The right needs to get innovative about infrastructure

by on 4 February, 2010

Sean-GarmanA new approach is needed on infrastructure, argues Sean Garman.

Australia’s infrastructure is old, creaking and needs to be urgently replaced or updated. Transport networks are congested. Energy distributors are labouring under old and decaying stations and lines. Australian broadband is slower than anything I’ve had to endure. Water is wasted at incredible rates. We can go on and on about infrastructure problems.

The issue with the centre-right is that too often we get into an ideological fit about infrastructure. The automatic assumption is that the private sector must run it and the distribution – be it water, broadband, energy etc – must be deregulated in order to attract investment and subsequent improvements in services. Life is more complex than simplistic assumptions. Both the left and the right tend to make serious mistakes with infrastructure but I want to focus on the centre-right.

I agreed with Barry O’Farrell when he stood against the privatisation of NSW energy generators. It was not because I wanted to stick it to Labor. Instead of beating the drum of economic liberalism and criticising the Liberal leader, I recognised that it was a policy designed for a different era.

At the time of the attempted sale, the international financial markets spun out of control. Australia has been protected from the worst of the credit crunch. Many Australians, including the commentators, cannot imagine or understand what was happening to banks and financial institutions around the world. The equivalent would be to turn on the television and have the news announcer state that NAB and/or the CBA are about to collapse. Now, imagine what they would do to your confidence?

This is not off the topic, it is very much on the topic because if banks, pension funds, insurance firms, hedge funds and private equity partnerships are all seeing massive losses in the financial markets spilling over to the “real economy”, who on earth would pay upwards of $20 billion to purchase and upgrade an energy network? Australia was largely protected which meant that the media and centre-right thinkers thought that selling the infrastructure network will be relatively easy.

Reality dictates that no one in their right mind would be able to raise the funds from banks. They were hoarding cash like there was no tomorrow. They could not raise it from the markets because institutional shareholders were running for the hills. The centre-right got itself locked into a narrow mind set that could not see the turmoil in front of their eyes. If private sector participants cannot raise enough cash to fund the initial purchase, let alone funding any upgrades, then we should not be supporting such a poorly thought-through policy.
We also have to accept that the government needs more than just a guiding hand in infrastructure. It needs to set a strategy to create certainty to get long-term investment – public and private – that results in improved quality of service without costing too much.

I think that the centre-right should look at more innovative financing structures to get private sector funds into infrastructure deals.  Superannuation firms have a massive pool of savings that could be used to invest in public infrastructure deals with a combined private-public board of directors that tries to get the best out of both sectors.

The type of income generated from infrastructure deals will match the long-term liabilities and is less volatile than investing the bulk of funds in the share markets. Many smaller investors will be happier knowing that their super fund will invest in an investment that can generate a regular income stream over a thirty-year period than invest in a volatile and comparatively risky share market.

Convertible debt can be issued which means that if the infrastructure deal has temporary cash flow problems the super firms can convert the debt into equity and take the cash either in dividends or in capital gains if they sell their stake to others. This is a way to ensure that superannuation funds have some level of control over the financial performance of the infrastructure deals.

If Barry O’Farrell is to become Premier of NSW and if we are serious about being competitive in investing in our critical infrastructure then we need to be innovative in funding infrastructure deals. Australia is unique in both that it has a large pool of savings, large-scale infrastructure needs and a rapidly growing population. We need to seize this opportunity to provide the infrastructure that will lift the barriers on economic growth while also providing a good investment for our ageing population.

Garman works in banking in the City of London.
He is on the committee of City Future; a part of the Conservative Party’s
Business Relations organisation and provides policy and economic research to
the UK
Shadow Treasury team. Sean has a B-Com from Macquarie University
where he was Deputy Chairmen of the Student Council and President of the
Liberal Club.

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