The pace of reform in infrastructure

Publication Date
04 June 2018

Good morning everyone. It's a pleasure to be here for the National Infrastructure Summit.

I would like to thank our hosts, the AFR and Deloitte, for once again bringing governments, industry and the broader community together for a valuable discussion on the infrastructure challenges we face now and in the future.

I also want to acknowledge the Deputy Prime Minister Michael McCormack, the Shadow Minister for Cities, Infrastructure and Transport, Anthony Albanese and all our distinguished guests here today.

It was timely this morning to hear the Deputy Prime Minister reflect on Australia's emergence as a world-leader in infrastructure.

We would certainly agree that by international standards, Australia has one of the most sophisticated infrastructure sectors in the world.

Our legacy of past reforms to the procurement and regulation of infrastructure assets and the creation of advanced infrastructure markets has placed us in an enviable position.

So too have the major microeconomic reforms of the 1980s, 1990s and early 2000s—namely floating the dollar, industry deregulation, increased competition, and the introduction of the GST.

These reforms have all helped deliver more than 25 years of uninterrupted economic growth for Australia.

However, the Australian economy can no longer rely on these reforms and the favourable trade and demographic conditions of the past. We musn't allow our past successes to breed complacency about the future.

Prospering in a booming Asia-Pacific region requires Australia to keep our foot on the pedal. We must work hard to find new sources of growth, efficiency and innovation.

But our productivity growth has slowed over the past decade—and there are other challenges on the horizon, too.

Australia's population is projected to grow to over 30 million people by 2031, with three quarters of this growth centred in our major cities—Sydney, Melbourne, Brisbane and Perth. This is the equivalent of adding a city the size of Canberra, every year for the next 30 years.

Our national economy is in a state of transition, as mining investment winds down and our focus shifts towards service and knowledge-intensive industries.

This is happening amid increasing competition in global trade, and at a time of unusually high policy uncertainty.

Technological change across a range of sectors is fundamentally changing how we live and work, and how goods and services are provided, regulated, consumed and paid for.

Against this backdrop, Australia's governments are increasingly facing fiscal gaps, which will impact on their ability to fund new and existing infrastructure.

Clearly, we are undergoing a period of profound change.

It is vital that our economic infrastructure can adapt to these changes so we can meet the challenges of the future and make the most of the opportunities available to us.

We need infrastructure and services that enhance the liveability of our cities and regions, strengthen our role as a global exporter and support the transition to a more diversified economy.

But if we are to deliver all this and seize on the historic opportunities in front of us, we must improve upon the current pace of reform.

As a nation, we need to reignite a new phase of microeconomic and market reform that recaptures the momentum of previous decades.

Making Reform Happen

It is in this spirit that Infrastructure Australia is today releasing our latest research paper, Making Reform Happen.

Like the other research papers we've published as part of the Reform Series, this paper builds on the recommendations made in the Australian Infrastructure Plan.

In this instance, we are making the case for the Federal Government to use incentive payments to drive much-needed national infrastructure reform.

We see an incentive mechanism as the catalyst for many of the 78 reforms we proposed in the Australian Infrastructure Plan.

This approach could help boost our stalled productivity growth and most importantly, deliver better infrastructure for our growing cities and regions.

The incentive-based approach

Currently, payments made from the Australian Government to states and territories are tied to specific projects, programs and services.

However, we believe that as a nation, there is much to be gained if some of this funding was also linked to reform outcomes.

We are proposing an incentive-based approach, where the Federal Government makes additional infrastructure funding available to states and territories—over and above existing allocations—in return for the delivery of key reforms across the infrastructure sector.

Australia's vertical fiscal imbalance means that the Federal Government would collect the majority of the tax revenue stemming from these reforms, while state and territory governments wear the implementation costs—as well as any short term political pain.

We think that the fairer way, the better way, is for the chief beneficiaries of reform to put a financial incentive in place to encourage these nationally-significant outcomes.

By tying additional infrastructure funding to the delivery of key reforms, the Australian Government has an opportunity to drive improvements in the way we plan, deliver and use our infrastructure.

This will ultimately deliver better outcomes for users, and drive more efficient investment in our infrastructure networks.

This is a win-win approach for all Australian governments—it provides a short-term boost to the economy through increased infrastructure investment, as well as productivity gains in the longer term.

A tried and tested approach

Infrastructure Australia is not alone in advocating for an incentive-based approach to national infrastructure reforms.

There is broad agreement, not only that reforms are necessary, but that incentive payments are an appropriate mechanism for achieving reform outcomes.

In addition to recommendations made in the Harper Review, incentive mechanisms have been supported in the past by the ACCC, the National Competition Council, the Australian Industry Group, the Australian Local Government Association, and a number of state and territory governments.

It is important to emphasise here that that this is not a new approach for Australia. Incentive payments have successfully delivered change in the past.

While both creatures of their time, the National Competition Policy reform program and the Asset Recycling Initiative proved to be highly effective in delivering targeted reform outcomes at a national level.

And while neither of these approaches were perfect, the development of a new approach provides an excellent opportunity to learn from these experiences to drive the infrastructure reform Australia urgently needs today.

So we know that this approach has worked before in Australia and that it has broad support as a means of driving national reform outcomes.

The question is, what can an incentive-based infrastructure reform agenda actually achieve?

Reform agenda

To demonstrate the value of this approach, we modelled the potential benefits of five key reforms which are well suited to an incentive-based funding approach. These are:

  1. Introducing road user charging
  2. Reforming the urban water sector
  3. Reforming the electricity market
  4. Reforming land tax and
  5. Franchising public transport services.

I want to acknowledge at the outset that although these reforms are ambitious, their potential benefits are substantial.

These reforms will grow our national productivity, deliver enduring and inclusive benefits to infrastructure users and boost our economic efficiency.

I also want to emphasise that these reforms are an illustrative starting point and not an exhaustive list. The paper we've released today is intended to show what is possible in infrastructure reform if we have a well-designed incentive based system in place.

We recommend that the Australian Government work alongside states and territories, who are best placed to identify appropriate reforms, to further develop the details of an appropriate incentive-based reform agenda.

However, we believe that any reforms under an incentive-based mechanism should deliver national benefits that enhance our economic productivity, social wellbeing or environmental sustainability,

They should also improve the efficiency, accessibility and affordability of infrastructure services for all Australians.

The report we've released today shows that using introducing incentive payments to encourage state and territory governments to progress these reforms could boost GDP by $66 billion by 2047.

This approach could also deliver a $19 billion ongoing increase in national tax revenue—which is, of course, money that could be used to deliver better infrastructure services for our growing communities.

Our current, constrained fiscal environment should not dissuade governments from using incentives. Our modelling shows that even after providing incentives to jurisdictions to undertake reforms, the Australian Government could see a significant and lasting improvement in its net fiscal position.

Failing to act on these opportunities for reform will leave Australian taxpayers and infrastructure users significantly worse off.

Introducing road user charging, for instance, is essential to address the serious road funding shortfall that Infrastructure Australia and others have highlighted as a key concern for some time.

Currently, funding to build and maintain our road infrastructure is sourced from a mix of fuel excise and vehicle registration charges. We will see a substantial reduction in revenue as uptake of electric vehicles and alternative fuels increases.

Our modelling shows that transitioning to a user-pays system of road funding could increase GDP by $21 billion per annum in 2031 and $36 billion in 2047.

The Federal Government has committed to undertake an independent study into road market reform to consider the potential benefits of road user charging, including any equity issues that may arise in regional and rural areas.

This was a key recommendation from the Australian Infrastructure Plan and it is important that it gets underway soon.

But in other areas we have seen less progress in recent years.

In terms of urban water, reform efforts to create an efficient, user-focused urban water sector remain incomplete.

More work is required to develop stronger market characteristics in each state and territory to meet significant challenges over coming decades.

Completing urban water sector reform could increase GDP by $1.4 billion per annum by 2031 and $1.8 billion by 2047.

An incentive-based funding approach provides the Australian Government with the opportunity to coordinate this process and ensure the delivery of nationally-consistent outcomes.

The benefits of reforming land tax would be similarly wide-reaching.

Broadening the land tax base, in addition to the removal of other inefficient charges such as stamp duties, would enable governments to unlock a reliable stream of funding that fairly reflects the productive value of land.

This would have positive impacts on housing availability and affordability, transport network efficiency, infrastructure funding sustainability and long term land-use planning.

A transition from stamp duty to a broad-based land tax could increase GDP by $20 billion per annum in 2031, and $24.3 billion in 2047.

Reforming the electricity market and franchising public transport, which are explored in further detail in our paper, also stand to generate a combined total GDP per annum of $1.9 billion in 2031, and $2.4 billion in 2047.

Concluding remarks

Clearly, the reforms I've just outlined are ambitious, politically challenging and would require a national consensus.

But they are vital if we are to deliver affordable, innovative and competitive services across transport, energy, water, land use and telecommunications.

This is exactly why we need an incentive-based approach to drive change.

Of course, it is part of Infrastructure Australia's remit to champion nationally-significant opportunities for reform.

It's our job to push the envelope, and establish a longer-term view of our collective needs as a nation—one that enables our leaders to look beyond elections and budgetary cycles to pursue reforms that are in the national interest.

The modelling we've published today in our paper, Making Reform Happen, clearly demonstrates that the benefits of these reforms would be wide-reaching and in the long-term, deliver vastly improved infrastructure services across the country.

It's about addressing today's infrastructure gaps, and setting us up to meet the challenges of tomorrow.

It is worth noting that more work is required. Our paper aims to give decision makers a framework to build on, not a comprehensive policy model.

The Australian Government, and state, territory and local governments are best placed to outline the nuances of an incentive-based payment architecture.

If designed properly, an incentive-based reform program can deliver the infrastructure we need, boost our national productivity, and ultimately build a fairer and more prosperous Australia.

If we don't take up this opportunity, Australia will miss out on the full benefits of a growing and dynamic economy.

This is clearly evidenced in our paper Making Reform Happen, and we invite you to engage with our findings and the resulting recommendations.

We know what needs to be done to drive our nation's prosperity and maintain our enviable quality of life. Now, it's matter of having the right incentives in place.

The time is right for Australia to reinvigorate the spirit of reform.

Thank you.