Victoria’s access to federal infrastructure spending is a bit like that legendary big black cat (not pictured) that’s often seen but is invisible to modern cameras

This week’s Federal Budget represents a dramatic change of tack on many fronts – education, health and the NDIS to name a few. But one of its major shifts has been in infrastructure funding.

Sometimes seen by political pundits as boring, infrastructure is in fact considered critical by many voters fed up with road congestion and rising power bills. Many people will therefore welcome the Government’s $75 billion, 10 year infrastructure plan announced in the budget. But does the plan include the right sort of projects? Can we afford it?

Key elements of the plan include:

  • $10 billion for a new National Rail Program to help deliver urban rail projects, such as the Adelink light rail network for Adelaide, Regional fast Rail and Tullamarine Rail link in Victoria, Cross River Rail in Brisbane, Metronet in Perth and the Western Sydney Airport Rail link
  • $8.4 billion equity injection into the Australian Rail Track Corporation to accelerate the Brisbane – Melbourne Inland Rail project
  • $5.4 billion equity injection to build the Second Sydney Airport at Badgerys Creek.
  • $2 billion to build the Snowy Hydro pumped storage scheme (subject to feasibility study), potential further equity investment in the scheme and a commitment to keep Snowy Hydro in public ownership.
  • $472 million for a Regional Growth Fund

This represents not only an acceleration of infrastructure spending, but a major change in emphasis from the Abbott era. Tony Abbott was famously only prepared to invest in roads.

The Treasure’s speech also represented a dramatic change in rhetoric:

Our choices are based on the principles of fairness, security and opportunity…. We cannot succumb to the laziness that thinks growth will take care of itself… We must choose to guarantee the essential services that Australians rely on… We cannot underestimate just how important these services are to people…. We cannot agree with those who say there is nothing that the Government can do.

Thus a major feature of the new announcements is the willingness of the Commonwealth to become much more involved in the financing and indeed delivery of key infrastructure projects.

Perhaps the failure of the Australian Electricity market to provide secure and affordable power, and the unwillingness of Sydney Airport to take up its option to build Badgerys Creek airport, have had an impact. It appears the Prime Minister considers that Governments do indeed have a role in infrastructure provision, particularly for major national or capital city projects, which are beyond the capability of the private sector or State Governments to plan or deliver.

Perhaps the Government has also realised that ramping up spending on infrastructure could be critical in keeping the economy moving, especially with housing investment beginning to fall in some cities, and with mining investment still subdued.

The real test will be how well planned, designed and executed these infrastructure projects are. The projects identified in the budget are not of course identical to those I identified in my proposal for a Building Australia Fund. However there is considerable overlap, and there are indications that they are on the “right track”.

Take the Inland Freight Rail project. By enabling the use of double-stack containers, heavier axle loads and higher speeds, this project can help transform Australia’s East Coast rail freight network into a world class system akin to our iron ore and coal rail systems, reducing the costs of our mining, agricultural and other exports. Similarly, urban rail projects such as Metronet in Perth or Adelink in Adelaide can enhance accessibility and housing affordability in our cities, while the Snowy Hydro pumped storage scheme could transform the prospects for rapidly replacing ageing coal fired power stations with wind and solar power.

One question remains however – can we afford this level of infrastructure spending? There are three answers to that question.

Firstly, the Budget also begins the task of budget repair, by further closing loopholes used by multinational companies to avoid tax, imposing a new tax on the big banks, increasing the Medicare Levy and reducing superannuation tax benefits for high income earners. There is much still to do, such as tackling capital gains tax concessions and negative gearing, and abandoning the tax cuts to big business, but this is a start.

Secondly, some of the new spending is in the form of equity investment, and can potentially be recovered over time. For example both the Inland Freight Rail, the Badgerys Creek airport and Snowy Hydro could all be expected to return earnings to the Federal Government over time, with the first two projects also potentially being on-sold to the private sector after perhaps 30 years, by which time they will be demonstrating their true worth.

Whilst urban rail projects usually do not return dividends, they do lead to increases in land value, in some cases equivalent to a significant part of the original capital. Indeed if the Government purchased strategic land parcels in greenfield or brownfield areas adjacent to future stations on urban rail projects, it could provide very handsome returns over the long term. Alternatively, other forms of land value capture could be adopted, as is common in the United States and other places.

For example a potential Metro West from Sydney CBD to Badgerys Creek airport could unlock the potential for 300,000 additional residents and additional commercial and office development in close proximity to key stations at the Bays Precinct, Olympic Park, Camellia, Parramatta and other locations, increasing land values by the order of $7-$10 billion, close to the cost of the metro line.

And finally, failure to invest in well thought out infrastructure projects is a false economy, and will only result in crimping productivity or failing to mitigate future climate change risks.

The 2017-18 Budget’s infrastructure measures should therefore be welcomed. It is hoped that the cross bench will support them, and that the alternative government will go even further in its proposals for investing in Australia’s long term future.