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The politics of infrastructure development: why it matters so much, and what can be done.

The politics of infrastructure development: why it matters so much, and what can be done.

The Hon Joe Hockey
Australian Ambassador to the United States

Speech to the Third Global Roundtable on Infrastructure Governance and Tools - Seoul, ROK
“Regulation, Governance, and Transparency - Building the Foundation for Sustainable Development”
26 June 2019

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Thank you Mr Soh [TBC] for that kind introduction.

It is my privilege and pleasure to address you today on the subject of Infrastructure, and the Governance of Infrastructure.

Everyone in this room knows, as I do, the vital importance of infrastructure – to people’s lives, to functioning communities and to growing national economies.

And I am sure I don’t need to detail for this audience the incredible shortfall in infrastructure needs in Asia – or the Indo-Pacific region, as we often think of it – with the Asian Development Bank estimating that the region requires USD26.2 trillion in infrastructure investment to [year] – half the world’s infrastructure investment requirement.  This is both a tremendous challenge, and a fantastic opportunity.

My purpose in talking to you today – and I am sure this is why the World Bank asked me to speak to you at this important Forum - is to make the argument very clearly that getting infrastructure development right is first, and above all, about getting the politics right.

I can see from the program and speakers for this Forum that very smart people are looking deeply into important matters such governance architecture, regulatory regimes, technology and finance. These all matter to getting it right.  But none will matter if the politics isn’t right.

This has been my lived experience from 26 years in Australian politics, not least from my experience as Australia’s Treasurer.  I will talk about that experience further in a moment.

You can also see the fundamental importance of getting the politics of infrastructure right in the country in which I currently represent Australia – the United States of America. The largest economy in the world, the land of free enterprise and the country which put a man on the moon fifty years ago, can today barely maintain its aging infrastructure, much less reinvest in it or expand it.

The problems with infrastructure in the US are political at heart, as are the solutions.  I will speak some more today too about my observations from working with the US to encourage infrastructure reforms and promote Australian investment.

My second key message for you today is on the fundamental importance of mobilising private investment for infrastructure development.

Put simply, governments and public finances cannot afford the investment required to deliver high quality infrastructure for the needs of tomorrow. This is especially so at State and local levels of government – the levels of government often responsible for much of our infrastructure.

Nor is government usually the best manager of the asset. The private sector is much more likely to manage infrastructure efficiently, and to deliver a return on the asset.

I believe this is equally true in the developed world and in emerging and developing economies. Again, I will speak to this theme today.

Let me now talk about some of my experience as an Australian politician and the Australian Treasurer, to put some detail behind my arguments.

As the Treasurer of Australia in 2014, I sought to spur significant new infrastructure investment. A long boom in mining-related investment in Australia was coming to an end, and the Australian economy was in danger of stalling.

We came to the view that we had to earn economic growth by improving productivity. Throwing money at the economy was not going to work. The easiest way to improve productivity was to build new improved infrastructure.

Unfortunately, the recent history of Australian infrastructure investment to that time had been disappointing: there had been too many projects identified, but delayed or not financed.

And, at the time, like every other Government, I didn’t have the money.

We had to be innovative and we used a number of tools.

I used our AAA credit rating to guarantee some private sector asset backed debt. We provided mezzanine finance for some projects and we provided some debt facilities for other projects.

For greenfields infrastructure, we would provide seed funding as either a grant or a loan. We had to find some way to take political risk out of greenfields infrastructure. In my view, that was the biggest handbrake on infrastructure investment.

But the federal Government in Australia doesn’t really build infrastructure. It funds infrastructure.

In Australia, as in many countries, it is State and local governments that have most of the planning, environmental and regulatory controls. They also know what the local priorities are and they know how to handle the local politics.

If anything was going to be built, I needed local administrations to have skin in each and every project.

But they didn’t have the money. They were asset rich and cash poor. The private sector is cash rich and asset poor.

This is why I launched the Asset Recycling Initiative. I want to explain this initiative to you today, as an initiative which was designed to get the politics of infrastructure right.

The Asset Recycling Initiative provided Australian state and territory governments with a financial incentive to sell or lease government assets and redeploy the proceeds into new infrastructure.

Effectively I gave them a bonus. I said I would give them a 15 per cent bonus to sell and invest in new infrastructure. Where did I get the money for this bonus? It came from the proceeds from selling the Federal Health Commission

State and territory governments had a pool of infrastructure assets that did not pay tax. I needed them to be more efficient and to pay tax. And if they paid tax, the assets would become taxpayers in perpetuity. The Federal Government in turn would get a return back in ten years, as I advised the Parliamentary Budget Office.

In order to create a sense of urgency, the Asset Recycling Initiative was open for a limited period of two years and operated on a first come, first served basis. As it was time limited, the financial bonus was contingent upon the states and territories selling and building at the same time.

The Initiative was only available for agreed transactions with the Federal Government. But here is the political catch. I did not tell the states or territories what to sell or lease or what to build with the proceeds. They had to own the politics. If I told the states and territories what to sell or what to build, then they wouldn’t have any buy in.

Overall, three of Australia’s eight states and territories participated in the scheme. Another state sought to participate but missed the two year deadline. Roughly $3 billion in incentive payments were paid to participating states and territories over the life of the scheme. This helped to unlock over $17 billion in new infrastructure development across Australia.

By way of example, the government of the Australian Capital Territory is building a new light rail system for Canberra, our capital city, paid for out of the proceeds from selling its lottery office and public housing. This was endorsement by a centre-left Government. And they are building what they wanted.

And that was just the direct benefit of the Asset Recycling Initiative. The much larger benefit has been the creation of an operating model and a politics of infrastructure which has changed our broader landscape.

Sydney, a city of 5 million people, now has among the largest number cranes and tunnel boring machines in any city in the world. And Australia is now spending more public money on new transportation infrastructure than any other major developed economy in the world.

The sale or lease of assets has spurned much of this growth. Government owned ports, electricity generators, transport and roads have been leased or sold. Even land titles offices, lotteries offices and dilapidated public housing have been sold or leased with governments redeploying the money into new infrastructure in partnership with the private sector.

And this approach has been embraced by all sides of politics. Last year, the centre left government of the state of Victoria, which boasts Australia’s beautiful city of Melbourne, was re-elected on the back of the biggest new infrastructure plan in Victoria’s history. Part of that is funded by recycling the proceeds of the lease of the Port of Melbourne into new infrastructure.

Australia is the world’s 13th largest economy with a population of just 25 million. It is the same size as the continental US. But we are investing more in transportation infrastructure than the likes of Germany, the UK, France or the United States.

Australia is spending more on infrastructure now than at any time in the past 30 years, since the Sydney Olympics. Last year alone, local, state and federal governments invested almost $100 billion in infrastructure development. Times have changed.

The number and value of Private-Public Partnerships has also broken records. In 2015, nine P3 transactions were completed in Australia – a record high - with a combined value of about $15 billion. In the state of New South Wales alone, for example, there are currently over 36 active P3s.

The benefits of infrastructure investment are obvious. Construction jobs now account for one in 10 jobs in the Australian economy – their largest ever share.

That’s not to say Australia’s infrastructure sector isn’t experiencing problems.  But these aren’t the problems you typically hear about internationally. The Chief Executive of our largest construction materials and building projects supplier lamented that he was “stretched” in meeting soaring demand for concrete and asphalt. From a business perspective, that isn’t a bad problem to have.

But bear in mind, the politics are never easy. Today critics are even complaining about too much construction work in our cities. A decade ago those same critics complained that there wasn’t enough infrastructure being built.

I mentioned my host country, the United States, earlier, and the difficulties it is currently experiencing in maintaining, reinvesting in and expanding its infrastructure.

Why are the results for the US in infrastructure so different to the results in Australia, even as the US economy powers along?

First, there is a lack of political will to engage with the private sector on infrastructure, in the same way that many other countries have engaged.

Many US Congressmen, Senators, Governors and Mayors that I have spoken with can see the obvious need for more public/private partnerships but they can’t see a way through the politics. Well, I tell them that the politics of these deals is no different in the United States to that of Korea, Brazil, Japan, the United Kingdom or any other country. The politics will have to be solved, not least as the US federal budget deficit and total debt continues to grow.

The US is also an example of both the difficulty and the vital importance of making local, state and national levels of government work, and work together.

Finally, as we did in Australia, the US will need to allow the private sector to step up to the plate. The last three years have seen the US private sector raise record levels of money for infrastructure investment. In the third quarter of 2018 alone, infrastructure funds raised almost $37 billion, with three quarters of that allocated to transactions in North America. However, utilizing these funds has been a challenge. It’s a challenge which only political reform will address.

Some of you in this audience may be thinking that the Australian example is a gold standard for infrastructure governance, to which many countries – especially developing countries  - cannot aspire.

I did not say it is easy, but I do say that it you want to change the trajectory of infrastructure investment in Asia, to meet the huge outstanding need, you will need to create the structures, incentives and the level of confidence needed to spur private investment.  In short, you will need to get the politics right.

The model will likely vary from country-to-country.  We all have our unique circumstances, and our local politics. But the bottom line is that we all need to create a model and a politics which succeeds in mobilising private capital at a scale far greater

The potential rewards are great.  The amount of capital available globally, and seeking solid long term returns, is massive.  There are many billions of dollars of “dry powder”, that is, money sitting in infrastructure investment funds, looking for projects, or – even better - portfolios of projects, in which to be invested.

More private investment is starting to flow into this region’s infrastructure. One of Australia’s corporate champions, Macquarie Group – the largest infrastructure investor in the world – is rapidly increasing its investments in India, and in the energy sector – especially renewables – across the region.

Macquarie and other private investors see positive prospects for Asian emerging markets, and are looking to invest further.  They are attracted by emerging Asia’s young, growing and urbanising populations, and the infrastructure demands of the region.

Local capital markets can also be greatly enhanced and deepened by creating private infrastructure investment opportunities.

So, if you build the infrastructure pipeline, and get the politics right, the investors will come, as they did in Australia.

Let me also address the elephant, or perhaps the dragon, in the room. We all know that China, with its Belt and Road Initiative, is offering a different model to the one I am outlining today. I am not here today to criticise that model.  I would simply point out again that a public sector (or even SOE) led model cannot hope to deliver the volume of investment we collectively require, nor can it mobilise the vast institutional capital pools which we need to see mobilised and invested in infrastructure.

I want to tell you too that Australia has been and remains committed to working with governments in the region to help you create the conditions which will spur greater infrastructure investment, and particularly private sector investment.

We do this in a number of ways. We are working in the G20 to promote the adoption of policies and standards which promote investment.  This year, with Japan in the G20 chair, the focus is – appropriately – on quality infrastructure.

In 2014, when I was the G20 host, we established the Global Infrastructure Hub, to enhance the quality and quantum of infrastructure investments around the world. I’m sure the Hub will make great progress in strengthening collaboration among all parties uder the new leadership of Marie Lam-Frendo, and welcome the new commitment to the Hub by the Government of Canada.

Australia has also had long-standing partnerships with the World Bank and Asian Development Bank, focused on infrastructure, and we joined the Asian Infrastructure Investment Bank for that reason too.  As mentioned last night, we are pleased to have been long term supporters of initiatives such as the PPIAF, which aim to bring projects to market.  This is a key constraint to overcome.

At APEC in Papua New Guinea last November, US Vice President Pence, Japanese Prime Minister Abe and Australian Prime Minister Morrison announced a Trilateral Infrastructure Partnership for the Indo-Pacific. This partnership aims to build our collective support for the development of quality infrastructure, using market-based models.

Australia also provides policy and technical advice to many governments in the region, supported from our aid program, and we are now creating an AUD2 billion Australian Infrastructure Financing Facility for the Pacific Island Countries.

In closing, as you work on your case studies later this morning, and on tools to build an infrastructure pipeline this afternoon, I implore you to think about the politics of your infrastructure ambitions.

Put yourself in the shoes of the political leader who needs to persuade the public that the proposed infrastructure development is good for people, communities and the country, and that having a private investor involved will deliver best outcomes for all. If you can’t do that, your road ahead will be rocky, if it gets built at all.

I hope I have stimulated your thinking this morning, and provided some food for thought. I will be happy to take questions from the audience.

Thank you.