16 minute read
Sir Rod Eddington AO
Sir Rod Eddington AO
Australia’s governments must commit to a rational, evidence-based debate about how market creations can play a role in solving the infrastructure stasis, says Sir Rod Eddington AO.
My message today is that without substantial changes, Australia’s governments cannot afford the level of infrastructure investment demanded by both the economy and the community.
Victoria and New South Wales have just a few billion dollars left in additional investment opportunities that they can make without constraining their credit ratings. Queensland and South Australia have both been downgraded because the call for public expenditure on recurrent capital items has outstripped the capacity of those states’ budgets, and this story is replicated across the Federation.
While the Commonwealth itself retains substantial budget capacities, these would quickly evaporate if the Commonwealth sought to fund the backlog alone, without leveraging investments to drive substantial changes to state finances.
The Commonwealth’s capacity is real, but it is by no means adequate. The private sector is the key.
To deliver a sustained increase in the level of infrastructure investment, Australian governments must undertake substantial and wide-reaching reforms to fund infrastructure. This includes through increased revenues via targeted taxation, tolling and other user charges; reducing operating expenses to deliver substantial operating surpluses; experimentation and refinement of models to increase private investment; and the recycling of capital by privatising appropriate existing public assets to fund new infrastructure and shifting the investment burden for these assets to private owners.
The debate about productivity must mature beyond simple restatements of the problem. We must move further towards a genuine process to examine, debate and resolve the reforms needed to bring forward major transport utility and social infrastructure projects that will, in large part, underpin national productivity.
In the mid-1980s, Australia’s governments faced similar challenges of inflexibility in their balance sheets, and declining productivity. Policymakers responded with the progression of market-based reforms that underpinned our growth through two decades.
The floating of the dollar; the deregulation of the financial sector; the lowering of tariff and trade barriers; National Competition Policies and related, but incomplete, deregulation of infrastructure markets; the progressive liberalisation of labour markets; the reform of taxation and prudential regulation; and the development of the Commonwealth superannuation guarantee all represented part of a continuum of reforms that benefited the wider economy and spurred both innovation and investment across the nation, including in infrastructure.
The National Competition Policy (NCP), in particular, seeded bold reforms to create efficient infrastructure markets in areas including freight rail, aviation, telecommunications and the beginnings of a National Electricity Market (NEM).
Taken together, these reforms, and others that followed through the 1990s, facilitated Australia’s most sustained period of economic expansion and productivity growth.
For instance, the liberalisation of the banking sector in 1985 was a fundamental step forward. It allowed the entry of both foreign capital and global expertise, and saw the development of worldleading innovations, including the public private partnership model.
While the impact of China’s, Japan’s and Korea’s appetites for our resources must be acknowledged, two decades of uninterrupted economic growth
Sir Rod Eddington AO
would not have been achieved if not for the newfound flexibility of our national economy.
But that process of reform has stalled, and so has our productivity growth.
Australia’s ability to compete will be increasingly hampered by inefficient infrastructure unless real solutions are found.
Those solutions, I believe, will lie primarily in market-based responses.
Markets in infrastructure sectors like energy and communications are reasonably well understood in the community. Prices vary according to demand, and efficient price signals are sent for both consumption and investment.
But in other areas, like transport – and in some parts of the country, water and social services – the concept of reform and efficient markets is not well understood.
Markets exist where supply meets demand, where efficient pricing meets the cost of capital and operation, and where there are sufficient numbers of buyers and sellers to provide for the discovery of an efficient price.
The challenge for Australia is to begin an honest, rational and evidence-based debate about how market creations can assist in solving the funding challenge, particularly in infrastructure.
I would suggest that the best place to start, if we are going to be serious about productivity, should be completing the National Electricity Market reforms: they have to be our first priority.
Completing the NEM requires Queensland, New South Wales and Tasmania to provide their remaining electricity assets to the market, so that the NEM can finally operate, without distortions and inefficiencies, across the nation.
The inefficient pricing of electricity causes substantial pain to Australian households, and it’s eroding the capacity of our businesses to remain competitive.
In 1995, the National Competition Policy agreement saw Australia’s NEM states restructure government monopoly electricity businesses to promote efficient markets. That was well received not only here, but globally. The reforms were difficult, but they delivered real results.
Only Victoria and South Australia have achieved competitive, wholly private electricity sectors.
In the other states, some or all of their assets are either publicly owned or privately owned. In many cases, much of it is still government-owned – prices are regulated by governments, and the result is inefficient pricing and distortion.
But I would argue that policymakers in the states where the reform is incomplete should be confident in the outcome of well-executed reform.
Since privatising the state’s electricity assets between 1995 and 1997, power prices have been consistently lower in Victoria than in any other NEM state. In 2011, an Ernst & Young study found the price
Sir Rod Eddington AO
paid per megawatt hour in Victoria increased by just seven per cent in real terms from 1996–2010.
Over the same period, prices in New South Wales and Queensland increased by 45 per cent and 46 per cent respectively. The defence rests its case.
But, of course, reform is not easy, as the divisive policy debates that have dogged energy reform in New South Wales demonstrate; but it’s important to get the right reforms in place, because the consumers benefit.
Full electricity reform also represents the best opportunity to break the back of Australia’s broader infrastructure funding shortfall.
In New South Wales, the sale of network assets would improve the state’s bottom line by between $40 billion and $50 billion.
This would represent a generational boost to the state’s budget capacity, and equip New South Wales to make transformational investments in new economic and social infrastructure. The same could be said in other parts of the country.
Turning to transport, change is not easy.
Transport shortfalls across freight and passenger networks are imposing substantial productivity constraints on our nation.
By some estimates, congestion on the road network nationally is stripping more than $12 billion from the economy this year alone. In Melbourne, road congestion will probably shred something like $4 billion from the state’s economy this year.
For most road users, access to the road network appears ‘free’ at the point of use because the current opaque charging structure does not provide motorists with visibility of the charges they pay. And the current approach does not and cannot adequately reflect the time and location of road use.
In the freight sector particularly, the pricing disparities between road and rail have distorted the market.
Only five per cent of total road cost to freight users stems from road access charging, while for rail freight, track charges account for between 30 and 40 per cent of rail freight costs.
The historic response to mounting demand has been to add more capacity to the transport network, and this will clearly remain an ongoing requirement.
But there are limits to supply-only responses, and Australia’s major cities are facing a situation in which they can no longer only seek to build their way out of trouble.
Policymakers must begin to face up to the challenges and opportunities that are posed by road network congestion, including through the exploration of rational market signals for access to our road networks.
Sir Rod Eddington AO
In the medium term, a mixture of new revenue and expense measures will be needed to provide a pool of funding to advance well-considered, well-conceived projects
Now, I know the political complexity of pricing reforms in the national market is considerable, and remains a persuasive force towards retention of the status quo.
The reform pathway for achieving change will require a number of steps, and the creation of a number of competitive submarkets, and it’s likely that large-area road pricing for freight vehicles will be the first step.
But experience shows that these kinds of reforms require champions.
And now, with congestion hurting the abilities of businesses and the amenity of households, it’s time to begin a mature, dispassionate debate about the options posed by the development of a rational transport market.
I do not see this kind of reform as either immediately possible or, in some cases, immediately acceptable to the motoring public. But we must
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SMARTER TRAVEL UNLOCKING CITIES – THE CURE FOR URBAN CONGESTION
With 60 per cent of the world’s population predicted to live in urban areas within 20 years, cities across the globe are grappling with increasing congestion and the impact this can have on their economic and social fabric.
Given the adverse effect that congestion has on productivity, inward investment, air quality, overall attractiveness and liveability of a city, the urgency to find smarter ways to move people around cities has never been more pertinent.
In today’s economic and environmental climate, the role of more sustainable movement, such as walking, cycling, public transport and not travelling at all by encouraging smarter working, is a key factor for cities in retaining a competitive advantage. To achieve wider economic, environmental and social benefits, innovations in sustainable travel need to be actively encouraged and progressed by both the public and private sectors. We need to consider how to make better use of what we have and dissipate people across networks to make them work more efficiently.
Viable transport strategies are based on a number of core themes:
• planning, which allows the delivery of the right solutions at an appropriate cost • accessibility to services and facilities • supporting urban development that generates a high level of trips to locations with the appropriate level of public transport accessibility and/ or capacity, thus reducing the need to travel by car • improving the capacity and accessibility of sustainable modes of transport, such as trains, buses, walking and cycling. This includes the multimodal interchange between different forms of transport, as well as attractive fare pricing schemes • facilitating the efficient distribution of freight while minimising its impacts on the transport network.
Transport behaviour change
There is increasingly compelling evidence that car use has passed its peak and entered a long period of decline. It appears that the costs of owning and running a car, environmental impact, and the increased use of portable electronic devices making public transport journeys productive, mean that public transport is increasingly a mode of choice. Increasing the accessibility of existing and growth employment areas is a strategy that will be delivered by rail and active travel schemes.
In the United Kingdom there has been a 50 per cent increase in rail demand over the past 10-12 years. In an Australian context, it is anticipated that by 2031, public transport trips in Perth will increase from 345,000 today to close to one million.
In addition, trends in growth sectors like financial and business services require different working environments to traditional sectors. Higher capacity transport links into concentrated business centres will determine the success of this employment growth, as this allows greater employment densities to be created, at which the productivity of organisations tends to be greater.
The future of public transport
Developing infrastructure to keep a city moving by providing realistic and attractive sustainable mode choices is at the top of the agenda for government strategy and policymakers as well as users.
There is an increased focus on city transport plans that are centred on moving people rather than moving private vehicles. The focus for public and private investment is implementing and/or expanding the accessibility and efficiency of public transport systems such as bus and rail. This has the additional benefit of improving air quality by reducing reliance on carbon inefficient travel, coupled with improving public health by ensuring greater uptake of active travel modes; satisfying public health priorities.
Significant funding is being allocated to cycling in cities around the world, including New York, Sydney and London, where bicycles account for the British capital’s fastest growing mode share. In addition to a cycle hire scheme aimed at occasional cycle users and tourists, £168 million has been allocated for the design and implementation of 12 cycle superhighways. These routes will provide safer, faster, more direct and continuous routes strategically located to serve the busiest commuting corridors into central London.
Positive change
Public transport strategies involve significant time and cost inputs in the planning stages to ensure they deliver for now and the future. Getting the transport mix right is of national importance as cities compete on a number of fronts and on a global scale for liveability, as a financial/business hub and as a preferred tourist destination.
Making better use of exisiting transport networks in cities is pivotal. This needs a strong application of travel demand management (TDM) to ensure that what we have is being used to its optimum levels. Future cities will be a well-balanced mix of improved application of home working technologies and attitudes towards it, lowcarbon vehicle technology, peak spreading by implementing TDM strategies to alleviate overcrowding and spread demand, as well as the pivotal increase in the use of active travel modes; all of which create positive change socially, economically and financially.
The author – Rose McArthur
About Sinclair Knight Merz
Sinclair Knight Merz (SKM) works with clients globally to address their unique infrastructure requirements. SKM has extensive experience in providing city leaders with strategic transport advice and has a track record in successful travel demand management planning.
Rose McArthur is SKM’s practice leader for sustainable travel, specialising in travel demand management and the field of development-related travel planning –specifically the use of planning regulations to deliver sustainable growth in transport terms. She works to support and mentor individuals wanting to get involved in the travel planning discipline, and lectures on this topic internationally.
Sir Rod Eddington AO
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begin the discussion about the options, the trade-offs and the opportunities to make Australia’s freight and passenger transport networks work better.
There are some issues around water, as well. They are important, and again some of the same sorts of signals apply.
The creation or completion of markets in electricity, water and transport are important reforms, and are fundamental to the productivity debate.
But solving the infrastructure funding challenge will require us to go further still.
Governments cannot expect to be able to fund a larger capital expenditure program, or even sustain the current levels, without substantial reforms to their own costs.
I spoke earlier about the opportunities that exist for asset sales, and they are genuine opportunities to get projects moving in the short term.
But the recycling of capital must be accompanied by a complex period of reform to lower the cost of public service delivery; this will be both complex and challenging.
Governments must return to a position in which they are routinely delivering net operating surpluses, because those surpluses fund capital investment.
The past decade has seen growth in the operating expenditures by Australia’s governments outstrip their revenue growth.
Without reform, New South Wales will see social security and welfare costs escalate by 6.6 per cent per year, and health by 6.2 per cent per year.
But revenue growth is projected to average just 4.9 per cent.
In Victoria, Michael Vertigan’s review of state finances found that Victoria’s budget position has declined since the early 2000s, with average annual spending growth outstripping average revenue growth. Queensland’s and South Australia’s budget challenges are also well known.
Health costs alone are projected to increase from 15 to 26 per cent of all Commonwealth spending by 2050, and the cost of public health will eclipse the total revenue of most states by the early 2040s.
Without reform, governments won’t be able to fund all the promises they’ve made, and we’re not the first to have to think about that.
In 2011, on public sector reform, the United Kingdom’s Prime Minister, David Cameron, said: ‘I want one of the great achievements of this government to be the complete modernisation of our
public services. Like every other western industrial nation, we won’t sustainably live within our means with unreformed public services and out-of-date welfare systems.’
We know it’s difficult.
But the central goal for government must be the delivery of the best possible services at the best value to taxpayers.
The reforms I’ve outlined are not all immediately possible; they will be very difficult, but they are ultimately necessary.
In the immediate term, new projects will have to be funded through the sale of existing assets, through public sector borrowing, through tolls and through the engagement of the private sector.
In the medium term, a mixture of new revenue and expense measures will be needed to provide a pool of funding to advance well-considered, wellconceived projects.
The development of rational markets in transport, utilities and public services must be the central focus.
What Australia is missing in all of this is a uniting national context within which to undertake reforms.
The experience of the NCP shows that a burning platform is required to drive consensus about change.
I would argue that that burning platform exists, because governments, business and the community are in agreement about the need for better infrastructure outcomes.
The roles of formal institutions, like Infrastructure Australia, the Productivity Commission and the National Water Commission, and the important contributions of bodies like Infrastructure Partnerships Australia, are all substantial in doing the heavy lifting to articulate the case for change.
But formal institutions can only inform the public debate. Only Australia’s governments can drive and lead these kinds of changes.
What is needed is a formal process to examine the rationale and requirement for change, and to provide a uniting national process to identify, assess, experiment and implement the transformational changes that will allow Australia to better its contemporary challenges.
I’m sure that the Partnerships conference will deliver clear recommendations about the sorts of changes we need; and that its proceedings will help us to ignite the national reform debate.
Sir Rod Eddington AO
SIR ROD EDDINGTON AO
Rod Eddington is non-executive Chairman (Aust & NZ) of J.P. Morgan, Chairman of Infrastructure Australia and non-executive Chairman of Lion.
Educated as an engineer at the UWA and then Oxford University as Western Australia’s 1974 Rhodes Scholar, Sir Rod’s career began in transport and aviation and he went on to become CEO of Cathay Pacific, Ansett Airlines and British Airways, before retiring in late 2005 and returning to Australia.
In 2005, Sir Rod was awarded a Knighthood by the British Government for service to civil aviation, and in 2012, an Officer of the Order of Australia (AO) for service to business and commerce.
In addition to maintaining non-executive directorships with News Corporation, CLP (China Light & Power) Holdings and John Swire & Sons, Sir Rod also serves as Chairman of Victorian Major Events Company and President of the Australia Japan Business Cooperation Committee.
