generate a revenue stream and hence will not attract private sector investment.
The Concrete Bank proposal from Mr Albanese and Mr Shorten cynically glosses over this fundamental distinction. It is nothing more than a presentational gimmick designed to disguise the fact that they want to announce lots of projects but do not have the money to pay for them.
By contrast the Coalition has introduced specific and effective policy mechanisms, such as the asset recycling initiative, to attract more capital into infrastructure. We have work underway on other mechanisms such as value capture, which we believe have the potential to supplement the billions of dollars we are spending on vitally needed infrastructure all around the country.
Modern, well designed infrastructure is critical to our national productivity and efficiency and the liveability of our cities and towns. That is why the Turnbull Government is investing $50 billion in infrastructure – to generate jobs and growth for Australians.
We have a clear, well-developed plan – and we are campaigning to be returned to government so we can get on and implement it.

1 Sean Nicholls, Ports sale adds $4.3b to coffers for key projects, Sydney Morning Herald, April 13, 2013, Sean Nicholls, http://www.smh.com.au/action/printArticle?id=4187194, downloaded 12/5/16
2 R Bianchi, M Drew and T Whittaker, The Predictability of Australian listed Infrastructure and Public-Private Partnership Returns Using Asset Pricing Models, 2014, p. 2. http://www.superresearchcluster.com/__data/assets/pdf_file/0005/106493/cp1wp1-the-predictability-of-australian-listed-infrastructure-returns-using-asset-pricing-models-1.pdf
3 Ernst and Young, Superannuation investment in infrastructure – steps to further efficiencies, 2014, p.7. http://www.ey.com/Publication/vwLUAssets/EY_-
4 OECD Working Paper No. 32, Pension Fund Investment in Infrastructure: A Comparison Between Australia and Canada, 2013, p.4. http://www.oecd.org/pensions/pensionfundinfrastructureaustraliacanada2013.pdf
5 Ibid.
6 Industry Super Network, Building Australia: Super investment initiative, June 2013, p. 3 and p. 12. http://www.industrysuperaustralia.com/publications/reports/building-australia-super-investment-initiative/
7 http://www.apra.gov.au/Super/Publications/Documents/2016QSP201512.pdf
8 http://www.billshorten.com.au/address-to-the-queensland-media-club
9 Bill Shorten, Transcript – Doorstop Interview, Thursday 7 April 2016
10 Bill Shorten, Transcript – Doorstop Interview, Tuesday 5 April 2016
11 Bill Shorten, Address to the Queensland Media Club, 8 October 2015
12 Bill Shorten, Address to the Queensland Media Club, 8 October 2015
13 “Qld forgotten in federal budget: Pitt”, Melbourne Herald-Sun, 3 May 2016, http://www.heraldsun.com.au/news/breaking-news/qld-govt-demands-1b-for-cross-river-rail/news-story/ace102a113defb90548ab32f5f94e192
14 http://anthonyalbanese.com.au/government-confirms-new-airport-will-have-no-rail-link, 7/3/16
15 Apr 13, 2016, Transcript of radio interview – FIVEaa Adelaide, Subjects: AdeLINK tram proposal; public transport funding; Whyalla steelworks, http://anthonyalbanese.com.au/transcript-of-radio-interview-fiveaa-adelaide-2