Funding & Financing the Nation’s Future Infrastructure Projects

Chris LeggChief Adviser, Infrastructure and

National Security

Outline

• Funding vs. Financing• Addressing the Funding Challenge

– Budget Initiatives– Encouraging private sector funding?

• Addressing the Financing Challenge • The International Dimension

– Australia’s G20 Agenda

Funding vs. Financing – an important conceptual distinction

• Funding: Who will ultimately pay for the infrastructure?

• Financing: Mustering the up-front resources needed, to be repaid over time by the funding

2007-08

2008-09

2009-10

2010-11

2011-12

2012-13

2013-14

2014-15

2015-16

2016-17

2017-18

2018-19

2019-20

2020-21

2021-22

2022-23

2023-24

14

16

18

20

22

24

26

28

-6

-4

-2

0

2

4

6

8Per cent of GDP

Per cent of GDP

Receipts (LHS)

Payments (LHS)

Underlying cash balance (RHS)

Budget year

1990

-91

1992

-93

1994

-95

1996

-97

1998

-99

2000

-01

2002

-03

2004

-05

2006

-07

2008

-09

2010

-11

2012

-13

-1.5

-1

-0.5

0

0.5

1

1.5

-1.5

-1

-0.5

0

0.5

1

1.5Per cent of GDP

Per cent of GDP

Fiscal challenges for all Governments

Sources: 1990-91 to 2011-12 ABS Cat. No. 5512.0; 2012-13 State and Territory Final Budget Outcomes; 2013-14 Mid-year Budget updates for NSW, QLD, SA, TAS, ACT and 2014-15 Budgets for VIC, WA and NT.

Aggregate cash position of the States

Source: 2013-14 MYEFO

2013-14 MYEFO payments, receipts and underlying cash balance

Note: Contributions to income growth in the period 2013 to 2025 are consistent with the forecasts and projections detailed in 2014-15 Budget Statement 2. The hatched area represents the additional labour productivity growth required to achieve long run average growth in real gross national income. Source: ABS 5204.0 and Treasury.

1960s 1970s 1980s 1990s 2000 to 2013 2013 to 2025-1

0

1

2

3

4

-1

0

1

2

3

4

Net foreign income Labour utilisation Labour productivity Terms of trade Per capita income

Percentage points contribution, annual

average

Percentage points contribution, annual

average

Living standards – Australia’s challenge

Commonwealth Budget - $11.6 billion infrastructure ‘Growth Package’

• $5 billion Asset Recycling Initiative• $2.9 billion for Western Sydney• $3.7 billion added to Infrastructure Investment

Programme– East West link (II), Perth Freight link, Toowoomba

2nd Range Crossing, North South Road Corridor– Black Spot Programme– Roads to Recovery Programme

Commonwealth Budget –sustaining record levels of transport infrastructure spending

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

2012-13

2013-14

2014-15

2015-16

2016-17

2017-18

2018-19

0

2

4

6

8

10

12

0

2

4

6

8

10

12$billion $billion

Previous transport infrastruc-ture commitments

Additional transport infrastructure commitments

Asset Recycling Initiative – unlocking State funding• $5 billion to leverage $38 billion.• States and territories will receive 15% of the

price of the asset sold if all the sale proceeds are allocated to new infrastructure– Which adds to productive capacity, has clear net

positive benefit and taps private sector investment where possible.

• Proposed asset sales will be included on the National Infrastructure Construction Schedule

Commonwealth Budget – addressing the Infrastructure funding challenge

Key elements of the Commonwealth’s approach to Funding

• Redirection of significant levels of recurrent spending• The Asset Recycling Initiative • Reintroduction of indexation of fuel excise and

hypothecation• Looking to test scope for increased private sector funding

– E.G. User Charging

Road user charges – Productivity Commission ReportDraft Recommendation 7.2• All governments should take deliberate steps towards implementing institutional

reforms in the road sector for cars and other light vehicles that improve project selection processes, facilitate greater adoption of direct user charging mechanisms, and more directly link road charge revenue with future spending on roads.

Draft Recommendation 7.3• Australian Government funding or other forms of assistance (such as loans and

government guarantees) for public infrastructure that is provided to local, State and Territory Governments should be conditional on the following:

– … evidence that the relevant government has efficiently used opportunities for users and other beneficiaries to fund the infrastructure through measures such as user charges, betterment levies and property development charges

Private Funding offers the potential to significantly grow the overall Infrastructure

spend

User charging – the story so far…

• User charging already common for much economic infrastructure – E.G. Electricity, gas, water and sewerage, communications

networks, airports, ports, public transport, car parks

• But a piecemeal approach for roads– Little recourse outside of selected major roads in Sydney,

Brisbane and Melbourne− Applied to individual roads, rather than to a road network− Little or no debate about possible regulatory framework

User Charging – not just a funding solution

• Incentives for the efficient use of existing road infrastructure

• Price signal to help ensure the right projects are built– Targeting scarce public funding to projects with

public benefits that cannot be reflected in market pricing

• Infrastructure Australia:– Governance reforms currently before Parliament– Rolling 15-year infrastructure plan – 5 yearly infrastructure audit

• Cost Benefit Assessment of projects, with funding over $100m

• Asset Recycling eligibility criteria• Consideration of PC Report

Selecting the right projects –the other key policy elements

Private funding means an increasing role for private finance

• The need to manage timing mismatches between funding and capital expenditures

• The case for a mix of private and public financing– Benefits of private sector discipline – Closing market gaps and addressing market

failures– Addressing viability gaps through mix of finance

and funding

Queensland (15)

Airport Link/Northern Busway $5.1bn

New generation rolling stock $4.1bn

North South Bypass Tunnel (CLEM 7) $3.2bn

Gold Coast Rapid Transit $1.1bn

New South Wales (31)

Victoria (45)South Australia (7)

New Royal Adelaide Hospital $2.9bn

Education Works (6 Schools) $193m

RailCorp Electric Suburban Rail Carriages $3.6bn

Western Sydney Orbital (M7) $1.54bn

Royal North Shore Hospital Redevelopment

Stage 2 $1.1bn

Lane Cove Tunnel $1.1bn

Tasmania (3)Risdon Prison Redevelopment $100m

Western Australia (10)

Mundaring Water

Treatment Plant $360m

Midland Public Hospital $360m

CBD Court Complex $235m

Northern Territory (2)

Darwin Prison $495mDarwin Convention and Exhibition Centre/Waterfront redevelopment $108m.

Australian PPP experience

Victorian Desalination Plant $5.7bn

Melbourne City Link $1.8bn

Eastlink $2.6bn

Peninsula Link $849m

Tasmania

Private financing – the emerging ‘Greenfields’ toll roads challengeRoad Transport Infrastructure Development

6 years to 2008 6 years to 2014 Next 6 years (proposed)

Quantum of road infrastructure developed

Government funded contributions

$0.8 BnGovernment grant leverage ratio: 22x

$2.7 BnGovernment grant leverage ratio: <1x

?

Greenfield patronage risks

~100% with private sector

100% with public sector

?

Source: AquAsia

$19 Bn$2.6 Bn

$25 Bn

Private financing – challenges for Governments• Possible Refinements to the PPP model?

– Too driven by short term considerations? Improving patronage forecasts. Lowering bid costs, etc

• Welcoming unsolicited bids• Creating and sustaining a pipeline of

investment opportunities• Impediments to institutional investors, e.g.

Super Funds?

A financing role for the Commonwealth - WestConnex Stage 2 • Concessional loan of up to $2 billion • Financing will enable the acceleration of this

stage of the project by up to 18 months• Complements $1.5 billion in grant funding that

the Government committed at MYEFO• Signals Commonwealth’s willingness to

consider alternative financing arrangements

The Commonwealth’s potential financing role – some high level principles

• Selecting the right projects remains critical • Sharing of risks between project participants

should be transparent• State Governments and private sector

partners should not be ‘crowded out’• The Commonwealth’s role in infrastructure

projects should be reported transparently

The International Dimension – The G20’s Infrastructure and Investment Agenda

• Actions to improve domestic investment environments– Comprehensive Growth Strategies to raise the level of G20 output by at least 2

per cent above the currently projected level in the next 5 years.• Supporting long term investment financing

– Improving the planning, prioritisation, evaluation and funding of projects– Greater transparency and certainty for investors

• Government can play a catalytic role in promoting infrastructure investment

• Deepening domestic capital markets and improving access to global capital markets

• Multi-lateral Development Bank work in support of these priorities

Thank YouQuestions?