State of the Nation 2016: Infrastructure funding - how to pay for the solutions we need

Infrastructure funding and financing are frequently discussed concepts, but getting to the bottom of what they mean can help policymakers find direct and effective ways to meet our future infrastructure needs.

The 2015 Australian Infrastructure Audit found that current levels of infrastructure spending in Australia will be insufficient to support our growing population and harness the benefits of our close proximity to the booming economies of China and South-East Asia.

The Audit identified that Australia’s population will grow to more than 30 million people by 2031, with the population of Australia’s four largest cities – Sydney, Melbourne, Brisbane and Perth projected to grow by close to 50 per cent.

Similarly, population growth to our north will see Asia represent around two-thirds of the world’s middle class population by 2031. This will drive significant demand for Australian produce, resources and services, and enable our businesses to access some of the world’s largest consumer markets.

However, if we don’t make fundamental changes to the way we plan, fund, deliver and use our infrastructure, Australia could face a future of congestion and constraint.

Increasing bottlenecks and delays will mean it takes longer for Australians to get to work or home, our goods will take longer to reach ports and markets, and the many services we rely on from infrastructure will decline. Road congestion alone could cost the Australian economy $53 billion each year by 2031.

Australian governments therefore need to deliver more and better infrastructure to support a growing and changing economy. This will require more funding and better use of that funding.

Given that infrastructure investments are often multi-decade in nature, the funding task extends beyond the substantial capital investments associated with new infrastructure to include the costs of operation, maintenance, renewal and disposal.

However, it is important to differentiate between funding and financing. This is not an academic distinction – it goes to the core of how we do better on infrastructure.

Financing is how the upfront costs of constructing infrastructure are met. Financing refers to the supply of capital, such as debt and equity, used to pay for the upfront investment costs of an infrastructure project.

Funding refers to how infrastructure is actually paid for. There are only two sources of funding for infrastructure, either taxpayers (through government spending) or directly by users (for example electricity charges or road tolls).

All public infrastructure funding ultimately comes from the community: either taxpayers or users, and often from both. While borrowings may help governments meet the upfront costs of infrastructure, these borrowings must ultimately be paid for through future taxes – just like mortgage repayments, they must be paid off over time.

If a project is financed by an investor like a superannuation fund, taxpayers or users will still be paying for it either through a combination of taxpayers’ funds, or beneficiary pays models like user charging or value capture.

Policymakers should be appropriately sceptical about a ‘financing’ solution to a ‘funding’ problem. The Australian Infrastructure Plan found that Australia does not have a shortage of available upfront capital for infrastructure investment.  But we do face an acute challenge in our ability to fund the infrastructure projects we need.

The financing decision is critical to the efficient delivery of infrastructure. It is a critical determinant of risk transfer, an important assurance framework around delivery and a commitment device between the parties involved.

But it is always a decision that should follow a call on funding. A good mantra for decision makers should be get the funding in place and the financing will follow, which means the right focus for governments should be on structuring projects and markets ensure they are appropriately funded.

This is also why it is vital that government infrastructure decisions are guided by long-term planning, rigorous evidence and transparent engagement with the community.

Infrastructure Australia’s Infrastructure Priority List provides a prioritised list of nationally-significant investments and guidance to decision makers on where they should direct funding.

Our rigorous assessment framework enables us to give decision makers the information they need to invest in the best infrastructure projects for our growing communities.

By encouraging strategic consideration of infrastructure problems and the best way to address them, we are helping to drive better outcomes for infrastructure users around the country, and work towards increasing the number of sound, productive projects to attract investment.

A more nuanced understanding of funding and financing in governments can create a win-win for investors, infrastructure users and taxpayers alike. Aligning these interests can go a long way to addressing Australia’s infrastructure challenges over the coming decades.