Professor Christine Smith, Griffith Business School

The pre-Budget talk was all about nation building through sizeable infrastructure projects. Now regional Australia is set to benefit after Scott Morrison opened the chequebook to bring forward a host of big ticket items from last year’s $50 billion infrastructure program.

By Professor Christine Smith, Griffith Business School

Good debt financed infrastructure

The 2017-18 budget will be framed around making a distinction between “good” and “bad” debt on the premise that the use of debt financing to cover ongoing or recurrent expenditure (e.g. welfare payments) is ‘bad’ while use of debt to cover expenditure on infrastructure which leads to future growth and/or productivity enhancement is ‘good’.

As a result various regions have been eagerly waiting to hear if the much vaunted boost to federally funded infrastructure projects will benefit their locality in either the short or the long term. The challenge for the government is to ensure that projects selected are not judged by the media (or the public more generally) as political pork barrelling for vulnerable electorates, but represent both good value for money and meet the definition of ‘good’ debt financed infrastructure — that is infrastructure likely to generate sufficient national economic benefits to enhance government revenue within the timeframe normally associated with debt financing. The government, to date, has been silent on this timeframe — yet it would be unfortunate in terms of intergenerational equity not to consider this when selecting its favoured projects.

The Federal government has indicated they want to ensure they get the credit for the enhanced infrastructure spend rather than the States, and that they are seeking private sector involvement in the project when feasible.

Inland rail boosts regional economies

In this context a good example of the preferred model is the Melbourne to Brisbane Inland Rail project. A feasibility study and land purchases for this new freight network was funded in the 2016-17 Federal Budget an is one of the projects anticipated to move from the planning into the construction phase in the 2017-18 budget. This rail line, going via Parkes, will not only link Melbourne to Brisbane, it will also link Queensland more directly to Adelaide and Perth. It is argued that it will provide a cost effective alternative to the existing road based freight routes and reduce congestion on the Greater Sydney rail network. There will clearly be a boost to a number of regional economies over the 10 year construction period anticipated for this project, since while the Inland Rail will use the existing rail network through Victoria and southern New South Wales it requires a number of track upgrades as well as the laying of new track in northern New South Wales and southern Queensland. The longer term benefit to regional communities along the proposed route is yet to be seen, since this depends in part on the number of on-load/off-load points enroute between Melbourne and Brisbane. It also needs to be recognised that if it is successful in its goal of diverting a large proportion of freight from road transport vehicles (e.g. one train is being argued by Infrastructure Australia to be able to carry the same freight as 110B Doubles) the towns on the main inland road freight routes (such as the Newell highway) may suffer a downturn in growth dependent on trucks travelling on these routes for much of their livelihood.

Transport infrastructure spend

The Federal Budget allocates funding to the 2nd Sydney airport project, following the Sydney Airport Corporation’s recent announcement that it did not want to be involved in this project. This will represent a significant boost to the Western Sydney region during the construction phase from the end of 2017 until it becomes fully operational in 2026.

Congestion busters

Budget allocations to address congestion in major metropolitan regions have also been forthcoming. For example, in WA, funds that were previously foreshadowed to fund a new Perth rail freight network have been reallocated, subject to a full business case being made, to kick start the Metronet railway expansion connecting Perth and peri-urban areas such as Ellenbrook into the system over time. In Victoria there is funding for a feasibility study to provide a rail link from Tullamarine airport to the city, as well as allocations to improve rail connections to regional areas such as Gippsland, Geelong, Shepparton and the Murray Basin. In Queensland funds have been allocated to improve and upgrade Bruce Highway bottlenecks in the South East region and to build in better flood resilience in the Rockhampton region.

Details of other road and rail infrastructure projects which have been selected for ‘good’ debt financing in 2017-18 have also been announced and analysis of which states and regions will be the winners and which will be the losers will now commence in earnest. For example, the lack of any specific allocation for the cross river rail project in Brisbane will represent a huge disappointment for the Queensland government. What is clear, however, is that the government’s position on the ‘acceptability’ of debt financing for ‘good’ infrastructure applies only to physical infrastructure and not to so-called ‘social’ infrastructure. The latter includes investment in human capital to make Australian industries more productive, and so includes funding for universities. The foreshadowed cuts to university funding and increased fees for university students are more likely to have negative impacts on outer-suburban and regional universities which disproportionately cater to domestic students from disadvantaged economic backgrounds and so might be expected to be more price sensitive in their demand for a university place.

Regional investment package

Funds have been allocated to fix mobile phone black spots in regional areas and to extend the National Broadband Network into key regional areas, as well as to establish a National Water Infrastructure Development Fund and an associated Loan Facility aimed at making access to water at affordable prices and in a reliable manner for agricultural producers and regional communities.

Ten regions with significant long term unemployment histories and/or facing significant economic challenges following the decline or disappearance of key traditional employing sectors have been identified, namely Tropical North Queensland, Bowen Basin, Wide Bay Burnett, NSW North Coast, NSW South Coast, Upper Spencer Gulf, Latrobe Valley, Goulburn Valley, Geelong, and Regional Tasmania. These regions will be able to access a significant ‘Regional Jobs and Investment Package’ aimed at assisting them to diversify their economies and create jobs in more sustainable industries. Whether this is in fact feasible in some cases, and whether some of these funds might be better allocated to assist households to move to other regions with more viable industrial bases does not appear to have been considered.

There is also an additional years funding for the ‘Building Better Regions’ program for non-metropolitan regions. This program allocates funds for regional infrastructure and/or community capacity building initiatives based on the assessment by the federal government of applications from these regions. What is interesting about this further allocation of funds to this program is that it has been forthcoming without an independent review being conducted as to whether the previous year’s allocation of funds represented value for money in terms of traditional criteria such as the rate of return on funds invested. While major projects in metropolitan regions have to produce detailed feasibility studies and/or establish business cases before the green light is given to the release of funds for the construction phase of these projects, the same level and nature of scrutiny does not appear to be applied to projects proposed for the ‘Building Better Regions’ program. It is unclear therefore whether this budget allocation meets the so-called ‘good’ debt criteria.