Speech to the Australian Financial Review Infrastructure Conference

The future of Australia’s infrastructure is a topic of immense economic and public policy importance. I congratulate the AFR for organising this conference – and I welcome the opportunity to speak at it.

The Turnbull Government has a strong policy agenda when it comes to infrastructure. Several of my colleagues including Josh Frydenberg, Minister for Northern Australia, and Angus Taylor, Assistant Minister for Cities, have spoken to you about their work in the infrastructure space.

There is near universal political agreement about the importance of infrastructure – as essential to the safety and reliability of our transport networks; as a platform for the liveability of our communities; and as an enabler of economic growth and efficiency. 

But there is a considerable disagreement over how best to plan, fund and operate such infrastructure.

In my remarks today I want to focus on three important priorities for the Turnbull Government when it comes to infrastructure.

The first is the importance of long term planning and a consistent approach.

The second is how best to engage with the private sector and attract private capital – where there are important opportunities.

Thirdly, I want to talk about procurement and how best to get value for money on the major projects – where there are some significant threats.

The importance of long term planning and a consistent approach

Let me start with the Turnbull Government’s commitment to better planning of infrastructure investment through the work of Infrastructure Australia.

Infrastructure Australia’s brief is to provide expert, evidence-based advice to plan and prioritise infrastructure projects, and to encourage private-sector investment by providing certainty and stability in planning.

The organisation has made good progress in this task, reflecting in part our 2014 reforms to IA’s structure and operations, establishing it as a truly independent statutory authority, governed by an independent board.

In 2015, IA delivered Australia’s first top-down audit of nationally significant infrastructure.

Earlier this year, IA issued its fifteen-year Australian Infrastructure Plan. A key element of the Plan is identifying infrastructure projects which are priorities for Australia, through preparing the Infrastructure Priority List.

When released in February, there were 93 projects on the list. But it is a living document and already projects have been added, and others have been removed, typically because they have moved on to the construction stage.

This List is an important step towards better national coordination.

We believe that setting out a list of priority projects will help all stakeholders – private sector participants as well as all three levels of government – to work together towards delivering projects.

One good example of the importance of long term planning for infrastructure is Western Sydney Airport. The area around the airport site at Badgery’s Creek has been protected from incompatible development for nearly 30 years.

After the Coalition Government made the decision in 2014 to proceed with building the airport, we began the next stage of work with a view to the airport being operational by the mid-2020s. In this year’s budget, we have allocated $115 million towards essential site preparation works, as well as designing the rail infrastructure to be built within the airport limits.

Western Sydney Airport has enormous economic potential.  To capture that potential, it is critical that we work closely with the NSW Government and with local governments in Western Sydney. And, of course, we need to work closely with the private sector, both in terms of building the airport and in promoting the commercial, residential and industrial development that will surround it.

An important aspect of infrastructure planning is the work of Infrastructure Australia in reviewing the business cases for major projects where Commonwealth funding is sought.  If the Commonwealth is to invest more than $100 million, there must be a cost-benefit analysis.

This is an important discipline, because not every project which gets put forward should be funded. With finite dollars available to spend on infrastructure, it is important that we allocate that funding to the projects delivering the highest return to the community.

Unfortunately, there are some challenges to a long term planning approach. I want to mention a couple of issues which concern me here.

The first is the increasing political hostility to major urban motorway projects from inner city Greens voters and in turn Labor politicians. This has resulted in a lack of consistent political commitment to such projects.

We saw this in the 2014 Victorian state election – when Labor came out against the East West Link project as it sought to win two inner city seats.

Contracts were signed and the project was underway when Labor came to power – but the Andrews Labor Government tore up the contracts.  The impact upon investor confidence has been significant.

More recently federal Labor has hit reverse gear on its previous strong commitment to the WestConnex motorway project in Sydney. In the 2013 budget, the then federal Labor Government committed $1.8 billion to WestConnex. Then Infrastructure Minister Anthony Albanese said the project would help “western and south-western Sydney residents to cut back on travel times and improve the quality of life they can enjoy with their families.”

But that was before Albanese’s seat of Grayndler was affected by the 2015 federal redistribution in NSW – exposing him to a serious challenge from the Greens.

This has led to a sharp change in Labor’s position.  Recently, Mr Albanese told a public meeting in his electorate that ‘if I am the transport minister there will be not one dollar from the federal Labor government for this WestConnex project’.

Perth Freight Link, another high priority project on the Infrastructure Australia priority list, will also be cancelled by a Shorten Labor Government.

This new found hostility to major road projects is occurring in the face of clear advice from federal and state government specialist infrastructure advisory bodies. Perth Freight Link and WestConnex, for example, are both rated ‘High Priority Initiatives’ by Infrastructure Australia.

The Coalition believes that infrastructure projects should be assessed on their merits: road or rail, city or country, what we want to know is what the expert advice says about the project. We do not have a preconceived view that one or other transport mode is superior; each has an important role.

Another concerning example of a lack of consistent political direction on infrastructure is seen with the NBN – the largest infrastructure project in the country with a $29.5 billion equity investment from the Commonwealth.

This week the Labor Party announced its intention to overturn the clear plan that the NBN company is currently executing.

History records that Labor’s stewardship of the NBN was chaotic.  After six years of the Rudd-Gillard-Rudd Government, barely more than 300,000 premises around the country were able to connect to the network.

As Communications Minister, Malcolm Turnbull led a remarkable turnaround.  Today, NBN is delivering consistent performance against its stated targets; it has met or exceeded those targets for eight quarters in a row. In less than three years, over 2.5 million premises can now connect and that number is increasing by 30,000 a week.[1]

Labor now proposes an abrupt change in direction, to sharply increase the share of fibre to the premises connections.  It would cost billions more and very seriously delay the rollout. Perhaps most concerning is the time that would be lost in winding down the current approach and transitioning across to the new approach.

When you see such sharp changes in direction proposed at the political level, that seriously undermines the capacity for consistent execution at the operational level against a rational plan.

How best to engage with the private sector

I want to turn next to the question of how best government should engage with the private sector – and in particular how best to attract additional private capital.

In a paper earlier this year, the John Grill Centre at Sydney University made some recommendations about the contracting relationship between government and the private sector.  It argued that that governments should seek to be buyers of infrastructure services, not assets. This argument reflects the increasing trend towards governments entering into public private partnerships, under which there is a stream of contractual payments for the ‘availability’ of the infrastructure facility – be it a road, a hospital or a school.

But the paper also argued that the service government seeks could be specified much more carefully in the contracts we enter into. Rather than a road, what we really want is for citizens to be able to travel between two points in a certain time, and to do so reliably – that is, we care not only about the average journey duration, but also the variance or standard deviation around that average.

The John Grill Centre argued that, to achieve an objective on journey times, for example, government could contract with a road operator to allow different classes of service at different price levels.

These arguments highlight the importance to our national infrastructure outcomes of the way that government engages with the private sector. I want to focus particularly on how best we attract additional private capital into infrastructure.

This is an objective for which both sides of politics express enthusiasm.

Labor, for example, in the Economic Plan it issued last week, restated its commitment to a $10 billion ‘concrete bank’.

Speaking last year, Mr Shorten said:

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.[2]

Earlier this year, he commented that this plan sought to answer the question of ‘how we could unlock the great wealth which exists in our superannuation funds.”[3]

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.

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 Labor has talked about do not.

In particular, public transport projects – light rail and heavy rail – do not generate a financial return. In Australia, public transport typically 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 Labor claims would be funded from the Concrete Bank, not one of them has a revenue stream. Most are multi-billion dollar heavy rail or light rail projects: such as Melbourne Metro, Cross River Rail in Brisbane 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 Labor has listed unless those projects generate a financial return.

Certainly no superannuation trustee is going to invest in a project like Melbourne Metro if it has the normal return characteristics of public transport projects in Australia.

Mr Shorten and Mr Albanese must know that – which suggests that this Concrete Bank proposal is nothing more than a presentational exercise.

If Labor’s Concrete Bank is not the answer, how then should we seek to stimulate greater private sector investment in new infrastructure? One successful approach has been the Coalition Government’s Asset Recycling Initiative.

The Asset Recycling Initiative rewards state and territory governments that withdraw capital from existing revenue-generating infrastructure and reinvest it in new projects.

It has stimulated state and territory governments to attract private capital into brownfields infrastructure assets with stable, proven cashflows, like ports and electricity networks.  State governments have then been able to recycle this capital into vitally needed new infrastructure – with a 15 per cent ‘top up’ from the federal government.

Under this policy, more than $3 billion has been provided for new infrastructure projects in New South Wales, Victoria, the Northern Territory and the ACT, including $1.7 billion towards Sydney Metro and $857 million towards Melbourne Metro.

Another approach to attracting private capital that the Turnbull Government has highlighted is the use of value capture.   This approach is based on the fact that new transport infrastructure typically drives significant increases in the value of land located nearby – around the stations located along new rail lines, for example.  If a share of this increased value can be tapped to contribute to the capital cost of the rail line, this may allow the line’s construction to be funded much earlier than would otherwise be possible.

There are many possible models.

One was described by Will Dwyer, Head of Strategy at the large industrial property company Goodman, in a presentation he gave at the Turnbull Government’s cities workshop recently. 

He spoke about land owned by Goodman at the Eastern Creek employment hub near the M7 in Western Sydney.  To unlock 160 hectares of its land – and 250 hectares of land owned by others – Goodman funded a $23 million four lane industrial road. Without this there could be no construction on the land – and no employment generated.

Yet another model is where developers contribute towards the capital cost of a new rail line, or a station along the line, through charges linked to the zoning of land around the station which allow the construction of apartment blocks, or commercial buildings such as a shopping centre.  Alternatively, a developer might commit to build the necessary roads, car parks and other supporting infrastructure around a station.

Businesses, councils and other stakeholders have raised with me, and with other Turnbull Government Ministers, models of these kinds in discussions over the last few months.  They are keen to join the conversation Prime Minister Turnbull has initiated about how we can secure additional capital towards the cost of vitally needed transport infrastructure – and integrate that infrastructure with urban planning.

If we think about a market for a supply of transport services which benefits a particular piece of land (or its occupiers) all too often there has not been a process within which land owners can state their willingness to pay, and a potential builder of transport infrastructure can state a price that it would charge.  In effect, there has been a form of market failure. 

The Turnbull Government stands ready to work with states and local government on better ways of addressing these issues, in part through coordinated land use planning and infrastructure investment strategies.

We have stated our interest in working with the Victorian Government on the value capture possibilities for Melbourne Metro (and committed $10 million of funding.)   We are interested to apply this approach in western Sydney to support our investment in Western Sydney Airport. 

The Queensland Government has said it wants to explore value capture approaches with the Cross River Rail project, and here too we are interested to engage on these issues.

Of course it is very important that we make urban planning decisions which serve the greater good – not just the private commercial interests of a particular developer.  But consistent with that principle, it is important that we explore realistic methods of attracting private sector funding to infrastructure that would otherwise rely solely on public funding.

Procurement and Value for Money on Major Infrastructure Projects

Let me turn in the final portion of my remarks to the question of how governments can get the best value for money for taxpayers as we invest in infrastructure.

In 2016-17, the Commonwealth Government will invest nearly $10 billion on transport infrastructure - the largest ever annual investment from any Commonwealth Government.

Naturally therefore we are critically interested to make sure that we get as much for the money as we can.

A recent Transport and Infrastructure Council meeting in Adelaide reviewed benchmarking work on the cost of procurement across various jurisdictions in Australia. The benchmarking demonstrated a wide range of prices paid for equivalent projects – from around $2 million to nearly $10 million per lane per kilometre[4].

Clearly, there is an opportunity to substantially improve performance on some projects and get better value for the dollars we are investing.

Of course, the economic importance of proper procurement processes in the construction sector goes well beyond government; it extends right across our economy.  This sector is fundamental to our economy and generates 7.7 per cent of our gross domestic product.[5]

Unfortunately the construction sector is marked by aggressive union activity, particularly from the notorious CFMEU. 

Weakened competition and the use of pattern industrial agreements has made Australia a high cost construction market. Australia’s ranking in the IMB World Competitiveness Yearbook has slipped from 5th in 2010 to 17th this year, underscoring the challenge in attracting international investment.

The effect of cost increases is most pronounced on union worksites. As Master Builders Queensland has noted, a unionised worksite can add up to 30 per cent to the cost of construction[6].

A recent report by Deloitte for Master Builders Victoria analyses the impact of the CFMEU’s aggressive industrial tactics on the infrastructure spend of the Victorian Government.[7]

Wage gains under union-negotiated enterprise bargaining agreements (EBAs) out-paced the Victorian construction industry average by 13 per cent between 2007 and 2015. [8]   

Deloitte pointed out that this 13 per cent difference in labour costs, without productivity increases, would mean that over four years the Victorian Government would need to spend an extra $621 million to purchase its planned amount of infrastructure. 

There is a direct linkage between the CFMEU’s industrial approach and the cost of public infrastructure investment.  If we are paying more than we should for the construction costs on major projects, we get less for each dollar invested. 

The CFMEU has a long-standing reputation for breaking workplace laws. In recent times there have been over 100 representatives of the CFMEU before the courts for unlawful workplace activities.

It was these factors which led the Howard Government to establish the Australian Building and Construction Commission.  It operated from 2005 to 2012 and was effective at driving improvements in the sector.

ABS data shows productivity in the construction industry grew strongly while the ABCC was in operation. Both labour productivity and multifactor productivity in construction outstripped the same measures in other industries during this period[9]. 

Of course, the Rudd-Gillard-Rudd Government abolished the ABCC in 2011-12.  Since then, the rate of industrial disputes in the construction sector has increased by 35 per cent, compared with a fall of 32 per cent for the All Industries average[10]. 

There remains a need for strong regulator to address the problem of unlawful conduct in the construction sector – so the Turnbull Government has made re-establishing the ABCC a priority.

If returned to Government on 2 July, the Turnbull Government will prosecute the case for re-establishing the ABCC in a joint sitting of both houses of Parliament.  I need hardly add that a Labor Government is most unlikely to do anything about tackling the criminality and thuggery of the CFMEU – which is after all a major provider of political donations to Labor and the Greens.

As the Minister for Major Projects, I strongly support the Turnbull Government’s policy.  If we can root out union thuggery, corruption and criminality, that will have many positive social and economic dividends – and one of those will be getting more infrastructure built for the dollars we spend.

Conclusion

Let me conclude with the observation that there is wide agreement about the importance of investing in infrastructure – but a significant difference of opinion about how best to deliver that investment.

The Turnbull Government has a strong focus on how best we engage and partner with the private sector.

We are promoting careful and considered planning through Infrastructure Australia to ensure projects are selected and prioritised on their merits. We are delivering major projects through a predictable and stable programme of investment that will encourage private sector involvement. We are looking to leverage private investment where is makes sense to do so. And we are focused on getting the best value for the tax-payers dollars that we are spending.

Each of these elements is part of our plan to deliver the infrastructure Australia needs to drive economic growth and improve our standard of living into the future.

[1] NBN weekly progress report for 2 June 2016

[2] Bill Shorten, Address to the Queensland Media Club, 8 October 2015

[3] Bill Shorten, Transcript – Doorstop Interview, Tuesday 5 April 2016

[4]

[5] ABS, Australian National Accounts, National Income, Expenditure and Product, December quarter 2015 (5206.0)

[6] Master Builders Queensland says unionised worksites drive up cost of new apartments (http://www.couriermail.com.au/news/queensland/master-builders-queensland-says-unionised-worksites-drive-up-cost-of-new-apartments/news-story/78616984868be2f4866744296fcbc137)

[7] Construction sector – outlook, labour costs and productivity, Deloitte Access Economics for Master Builders Association of Victoria, 31 March 2016

[8] Ibid, p 26

[9] Ibid.

[10] ABS, Industrial Disputes, Australia (6321.0.55.001)