16 minute read
The oracle of Australian infrastructure An interview with Sir Rod Eddington
The Great Australian Fragmentation is the nation’s fi rst biggest infrastructure problem. The second is who is going to pay for it. Leon Gettler discusses these issues with the captain steering Australia’s historic infrastructure reforms, Sir Rod Eddington.
Each of Australia’s three tiers of government are responsible for building and maintaining the nation’s infrastructure from local roads, hospitals, schools, public transport, aviation, ports and telecommunications.
This has created a range of federal, state and local bodies in charge of different elements of infrastructure, from freight to roads. There is little coordination; the system is fragmented.
For Australia, the challenge is not just about building new rail lines, roads, and ports, and creating a faster and more effi cient broadband network, but about ending the fragmentation and creating some policy coordination.
Sir Rod Eddington agrees that fragmentation is one of the biggest hurdles. It’s there, he says, not just in infrastructure but in a range of other areas. Part of the problem refl ects Australian history and a national constitution framed 110 years ago.
“The challenge of the national agenda is not just a frustration in infrastructure,” Sir Rod says. “You hear echoes of it in education and in health. It is not something that is limited to infrastructure.
“Infrastructure is one of those topics where naturally parts of it fall to federal government, parts of it fall to the states and parts of it fall to local governments. It’s about the way in which our constitution is constructed.
“Education and health, for instance, are currently matters for state governments, and on the transport side, rail infrastructure is a matter for state entities. Shipping and aviation are federal matters. Telecommunications is a federal matter.
“The reality is that parts of the infrastructure jigsaw that were put in place before Federation were and are still organised along state lines. The things that came to pass since Federation – aviation and telecommunications for example – are all organised nationally.
“In a sense, that is one of the things Australia is trying to do, get a national perspective on these sorts of things.
The oracle of Australian infrastructure
“While we have state bodies there, we also have federal entities that have responsibility for water, that have responsibility for energy and we have federal bodies that have oversight of transportation.
“There really has to be more coordination, and one of the frustrations that the infrastructure challenge has faced over the last few decades has been to try and get the key players thinking about it nationally rather than on a state by state basis.”
Then there is the question of cost.
With Australia’s population tipped to hit at least 35 million by 2050, the next 40 years will make or break Australia in terms of its infrastructure. Unless the funding is right, and models that have the private sector investing in infrastructure are encouraged, then Australia risks becoming a backwater.
On top of that are the fi ndings of the federal government’s recent intergenerational report which warns: “A growing population will help manage pressures of the ageing population but will put pressure on our infrastructure, services and environment. This will require continued planning and investment ahead of time.”
The intergenerational report identifi es a key problem. An ageing population means fewer will be entering the workforce. As a result, the tax base will shrink and tax revenues will not keep pace with rising costs, which means the private sector will have to help fund infrastructure.
And it will be costly. In freight and transport alone, the amounts required are staggering. IPA has called for a complete overhaul of the system. As Prime Minister Kevin Rudd said in January, the needs are “truly staggering”. According to IBISWorld fi gures, commissioned by IPA, Australia’s freight volumes will triple by 2050, an inevitable development from the projected population growth in that period. According to the report, transport infrastructure would need to nearly quadruple to an eye-popping $62.5 billion a year to meet the demand.
An interim report prepared by Infrastructure Australia says priority should be placed on 40 road projects worth $69 billion and six port and airport projects worth $6 billion.
The infrastructure challenge cannot be underestimated. Over the long term, infrastructure investment in Australia has been slipping. According to a 2009 OECD report, Australia’s investment in transport, storage and communications infrastructure as a percentage of GDP fell between the 1980s and 1990s. Worse still, it fell again in the fi rst decade of this century.
In contrast, infrastructure investment for these sectors has been rising across the OECD. That means one thing – if the trend continues, Australia will slip behind the rest of the world, affecting national productivity, growth and living standards.
There is a massive chasm between the infrastructure now in place and what this country needs.
Better infrastructure not only creates a more effi cient and workable country, it lifts productivity. International Monetary Fund research shows that in developed countries such as Australia, increasing public infrastructure stock by just one per cent results in an increase in output by 0.2 per cent. According to the Productivity Commission, improving the effi ciency of Australia’s energy and transport infrastructure could increase GDP by two per cent.
Sir Rod is also chairman of Infrastructure Australia, the body established by the Rudd Government when it took offi ce in 2007 to provide advice on the long-term planning of Australia’s infrastructure needs. Infrastructure Australia is now working on a National Ports Strategy and a Freight Network Plan. Infrastructure Australia works closely with COAG, which seeks to develop a national approach to infrastructure issues. It also reports to the infrastructure minister Anthony Albanese.
The Hinze Dam Stage 3 project will increase water supply from the dam to 225 million litres a day. (Image: Thiess)
Sir Rod is also closely linked to Infrastructure Partnerships Australia. IPA chairman Mark Birrell sits on the Infrastructure Australia board and Sir Rod gave the Infrastructure Oration at the IPA’s annual dinner in March.
Sir Rod says the services sector needs infrastructure.
“The last 50 years have shown us that services are a growing percentage of the economy,” Sir Rod says.
“Technology has shown us that traditional areas of employment like agriculture and manufacturing require fewer and fewer people to deliver the goods. Instead, we have found a growing emphasis on services in the economy and services in the employment community.
“Three quarters of our economy is in services today, and over 80 per cent of employment is in services.
“That raises the question about the role of cities and their supporting regions in a services economy. What, for example, is the role of our international gateways, like the ports and the airports?
“We see both of those as being important in the economy of today and tomorrow.
“We don’t just export iron ore and coal and beef through those gateways. We import manufactured goods like motor cars.
“And also, the third and fourth biggest contributors to the economy in Australia today are education and tourism, both of which depend on our airports.”
He says the workability of our cities is an important part of the infrastructure jigsaw.
“I think one of the things we are beginning to see now is this whole question of the role of cities and what they mean for the economy and what they mean for liveability and the environment,” he says.
“Now, when governments refl ect on infrastructure, they don’t just refl ect on the economy, they also refl ect on the community and sustainability. In Australia, when refl ecting on the infrastructure needs of the economy, we need to look hard at those issues as well.”
The other key part of the equation is projecting into the future, complete with its unknowns and uncertainties. What will tomorrow’s economy look like? What will be its key drivers?
“One of the ways you can look at it is to say, what is the economy going to look like in 20-30 years time? And importantly, what is the role of our of cities, the international gateways? We also see regional and rural Australia in that context and ask what their infrastructure needs are.
“You come back to the connectivity and viability of our international gateways for trade.
“So you try and get a vision of where the economy is headed, where the community is going and what the sustainability agenda will be. As you refl ect on infrastructure for the future, you need to refl ect on those things.”
The world today faces challenges that were inconceivable just 10 years ago. These include convergence of industries and products, the rising cost of capital, the growth of the fi nance economy, the end of low infl ation, globalisation’s transformation of trade, water, terrorism versus the nation state, derivatives and the shadow banking system, the rise of China and India, overcapacity, ageing, climate, networks, intangibles and volatility of markets.
Our supply chains were built to get coal to the loaders, and wheat, sugar and barley to the silos at port. Will that still be required 40 years from now? What is the future of coal in a low carbon economy? Will we still be building rail to new coalfi elds? Will the government continue to subsidise a timber industry and create infrastructure around it when it takes water and land away from food production? How many people will be living in the eastern cities in 2050? Will new cities emerge in the population boom? Will, for example, a place like Broome become the next Gold Coast? Will the Murray-Darling have a future as an agriculture producing area as global warming takes hold?
Sir Rod says this is the major challenge for all infrastructure planning.
“We don’t know the answer to those questions, in part because they beg other questions. Like, for example, what about carbon capture and storage? Will that be available at an industrial level? That’s going to have a real impact on the future of coal’s role in the future economy.
“We need to think about what the economy looks like tomorrow and what’s happening tomorrow.
“The electricity grid, for example, needs to accommodate renewable energy supplies including wind and solar which will come from different geographies from coal fi red plants.
“It’s about the need to look forward to the economy of the future.”
Sir Rod says Infrastructure Australia’s review of freight and electricity are an important part of this future planning.
“We are looking hard at a national ports policy. The resources sector, for example, relies on our international gateways and our ports, and we have seen some real constraints around our country.
“We have 60-plus ports around the country, we need to ensure that we have an understanding of the holistic picture of our ports and how they work and how they contribute to the economy.
“There are also issues about the connectivity of the ports through surface infrastructure, road and rail being key pieces of the jigsaw, and how all our ports are linked in.
“We are also looking at the demands on the national electricity grid, challenged as it is by things like the commitment to renewable energy and renewable energy sources.
“The current electricity grid is built primarily around fossil fuelled power plants, many of which are located at coal fi elds. In a world where renewable energy also has an important role, the question is what you need to do to the grid to accommodate these new energy sources.”
But doesn’t global warming create issues for road transport? In a low carbon economy, road transport is now vilifi ed by many because of its relatively high output of greenhouse gas emissions.
Sir Rod concedes it is an issue but insists the planning needs to be realistic.
“My view is quite simple,” he says. “This not about road or rail, it’s about road and rail. If you look at freight for instance, one of the things we are focused on is rail freight and the capacity of the network to carry more of the freight burden, particularly for long haul freight.
“Now, freight comes into its own over a long distance. But a lot of things that get moved in a freight sense end up at your front door and they are not going to make the last piece of that journey by rail. We need to recognise the importance of the road network to freight as well. Not instead of the rail network but as well as.”
When all is said and done, however, there can be no infrastructure growth without the private sector. “To be frank if it doesn’t happen, the infrastructure won’t get built,” he says.
State governments have turned to PPPs to put infrastructure projects on the map.
Potts Point Sydney: Tourism is the fourth biggest contributor to the Australian economy.
“Traditionally, much of the funding for infrastructure has come from federal and state governments, but federal and state purses are getting stretched thinner and thinner by escalating healthcare and education costs and escalating spending on issues like security, law and order and social welfare. How does government continue to meet its growing obligations, and on the other hand meet the challenge of infrastructure spending?
“We need to be more inventive about how we think about infrastructure funding.”
Many state governments have turned to public private partnerships to get major projects off the ground. Examples include CityLink, EastLink and the desalination plant in Victoria, the Sydney harbour tunnel and the link to Brisbane airport.
Sir Rod says the PPP model is a “broad church” and governments need to consider it carefully. “We have seen examples of where this idea works and where it doesn’t,” he says. “The issues are who takes what risks when. Who takes the construction risk, who takes the patronage risk and what sort of returns do infrastructure investors get?
“The private sector will step up to infrastructure investment as long as it sees it as a reasonable investment opportunity. There is no shortage of investment funds looking for long term stable returns. The question is on what terms.”
Another innovative approach, he says, is developing infrastructure bonds for the public to invest in big projects, and get good returns.
In the end, however, it will require some creative and lateral thinking from Australia’s political leaders. “Governments will need to think about fi nding opportunities in the broadest sense,” he says.
Snapshot – Sir Rod Eddington
Educated as an engineer at the University of Western Australia and then Oxford University as WA’s 1974 Rhodes Scholar, he has demonstrated his acumen and expertise on the national, regional, and international stages. Sir Rod’s career began in transport and aviation in 1979 when he joined the Swire Group and Cathay Pacifi c and went on to be CEO of Cathay Pacifi c, Ansett and British Airways, before retiring in late 2005 to return to Australia. In 2005, Sir Rod was awarded a knighthood by the British Government for services to civil aviation. In December 2006, he completed a study for the British Government on the links between transport and the economy, before conducting in 2008 a similar investigation and report for the Victorian Government, the ‘East-West Link Needs Assessment’ transport study. Today, numerous companies benefi t from his time and talents. In addition to maintaining non-executive directorships with News Corporation, Rio Tinto PLC, CLP (China Light & Power) Holdings and John Swire & Sons Pty Ltd, Sir Rod also serves as chairman of Victorian Major Events Company.
DLA PHILLIPS FOX WELL PLACED TO TAKE ADVANTAGE OF THE UPSWING IN INFRASTRUCTURE PROJECTS
Australian Federal Government economic policy is clear: increasing economic productivity through investment in infrastructure is a national priority and essential to Australia’s long-term growth prospects.
A shortfall in infrastructure investment over recent decades has resulted in a disconnect between the infrastructure Australia needs and the infrastructure it has - particularly when it comes to ports, freight, rail, roads and broadband.
Productivity Commission research has indicated that improving the efficiency of energy and transport infrastructure could lead to an increase in Australia’s gross domestic product by almost two per cent.
With infrastructure investment on the up, leading business law firm DLA Phillips Fox has seen a growth in demand from industry players for cost effective and strategic solutions.
The firm has significant experience advising public and private sector market participants on the biggest infrastructure projects underway in Australia including the Oakajee Port & Rail project in Western Australia, the Regional Rail Link in Victoria, Sydney Metro in New South Wales and the Gladstone LNG Project in Queensland.
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TONY HOLLAND
CEO, DLA Phillips Fox
LEADING ADVISORS TO THE INFRASTRUCTURE SECTOR
www.dlaphillipsfox.com
