Office of the National Infrastructure Coordinator
Supplementary submission to the Productivity
Commission inquiry into public infrastructure
April 2014
Contents
1. Introduction ................................................................................................................................. 1
2. Information request regarding capital recycling ........................................................ 4
3. Information requests regarding infrastructure bond finance ............................... 6
4. Information request regarding pipeline of projects .................................................. 9
5. Information request regarding land corridor and site preservation
strategies ....................................................................................................................................... 10
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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.
2. 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 Office continues to endorse the consideration
of fundamental changes to existing models of infrastructure provision that
would see the greater application of beneficiary or user charging,
particularly for transport infrastructure and welcomes the Commission’s
draft recommendations in this area.
3. 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.
4. 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
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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.
5. 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.
6. 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.
7. 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.
8. 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.
9. 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 charging as recommended in PC’s draft
report.
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10. 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.
11. This submission includes additional information in a number of areas
requested by the Productivity Commission’s draft report including:
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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.
12. The Office welcomes the opportunity to provide further information at
the inquiry’s public hearings.
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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:



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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).
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Table 1: Categorising economic infrastructure sectors
1. Competitive sectors
National Electricity
Market (NEM)
Generators
NEM Retailers
Operating in competitive markets
NEM Distribution
and Transmission
Airports
Monopoly characteristics, but already subject to price regulation
within a well established regulatory framework.
Regional airports have less monopoly characteristics than major
airports. Accepted regulatory framework in place.
A number of ports have been transferred to private sector ownership
with a successful regulatory framework.
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.
ARTC Hunter Valley interests in coal. Monopoly characteristics,
however, subject to suitable and accepted regulatory framework.
Includes any remaining government owned terminals.
Accepted pricing and access regime currently operating.
Also operating in competitive markets – could possibly be transferred
with corresponding generators or with hedging arrangements.
2. Some level of monopoly characteristics, but with suitable regulation
Capital City Ports
Bulk Ports
Bulk commodity rail
Australian Rail
Track Corporation
(ARTC) East-West
Intermodal Rail
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.
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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.
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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
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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 stream1.
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.
1
Australian Centre for Financial Studies, Melbourne Mercer Pension Index 2013
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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 much-needed
foil to the temptation for short-term 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.
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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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