Bankable infrastructure

Australia is skint. Or so we’re told. Our federal and (most) state budgets are in the red.

Treasury says we’re headed for a ruinous mismatch between tax income and spending—they call it a “fiscal gap”—of $40 billion a year within two decades.

The New South Wales Government reckons annual health spending alone will exceed the state’s entire revenue base by 2044.

Then there’s Australia’s colossal infrastructure backlog: Figures range from $260 billion to $770 billion over a 10-year horizon.

Fixing the problems

The good news is that Australia enjoys low(ish) government debt levels compared to our international rivals—23 per cent public debt to GDP versus 103 per cent in the US and 230 per cent in Japan.

We can also tap into the nation’s $1.51 trillion superannuation savings pool if we provide smart incentives to superannuants.
In addition, we’re a magnet for patient equity capital from other countries—despite the federal government’s recent fumbling on international taxes.

A top election priority for the Property Council is to persuade politicians to get serious about investing in Australia’s local communities and suburbs.

We need a dedicated urban infrastructure fund that will help fix bottlenecks, ease congestion and provide essential services for families and businesses. Better-connected and better-functioning cities boost both productivity and living standards.

Investing in infrastructure

The Property Council of Australia is calling on all political parties to establish an urban bond bank that will transform infrastructure financing into an investment asset class. There are several strands to our proposal:

One: Set smart infrastructure investment priorities based on strategic need and value for money—we should expand the remit of Infrastructure Australia to set priorities for smaller-scale urban investment as well multi-billion-dollar kit.

As Lucy Turnbull remarked recently, “We tend to veer toward big pieces of heroic infrastructure … but we need to concentrate on cracking the smaller nuts that have a high impact on productivity—such as fixing the pinch points on road systems.”

Two: Develop a pipeline of infrastructure projects based on a 20- to 30-year outlook—this will deliver the deal flow and scale that attracts investors by pooling a rolling bundle of future cash flows that can diversify risk.

Three: Establish a bond bank to issue bonds that can be used to help finance projects in the pool. Bond banks have been used widely across the US and Canada to help local councils pay for infrastructure. Our approach would extend the concept across all spheres of government.

Four: Attract funds to the bond bank from institutions and self-managed super trustees by offering tax breaks for purchasing bonds that can be used to finance projects approved by Infrastructure Australia—a rebate of between 33 and 50 per cent is proposed.

Yes, the tax rebate represents a short-term loss of federal government revenue; however, the incentive delivers a powerful leveraging dividend—on one estimate, $150 million of tax foregone induces $20 billion of privately funded infrastructure finance. In addition, bond bank returns would be guaranteed by the federal government for a set period of time.

Five: Focus on seed funding—the bond bank won’t fork out for an entire project. It’s assumed that project sponsors will provide capital (and skin in the game). A bond bank injection would also assist in PPP arrangements.

By pooling infrastructure projects and their future cash flows in a bond bank that offers guaranteed, credit-enhanced returns, we believe that Australia could forge a nation-building investment asset class that boosts productivity.

Please check out the full details of our bond bank proposal in the Property Council of Australia’s federal election platform at www.propertyoz.com.au/election2013