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A fresh beginning – Private sector investment in West Australian infrastructure May 2017

May 26, 2017

 

BACKGROUND 

The new State Government is committed to increasing infrastructure investment in WA however, the financial situation is challenging. As with any crisis, there is also opportunity. This summary paper focuses on how Government can collaborate with the private sector to capture the maximum economic and social benefits through innovation and the use of external finance to develop infrastructure in WA to exploit the available opportunities. The focus is economic infrastructure that can generate positive cashflows as opposed to social infrastructure that doesn’t.

 

COMPETING FOR PRIVATE FUNDING

The State Government lacks the funds and the resources to make the necessary infrastructure investments WA needs. The private sector has hundreds of billions of available capital and expertise to invest this money. However, decades of bureaucratic decision making has created layers of regulatory hurdles that together with a lack of access to fundamental data, make investment in WA infrastructure expensive, high risk and slow. In a world where all States and countries are competing for international finance, WA needs to increase its investment attractiveness if the State wants to develop infrastructure projects with private sector funding. WA needs to move beyond the Eastern States and benchmark against the rest of the world.The issues we have locally are not unique. A recent bipartisan report in the US stated “The biggest barrier to private sector delivery of infrastructure seems to be government, in the form of planning restrictions, government monopolies…and environmental restrictions.(1)” The first step in solving any problem is recognizing there is one and the following points detail how to address these issues.

 

 

 

PRIVATE INVESTMENT IN ECONOMIC INFRASTRUCTURE

Simply put, infrastructure is paid for in two ways, by the Government or by beneficiaries. When the Government pays for infrastructure the entire community invests although only those beneficiaries or companies around the assets or use the assets benefit, this can lead to extraordinary profits for a limited few particularly in the case of rezoning. Is it fair that all citizens contribute to some projects where the returns and compensation is limited? Economic infrastructure paid for by beneficiaries is a user pays system, which means it is more targeted and can be fairer. The influential Entrepreneurial Rail Model (2) is focused on unlocking private sector funding for transport projects which at its core is a user pays based system.

 

In recent years, only a few projects have been open to Public Private Partnerships (PPP) or Private Financing Initiatives (PFI) that share the financing and risks. The recent Perth Stadium and the Schools PPP were social infrastructure and were effectively underwritten by the Government.

 

Economic infrastructure directly contributes to production and distribution of goods and services in an economy such as ports, rail, roads, communication, water and energy etc. Economic infrastructure is usually more complex as it generates external income that has to be forecast years in advance. This changes the risk profile and in many cases the projects do not have Government guarantees. This also means the Government doesn’t have to pay for economic infrastructure if it is commercially viable. Economic infrastructure is sustainable and can generate surplus funds to pay for social infrastructure along the way generating jobs and economic stimulus.

 

1. Institute of Economic Affairs - Ryan Bourne and Diego Zuluaga, November 2016
2. Newman, Jones, Green and Davies-Slate . Curtin University 2016

 

 

Germany is a world leader in infrastructure and also recognises that the existing development model from the past needs to change(3) “The government aims to make greater use of cooperation between public and private sector companies where 

this leads to cost savings and a more efficient realisation of projects.” 

 “Successful PPPs require governments to set clear, transparent and flexible frameworks for agreed outcomes, rather than detailed project specifications. Reducing the administrative burden often associated with PPPs will support the objective to open PPPs more to Small and Medium Enterprises (SME). Doing so will provide the government with a wider choice of 

contractors and hence enable potentially more efficient outcomes.” (4) 

In WA this can mean completing proper business cases that are of investment standard, standardising the Cost Benefit Ratio analysis in a transparent way, allow for unsolicited proposals, hold departments and individuals accountable and responsible for project development commitments and deadlines and finally, standardise project evaluations. This is standard private sector investment discipline and would go a long way in addressing the issues we have with economic infrastructure 

investment in WA. 

PPPs can also improve contestability in certain infrastructure sectors that have previously been solely provided by a public 

sector entity, without losing public sector control over the standard to which those services are delivered. 

In November 2008 the Council of Australian Governments endorsed the National PPP Policy and Guidelines that applies to all Australian, State and Territory government agencies. The aim is to resolve the Government’s lack of (financial and human) 

resources to identify, prioritise, prepare, procure, deliver and operate projects. PPP procurement should only be used where 

it offers a better value for money over the life of the project relative to conventional procurement methods. This means 

achieving a superior project outcome compared to being procured using conventional methods, such as a lower net present cost. 

 

3. https://www.oecd.org/germany/Better-policies-germany.pdf  
4.Germany: Keeping the Edge : Competitiveness for Inclusive Growth February 2014

 

 

UNSOLICITED PROPOSALS 
From a private sector perspective there can be large risks in unsolicited proposals because the project is publicised, valuable intellectual property is disclosed and development costs are incurred with significant deal completion risk. However, it is in 

the interests of Government to incentivise unsolicited proposals, not only to capture innovation and new projects but also to identify parties willing to help build projects in WA. Building upon our mercantile heritage in WA our standards must be to an international level and should surpass the Eastern States. Lessons learnt from other jurisdictions about unsolicited proposals are ; 

  • Develop a clear and transparent unsolicited proposal framework - especially minimum submission requirements.

  • How potential reimbursement and the clear protection of intellectual property works. Also procedures for incentivising unsolicited proposals such as introducing competition and reward systems (Bonus systems, first right of refusal, Swiss Challenge, compensation, automatic short-listing, etc.).

  • Build knowledge and experience capacity – develop local capabilities in this field both in Government and the private sector for developing and managing unsolicited proposals. Train locals rather than use foreign and eastern states resources. This builds experience and knowledge and is also cheaper over time.

  • Production of quality feasibility studies or business cases, suitable for Infrastructure Australia. 

  • Follow transparent competitive procurement process and procedures - establish communication with initial proponents and competitors.

  • Develop stakeholder coordination and communication; ensure commitment for contract enforcement; and

  • Follow typical PPP process and procedures.

 

SUSTAINABLE DEVELOPMENT 
Sustainability can be defined as ensuring that better lives for ourselves don’t mean worse lives for future generations and 

this essentially means balancing environmental, economic and social interests. Development means growth. Central to 

growth is adopting new methods, evolving to a changing competitive world, adjusting to new technologies, being more 

efficient with resources and achieving a higher quality of life. 

In the context of private financing for infrastructure consideration should be given to training younger generations locally 

and being open to testing new methods, applying new technologies and creating a positive environment to develop and operate new projects. 

Having local expertise as well as experience with new methods and technologies reduces infrastructure development and 

operational costs over time. This also avoids FIFO consultants, financiers, asset managers etc as well as providing more 

diversity to the economy and local opportunities for employment. 

LOCAL WA ISSUES 
As mentioned previously, the issues we have in WA are similar to around the world. For instance the US Bipartisan policy 

centre recently stated that top three risks of attracting infrastructure capital are the lack of a project pipeline, political risk, 

and permitting risk . Anyone who has developed projects in WA would know these risks are relevant here too. 

Lack of a project pipeline 
One of the main barriers is the lack of a project pipeline with clearly defined costs and revenues. Without suitable analysis it 

isn’t possible for investors to adequately review them for bankability and commercial viability and this reduces the 

opportunities for private investment. It also allows for projects to be prioritised and provides the opportunity for the private sector to make unsolicited proposals to perhaps build projects in the pipeline. 

 

 

Political risk 
As with many modern democracies, political risk could be considered high due to the current parochial nature of politics, 

differing stakeholder interests and difficulty in gaining political consensus. From an investors’ perspective the development of projects like Perth Freightlink, James Point Port, uranium projects, Kwinana Bulk Jetty, MAX light rail etc increase the risk 

weighting for future projects. 

Approvals risk 
Infrastructure projects require many different types of approvals, permits, licenses, easements, heritage etc from many levels of government and stakeholders. The permitting risk is substantial especially when significant work has been completed on a project. One person in one department can slow or stop approvals and in many cases the reasons and the people involved are obscured. Transparency, accountability and responsibility are important foundations in approvals processes. This has 

been demonstrated in recent years with few large scale infrastructure projects being on time or budget with delays in 

approvals being one of the major reasons. 

Potential solutions 
A centralised group, such as Infrastructure WA, that is independent, operating within a strong corporate governance 

framework with suitable expertise that can filter projects from around the State while also providing a centre of expertise. 

These projects can be from both Government and private sectors and are assessed in a consistent way using published 

methodologies and results. Develop these projects into viable and bankable projects that are open for Government or 

private sector financing. Published projects that fit within a long term (say 15-30 year) plan and have a transparent 

procurement process and unsolicited proposal process. As well, greater transparency, responsibility and 

accountability of the planning and development process that includes increased community engagement 

throughout project lifecycles. 

 

“While government budgets are constrained, in part by prior borrowings, there is a genuine opportunity for high-return infrastructure investment to be financed by borrowing at exceptionally low interest rates. The challenge is to ensure that any such borrowing is identified, selected and managed wisely and transparently, to the benefit of the economy and 

community.” Grattan Institute 2015

 

IMMEDIATE ACTIONS 
When companies invest they consider the operating costs over the lifetime of the project based on current and expected 

future conditions. Should Governments also consider these operating and maintenance costs too rather than just the initial upfront capital costs? Improved investment discipline is required for external financing. Infrastructure Australia also requires proper Business Case Assessments if Federal funding is to be requested. One of the main lessons learnt recently is the 

importance of communication and transparency with the community to the costs, benefits and requirements of new 

projects. PPPs are especially sensitive because of the private involvement however with limited Government funding, private sector contributions are essential to capture the economic and social benefits otherwise the opportunity costs 

to the WA economy will be significant. 

 

 

 

 


 

 

 

 

 

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