All governments now recognise that they can’t increase national productivity without improving their infrastructure. Those governments that can get the most out of their infrastructure, existing and new assets, will have a powerful equation for growth. To unlock greater value from their infrastructure investments governments must:
In Australia, we spend a lot of time talking about infrastructure. We are passionate about our ports and roads. We are committed to our local hospitals and communities. And we believe we have a fairly good grasp of the link between infrastructure and quality of life.
Yet even in Australia, we have allowed our economy to outpace our infrastructure. We are the world’s 12th largest economy, yet the WEF ranks our infrastructure at 35th out of 144 countries. We ranked 32nd for our railways, 38th for our ports and 43rd for the quality of our roads. And – much like any other market around the world – analysts have attached a massive figure to the infrastructure ‘deficit’ in Australia: $770 billion.
Clearly, more can be done to ensure that Australia’s infrastructure is creating a more productive and competitive economy. But we also recognise there are limitations on how fast and how much new infrastructure we can build – financial limitations, resource limitations and capacity limitations to name a few.
That is why we believe that governments should be balancing their attention between building new infrastructure and driving efficiency across all aspects of the infrastructure lifecycle to drive incremental and valuable improvements.
In part, this will require governments to reassess the way they prioritise infrastructure investments to better reflect societal welfare and real economic impacts. The current approach used by governments to appraise and prioritise projects is generally not on the basis of the economic value they add, but on other factors.
For example, the benefit to cost analysis typically adopted on transport projects tends to focus on the value to transport users – primarily measured in direct benefits such as improved journey time, less congestion, improved safety and reductions in environmental externalities. It does not however, capture all of the benefits to the economy such as increased land valuations near the transport terminals, improved economic activity and access to jobs, and all of the tax revenues that are created as a result.
Rather than centring their assessments on conventional benefits, governments should be strengthening their approach by measuring real economy impacts of infrastructure projects and prioritising projects that deliver broader productivity impacts. This could work side by side with the current appraisal approach to provide a more robust consideration of the value created by competing investments.
Governments must also focus on ensuring they are making best use of – and responding appropriately to – technological change, clearly explains, new technologies are set to change the way governments plan, fund, deliver and operate infrastructure. Simply put, technology changes everything: It has the potential to enhance the productivity of our current infrastructure leading to a lower long term investment requirement; it impacts what infrastructure we will require for the future; and it impacts all of our funding and regulatory frameworks into the future.
Consider, for example, how the adoption of solar and the development of solar batteries for energy storage has the potential to radically reshape the power sector and the related infrastructure investment requirements. Or how – by embedding sensors and navigation technology – Patrick Ports in Brisbane has enabled driverless container handling which has increased capacity and delayed the need for new infrastructure investment.
Clearly, technology has the potential to drive a radical shift in the way governments plan, develop, maintain, fund and regulate infrastructure and, ultimately, can deliver massive productivity improvements.
Another – equally holistic – approach governments can take to maximising investment is to ‘recycle’ their assets in order to fund new infrastructure development. In New South Wales, Australia, the government has created a ‘Rebuilding NSW’ infrastructure plan that includes an asset recycling initiative that is expected to add some $20 billion in funding to deliver road, rail and social infrastructure across the State.
We recently sat down with New South Wales Premier Mike Baird to talk about the initiative and the drivers behind it. “We had nothing near the funds we needed to address the infrastructure backlog we inherited. So we had to take a new approach. We looked at the balance sheet and asked ourselves, can we turn our old assets into new assets? The $20 billion program is a once-in-a-generation opportunity to get ahead of the infrastructure curve,” he told us.
As with most new infrastructure initiatives, the impact of the New South Wales asset recycling approach will only be known in hindsight. The shorter-term impact of the New South Wales construction stimulus will be observable over the next 5 years, but the greater (and arguably more important) outcome of improved productivity will only be known in 10 to 20 years.
With this in mind and against the backdrop of the two previous articles, here are a few steps that governments can start taking in order to unlock greater value from their infrastructure investments:
All governments now recognise that they can’t increase national productivity without improving their infrastructure. Those governments that can get the most out of their infrastructure, existing and new assets, will have a powerful equation for growth.
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