An in-depth interview with Brendan Lyon, CEO of Infrastructure Partnerships Australia, sheds light on the infrastructure challenges we face.
GHD: Infrastructure development is one of the greatest challenges of the 21st century. How can governments keep pace with projected demand?
Brendan Lyon: The only way we can sustain an increased level of investment in infrastructure is through the recapitalisation of government budgets and the sale of existing public assets and businesses.
However, it is critical that privatisations are done well, with a focus on creating long-run efficiency of the market through the sale of assets. The windfall from privatisation also needs to be accompanied by an ongoing process to address the structural deficit of public sector budgets.
Conceptually, funding infrastructure is a simple issue. It requires governments to spend less than they earn on the recurrent side of the budget, with the operating surplus or profit used to fund capital borrowings and capital investment. Long term public debt is an important way to fund infrastructure, however it is financed.
GHD: What are some of the infrastructure challenges developed nations face?
Brendan Lyon: Governments in developed nations face similar problems to those in the developing world: both desire and require infrastructure beyond what is affordable, on current settings.
The biggest challenge we face in giving rise to much needed infrastructure is honesty about the lack of money to pay for it, and leadership towards reforms that offer funding capacity.
At the project level, another challenge is developing the frameworks and assessment tools to bring forward the most beneficial projects first, given the limited money available.
In Australia, we have to get on with the job of finishing the National Electricity Market, in terms of privatising the NSW, Tasmanian and Queensland electricity sectors. Reforming electricity should be relatively easy because we have a developed and well understood national regulatory and pricing framework; but this is not the case in urban water and wastewater markets. Water stands out as the last great unreformed public sector monopoly. Now that we are out of the drought conditions that created urgency over the security of urban water supplies, we should be examining how urban water markets can be refined and streamlined for efficiency.
These problems don't hit any single infrastructure sector - they hit all of them, and they apply to many countries around the world. We just don't have the funding to get the required transport, utilities and social infrastructure projects delivered in the time they are needed.
GHD: What are some of the solutions available to fix the infrastructure problems nations face?
Brendan Lyon: Governments can't apply the same approach to infrastructure project selection, funding and delivery and expect a different result.
In terms of project selection, a key challenge is that we expect relatively unsophisticated assessment tools, like the direct benefit cost ratio, to inform very sophisticated decisions about priorities. We don't yet have a consistent toolkit to provide the best possible decisions on project priorities, based on rigorous analysis.
GHD: What is the number one priority for change?
Brendan Lyon: It is about resolving how we get projects funded and started in the immediate term.
We absolutely need a mechanism to sustain immediate, medium and long term funding. Take any country as an example – the economy and the household sector cannot afford for lawmakers to keep talking about what's needed – we have to consider how we get it.
GHD: If we don't address this, what are the impacts?
Brendan Lyon: The whole discussion about productivity and the cost of living are the bookends of the same problem, which is that inefficient infrastructure markets lead to inefficient costs for consumers and businesses.
For example, services like transport, electricity, telecommunications and other utilities are key inputs for the production of goods and services, meaning unnecessarily high infrastructure services costs reduce the relative competitive advantage of a country's business sector. This results in less money in the economy and, therefore, reduced prosperity across the board.
GHD: How can we increase the performance of assets?
Brendan Lyon: The imperative is to think aboutinfrastructure assets in terms of markets, not projects.
If you consider transport, electricity, utilities and even social services as markets where demand meets supply, then you will start to get the right signals, proficient utilisation and efficient outcomes for new inestment when it is economically feasible.
GHD: Financing obviously has a huge role to play in delivering infrastructure. Talk us through the options.
Brendan Lyon: The financing issue requires governments to create a structure that delivers signals for private investment, which in turn will provide a wealth of available debt and equity.
The purpose of a private capital structure is to align private profit and public benefits. This protects taxpayers from cost overruns or project failures and maximises competition in the cost, design and operational outputs of the infrastructure being procured. In developed nations, it is likely that over time we will see capital programs start to inject competition into the delivery of public services in areas like health, social housing, corrections and public transport.
I think the experiments we are seeing in Australia around full service health, corrections and social housing Private Public Partnership (PPP) models signal that we are on the edge of an exciting reform period for public administration broadly, and the procurement of infrastructure specifically.
GHD: What initiatives would you like to see adopted in Australia to facilitate key projects?
Brendan Lyon: In a tight fiscal climate, progress on infrastructure requires the Australian Government to invest alongside State Governments to get projects moving.
We need a smarter approach from the Australian Government to substantially increase debt funding for state-based projects in the short to medium term. However, this needs to be linked to the sale of state-owned assets with a broader realignment of revenues and operating costs.
The Australian Government must see its investment as a catalyst for state reforms, so states can restore their own capacity to fund major projects. This is the best immediate option, because poor infrastructure constrains economic activity, thereby reducing future revenues for the nation from both income and company taxes.
GHD: What can Australia learn about infrastructure management from the rest of the world?
Brendan Lyon: Australia has one of the most sophisticated infrastructure markets in the world. But we have become complacent about trialling new approaches, largely because we've enjoyed an economic super cycle which has reduced the drive on policymakers to seek more efficient approaches.
New Zealand stands out for its bold approach to adopting new models that ensure new capital investments deliver outcomes.
The recent Transmission Gully road PPP is a great example. It sees the operator fined a substantial amount for each fatality on the road. This creates a considerable incentive to design and operate the road in a way that reduces the tragedy of motor vehicle accidents, as well as the downstream cost to the public purse in terms of road trauma.
This is a smart approach that's stretching the envelope on what's possible through innovative approaches to delivery.