Private sector best equipped to absorb infrastructure risk

Malcolm Turnbull blames the National Broadband Network debacle on the former Labor government, but he has adopted Labor’s framework for its broadband dream as the template for his infrastructure policy.

In place of the simple grants traditionally used by the commonwealth to fund state roads and rail, the Turnbull government wants to be the prime investor in projects of its choosing.

“I want the federal government to be more than just an ATM. We must be investment partners,” the Prime Minister has said.

Turnbull is aiming to become a nation-builder by funding corporate vehicles that do not appear on the budget.

The government has set up a special company to receive its $5.3 billion equity investment in the West Sydney Airport and is funnelling its $9bn investment in the Melbourne-Brisbane inland rail route through the Australian Rail Track Corporation. This is the model used for the $48bn funding of the NBN.

The government controls dozens of organisations such as the ABC, SBS and the Future Fund that sit on its books as budget line items. If the government injects funds, it is recorded as an expense and adds to the deficit.

But the NBN, the West Sydney Airport Corporation and ARTC are all classed as “public non-financial corporations”. They are treated in the budget as investments. Infrastructure minister Paul Fletcher says the new approach reflects the government’s concern for its balance sheet. Grants to the states boost the state balance sheets but add liabilities to the commonwealth.

However, the new approach is not costless. As a report on the NBN by the Parliamentary Budget Office last year showed, investments have to be funded with public debt. It estimates that the annual interest cost on financing the NBN will rise from $580 million in 2015-16 to $2.1bn by 2026-27. This assumes everything goes to plan.

The budget records a cashflow of almost $90bn into financial assets across the five years to 2019-20, with a commitment of $22bn in this year alone. This is all funded with debt. Turnbull’s Snowy Hydro Project would add to this.

There is nothing wrong with funding infrastructure with debt, provided it makes a return that exceeds the financing cost. In the case of the NBN, this prospect is vanishing. Chief executive Bill Morrow says it is receiving $43 a month from each household it services but needs $52 to recover costs. The Australian Competition & Consumer Commission argues the NBN should be relieved of its obligation to recover costs. Instead the government should consider direct budget funding for the NBN’s non-commercial services to the regions, debt relief and an asset writedown.

This goes to the heart of the problem with funding infrastructure through off-budget corporate vehicles. To be excluded from the budget, they should operate on commercial principles, selling services at market prices with the objective of delivering a profit. It is assumed that investments will deliver dividends and that loans will pay interest and ultimately be repaid.

The NBN shows that even when they are off budget, the risk ultimately comes back to the taxpayer. There is scant likelihood of the NBN paying dividends and there are questions over its ability to repay the government’s $18.8bn loan to it when it falls due in 2020-21. The public debt interest still has to be paid.

Yesterday Finance Minister Mathias Cormann and Fletcher set out a statement of expectations for West Sydney Airport, including that it operate on private sector principles. However, airport construction is a high-risk business in which the commonwealth has little experience. There are risks around the design, the construction and its usage. It will be hard to push cost blowouts or revenue shortfalls on to customers, leaving taxpayers on the hook.

Inland Rail faces similar issues. The ARTC is a highly experienced builder of rail, and a private-public partnership will be used to defray risk in the most difficult part of the project, the 6km tunnel through the Toowoomba ranges.

However, the overall economic case for the rail was marginal and the business case — which takes account only of the profitability of the venture rather than the broader economic benefits — showed it would never cover its capital costs.

The business case relies on projections of a big increase in coal and regional and intercity freight. It does not allow for the potential duplication of the Newell Highway to make road more competitive.

All these government-owned infrastructure ventures are susceptible to political interference. The political requirement that urban users of the NBN subsidise services to the bush is contributing to its commercial crisis.

It has long been rumoured that the Inland Rail was itself a political fix — Barnaby Joyce refused to sign on to the West Sydney Airport favouring urban Liberal voters unless Turnbull delivered the rail project for the Nationals. It was therefore stunning to see all Queensland backbench Nationals MPs and senators (including temporary backbencher Matt Canavan) put their names on a petition last week to Nationals Transport Minister Darren Chester protesting against the chosen route.

Their concern is a 12.5km stretch of the 1700km project that crosses the Condamine flood plain in south Queensland.

Laying the rail on a culvert would interfere with drainage during floods, they claim, while the cost of a viaduct to carry the train would be prohibitive, so they demand that the route be changed. This is how government-controlled infrastructure gets done, whether in a supposedly independent corporate vehicle or not.

The lesson was learned 20 years ago that government is poorly equipped to judge the commercial risks of infrastructure development. It is far better to use grants where subsidies are needed and contract the private sector to absorb the construction and delivery risks.