Treasurer Scott Morrison’s budget speech for 2018/19 featured a reflection on the physical transport assets being delivered by government. In addition, the major new transport infrastructure initiatives announced were a $1 billion Urban Congestion Package, and a $3.5 billion freight road upgrade package. These works will be key to capitalising on the rise of goods distribution anticipated through increased use of online shopping, the rebound in exports driven by economic growth in south-east Asia and low Australian dollar relative to the USD, and the rise of agriculture.
However, the budget papers indicate a decline in spending in infrastructure on the 2017-18 financial year. In his speech, Morrison cited 14 major infrastructure projects encompassed in the rolling 10 year $75 billion infrastructure investment strategy. The list of projects is not necessarily reflective of new works to commence in the 2018/19 financial year. Of the major infrastructure projects cited in the budget, at least 8 had been announced by the time the previous budget was handed down, suggesting much of these were re-announcements. The Bridgewater Bridge for example, a $750 million bridge to span across the Derwent River in Tasmania, was first reported by Cordell in 2011.
In total, the budget papers estimate $5.3 billion in road expenditure, and $1.2 billion on rail. These areas of funding are expected to slow by 31% and 48.9% respectively, in real terms, by 2021-22. Infrastructure spending estimates and projections over the next four years are shown in Figure 1.
“Innovative methods” of funding
The budget papers partially attribute the decline in transport infrastructure spending to “innovative methods” of funding.’ Some of the methods of infrastructure financing employed over the financial year ensure that spending stays out of the budget balance.
One such innovation is equity investment. This means that the government invests in assets or transport management companies with a view to make a commercial return, rather than providing direct funding grants to build infrastructure. One of the benefits of equity investment is that, because the expenditure contributes to government assets, the spending does not appear on the budget as expenditure.
In addition to the $9.1 billion in expenditure outlined in the full budget paper, the government is funding $9.3 billion of the inland rail line, from Melbourne to Brisbane, through equity investment. A commitment of $5 billion to the Melbourne Airport Rail Link is also being explored for equity options. $5.3 billion in equity investment will be used in establishing the WSA Co., to deliver the Western Sydney Airport. Had these three projects alone been funded through government grants, the deficit may have blown out to $34.1 billion.
At first glance, this seems like sound approach to infrastructure investment. The government is acquiring commercial assets to deliver infrastructure, which will likely increase economic capacity and potentially productivity. Keeping large scale infrastructure funding off the balance sheet maintains a healthy appearance of debt, which is crucial for attracting investment in Australia.
However, the downside is that these assets need to deliver a financial return, otherwise the government may be unable to repay the debt borrowed to fund equity investments. In other words, these investments may manifest in the budget deficit in the long term.
A return on these infrastructure assets mean they need to be sellable and profitable. Profitability may be sought through tolls and charges, which ultimately eat into the pockets of consumers and businesses.