Australia must invest in renewal

Infrastructure is back in fashion. Electricity problems in Queensland and Western Australia, rail problems in NSW and bottlenecks at coal ports have combined to put infrastructure back on the agenda.

Figures on government infrastructure spending are often cited as evidence of neglect. According to the Organisation for Economic Co-operation and Development (OECD), total government infrastructure spending fell from 2.6 per cent of gross domestic product in 1991-97 to 2.2 per cent in 1997-2003. Government capital formation fell from 7.5 per cent to 3.9 per cent of GDP in 1984-2002.

Yet detailed Australian Bureau of Statistics figures reveal that there has been relatively little change in government capital formation since the early 1990s. Data for government engineering construction activity present a similar picture. Several states have been spending more heavily in recent years than during the '90s. Total investment across public and private sectors has increased. Privatisation and public-private partnerships have shifted some investment burden on to the private sector. The Federal Airports Corporation no longer invests in our main airport infrastructure, for example.

So is there a problem? Yes, but not a simple one that can be squeezed into a cute political slogan. In fact, there are several problems, and they are far from uniform across the various infrastructure sectors. Some are in good shape, others are in crisis. There is no simple remedy, but there are serious reforms that can address these issues.

After enjoying the benefits of past investment, we are reaching the point in the cycle where widespread infrastructure renewal is required. Whatever the arguments about whether we have been doing enough in the recent past, there is little doubt that we need to do more in the immediate future. From Melbourne-Sydney-Brisbane rail links and coal ports to irrigation pipelines, sewerage infrastructure, urban rail and main roads, the list of work needed is large and growing.

Unsexy things such as stormwater infrastructure are reaching the end of their useful lives and will soon require complete renewal. Our abysmal performance in broadband access requires urgent attention.

Every infrastructure sector has specific problems but there are generic obstacles to greater investment. Government phobia of debt has reached a point where it is counterproductive. Our public sector debt is almost the lowest in the developed world. Borrowing to fund long-term infrastructure is entirely orthodox, as it ensures that future generations of users that benefit from it help pay the cost.

Recent economic modelling concludes that government debt is the most economically beneficial way of financing large infrastructure. An Allen Consulting Group study concludes that "by restricting infrastructure development in the name of fiscal conservatism, the approach of Australian governments has undermined our future economic potential". Borrowing could increase significantly without undermining AAA credit ratings or increasing interest rates.

Private investment is hampered by outdated tax legislation that prevents investors claiming interest deductions on borrowings for infrastructure they don't fully control. Reform promised for July 2004 by the Howard Government is yet to eventuate. Access regimes profoundly influence investment decisions, allegedly causing the break-up of Epic Energy and investment delays at the Dalrymple Bay coal terminal.

Getting the balance right between investment and competition needs is very complex, but there is no excuse for the Government's continuing failure to respond to the Productivity Commission's 2001 reform blueprint for the national access regime.

Coupled with these particular obstacles is a general lack of data and objective analysis, which clouds debate about infrastructure. Governments dabble in fast-train projects, canals and unviable rail lines without comprehensive independent scrutiny.

The recent experience of the West Australian canal proposal shows that it is wise to constrain the ability of governments to borrow. The way to do this while facilitating borrowing for infrastructure investment is to create an infrastructure commission to scrutinise projects and financing proposals, publish comprehensive data on infrastructure needs and performance, and develop model regulatory codes. Rather than an advisory council, which may be dominated by sectoral interests, an independent commission would profoundly influence public debate.

Wasteful pork-barrelling such as the Howard Government's roads spending would be more difficult. Any government borrowing to fund a very fast train or a canal without its approval would be asking for trouble.

Australia has been well served by independent expert bodies such as the Productivity Commission, Reserve Bank of Australia and the Australian Competition and Consumer Commission, and would benefit from a similar contribution by an infrastructure commission. By accepting moderate debt financing, completing taxation reform, hastening regulatory reform and creating such a commission as the focus of considered public debate and scrutiny of infrastructure issues, we can ensure that the essential framework that underpins our economy gets the remediation and renewal it requires.