Why public infrastructure needs private investment: Gottliebsen

At the ADC Future Summit the head of Infrastructure Australia, Rod Eddington, started a new wave of debate about infrastructure. And in the front line of that debate will be the National Broadband Network and Australia’s looming power “black” or “brown” outs.

Eddington at no time mentioned the NBN but he did say that in the broad, governments were not as good at erecting infrastructure as the private sector and that Australian governments did not have the money to develop our infrastructure needs and would need to rely on private sector cash.

In discussions after the Eddington session the NBN was cited as a classic illustration of how not to go about gaining private sector capital for infrastructure. Rather than leave labour relations to the private sector, the Government has agreed to onerous labour agreements with the unions based on the disastrous Victorian desalination plant. The agreements will add a minimum of 25% to the cost of the NBN and greatly jeopardise its fragile economics.

The agreement gives unions extensive rights over labour use in the project management. There is great danger that anyone attempting to build the NBN using that labour agreement will suffer the same fate as Leighton at the desalination plant.

The private sector is not only being asked to take the risks of this labour agreement but other risks in the very difficult process of taking fibre to the home, plus in the need to sign up customers. Those involved in infrastructure funding at the summit will not back the project in its present form.

Unless the Government abandons the labour agreement and adopts a whole new approach, the NBN project is in danger and will have to use government funding. Delegates pointed out that had the private sector been asked to realise the NBN goals they may have used the so-called fibre to the node option and a realistic labour agreement.

While Rod Eddington did not explore NBN issues, his basic point – that the private sector is usually better at infrastructure than governments – underlined that what started out as a great vision has been made much more costly, and perhaps uneconomic, because government kept control too long, partly because of the Telstra delays.

Eddington illustrated via the power shortages looming that governments no longer have the money to undertake the massive infrastructure expenditure required in Australia. Without about $100 billion in capital investment Australia faces power brown outs.

He could also have added that those shortages will cause huge rises in electricity prices as retailers desperately bid for power. And he could also have pointed out that the political carbon mess means erecting power infrastructure in Australia is now high risk for the private sector. Eddington left that for others to discuss.

Meanwhile, he pointed out that there are also hundreds of billions of dollars required for other non-power infrastructure projects, much of which the private sector will have to fund.

As I thought about what Eddington said I realised that higher interest rates, the carbon mess, the big investment in housing and other forces have lessened the community’s ability to raise the capital needed to fund city and other non-mining infrastructure. Banks are going to need local capital to lessen their dependence on overseas borrowing while the value of non-mining equity is under pressure given current conditions.

The only way to raise hundreds of billions on the local market is to entice superannuation funds to invest in infrastructure instead of equity or other interest bearing securities. Eddington doesn’t favour compulsion. Almost certainly overseas investors will be required.

Infrastructure projects will also need to devise much better securities than have so far been offered. Luckily, however, it seems that government could be about to backtrack on the worst feature of the original agreement.

This article first appeared on Business Spectator.