Shorten’s plan to be the “infrastructure PM”

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By Leith van Onselen

As reported today in Fairfax and The Australian, Opposition leader Bill Shorten will release a new plan today to turn Infrastructure Australia into a $10 billion ‘infrastructure bank’ that would finance new public works and get stalled major projects moving, such as the Melbourne Metro urban rail project and Sydney’s Airport to Badgerys Creek line.

The ‘infrastructure bank’ would be based on the Clean Energy Finance Corporation “green bank” and would be capitalised via the $3.6 billion currently in the “building Australian Fund” with the remainder coming from government borrowings, taking advantage of the near record low interest rates on offer.

Under the plan, Infrastructure Australia would become an independent authority, like the RBA, that would assess and rank projects on a priority list before acting as a broker to get it started and attract private finance.

The plan is aimed at attracting more of Australia’s $1.4 trillion of superannuation savings and international investors into backing infrastructure projects.

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Once a project is under way and “financeable’’, Infrastructure Australia would then sell its stake to long-term investors, such as superannuation funds.

Shorten’s plan makes a lot of sense.

With Australia’s population projected to rise to around 50 million by mid-century, congestion will rise and living standards will fall unless there are major offsetting investments in well-targeted infrastructure.

Indeed, the Australian Council of Learned Academies’ (ACOLA) new report, released yesterday, noted that Australia already has an accumulated infrastructure deficit of $100 billion that will rise to $350 billion by 2025 without corrective action. Accordingly, the report forecasts that the costs of urban congestion in our capital cities will increase four-fold in two decades, reaching $53.3 billion by 2031, unless there is a change of direction.

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Put simply, with all sides of politics intent on running a Big Australia policy, significant new investments in infrastructure must be made if living standards are to be maintained.

As it stands, the states are unable to undertake such investment on their own, given the massive vertical fiscal imbalances present in the federal system. So any scheme that can help bridge the funding gap is welcome.

That said, one of the the most important forms of infrastructure during a Big Australia program is housing-related, and this continues to be ignored by all and sundry. This includes all the tedious stuff like drains, kerbing, power supply, access roads, parks, roads, transport corridors, which all costs money and are critical in the housing supply process. The states can’t afford to fund it, which is why they have limited land release and front loaded their costs onto new home buyers, destroying housing affordability and choking affordable supply in the process.

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The best way to overcome the states’ reluctance to release land and fund housing-related infrastructure is also to ‘show them the money’ and offer them incentive payments in return for genuine supply-side reforms.

In this regard, why not expand the ‘infrastructure bank’ even further and get it to pay the servicing and development costs of bringing new housing land to market, along with the housing-related infrastructure, and then recover part or all of the cost from rates or taxes on the land over the next 20-30 years?

Again, the reason why the federal government should lead the way and fund infrastructure (including housing-related) is because it controls population growth via its control of migration, and because it can borrow at a lower cost than anyone else.

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If Shorten remains reluctant to fund housing-related infrastructure, he could instead advocate setting up a Municipal Utility bond model (explained here and here), like the one operating in Houston Texas, and then let the growing self-managed superannuation fund (SMSF) sector do the funding. The returns will be secure if the rates/taxes are a first charge on the property, and the SMSF industry is begging for simple secure long term investments that generate a steady return. In any event, the model certainly beats the current one whereby SMSFs are having a punt with retirement savings on the housing bubble.

In any event, it is great to see the alternative Prime Minister showing some genuine policy leadership to overcome one of the biggest conundrums facing Australia: how to continue growing in size without causing massive congestion and choking living standards.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.