IPA Reform Series – The case for reforming infrastructure service delivery

Publication Date
30 May 2017


Good afternoon ladies and gentlemen. It's great to be here in Melbourne this afternoon for the first event in the Infrastructure Australia and Infrastructure Partnerships Australia Major Reform Series.

As Mark said, we are very pleased to be sponsoring today's event and I'd like to thank IPA for bringing so many of the leaders in infrastructure together to discuss the reforms we need.

Infrastructure has been fundamental to our national economic success. It has helped underpin our high standard of living and enabled our cities to thrive.

But with our population expected to grow to more than 30 million by 2031, we need to embark on the next era of infrastructure service delivery.

Australians will be best served by infrastructure that is well planned, well considered and well delivered. This is critical not only to meet the needs of our growing population, but also to enhance our economic productivity.

Fortunately, there are a few different levers we can pull to help meet our future growth challenges and deliver the best outcomes for infrastructure users. That is:

Getting the integrated long-term planning right

Making better use of what we've already got and

Embarking on reform to deliver efficient, customer-focused infrastructure services

Long-term planning

Firstly, meeting our future growth challenges and improving infrastructure decision-making and delivery in Australia begins with getting the long-term planning and project selection right.

This is a central theme of the 15-year Australian Infrastructure Plan.

Long-term planning must remain a priority so that governments can better prepare for changes in infrastructure demand, identify emerging issues and construct the right projects at the right time, for the right price.

Importantly, long-term infrastructure planning must go hand in hand with a robust process for selecting projects that deliver the best outcomes for the community—and this is where Infrastructure Australia comes in.

The Infrastructure Priority List supports evidence-based decision making and investment in projects that will deliver the best outcomes for the community.

We recently released a revised version of the Priority List, identifying 100 nationally-significant infrastructure priorities in each state and territory.

The Priority List includes 18 Projects. This is the largest-ever number of projects with full business cases to be published on the List, and reflects the record number of business cases our organisation has assessed over the past 12 months.

Better use of existing infrastructure

The second lever is to make better use of existing infrastructure. In particular, we need to ensure that existing infrastructure is used more efficiently, with a focus on optimisation of asset performance, data analytics, maintenance and the use of new technology.

In the Australian Infrastructure Plan, we propose these kinds of targeted investments as part of a broader program of network optimisation. This simply refers to the opportunities for low cost/high value investments which address capacity constraints often in the short term.

Embedding technology in existing infrastructure can provide operators with rich data on network performance and use, which in turn drives improvements in efficiency and reliability.

Delivering infrastructure within robust, well-regulated markets

And the third lever to deliver better outcomes for infrastructure users—and indeed the subject of my presentation today—is to embark on reform to ensure our infrastructure services are delivered within robust, well-regulated market structures.

Experience both here and abroad shows that with the right incentive and regulatory structures, infrastructure markets can deliver better outcomes for users.

And by that I mean infrastructure that is well-maintained, customer-focused and responsive to shifts in demand. In other words, infrastructure that better meets the needs of our growing population.

In Australia, we've already seen this in infrastructure sectors such as aviation, telecommunications and energy, where we have developed the right structures to deliver efficient and responsive services.

In these sectors, variously by establishing competitive and regulated markets, bringing commercial rigour of the private sector and powerful incentives for efficient service delivery—the benefits users and taxpayers have been unambiguously positive.

Of course there are areas of infrastructure service delivery where it is much more complex to establish commercially viable markets—public transport, for example.

While public transport will continue to be publicly subsidised, we should still be asking ourselves how we can apply commercial discipline and other incentives to drive efficient infrastructure service delivery.

As we have often said, funding and market reform of the transport sector represents one of the most significant infrastructure challenges for Australian governments. But we shouldn't be discouraged.

There is a clear opportunity to introduce the competitive piece at the front end by exposing the time-limited operation of our public transport networks to a competitive tender process.

This brings me to franchising and the most recent paper in our infrastructure Reform Series, Improving Public Transport: Customer Focused Franchising, which we released just last week.

Customer Focused Franchising

Like the first paper we released in the series late last year, Capturing Value, this piece of work builds on the recommendations in the 15-year Australian Infrastructure Plan.

 In this case, the paper provides further evidence of how franchising more of Australia's government-run public transport services can deliver better outcomes for commuters and better value for taxpayers.

Governments would still own the infrastructure and have responsibility for important decisions such as network planning, investment in new infrastructure, fares and timetabling.

 We commissioned PwC to conduct modelling on the potential benefits of franchising public transport services traditionally operated by state, territory and some local governments across the country.

What that modelling found is that nationally, franchising could deliver up to $15.5 billion in taxpayer savings by 2040.

 A significant portion of the savings are in NSW, where franchising could save taxpayers close to $9 billion by 2040.

In Queensland, the savings are also substantial, with our modelling suggesting that franchising could deliver more than $3 billion in savings for the state's taxpayers.

 Here in Melbourne, where franchising has been successfully operating for almost 20 years, extending the benefits of reform to Melbourne's bus networks could save more than $1 billion.

Victorian example

Victoria was the first Australian state to introduce franchising of major public transport, and provides useful lessons for Australian governments particularly in regards to creating the right conditions for franchisees to respond to incentives.

 While it has not been without its challenges, the evidence shows that franchising Melbourne's tram and heavy rail services has delivered better services for commuters and better value for taxpayers.

Customer satisfaction with Melbourne's tram and train services is at a 15-year high. Performance targets for private operators have driven clear improvements in punctuality with, for example, on-time running for Melbourne Metro improving by 7.1 percentage points since 2009.

 Most importantly, the Victorian Government is in an excellent position to drive ever greater value services for taxpayers from any new franchise agreements.

With 17 years of experience in managing train and tram franchises, the State's transport agencies have the data they need to set the right performance targets for operators and ensure the delivery of efficient, affordable services for commuters.

 But as I said, there are lessons to be learned from the experience both in Melbourne and abroad. This includes ensuring that operators are properly incentivised to continually improve service quality, and that risks are properly scoped and assigned.

It's also important that governments periodically re-franchise to ensure that competitive pressures are maintained, and choose an appropriate contract length that suits the local context and the type of service being franchised.

 Similarly, it is important to ensure the assessing agency is appropriately informed and skilled, and that the process for selection, its criteria and weighting are made as transparent as possible. This is to ensure consistent advice is provided to bidders and support overall confidence in the process.

How do we make reform happen?

We know then that there's a strong case for franchising Australia's public transport services, and we know broadly how it should be approached to deliver the best outcomes for the community. The question then becomes; how do we make reform happen?

This is where the idea of Customer Focused Franchising comes in. As everyone in the room would well understand, franchising is distinct from the sale of infrastructure assets.

Franchised public transport is delivered in a tightly-regulated environment with clear performance targets, and contracts are regularly reviewed to ensure competition delivers the best result for the commuters and taxpayers.

 However, communicating this to the community will undoubtedly be a key challenge if we are to make reform a reality. And even if the benefits in the form of taxpayer savings and more efficient service delivery were well understood, we know from previous reform attempts that that isn't enough.

Fortunately, Australia's recent reform history also provides useful insights into how to create a fertile environment for the introduction of complex policies, like franchising.

 In particular, Australian governments should be drawing lessons from the Asset Recycling model, where the proceeds from public asset sales are reinvested back into productive infrastructure.

With Customer Focused Franchising, we're proposing to replicate and build on the success of Asset Recycling.

 More specifically, the billions of taxpayers' dollars that could be saved via franchising should be reinvested back into the public transport system to deliver new trains and buses, station upgrades or additional capacity and services on our networks.

Let us remember that franchising could deliver up to $15.5 billion in taxpayer savings by 2040, money which could be directed to some of the transformational, city-shaping proposals currently on the Infrastructure Priority List.

 For example, the $12.5 billion Sydney Metro, Perth's $2 billion Forrestfield to Airport rail link, Victoria's $800 million tram procurement program or the ACT's $700 million light rail.

Our proposal, Customer Focused Franchising—where the savings delivered through well-structured competition are reinvested back into transport networks— would allow state and territory governments to invest more money in delivering public transport and enable more Australians to benefit from world class infrastructure services.

 While public transport is the responsibility of state and territory governments, there is an important role for the Federal Government to play in encouraging these governments to embark upon public transport reform under the Customer Focused Franchising model.

Although it will need to implemented at a state and territory level, the franchising of major public transport services will deliver substantial productivity benefits across the Australian economy.

 That's why, building on the success of the National Competition Payments and more recently the Asset Recycling Initiative, the Australian Government should use direct incentives to drive the implementation of franchising.

There are a number of different ways to do this. In the Australian Infrastructure Plan, we proposed Infrastructure Reform Incentives wherein the Australian Government would use its funding powers to drive the implementation of reforms to the infrastructure sector by other jurisdictions.

 The structure is particularly well-suited to the introduction of contestable supply on public transport, because it links Australian Government infrastructure investment with the delivery of wider reforms across the infrastructure sector.

Other options to use the Commonwealth's role as an infrastructure funder to drive reform include through City Deals, or the implementation of new competition and reform agreements for COAG.

 Regardless of which mechanism it chooses, the Australian Government should maintain the momentum of the successful Asset Recycling Initiative and provide incentives to drive the introduction of other nationally significant reforms, like franchising.

Concluding remarks

The benefits of delivering infrastructure within well-structured, well-regulated markets don't just apply to economic infrastructure like transport.

 IPA has been leading the way on how market principles can be applied to social infrastructure such as housing to address changing and growing community needs.

For our part, we would encourage industry and think tanks to follow IPA's lead in looking at innovative ways to deliver social infrastructure services, and the incentives that need to be in place to support better outcomes for the community.

 There is no doubt that reforming infrastructure service delivery will be challenging. But Australia is in a unique position to learn from past experiences and deliver successful reform.

It won't be easy, but the reward is better services for all Australians and significant productivity gains right across the economy.

 For that reason, the Australian Government must look seriously at the incentives it can put in place to encourage the states and territories to embark on these politically complex, but nationally significant reforms.

Thank you.