The White House is interested in modeling Australia’s approach to national infrastructure. Here’s how they do it Down Under.
Clement Tan | June 9, 2017 | CityLab
The White House’s “Infrastructure Week” didn’t offer many clues about how the Trump administration might approach its promise to “spend big” on ailing infrastructure in the United States. But when it comes to financing roads, bridges, and other projects through public-private partnerships, we know Trump advisers have one model in mind that Australia figured out nearly 10 years ago.
In July 2008, facing the fact that inadequate infrastructure could limit economic growth, the Australian government decided to do what it had never done before: infrastructure planning on a national level.
That month, the federal government created a statutory body—Infrastructure Australia—that brought together the public and private sectors to devise a long-term strategy and prioritize key projects for funding.
The agency’s mandate includes auditing the country’s significant infrastructure network and developing 15-year rolling masterplans that specify national and state-level projects. It finished its first audit in 2015, followed by the first masterplan last year. It maintains a list of priority projects that is updated monthly, with a detailed business case study for justifying each classified high priority—which partly accounts for its bipartisan success.
And there is more to be gained from the Australian experience. The country is seeing early success, not only from garnering bipartisan political support for infrastructure projects, but also by holding “deep conversations” between various public and private stakeholders about the problems that needed to be solved.
“You won’t get change just by identifying projects,” Mark Birrell, Infrastructure Australia’s chairman said at McKinsey’s Global Infrastructure Initiative Summit last week in Singapore. “You also have to understand the problems that were causing the absence of funding or the absence of approvals, so we sought to generate debate about the reforms that were needed to create better and deeper markets in infrastructure.”
Australia’s rethinking of the way it was purchasing and financing infrastructure involved the “recycling” of assets in a partnership between public and private entities. The basic idea is to sell or lease existing public assets such as ports and roads and use the revenue to fund new infrastructure investments.
Under the program, the federal government promised the New South Wales state government A$2 billion in return for leasing 49 percent of the state’s electricity assets, the Australian Financial Review reported. The money will be ploughed back into a series of public roads and rail projects, including expanding the Sydney Metro.
While the federal asset recycling incentive program has since been discontinued by the current Prime Minister Malcolm Turnbull, the three-year program has yielded several eye-catching transactions, including the A$9.7 billion paid for a 50-year lease for the Port of Melbourne by four investment funds.
“Australia needed to change the status quo: the way it was purchasing infrastructure, the way it was funding infrastructure,” Birrell said. “But behind all that, we needed to understand the outcomes that we wanted from infrastructure a lot better.”
“The big lesson really is around rigor,” says Tyler Duvall, a Washington-based McKinsey partner who advises clients on capital projects and infrastructure. “You don’t need to create a new institution to have rigor. The current processes can incorporate a lot of the structured thinking the Australians have done.”
Still, there are several limitations to deriving Australian lessons for the U.S.
Public-public partnerships remain largely elusive in the U.S., with the bulk of projects currently concentrated on Florida, Virginia, and Texas, Duvall says. In 2016, the American Society of Civil Engineers estimated the U.S. will fall $1.44 trillion short of what it needs to spend on infrastructure through 2025. This funding gap could translate into a loss of 2.5 million jobs and $4 trillion of gross domestic product from the economy.
Current ownership structures may also inject another layer of complication. New York’s LaGuardia Airport was cited by Vice President Mike Pence when he visited Australia in April as an example of an asset that could be improved with private capital, but the airport is operated by the Port Authority of New York and New Jersey, a joint venture between the two states. Meanwhile, two of America’s largest ports, at Long Beach and Los Angeles, are operated by city governments.
Funding for infrastructure projects usually flow from the federal government to state governments. It would be difficult to decide how to split the proceeds between the two states if assets belonging to the joint venture were sold to private investors. Similarly, more work would need to be done to decide if the city should get all proceeds from a sale of these major port assets, which could be used to fund new projects elsewhere in California.
Then, there are also potential concerns with foreign investment in key infrastructure assets. Even when the Committee on Foreign Investment in the United States approved Dubai Ports World’s planned acquisition of P&O’s port management business at six major American ports in 2006, Congress blocked the sale despite President George W. Bush’s support.
“It’s going to evolve very differently in the U.S. compared to the other countries,” Duvall says. “U.S. has very specific politics, but the model of getting consensus for a good idea, building capacity to do it and then getting projects that you can drive to completion to show everybody else these are good meritorious investments to make, that will ripple through the U.S.”
That political landscape could derail plans to create a new infrastructure commission in the mold of Infrastructure Australia, given the broad difficulty such attempts face in Congress. President Trump’s divisive appeal probably won’t help, either. A truncated look in the Trump administration’s first budget allocation for transportation infrastructure has already provoked a backlash from Democrats. The Trump budget has provisions for $200 billion that are aimed at generating $1 trillion worth of investments in the next 10 years.
One way the Aussies have managed to achieve bipartisan political agreement has been to publish a list of top-priority projects, along with policy and business case studies involving cost-benefit analysis that justify the urgent need for these projects. That the list of top priority projects is being derived by a panel of various public and private stakeholders also aims to give it more objective credibility.
“It starts when everybody has a broad understanding that we’ve got a problem that’s got to be fixed,” Birrell says. “You need a burning platform if you’re going to have people talk about the need for change.”
This was first published at CityLab.com.