Public Private Partnerships: The key to a successful infrastructure system

by on 19 October, 2012

Sun Yong Kim cover pictureSun-Yong Kim defines the many problems
with government infrastructure, including lessons not learned. 

Given the relative inefficiencies of
governmental infrastructure over the years, it is understandable that there is
much cynicism on any governmental role in Infrastructure. After years of
government investment, Australian infrastructure is still manifestly out of date with freight railway and a track system that has yet
to move forward from the 1960s. After 10 years of continuing public
commitments, the Parramatta-Epping Rail link has yet to be built, the Epping to
Chatswood Link was built with half the speed capacity originally promised and
High Speed Rail remains a second rate priority for the current government.

Whilst the abysmal failure of
governmental infrastructure is there for all to see, the relative failures of
government infrastructure should not be interpreted as meaning that the
government cannot play an effective role in promoting a world class
infrastructure system. On the contrary, experience in the great modern
infrastructure systems of Asia suggest that an active government in partnership
with the private sector is crucial towards harnessing a 21st century
infrastructure system. Public Private Partnerships have been a feature of the
great railway systems of the past, present and the future and if Australia
wants to move forward in the 21st century, she would be wise to adopt this
proven infrastructure strategy.

At the very heart of Public Private
Partnerships in Infrastructure is an appreciation that the private sector
investment must be at the centre of commercially viable infrastructure. Only
Private companies that run on efficient market mechanisms will be able to
ensure efficient infrastructure investments for the future and eliminate
wasteful investments that have too often been a trait of the government centric
approach to infrastructure investment. Experience shows that the government can
help the private sector achieve these goals, but if it takes its place as the
infrastructure venture capitalist, infrastructure is doomed to fail.

Past experience of success is often a
very good guide for what an instructive governmental role in infrastructure
should look like.  During the
aftermath of the Northridge Earthquake in California in 1994, California Governor
Pete Wilson provided a bonus/penalty of $200 000 for every day before/after
deadline infrastructure tenders finished the project as a means to quicken up
the delays in infrastructure. In addition, Governor Wilson’s exercise of his
‘emergency powers’ which suspended all regulations and statutes that might
impede or delay recovery of this damage for the duration of crisis also helped
create the business environment that made these infrastructure projects more
quickly done. By providing incentives for the private sector to invest more in
infrastructure, Governor Wilson was able to fundamentally change a crippled
infrastructure system dominated by the unions to a modern world class one that
was able to assist his state in its our of need.

It is very encouraging that the
Coalition’s policy at the last 2010 election advocated for a greater private
involvement in Infrastructure.  The
Infrastructure Partnerships Scheme which allows issuance of 10 year Private
Infrastructure bonds that will receive concessional tax treatment in the form
of a 10% tax rebate will undoubtedly replace previously wasteful government
investment with more efficient and effective private infrastructure investment.
Moreover the fact that the scheme allows two-thirds of the tax liability of
superannuation funds to be covered by the tax rebate encourages savings that is
crucial to economic security. However it is only a step in the right direction.

The 10 per cent tax rebate is nowhere
enough of a tax break. The tax rebate amounts to  $150 million [per annum] up as a tax concession that is not
enough to even fund one big project, let alone any number of projects. The tax
rebate in itself is a drop in the ocean and needs to be dramatically expanded
for it to have any effect.

This is perhaps where an instructive
government could play a crucial role. Whilst small scale infrastructure
projects are heavily commercially viable, large scale infrastructure projects
such as High Speed Rail are not. No matter how large the tax break, the private
sector simply would not be interested in funding such large-scale investments
given the scale of costs involved. This is where there is a necessary role for
government in infrastructure.

It is a known fact that the Australian
Governments AAA credit rating allows it to be far better placed than private
companies to cost-effectively fund essential infrastructure. Only with the
credit rating of government was it possible for the Transcontinental Railway to
have been built in the United States and for the Shinkansen to have made any
traction in East Asia. For that reason we should seriously consider the
suggestion of Transfield Holdings chairman Tony Shepherd who has called for
long-term guaranteed indexed bonds. Shepherd calls specifically for 30-year
Australian government-guaranteed indexed bonds, which he believes would be
attractive to mums and dads and super funds. By engaging an efficient public
private partnership which funds large scale infrastructure projects which are
run by the private sector but funded through government securities, a world
class infrastructure system is only a matter of time.

Sun Yong Kim studies Commerce/Law at Macquarie University and is a member of the Young Liberal movement. He has also launched a policy magazine/blog, Aus Solutions. www.aussolutions.com.au

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