Office of the National Infrastructure Coordinator

Supplementary submission to the Productivity Commission inquiry into public infrastructure

April2014

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Contents

1. Introduction

2. Information request regarding capital recycling

3. Information requests regarding infrastructure bond finance

4. Information request regarding pipeline of projects

5. Information request regarding land corridor and site preservation strategies

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1. Introduction

  1. The Office of the National Infrastructure Coordinator (‘the Office’) welcomes the opportunity to comment on the Productivity Commission’s (‘the Commission’) draft report on public infrastructure. The Commission has made a number of important draft findings and recommendations and has identified a number of areas where it is seeking additional information.
  1. As noted in our December 2013 submission to the Productivity Commission, the Office supports policies and mechanisms aimed at improving the efficiency of infrastructure markets to facilitate private investment. To this end, the Officecontinues to endorse the consideration of fundamental changes to existing models of infrastructure provision that would see the greater application of beneficiary or usercharging, particularly for transport infrastructure and welcomes the Commission’s draft recommendations in this area.
  1. In our view road use and infrastructure should be brought into line, as far as possible and as quickly as possible with the principles of use and provision of other infrastructure. Congestion pricing is a key issue but should be seen in this wider context. Other important elements include transparency in performance and decision making, independent regulatory oversight aiming at outcomes including economic, social (including public health and safety) and environmental, and a special focus where there is significant risk of resource misallocation or long term economic distortion such as locations where roads compete with other transport infrastructure. This was outlined in Infrastructure Australia’s state of play publication. Application of the concepts of the national access is a pivotal element in this, but the office is disappointed with the analysis conducted by the Commission on this issue in the National Access Regime Inquiry.
  1. Congestion pricing is a favoured topic of advisers around the world, however, implementation has been piecemeal. Trials are therefore a good idea. Trials need to be carefully constructed, however, to date transport authorities have effectively not conducted trials of these types of matters; at least in the sense of conducting trial of operational matters such as timetable changes or road closures. IA’s urban transport strategy asked for ‘desktop’ trials of pricing – to indicate potential effects AS IF optimal transport pricing was implemented, even if governemt of the day does not decide to establish actual pricing. Schemes such as used in Oregon USA may provide a useful model, and there is strong expertise in Australian universities regarding this modelling.
  1. The focus on better use of existing infrastructure in the draft Commission’s draft report is welcome. Transport control systems have a major impact on efficiency of utilisation of infrastructure and therefore on perceived ‘hard’ infrastructure needs.
  1. From time to time anecdotal and prima facie evidence that network controls are not operated as efficiently as possibly emerges. For example, undue delays to trucks on major freight routes due to traffic lights, some mismatching of train scheduling and passenger demands, and substantial decay in operational performance through peak hours.
  1. At present there is no real culture of public or regular reporting of such issues, even though such reporting is becoming considerably easier through cheaper remote sensing and data analysis technologies. At least some of the public reporting that does occur is ‘traditional’, at the convenience of transport operators and departments and does not indicate actual system performance.
  1. Infrastructure funding and financing cannot be reviewed in isolation from broader institutional reforms that are needed to enhance decision-making processes for infrastructure investment. The Office therefore welcomes the Commission’s draft recommendations around better institutional and governance arrangements contained in the draft report.
  1. The Office also welcomes the draft recommendations regarding the transfer of government held electricity and port assets to the private sector. The office feels that there is scope to go further and that there are advantages in using the net proceeds from the transfer of assets to the private sector to fund greenfield infrastructure. An important policy consideration when developing and implementing reform is community acceptance. The success of the Restart NSW infrastructure funding model in demonstrating to the community the benefits of government balance sheet reform should be an important consideration in the Productivity Commission’s recommendations in this area. Of course, using the net proceeds of asset transfers to fund infrastructure does not obviate the need for good decision-making in project selection and the broader application of user chargingas recommended in PC’s draft report.
  1. The Office also supports the draft recommendations aimed at reducing infrastructure costs and improving data collection. Infrastructure Australia’s Reform and Investment Framework encourages the full exploration of options to address national infrastructure priorities, in particular initiatives that result in the better use of existing infrastructure. Infrastructure Australia’s experience has been that such initiatives often yield much higher benefit/cost ratios than traditional build solutions.
  1. This submission includes additional information in a number of areas requested by the Productivity Commission’s draft report including:
  • Information request 2.1 - views on other prospective infrastructure assets that the Commonwealth, States and Territories should consider for transfer to the private sector;
  • Information request 5.1 - the availability of bond finance for public infrastructure projects in Australia;
  • Information request 7.1 - views on the appropriate organisational framework to collect and disseminate information about a pipeline of projects; and
  • Information request 7.2 - further information from participants on the costs and benefits of land corridor and site preservation strategies.
  1. The Office welcomes the opportunity to provide further information at the inquiry’s public hearings.

2. Information request regarding capital recycling

information request 2.1

The Commission seeks views on other prospective infrastructure assets (in addition to electricity generation, network and retail businesses and major ports) that the Commonwealth, States and Territories should consider for transfer to the private sector

Infrastructure Australia’s October 2012 report on Australia’s Public Infrastructure (PC sub.78, attachment B), analysed the suitability of economic infrastructure sectors owned by government for transfer to the private sector.

In drawing its conclusions, Infrastructure Australia used the following criteria:

  • the asset class includes infrastructure or infrastructure like assets;
  • the asset classes are energy, water, transport sectors and plantation forestry – while forestry is not usually covered by Infrastructure Australia, the sector has many of the characteristics of infrastructure assets;
  • assets in the class must be owned, or part-owned, by federal, state or local Governments;
  • assets in the class must be applying or have the potential to apply a user-pays framework, or already have a non-government earnings stream with the potential to cover operating costs; and
  • assets in the class have limited or defined public policy benefits which can be obtained by way of regulation, sale conditions or community service obligations.

The suitability of assets in these classes for transfer to the private sector varies between different states, given different regulatory and governance regimes and commitment to user-pays principles. The transfer of individual assets should also only occur where the proceeds from sale exceed the retention value of the asset (PC sub.78, attachment B, page 17 and PC sub.78, attachment C).

Many economic infrastructure asset classes have monopoly characteristics. As discussed in the PC’s draft report, this is not an impediment to a transfer to the private sector, as long as an appropriate regulatory regime is in place to protect customers and to avoid inefficient economic outcomes.

Based on the above criteria, Infrastructure Australia’s October 2012 report concluded the following sectors were suitable for transfer to the private sector: (PC sub.78, attachment B, page 31).

Table 1: Categorising economic infrastructure sectors

  1. Competitive sectors

National Electricity Market (NEM) Generators / Operating in competitive markets
NEM Retailers / Also operating in competitive markets – could possibly be transferred with corresponding generators or with hedging arrangements.
  1. Some level of monopoly characteristics, but with suitable regulation

NEM Distribution and Transmission / Monopoly characteristics, but already subject to price regulation within a well established regulatory framework.
Airports / Regional airports have less monopoly characteristics than major airports. Accepted regulatory framework in place.
Capital City Ports / A number of ports have been transferred to private sector ownership with a successful regulatory framework.
Bulk Ports / A number of ports with commercial operations, full user-pays charging regimes and a light handed regulatory approach. Some ports have significant embedded subsidies, no transparent community service obligations and do not apply full user pays pricing. For these ports governance and regulatory arrangements should be worked through as part of the privatisation process.
Bulk commodity rail / ARTC Hunter Valley interests in coal. Monopoly characteristics, however, subject to suitable and accepted regulatory framework.
Australian Rail Track Corporation (ARTC) East-West Intermodal Rail / Includes any remaining government owned terminals.
Accepted pricing and access regime currently operating.

The report also concluded that for metropolitan water and wastewater and rural water assets, in most cases, further price and regulatory reform is required before any possible transition to private sector ownership. However, the report also noted that some Sydney and Melbourne metropolitan assets now operate in a suitable regulatory environment.

The Office of Infrastructure Coordinator is currently examining the potential for assets to be transferred to the private sector.

3. Information requests regarding infrastructure bond finance

information request 5.1

The Commission seeks feedback on the availability of bond finance for public infrastructure projects in Australia.

  • To what extent are there impediments to the development of the Australian bond market to support investment in infrastructure?
  • To what extent are there barriers to Australian infrastructure firms accessing international bond markets?

Infrastructure Australia’s paper on the infrastructure debt market (PC sub.78, attachment M) examined demand and supply side factors impacting on the development of the infrastructure bond market.

Supply side factors include:

  • Bidding and procurement processes

The public private partnership procurement model is focused on net present cost, the public sector comparator and value for money and drives bidders to bid low debt margins (just as bidders were driven to bid highest patronage on the toll roads). This framework incentivises bidders to use short term debt and take a view on refinancing margins. There is no incentive to bid a more stable capital structure with longer term debt – which may offer the public sector better value for money in the longer term.

  • Lack of a competitive liquid corporate bond market

During the consultation phase of the paper’s development the low level of development of the corporate bond market generally, and in particular at lower credit grades, was acknowledged as a key hurdle for greater use of project bonds.

  • Current project bond pricing uncompetitive due to nascent state of market development

In the consultation process, industry generally considered that banks are pricing loans to greenfield projects appropriately and that the debt capital markets would price the same risk higher, initially at least. Therefore a bond solution will not be competitive on price grounds in the short term. However, in the medium to longer term competition should bring market benefits.

For example, in Canada, where there was loan on bond competition for long term debt until end 2010 (when long term bank loans were no longer available in any volume) - post the Global Financial Crisis, 30 year+ bond pricing started at 385 basis points over the benchmark, reduced to around 300 basis points in 2010 and further to 200 basis points in 2011. More recent transactions have priced marginally below 200 basis points, although deal flow and transaction volumes have declined from previous peaks. In terms of market share, over the period 2007 to 2011, the share of public private partnerships debt provided by bonds has increased from less than 10 percent to greater than 70 percent but has since reduced back to around 50% reflecting greater use of the build finance model and a trailing off of large hospital projects. Given the general market, tenor and rating differences (most projects are rated A) it is difficult to draw specific conclusions other than that pricing has tightened up over time and competition contributed to this. Further information in relation to the Canadian market is attached.

Demand side factors included

  • Lack of a well funded greenfield infrastructure pipeline

The importance of a funded pipeline of projects was strongly emphasised by participants, particularly in order to build up critical mass in the investment community to understand and price the risks involved in greenfield infrastructure.

The Province of Ontario in Canada, through Infrastructure Ontario, is an example of best practice in this area, and this is often cited as one of the key success factors for that market.

  • Retirement income products

Retirement income products can support a long-term, liability-driven investment approach as it is generally accepted that a more defensive investment strategy is appropriate for retirees. This will change asset allocation and increase the pool of funds available for defensive assets such as bonds.

The scope for annuity product innovation is currently limited by legislation. In September 2012, the Actuaries Institute published the white paper Australia’s Longevity Tsunami – What Should We Do? This report supported the inclusion of post - retirement products in Mysuper and outlined reforms to provide greater incentives to individuals to take the majority of their retirement benefits as an income stream. It also proposed the removal of any legislative barriers preventing innovation in developing post-retirement income stream products such as annuities.

The Cooper Review recommended that ‘MySuper’ products should include one type of income stream product, either through the fund or in conjunction with another provider, so that members can remain in the fund and regard MySuper as a whole of life product’ (recommendation 7.1).

The 2013 Melbourne Mercer Global Pension Index, which surveys and ranks the pension systems of 20 nations, rates the Australian system very highly - third overall (against adequacy, sustainability and integrity criteria) but identified the key weakness as an insufficient requirement or incentive to take retirement benefits as an income stream[1].

Industry has noted the lack of available long term bonds in the market to match liabilities may be constraining product development of retirement income products. The Australian Government recently issued a 20 year bond and further extension of the yield curve is under consideration. This should also help provide a pricing benchmark for longer term domestic corporate debt.

During the consultation process, industry raised with Infrastructure Australia the lack of a long term foreign currency swap market as a potential barrier to Australian firms financing infrastructure debt from international bond markets.

4. Information request regarding pipeline of projects

information request 7.1

The Commission’s current inclination is that the package of measures proposed in this report would be sufficient to constitute a ‘pipeline’ that would assist purchasers and tenderers in forward planning and to minimise costs. The Commission seeks views on the appropriate organisational framework to collect and disseminate information about a pipeline of projects and the extent to which private organisations should provide information about their plans to build significant infrastructure.

The Office agrees with the draft report that a well funded pipeline of infrastructure projects is critical to create the conditions necessary for the private sector to efficiently and effectively respond to Australia’s infrastructure needs. The Office also agrees that the package of measures proposed in the draft report will go some way to developing such a pipeline.

Infrastructure Australia is currently undertaking an infrastructure audit and developing a 15 year pipeline of nationally significant infrastructure projects which will be revised every five years. As noted in the Productivity Commission’s draft report, “an independent IA would provide a muchneeded foil to the temptation for shortterm and politically expedient project selection.”

The role in developing infrastructure plan and ongoing independence of IA positions it well in disseminating information about a pipeline of projects.

5. Information request regarding land corridor and site preservation strategies

information request 7.2

The Commission seeks further information from participants on the costs and benefits of land corridor and site preservation strategies. In particular, it seeks evidence on the effectiveness of current jurisdictional strategies and the merits of a national regime. It also seeks views on the optimal ways in which corridors and sites can be used prior to infrastructure developments.

Please find attached a draft paper prepared by this Office which discusses the cost and benefits of corridor protection. In particular, the paper addresses:

  1. the background to the development of a national corridor protection strategy;
  2. population and urban growth challenges that are driving the need to develop new infrastructure corridors;
  3. key issues to be addressed in an effective corridor protection strategy; and
  4. principles for a national corridor protection strategy (see Appendix 4) which would then be translated into bi-lateral agreements between the Australian Government and State/Territory governments.

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[1]Australian Centre for Financial Studies, Melbourne Mercer Pension Index 2013