securing victoria’s future - parliament of victoria - home€¦ · victoria is in the midst of an...

Securing Victoria’S Futurea Program to Plan, Fund and deliVer inFraStructure

Disclaimer

Whilst all care and diligence have been exercised in the preparation of this report the Property council of australia, The allen consulting group and Sinclair Knight merz does not warrant the accuracy of the information contained within and accepts no liability for any loss or damage that may be suffered as a result of reliance on this information, whether or not there has been any error, omission or negligence on the part of the Property council of australia, The allen consulting group and Sinclair Knight merz or their employees. any forecasts or projections used in the analysis can be affected by a number of unforeseen variables, and as such no warranty is given that a particular set of results will in fact be achieved.

Property Council of Australia

level 7, 136 exhibition Street melbourne, Victoria 3000t: 03 9650 8300F: 03 9650 8693e: [email protected]: www.propertyoz.com.au/vic

SeCuring ViCtoriA’S Future — A ProgrAm to PlAn, Fund And deliVer inFrAStruCture

Property council of australia

3

Infrastructure delivery is vital to the task of improving Victoria’s liveability and productivity.



4

ForeWord

Victoria is in the midst of an era that will define its future success. The choices we make now and in the years to come, will determine the future of the state, its cities, towns and communities.

Victorians have benefited from decades of smart investment in core infrastructure and as the population has grown, this growth has been well accommodated.

But now, the cracks are beginning to appear.

infrastructure delivery is vital to the task of improving Victoria’s liveability and prosperity. Victoria’s transport system is not coping with increased capacity issues, we are not delivering infrastructure fast enough in melbourne’s growth areas, and we do not have a plan for the future.

The Property council believes that there is an urgent and vital need for Victoria to develop a Program to Plan, Fund and Deliver Infrastructure for Victoria’s Future.

investment in infrastructure delivers productivity values that will stimulate and invigorate Victoria’s economy. The implications of minimal infrastructure investment will be devastating and will cripple Victoria’s competitiveness and the future livability of our towns, cities and communities.

Victoria, as a state, needs to demonstrate that it is serious about its future by investing in infrastructure for the future.

Victoria’s cities will be the focal point for population growth. cities will hold the key to determining the future prosperity of the nation.

Victoria’s next productivity leap will be achieved by building efficient urban areas, optimising land use and minimising travel and congestion costs.

a carefully developed metropolitan Strategy is needed in Victoria to build productive, affordable, and sustainable cities that can cater for the needs of this increased population. The Victorian government has begun this task.

The Victorian government needs to overhaul public finance methodologies in order to better meet the goals of current and future infrastructure needs.

as well as direct allocations from governments, infrastructure strategies will need to draw on innovative funding solutions to ensure adequate resources are available.

government policies will need to focus on urban renewal, infill development, and the delivery of essential infrastructure to ensure that the populace can be properly accommodated.

Without the timely, cost effective delivery of infrastructure – transport, utilities, health and education facilities – our cities and communities simply won’t work.

Without a program to plan, fund and deliver infrastructure, Victoria’s future is not secure. now is the time to get this right for the future.



5

PlanVictoria needs an infrastructure pipeline that is solid, transparent and that transcends the short term, immediate nature of the political cycle.

if Victoria is going to remain competitive in the national and global context, an infrastructure pipeline must be established that:

• outlines government priorities;

• provides investor and market certainty;

• instils confidence in the private sector to invest in Victoria; and

• is updated and reviewed regularly by government and is well integrated within government processes so as to deliver short, medium and long term outcomes.

Fundinfrastructure cannot be funded solely out of budget surpluses. if Victoria is to retain any competitive advantage, alternative funding methods must be considered.

innovative funding models such as PPS, growth area Bonds, Business improvement districts, government borrowings, and the use of superannuation funds must be explored by the public and private sectors so that a mix of funding mechanisms can be applied in order to deliver infrastructure.

deliverinfrastructure delivery must be better coordinated within government so as to achieve:

• a cohesive approach between government departments and agencies working toward delivering shared outcomes;

• a framework for delivery that transcends the electoral cycle; and

• greater confidence in the ability of the public sector to operate in an efficient and transparent manner.



6

Contents

ForeWord 4

tHe StAte oF inFrAStruCture in ViCtoriA 8Why infrastructure investment is important 8

managing our growing population 9

Victoria’s current infrastructure 9

Victoria’s infrastructure gaps and priorities 12engineers australia infrastructure report card 12

infrastructure australia priority list 15

Property council assessment of Victoria’s top infrastructure needs 16

PlAn For inFrAStruCture inVeStment in ViCtoriA’S Future 18melbourne 18

Victoria’s infrastructure project pipeline 18

melbourne metropolitan Pipeline 19

regional Victoria Pipeline 23

Funding inFrAStruCture For ViCtoriA’S Future 28

The role of Public infrastructure 28The role of government in infrastructure provision 28

alternative finance models 30

Choosing Between Funding methods 33

deliVering inFrAStruCture For ViCtoriA’S Future 44Victoria’s budget position and outlook 44

Victoria’s credit rating 50

credit rating comparison across the major states 52

Potential for credit rating downgrade 53

Potential implications of Victoria losing its aaa credit rating 54

Scope for increased debt financing of infrastructure investment 55

Challenges posed by the recent macroeconomic environment 58

Scenario analysis melbourne metro and the east West road link 60melbourne metro 61

east-West link 62

SummArY And reCommendAtionS 66

Appendix A: Productivity and infrastructure 70Public infrastructure links with productivity growth 70

Appendix B: international debt Comparison (2011) 74

references 78

7

a Program to Plan, Fund and deliVer inFraStructure For Victoria’S Future


Without the timely cost effective delivery of infrastructure —transport, utilities, health and education facilities — our cities simply will not work.



8

tHe StAte oF inFrAStruCture in ViCtoriA

Victoria’s cities and towns hold the future of the state’s population growth. cities such as melbourne, geelong and other regional centres, will be the key to the future prosperity of australia as a nation. australia’s next productivity leap will be achieved by building efficient urban areas, optimising land use and minimising travel and congestion costs.

carefully developed metropolitan strategies and regional plans will be needed to build productive, affordable, and sustainable cities that can cater for the needs of this increased population.

government policies will need to focus on urban renewal, infill development and the delivery of essential infrastructure to ensure that the populace can be properly accommodated.

Without the timely, cost effective delivery of infrastructure – transport, utilities, health and education facilities – our cities simply will not work.

Victoria and melbourne in particular, is held up as one of the most desirable places to live in the world. The quality of Victoria’s transport, education and health services, water and energy supply together with its lifestyle attracts people from all over the world.

melbourne’s highly prized mantle of ‘liveability’ has not happened by accident. Victoria has long benefited from well thought out, long-term planning which has gifted the economy and its people with access to good quality infrastructure that has improved people’s lives and the productivity of the state.

now Victoria has reached a pivotal point in terms of how we respond and plan to meet the challenges ahead including:

• increasing use of public transport and the existing road network;

• the mass movement of people and freight over the same transport networks;

•The increasing size, frequency and capacity of international ships and aircraft with the provision of suitable access to terminals designed to handle the efficient movement of freight and people;

• encouraging behavioural shifts to more desirable and sustainable accommodation and transport choices;

• the manner in which we provide high quality education and health services;

• how we ensure access to cost efficient and sustainable water and energy sources; and

• future funding mechanisms and the repayment of debt used to deliver infrastructure with construction costs continuing to over time.

greater accountability is required at all levels of government for the development of policies and plans to deliver short, medium and long term infrastructure which meets the needs of the Victorian economy and its people.

Victoria does not currently have a long term, state-wide plan or program for the funding and delivery of infrastructure. Victoria risks losing commonwealth funding to other states and territories if it does not develop a such a program. The lack of a clear program for the future reduces the attractiveness of Victoria as a place to live and invest.

Previous plans and strategies have changed frequently over the last 10 years, did not have bipartisan support, were not linked to any long term vision for Victoria and had no long term sustainable funding or delivery plan attached to them.

Why infrastructure investment is importantmodern, efficient infrastructure that connects people and places is at the heart of any thriving economy. continued investment in infrastructure, from both the public and private sectors is vital to continue australia’s rise as a leading global economy.

The positive impact of the resources boom on australia’s gross domestic product (gdP) has masked a major decline in the nation’s productivity growth. on a state level, Victoria’s recent productivity performance has lagged behind that of similar economies such as new South Wales and South australia.

There is an emerging understanding of the importance of productive cities and major regional centres to efficiently meet people’s needs. The State of Australian Cities 2011 report prepared by the federal department of infrastructure and transport illustrates the increasing importance and role of urbanisation in the nation’s economic activity and the need to lift productivity.



9

continued investment in strategic infrastructure is vital to increasing productivity and improving Victoria’s competitiveness both within australia and internationally. The creation of a program to plan, fund and deliver infrastructure for Victoria’s future is of the utmost importance for the future of this state.

managing our growing population •at 30 June 2011, the population of Victoria was

5.6 million.

•melbourne is home to nearly three-quarters of the state’s population (4.1 million), while almost 1.5 million people live in regional Victoria.

•over the 40 years to 2051, Victoria’s population is projected to increase by 3.2 million to 8.7 million. over the same period, melbourne’s population is expected to grow to 6.5 million, while regional Victoria is projected to grow to 2.3 million.

The continued growth of metropolitan and regional communities will require a range of community facilities and services to meet their needs over time. The development of communities by driving new jobs and investment in industries for the long term is essential to the Victorian economy.

Our Nation: Australia on the Move

By 2030, australia will need:

•more homes – 2.7 million

•more childcare places – 104 thousand

•more retirement living places – 125 thousand

•more aged care places – 133 thousand

•more class rooms – 29 thousand

•more hospital beds – 24 thousand

•more office space – 23 million sq. metres

•more retail space – 13 million sq. metres

Victoria will need to cater for a significant portion of this national growth.Source: www.ournation.org.au

Victoria does not have a solid plan for infrastructure investment to meet the needs of population growth. Without a transparent pipeline of government investment priorities, the private sector will increasingly view Victoria as an investment risk rather than an opportunity for investment.

existing health, education facilities and community facilities located in established metropolitan and regional areas will continue to play a significant role in meeting the future needs of residents. over time these services will need to be extended to meet future demand.

in particular, getting our transport system right is critical to continuing to support and attract people to live in Victoria. continuing to improve and support major road and public transport connections to melbourne and other regional centres is integral to supporting long term economic sustainability throughout Victoria.

regional economies are vital to Victoria’s future prosperity and there is a need for continued investment in regional infrastructure. in the last decade, growth has been strongest in the larger regional centres of geelong, Ballarat and Bendigo and smaller towns within proximity of these centres. Some coastal areas and inland areas close to melbourne have also attracted growth driven by lifestyle preferences.

generally speaking, a growing population will result in increased demand for all key infrastructure services, including water, electricity, transport and telecommunications (engineers australia 2010). The australian centre for governance and management of urban transport has identified a number of opportunities for accommodating population growth, particularly within the existing metropolitan area. These are summarised in Box 1.1.



10

Box 1.1

Strategies to Accommodate Population growth• Increase density in new growth areas - Melbourne @ 5 Million suggests that development

in new growth areas should occur at 15 dwellings per hectare. in recent years, the average density of developments has increased, though only to 12 dwellings per hectare.

•Utilise urban brownfields - There remains substantial areas of disused industrial land which could be developed for residential and associated purposes. chemical and industrial contamination of such sites can be both time consuming and costly and, to date, this has made many unusable or unattractive to developers. However the size and location of such sites in melbourne is increasingly making them more attractive for development.

• Increase housing density along transport routes - increasing the density of the vast majority of melbourne’s suburbs is unlikely to be achieved unless areas are better serviced by public transport.

•Promote construction of inner city high-rise residences - melbourne has been late in adopting the inner city high-rise as a viable residential option.

•Dual occupancies - The development of two dwellings on a single allotment also offers some further potential to increase the density of housing without redevelopment and massive changes to the nature of a residential area. However, given planning restrictions, the potential for dual occupancies to make a long-term impact on housing development is unlikely to be significant.

• Further ‘decentralisation’ - another strategy to deal with expected population growth is to make it more desirable to live and work in regional cities. This relies on regional cities being linked to melbourne by well-developed transport corridors.

Source: russell, B. 2009, Assessing the infrastructure issues of Victoria’s population growth, australian centre for governance and management of urban transport (gamut) university of melbourne, Victorian infrastructure Summit

Victoria’s current infrastructure Victoria does not have a program to plan, fund and deliver infrastructure. Previous transport and infrastructure strategies such as the Victorian Transport Plan have been retired following a change in government in the 2010 Victorian election. When elected, the liberal national coalition committed to developing a new metropolitan Strategy for melbourne which is expected to be released in 2013.

Following the 2010 election, the Property council of australia engaged The allen consulting group and Sinclair Knight merz to analyse the current state of infrastructure in Victoria. The Property council, through this research, aims to provide policy direction and advice to the Victorian government and the wider industry and community, around Victoria’s infrastructure needs and how they can best be met.

a key element of this research is to determine the best productivity outcomes for Victoria through infrastructure prioritisation and investment.

in light of infrastructure cost overruns in recent years, the Victorian coalition government has implemented a new oversight process in its capital program to ensure such overruns are minimised in the future.

The process involves greater rigor in developing, approving and implementing capital works which are deemed to be ‘high value and high risk’. Such asset investments have been defined by the Victorian treasury as those that (dtF 2011b):

• have a total estimated investment (tei) greater than $100 million, regardless of the funding source;

• are identified as high risk, using an approved risk assessment tool; or



11

table 1.2

High value and high risk infrastructure projects in Victoria

Project Total estimated investment($m)

Projects already underway

regional rail link tbd

Victorian desalination Plant $3,500

Bendigo Hospital $630

myki $107

Box Hill Hospital redevelopment $448

West gate Bridge rehabilitation $240

melbourne Wholesale market redevelopment tbd

new trains for melbourne commuters – Stage 1 $210

HealthSmart $186

State sports facilities project $67

Projects in planning / development

additional 500 prison beds tbd

metropolitan level crossings $17

emergency services communications tbd

doncaster rail – planning $42

melbourne airport rail link tbd

lara to avalon airport link tbd

rowville rail – feasibility study tbd

Southland Station – planning and development $700

notes: tbd = to be determined

Source: DTF 2011b, 2012

• are determined by the Victorian government as warranting the rigour of increased oversight.

Project proposals assessed as high value and high risk are subject to the following (dtF 2011b):

•more rigorous processes at all stages of development, from project development, robust business case development, to project implementation and reporting;

• increased central review and treasurer’s sign-off at key project stages; and

• the gateway review process.

infrastructure projects that have been deemed by the Victorian government as high value and high risk are listed in Table 1.2.



12

Victoria’s infrastructure gaps and Priorities

engineers australia, infrastructure australia and Sinclair Knight merz have highlighted Victoria’s infrastructure gaps and priorities.

engineers Australia infrastructure report cardengineers australia released their most recent Report Card for Victoria in 2010. The report gives a letter grade to the infrastructure in 11 Victorian sectors, based on the principle that infrastructure policy, regulation, planning, provision, operation and maintenance are optimal if the infrastructure meets the current and future needs of the community, economy and environment in terms of sustainability,

effectiveness, efficiency and equity (engineers australia 2010). engineers australia’s description of the rating scale is as follows:

•A (Very good) — infrastructure is fit for its current and anticipated future purposes.

•B (Good) — minor changes are required to enable infrastructure to be fit for its current and anticipated future purposes.

•C (Adequate) — major changes required to enable infrastructure to be fit for its current and anticipated future purposes.

•D (Poor) — critical changes are required to enable infrastructure to be fit for its current and anticipated future purposes.

• F (Inadequate) — inadequate for current and anticipated future purposes.

The 2010 report card for Victoria is shown in Table 1.3.

table 1.3

2010 Victorian infrastructure report Card: infrastructure rating

Infrastructure type Grade Comment

roads : •road infrastructure under stress due to demand rising faster than supply

•congestion will continue to rise without investment

overall C+

State C+

Local C-

rail d •no fundamental improvement to the metropolitan rail network since 2005, although there are a number of projects underway that should deliver improvements.

•While important regional rail segments have improved, quality is still below what is needed for rail freight to increase its market share.

Ports C+ •despite improvements, there are many significant access and congestion problems remaining at and around ports.

airports B •There have been improvements in capacity and quality of infrastructure at melbourne airport

•The ongoing viability of smaller regional airports is a concern.



13

Infrastructure type Grade Comment

Potable water C •The construction of the desalination plant will future-proof melbourne’s water supply for the next decade, although at high energy and financial costs.

•ensuring water sustainability will also be a challenge in a number of regional areas.

Wastewater B- •melbourne’s sewerage and treatment infrastructure is efficiently managed and effective, and the upgrading of the eastern treatment Plant will produce much better environmental outcomes.

•However, failure to use its recycled water is a waste of a valuable resource.

•Wastewater treatment infrastructure in some regional areas is considered inadequate.

Stormwater C- •There has been improvement in the quality of stormwater flow due to the installation of gross litter traps and other devices. However, there has been no substantial improvement in the exploitation of the stormwater resource.

irrigation C- •There has been increased investment in irrigation modernisation and efficiency. Projects underway will lead to improved irrigation efficiency, however, much of this infrastructure is yet to be delivered

electricity C- • investment in gas and renewable generation has increased, and transmission and distribution assets are in a reasonable condition. However, the demand-supply balance remains tight.

• insufficient attention has been given to demand management as a way to reduce peak demand.

gas C • improvements are being made to the operation of the gas market and the quality of gas planning information. However, asset quality has not significantly improved

• Significant expansion in gas-fired generation will require additional investment in gas transmission pipelines.

telecomms C •While voice and mobile phone services are almost universally available, this is not the case for fast, affordable broadband across the State.

•overall, there is a lack of an integrated strategic plan for telecommunications.

Source: Engineers Australia 2010, Victoria Infrastructure Report Card 2010



14



15

Three of the infrastructure areas with among the lowest grades are rail (d), local roads (c-) and stormwater (c).

Rail•There is severe rail congestion and inadequate

service to meet the growing demand.

•minimal progress has been made in removing railway crossings.

•minimal progress has been made in increasing tram-road separations.

•There have been insufficient new locomotives ordered to allow the retirement of aged locomotives.

•There has been inadequate progress made in providing rail lines to outer suburbs and urban fringe.

Road• increased road congestion and reduced

travel time.

• Static or declining quality of municipal roads.

• lack of committed forward funding of many road projects.

• lack of planning to address gaps in urban network connectivity, notably Westlink and north east link for example.

• limited deployment of intelligent transport systems.

Stormwater• lack of a State-wide urban Stormwater

Strategy.

• limited exploitation of stormwater.

• limited capacity for local governments to fund stormwater infrastructure renewals and replacements.

• Failure to incorporate changes in rainfall due to climate change in the design of stormwater systems.

infrastructure Australia priority listinfrastructure australia’s role is to provide policy advice through the development of infrastructure priority lists. more specifically, the main areas of focus for infrastructure australia are: establishing the right strategic settings in the infrastructure sector; financing reform; and facilitating a more mature debate about australia’s infrastructure and how it should be financed. (ia 2011).

infrastructure australia’s 2012 report to coag includes an ‘infrastructure Priority list’ based on analysis of submissions received from both the private and public sectors. The Victorian projects on this list are shown in Table 1.4.

table 1.4

Victoria’s infrastructure priorities – infrastructure Australia

Project Estimated cost

integrated transit corridor development – route 86 demonstration Project

$30 million

melbourne metro Stage 1 $4.9 billion

melton rail line duplication and electrification $1.3 billion

Freight access to Port of melbourne – ‘Westlink’ $5 billion

melbourne international Freight terminal $260 million

‘Smart Port’ information and communications technology $16 million

Port of Hastings (Stage 1 development) $80 million

Western interstate Freight terminal $2.3 billion

Source: Infrastructure Australia 2011

Securing Victoria’S Future — a Program to Plan, Fund and deliVer inFraStructure


16

Property council assessment of Victoria’s top infrastructure needsBased on the analysis undertaken by Infrastructure Australia and Engineers Australia, the Property Council with the Allen Consulting Group, has established a shortlist of infrastructure projects that should be prioritised based on the productivity and economic dividends they would produce.

These projects are listed in Table 1.5.

The Property Council believes that these projects would deliver significant short, medium and long term benefits for Victoria and urges the Victorian Government to consider the full list of projects when assessing Victoria’s infrastructure needs and priorities.

Victoria must invest in infrastructure that will enhance the state’s productivity and

competitiveness in addition to maintaining core infrastructure services. This will be essential to the future of Victoria and of its towns, cities and communities.

table 1.5

Shortlist of productivity enhancing infrastructure projects for Victoria

Project Estimated Cost ($b)

Melbourne Metro $13.0

East West Road Link $12.0

North East Link $6.0

Melbourne Airport Mass Transit Access $3.5

Western Interstate Freight Terminal $2.3

Melton Rail Line Duplication and Electrification $1.3

Dandenong Rail Corridor Grade Separations $1

Melbourne International Freight Terminal $0.26

Total $38.9

Source: Infrastructure Australia 2011; ACG analysis



17

Victoria needs a pipeline of infrastructure that is solid, transparent and that transcends the short term nature of the political cycle.



18

A PlAn For inFrAStruCture inVeStment in ViCtoriA’S Future

melbourne melbourne is the capital of Victoria and the major residential, commercial and manufacturing centre for the state. it is the second largest city in australia and has more than 73% of the state’s population. at 30 June 2011, the population of melbourne grew to over 4.1 million persons. (Victoria in Future, dPcd, 2012)

all local government areas (lgas) in metropolitan melbourne recorded population growth in the year ended 30 June 2011. The four lgas with the highest growth rates were on the urban fringe: Wyndham (7.8%), cardinia (5.9%), melton (5.6%) and Whittlesea (5.6%). The fifth highest was the city of melbourne (2.6%).

melbourne is projected to grow by almost 1.8 million persons between 2006 and 2036 but at the same time the ageing population will result in the number of persons aged 60 years and over doubling by 2036.

as the metropolitan area continues to grow, more people in the growing outer areas will be required to commute lengthy distances to work and greater demand will be placed on existing infrastructure services. access to the inner and middle areas will become more and more congested. careful management of development is also vital in melbourne’s growth areas; where by 2030 an estimated 450,000 additional people are expected to live in approximately 220,000 new homes. The way this growth is managed will determine whether the next generation enjoys the quality of life melburnians have come to expect.

Victoria’s arterial road network and rail network connects our communities, links people to work, study and home, and drives our economy, channelling freight to our ports, service centres and markets. as Victoria’s population grows, so does the demand on the network more than ever before, with more passenger vehicles, more trams, trains and buses and trucks.

Victoria’s infrastructure project pipelineThe Property council believes a plan for Victoria’s future infrastructure investment and delivery is vital to the success of the state. With Sinclair Knight merz, the Property council has developed a melbourne metropolitan Pipeline and a regional Victoria Pipeline of infrastructure based on known projects.

Both pipelines show planned state infrastructure projects and include information about projects, such as current status expected timing and investment information.

The inclusion of these projects and programs does not necessarily mean that state or federal government funding has been, or will be, provided for these projects and programs.

The melbourne metropolitan Pipeline and regional Victoria Pipeline include projects catagorised as ‘transport’, ‘education’, ‘Health’ and ‘Justice’. The Property council recognises that infrastructure projects outside these catagories have not been included.



19

melbourne metropolitan Pipeline

Project details Expected timing Investment

Project name Project status Status 2012-13 2013-14 2014-15 2015-16 total ($’000)

transport

altona/laverton intermodal terminal ▲ Planning 32,000

additional car Parking - merinda, narre Warren, Beaconsfield, Syndal ● Pre-construction 2,500

Balaclava Station ● Planning 11,900

Better roads - existing metropolitan projects ● delivery 404,985

Better roads - new metropolitan projects ● Planning 375,070

Building upgrades risk mitigation – 2012-13 Program (statewide) ● Pre-construction 1,400

channels and waterways – capital projects (existing) ● delivery 10,535

channels and waterways – capital works (Port Phillip Bay) (new) ● delivery 50,100

clyde rd duplication - High St to Kangan dr ▲ Planning 30,000

construction of mornington Bus interchange (mornington) ● construction 450

dandenong intermodal terminal ● Planning 18,000

dingley Bypass between Warrigal rd to Westall rd ● Pre-construction 135,700

doncaster area rapid transit ■ Planning 41,500

dynon central Hardstand (statewide) ● delivery 8,400

east-West road link (development) ▲ Planning 15,000

Fish market acquisition ▲ Planning 9,700

Footbridge over railway line to Box Hill cemetery ● construction 460

Hastings Port development (Planning only) ▲ Planning 4000+tba

Heritage Works – 2012-13 Program (statewide) ● delivery 1,000

information technology – upgrades and development (Port of melbourne) (existing) ● delivery 6,347

information technology – upgrades and development (Port of melbourne) (new) ▲ delivery 4,967

Kings rd interchange - calder Fwy ● construction 25,000

m80 ring road upgrade ● Planning 1,196,900

melbourne metro (planning only) ▲ Planning 49,700

melbourne metro rail tunnel (planning and development) ▲ Planning 40,000

■

Project delays. Project on hold or under review. No current forward plan.

▲

Seeking further funding before program can be moved to next phase. New program of work needs to be identified for funding.

●

On track to be delivered



20



transport (continued)

metropolitan level crossings (development and early work) ▲ Planning 16,500

metropolitan Park and ride Program ● delivery 26,900

metropolitan rail infrastructure renewal Program ■ construction 802,632

metropolitan rolling stock ■ delivery 1,175,317

metropolitan train control reliability ● delivery 87,900

metropolitan train Safety communications System ● delivery 32,500

myki ticketing System ■ delivery 106,500

network communication optimisation 2012-13 Program (statewide) ● delivery 2,430

new metro trains ▲ delivery 210,360

new stations in growth areas ● construction 188,500

noise Wall Program ● Planning 20,052

other – new capital projects (Port of melbourne) ● Planning 33,000

other (Port of melbourne) ● Planning 4,365

Peninsula link ▲ delivery 60,400

Preserve W-class trams ▲ Planning 8,000

Protective Services officers - railway Station infrastructure ● delivery 17,700

Public transport safety ● delivery 37,220

regional rail link ▲ construction tba

reopening of new Street Brighton railway gates ● Pre-construction 2,000

ringwood railway Station upgrades ■ Planning 2,000

Site rehabilitation and environmental Projects (Port of melbourne) ● delivery 1,000

SmartBus - Yellow orbital Stage 2 ● delivery 37,900

Somerton intermodal terminal ▲ Planning 20,000

South morang rail extension and busway ● delivery 559,100

Southland railway Station (planning only) ■ Planning 700

Station Pier – capital projects (new) ● construction 3,750

Station Pier – capital works (existing) ● construction 18,616

Sunbury electrification ▲ construction 194,500

Swanson dock crane rail replacement (existing) ● construction 8,350

Swanson dock crane rail replacement (new) ● construction 3,100

■


▲


●




21




tram procurement and supporting infrastructure ● delivery 512,770

Western Highway upgrades ● construction 604,000

Wharf rehabilitation (various) (existing) ● construction 54,342

Wharf rehabilitation projects (various) (new) ● construction 10,300

education and training

Feasibility study - additional secondary school in Prahran area ▲ Planning 200

High School modernisation ● construction 67,082

Kingswood Primary School - minor capital works ● construction 55

land acquisitions ▲ Planning 56,180

new Schools in growth areas ● construction 60,000

Primary School modernisation ● construction 51,846

replacement Schools - glenroy Specialist ● construction 17,597

School communities regeneration ● construction 81,904

Schools development Projects (planning) ▲ Planning 2,305

Special Schools modernisation ● construction 57,954

Victorian deaf education institute - establishment of institute ● construction 1,660

Health

austin Health community care unit ● construction 14,200

Box Hill Hospital – redevelopment ● construction 447,500

casey Hospital expansion (planning and development) ▲ Planning 1,000

dandenong Hospital – mental health redevelopment and expansion ▲ Planning 66,000

Frankston Hospital – emergency department redevelopment ● Pre-construction 39,964

Frankston Hospital – inpatient expansion ● Pre-construction 35,959

improving ambulance Service delivery – outer metropolitan melbourne ● delivery 21,231

Kingston centre redevelopment – Stage 2 ● construction 45,000

maroondah Hospital – expansion ● construction 21,987

mental Health inpatient beds – Stage 1 ● delivery 1,800

monash children's Hospital – acute and intensive care services expansion ● construction 10,980

monash children's Hospital (planning and development) ▲ Planning 15,800

■


▲


●




22



Health (continued)

monashlink community Health Service ● construction 9,100

motorcycle Paramedic unit ● delivery 1,000

new mental health beds – Stage 2 ▲ delivery 7,800

north richmond community Health centre – relocation ● delivery 22,500

northern Hospital – emergency department expansion ● construction 24,480

olivia newton-John cancer and Wellness centre – Stage 2 ● construction 71,969

royal children's Hospital ict investment ● delivery 23,947

royal melbourne Hospital – allied Health redevelopment ● construction 9,980

royal talbot rehabilitation centre – mellor Ward refurbishment ● delivery 5,876

royal Victorian eye and ear Hospital redevelopment – planning and development ■ Planning 2,000

Sunshine Hospital – expansion and redevelopment – Stage 3 ● construction 90,500

Sunshine Hospital critical care services ● delivery 15,100

Justice

emergency Services communications – asset enhancement ● delivery 8,495

managing court demand ● construction 2,475

new children’s court at Broadmeadows ● construction 10,000

responding to increased demand for men’s prison accommodation – new asset ● construction 28,000

State coronial services redevelopment ● construction 102,676

upgrade Police Stations – Stage 2 ● construction 47,707

Victoria Police accommodation strategy – construction ● construction 69,820

■


▲


●




23

regional Victoria Pipeline



transport

accessible public transport ● delivery 20,000

Ballarat Western link road (planning only) ▲ Planning 35,500

Bendigo trains to epsom and eaglehawk and new station at epsom and boomgates ● delivery 500

Better roads - existing rural arterial roads projects ▲ construction 625,010

Better roads - new rural arterial roads projects ▲ construction 121,320

Building upgrades risk mitigation – 2012-13 Program (statewide) ● Pre-construction 1,400

country level crossings upgrades ● construction 35,300

cycling package ● Planning 15,273

dynon central Hardstand (statewide) ● Planning 8,400

geelong ring road ▲ Pre-construction 65,000

grovedale railway Station (planning only) ▲ Planning 8,400

goulburn Valley nagambie Bypass ▲ construction 150,960

Heritage Works – 2012-13 Program (statewide) ● Planning 1,000

improving train operations - rail service efficiencies ■ delivery 111,604

lara to avalon airport link ■ Planning 2,100

local Ports critical infrastructure Works ● construction 22,900

network communication optimisation – 2012-13 Program (statewide) ● delivery 2,430

north east rail revitalisation ▲ construction 10,248

opening unused railway station buildings ● Planning 5,000

Princes Highway ▲ construction 320,000

railway crossing upgrades ● delivery 67,714

regional arterial road and Bridge links ● construction 41,930

regional rail network major periodic maintenance ● delivery 171,900

regional rolling stock ■ delivery 315,150

regional station and modal interchange upgrade program ● Planning 8,700

reopen talbot railway station ● delivery 2,500

repair of flood damage to arterial roads ● construction 50,000

Safer road infrastructure Program 3 ● construction 772,202

■


▲


●




24




South West Victorian Passing loop ● construction 10,000

telecommunications - unified communications platforms ● delivery 7,098

traffic signal retrofit program - installation of led lamps ● delivery 25,000

Vicroads registration and licensing System ● delivery 158,531

Victorian Freight logistics Plan ● delivery 5,000

Warragul Station carpark improvements ● delivery 10,700

education and training

School communities regeneration ● construction 101,469

Schools development Projects - Planning ▲ Planning 1,850

High School modernisation ● construction 36,000

K-12 School modernisation ● construction 10,000

Primary School modernisation ● construction 1,500

Special School modernisation ● construction 5,400

new Schools - torquay Secondary college ● construction 26,500

refurbishment of Science laboratories ● delivery 1,000

relocatable classroom renewal ● construction 10,250

minor capital Works ● construction 20,060

Feasibility study - additional secondary school in romsey area ● construction 200

adult, community and Further education Building maintenance Program ● construction 2,000

trade training centres - government ▲ construction 225,700

taFe Student management System ● delivery 66,930

taFe technical education centres ● construction 35,250

taFe institute development ● construction 43,050

Health

Ballarat Hospital – additional beds, ambulatory care and helipad ● delivery 46,363

castlemaine Hospital – upgrade ● construction 10,000

charlton Hospital – reconstruction ● construction 22,700

critical care capacity – expansion ● construction 2,400

geelong Hospital – major upgrade ▲ construction 93,270

geelong residential aged care – retention of surplus public land for residential aged care ● Planning 2,000

Kilmore and district Hospital –redevelopment ▲ construction 20,000

■


▲


●




25



Health (continued)

radiotherapy services for South West Victoria ● delivery 5,000

regional mother-baby mental health units ● construction 6,000

Securing our Health System – Statewide equipment and infrastructure replacement program

● delivery 60,000

Seymour Hospital chemotherapy chairs ● delivery 2,000

Ballarat Base Hospital – redevelopment ▲ construction 20,000

Ballarat regional integrated cancer centre ● construction 55,000

Barwon Health/geelong Health – expanding health capacity ● delivery 26,600

Bendigo Hospital – enabling works Stage 1 ● Planning 54,960

Bendigo Hospital – redevelopment ● Pre-market 575,000

coleraine Hospital – redevelopment ● construction 25,800

echuca Hospital – redevelopment ● construction 40,000

geelong Hospital – enhanced capacity works ● construction 28,670

geelong Hospital upgrade – enabling and decanting works ● Pre-construction 8,330

Healesville Hospital – upgrade ● construction 3,000

improving ambulance service delivery – regional and rural ● delivery 3,950

Kerang district Health – residential aged care redevelopment ● Planning 17,850

leongatha Hospital – redevelopment stage 2 ● construction 26,500

mildura Base Hospital – expansion ● construction 5,000

mobile intensive care ambulance ● delivery 1,000

rural capital support ● delivery 56,000

Safety of women in care ● delivery 4,000

Swan Hill Hospital – aged care redevelopment ● construction 18,000

upgrade and build ambulance stations ● construction 16,000

Warragul Hospital – emergency department upgrade ● construction 2,000

Warrnambool Hospital – redevelopment stage 1c ● construction 26,200

Youth prevention and recovery care services ● delivery 8,000

gippsland cancer centre – expansion ▲ construction 22,000

improving hospital services ● delivery 27,300

Statewide enhancements to regional cancer centres ● construction 9,500

■


▲


●




26



Justice

Bushfire response – retreat and resettlement Strategy – Phase 2 ● Planning 20,237

emergency Services communications ● delivery 1,411

increase prison capacity ● construction 670,410

High Security Prisoner – asset enhancement – Phase 1 ● construction 1,300

Peninsula link fixed digital safety cameras – equipment ● delivery 9,575

Police Station infrastructure to accommodate 1 700 frontline police and 940 Protective Services officers – asset enhancement

● construction 48,718

expansion of new model conferencing ● delivery 1,320

improving the response to sexual assault – multi-disciplinary centres ● delivery 4,918

additional prison beds – asset enhancement ● construction 37,000

automated number plate recognition ● delivery 1,036

Building confidence in corrections – construction/asset enhancement ● construction 108,736

community crime Prevention Program – upgrade police stations ● construction 30,150

infringement management and enforcement services – enhancement/equipment ● delivery 34,363

responding to increased demand for women’s prison accommodation – construction/enhancement

● construction 21,724

upgrade to the Victoria Police academy ● construction 15,350

Victoria Police global asset management strategy – equipment ● delivery 6,000

Victoria Police physical assets building – regional police stations program construction ● construction 21,280

■


▲


●




27

Investment in public infrastructure is strongly linked to productivity growth and economic prosperity.



28

Funding inFrAStruCture For ViCtoriA’S Future

The role of public infrastructurePublic infrastructure is the stock of facilities, services, and equipment in a community that are needed for it to function properly. Within this broad definition, infrastructure can be classified as either ‘social’ or ‘economic’ in nature.

Social infrastructure refers to the physical assets that support the social development of a community, including education, health and public housing facilities. economic infrastructure refers to the physical assets available for conducting business activities, including communications, transportation and distribution networks. it is important to make this distinction, particularly when assessing the likely productivity benefits of infrastructure investment.

The characteristics of public infrastructure services make public provision challenging. in many cases the benefits of public infrastructure extend beyond the users (e.g. schools, prisons, hospitals, sewage facilities and many services provided by networks). even where it is feasible to apply user charges, the social or environmentally optimal price for the use of an infrastructure facility (e.g. use of less polluting public rail transport facilities) is below that required to provide an economic return (i.e. operators still require a subsidy).

There is compelling evidence that investment in public infrastructure is linked with productivity growth and economic prosperity. The link is apparent in australia and in many comparable countries. The findings of studies pointing to these links have been reinforced by more recent work testing the validity of earlier observations (appendix a).

There is increasing recognition of the interconnected roles played by public infrastructure. in addition to underpinning economic performance, public infrastructure also features in social and environmental capital that binds our communities and makes them liveable. Failure to provide sufficient or appropriate infrastructure undermines the competitiveness of a place and its social and economic sustainability.

The role of government in infrastructure provisionThe case for public sector involvement in infrastructure provision arises because, while markets can generally be relied on for the efficient provision of goods and services, there are circumstances where normal market forces may fail to deliver goods and services or fail to do so at efficient prices.

Key reasons for this include the following:

•Public goods — these are goods or services where consumption has to be decided by the community as a whole rather than by each individual. This reflects characteristics of non-rivalrous consumption. one person’s use does not deprive others. They are also non-excludable. it is difficult to prevent people from using the good. Police, fire services, the courts, and public parks have many of these characteristics, although it should be apparent that a pure public good is rare in practice. competitive markets will under produce public goods because investors would not obtain sufficient returns.

•Externalities — consumption or production of some goods and services have implications beyond the benefits between buyers and sellers. external or third parties can be disadvantaged (or advantaged) by ‘spillover’ impacts not reflected in the market price paid. common negative externalities include pollution, noise, and congestion. left to themselves, competitive markets are likely to overproduce goods involving negative externalities and under produce those involving positive externalities. The ‘free rider’ problem emerges where some parties overuse common resources where they do not pay the full costs. over the long-run, this can lead to depletion of common resources, including those that underpin the integrity of our social and ecological systems.

•Natural monopolies — the existence of a ‘natural monopoly’, where one provider is able to meet total market demand at a lower unit cost than two or more providers, was once viewed as a key reason why the public sector should own and operate infrastructure. The rationale is most compelling in the case of network industries although, even in this case, technological change is enabling the entry of efficient competition.



29

The existence of these market failures does not necessarily imply that all infrastructure should be delivered by the public sector. However, their existence shapes the way the services are provided and the way they are funded.

Conventional funding approachesBroadly speaking, investment in public infrastructure can be financed by:

• public sector through revenues or savings; or

• capital markets through borrowings or equity contributions from the private sector.

numerous funding approaches exist within these two broad areas, some of which involve a mix of both. These approaches can be categorised into three areas: general budget appropriations, development contributions and public private partnerships.

General budget appropriationsFunding of public infrastructure through general budget appropriations can be sourced from a variety of areas, including:

• taxation revenue from a wide range of taxes at the state (e.g. payroll taxes and stamp duties) and local government levels (e.g. rates paid on commercial and residential property);

• intergovernmental transfers such as federal or provisional grants (e.g. gSt allocation);

• proceeds from asset sales;

• user charges (i.e. a price or a fare paid by the consumer of the infrastructure services such that costs are fully or partially recovered); and

• general purpose public borrowing (i.e. the raising of funds via debt securities issued on domestic or international markets).

it is imperative, however, that general government infrastructure investment meet stringent tests, especially if it is to involve any debt funding. These include the following (Fitzgerald 2011):

• the infrastructure project is not able or appropriate to be done on a commercial basis.

• the infrastructure project has a high social benefit-cost ratio.

• debt and other whole of life costs are able to be funded out of an operating budget with competitive tax rates and which meets other needs

• the project is at least partly funded by surpluses and debt is never used to fund expenses.

Development contributionsdevelopment contributions, such as producer levy or developer charge, require developers to provide infrastructure or make payments commensurate with development-related infrastructure needs.

developer contributions can take the form of:

• land transfers where land is ‘gifted’ to the government by the developer for roads, public open space and drainage;

•work-in-kind where infrastructure works or facilities are constructed by developers and transferred to public authorities on completion; and

•monetary contributions towards the cost of acquiring land for public use or the provision of infrastructure by public authorities or others (chan et at. 2009).

developer contributions can influence the allocation of resources in the development of urban infrastructure in the following ways:

•The contribution increases the cost to developers when bringing lots to market and developers are hence likely to increase the scale of developments to cover such costs.

• infrastructure services are put in place in advance of building, which costs less than subsequent installation.

•developers may focus on developing land in lower cost areas where service provision is less expensive.

a number of issues have been raised in relation to developer contributions. one relates to the existence of split incentives where developers have an incentive to provide facilities that may be ‘less than optimally durable’ to meet immediate requirements while authorities seek to over-build infrastructure to avoid future expansion and reduce whole-of-life costs. another relates to the fact that they may potentially encourage government planners to open up greenfield sites for development rather than consolidate urban development (acg 2003).

in addition, the auditor general has expressed concerns regarding the Victorian system of developer contributions stating that there is little assurance that it is operating as intended across local government, and that there is a continued lack of effective oversight and reporting (Vago 2009).



30

Public private partnershipsPublic private partnerships (PPPs) are service contracts between the public and private sectors where the government pays the private sector to deliver infrastructure and related services over a long-term period.

under such an arrangement, private sector parties contracted to build public infrastructure are financially responsible for its condition and performance throughout the lifetime of the resulting asset. a typical project would involve engaging one party to design, finance, construct, maintain and, in some cases, operate the facility. The government makes payments only after the facility has commenced operations and such payments are made over the term of the contract based on services delivered against the achievement of key performance indicators — with these payments conditional upon performance (dtF 2007).

PPPs involve a wide range of different contract types, with the key difference being the extent to which the private sector is responsible for the infrastructure being constructed. Some examples include: design build; operate maintain; design build operate; build own operate; build own operate transfer; lease own operate; and alliance.

Special purpose vehicles (SPVs), which can be designed as PPPs, are dedicated entities created for the purpose of providing public infrastructure and associated services. They include government trading enterprises (gtes) and the spectrum of public/private provision. SPVs are commercial in nature and are created as off-budget entities.

gtes typically provide economic infrastructure services in sectors like communications, energy, transport and water supply. They can be fully or partly owned by government. either way, however, the government always has a controlling interest. gtes are operated to provide goods and services on a commercial basis by substantially or fully covering their costs. user charges are the main revenue source but governments may also directly purchase or subsidise services provided by gtes (chan et al. 2009).

The global financial crisis and implications for private financingduring the global financial crisis, the private sector found it more difficult to raise debt finance for large infrastructure projects such as PPPs, as fewer banks were willing to provide funds. Several factors contributed to this, including:

•market constraints where access to lenders has been severely constrained and lending capacity for all commercial projects has been substantially reduced;

• changes in the banking sector where banks are taking a more conservative approach to lending and, in the instance where capital is available, banks are rationing it and imposing more stringent lending conditions; and

• limitations to the amount of debt that can be raised in the australian market for infrastructure investment as fewer banks are prepared to lend and, even if they are, will only lend relatively small amounts.

according to infrastructure Partnerships australia (iPa) this had implications for bid processes and affected the types of infrastructure that could attract funding (2009). it also jeopardised PPP projects that were in the advanced stage of planning or those that were under procurement (iPa 2009). in responding to this, iPa suggested that government could intervene to support or provide funding in light of the scarcity of private capital (2009).

although the availability of capital has improved somewhat since the gFc, capital constraints remain pervasive in the construction and property sectors. given recent international difficulties, particularly concerns over the european sovereign debt crises, such constraints are likely to persist.

Alternative finance modelsSpecific-purpose securitised borrowingSpecific-purpose securitised borrowing involves the issuing of debt instruments such as bonds, debentures and inscribed stocks in capital markets to finance infrastructure projects. When used to fund economic infrastructure (such as water treatment facilities, bridges or freeways), the debt is commonly repaid from income generated through the project. When used to fund social infrastructure (e.g. schools and hospitals), the debt is commonly repaid through taxation revenue.



31

in australia, the use of specific-purpose bonds peaked in the post-World War ii era but subsequently declined, disappearing almost completely by the late 1970s. The key reasons for this decline were the corporatisation of government businesses and reforms to australia’s financial sector. currently, public borrowing is undertaken through bonds issued by central borrowing authorities (cBas) in each jurisdiction, and bonds are not linked to specific assets or activities (chan et al. 2009).

in this way, cBas are able to incur lower costs for public borrowing. cBas bank on their respective state credit rating to issue bonds with high credit ratings, that is, bonds that would require lower rates of return. if specific-purpose bonds were to be issued for economic infrastructure instead, then these would be linked intrinsically to the risk profile of the infrastructure project, with high risk (and possibly high cost) projects requiring higher bond yields. By issuing bonds through cBas, state governments effectively reduce the costs of funding such projects by spreading or averaging the risk associated with different project types.

Certificates of participationa variation on specific purpose securitised borrowing is the certificate of Participation (coP) or lease revenue bond. These are typically used by municipal governments to fund construction of capital facilities at the municipal level. under such an arrangement, investors purchase a share of the lease revenues and are paid as the construction progresses, based on the share that the investor has in the lease agreement.

This is more attractive than a traditional bond as it does not require the investor to wait for the bond to mature before obtaining a return on investment. if a council defaults on the arrangement, the terms of a coP provide investors with the ability to assume control of the facility. The investors can then choose to either complete the facility and sell it to a private investor or band together and use the completed structure for purposes of their own.

coPs are popular in the uS where they have been used to finance a wide range of capital projects including public office buildings (courthouses, police and fire stations), telecommunication projects, correctional facilities, power facilities, airport facilities and health care facilities (Pca 2010a).

Value capture levya value capture levy aims to capture the uplift in land values that result from the planning process, development of land or construction of beneficial infrastructure. The levy is generally only captured when the property changes ownership and receipts are used to fund infrastructure that further supports development (Pca 2010a).

a number of australian jurisdictions apply the value capture levy including new South Wales (nSW), the australian capital territory (act) and Queensland. in nSW, value capture levies were introduced in 1970 and were set at 30 per cent of the increase in land value when the land was sold. in the act, all land is leasehold. if the leases are varied in a manner that increases the value of the use and development rights attached to the land, a charge is payable to give back some of the increased value to the community. in Qld, the urban land development authority (ulda) recently introduced a value capture charge for urban development areas (infrastructure charges taskforce 2011).

Value capture levies are also used in the united Kingdom, israel, Hong Kong, Singapore and denmark.

Specific purpose leviesSpecific purpose levies are ad hoc levies that government can use to raise funds for a specific purpose. However, where they are not directly linked to the services they are levied upon, they can often be regarded as a tax. Specific purpose levies are often contentious and are best applied only if there is a clear link between the levy and the infrastructure constructed or services provided (Pca 2010a).

Growth area bondsgrowth area bonds (gaBs) are commonly used in the uS as a specialised form of debt financing where future property tax revenues are used to repay bonds issued to finance items of public infrastructure.

When new public infrastructure is developed, it leads to new property development and higher valuations, which increase the revenue that will be generated from property taxes such as transfer duty and council rates (refer to Figure 3.1).



32

Figure 3.1

growth area bond model

Source: Property Council of Australia 2010b

under gaB financing, specific gaB districts are established with a plan outlining the districts’ infrastructure needs and their cost. a financing body issues gaBs that are tied to a specific region and their future tax revenue collection is used to repay the bonds. once the debt has been repaid, the tax revenue reverts to the original taxing authority.

gaBs are different from value capture levies. They target the growth in property taxes levied on a continuous basis. Value capture levies, on the other hand, only capture part of the growth when a property changes ownership. gaBs require a defined area, whereas value capture levies can apply both within a defined area or a whole jurisdiction (Pca 2010a).

The advantages of using gaBs are that they provide a transparent approach to infrastructure selection and provision. They also result in a sustained commitment to infrastructure provision that is not subject to changes due to the electoral cycle. in addition, provision of infrastructure is appropriately timed and debt is repaid through asset revaluations (Pca 2009).

gaBs are not used in australia, but research has tested their feasibility through two case studies. The research found that gaBs would repay 75 per cent of a metro rail station and complementing infrastructure upgrades in gladeville (Sydney) in 18 years and that they could also pay for 75 per cent of infrastructure costs of the Sydney south west growth centre in 19 years (PWc 2008).

$ Annual taxes generated inGAB district

Incremental tax revenue(used to �nance debt service)

New tax basepost GABreverts to taxingauthority

Final year GABYear 1 of GAB

Existing tax base (frozen at startof project, although can be keptconstant in real terms, and continuesto current taxing authority)

Business improvement districtsa business improvement district (Bid) is a business and local authority partnership in which businesses in a defined area pay an additional tax or fee in order to fund improvements within a district’s boundaries. Bids are also known as business improvement areas, business revitalisation zones, community improvement districts, special services areas,

or special improvement districts. Bids are used for cleaning streets, providing security, making capital improvements, and marketing the area. The services provided by Bids are in addition to those already provided by the council.

Bids are common in the uS, canada, england, Wales and were recently piloted in Scotland.



33

Choosing Between Finance models

different finance models may be appropriate for different types of infrastructure projects, depending on their characteristics. The strengths and weaknesses of the different finance models are presented in Table 3.2.

it is important to note that this method for choosing between different funding methods differs from other more generalised approaches. For example, a previous report by The allen consulting group — Funding Urban Public Infrastructure: Approaches Compared — provides a qualitative and quantitative assessment of

different finance approaches, where the results were used to rank different approaches from most preferable to least preferable (2003).

although the framework outlined in Table 3.2 draws on similar information to determine strengths and weaknesses of different finance models, the intention is not to provide a ranking of the different approaches; rather, the intention is to outline the circumstances under which each funding approach is most appropriate. The implication is that the choice of the most appropriate finance models will depend on a number of factors, including the type of infrastructure being financed, the timeline of costs and benefits and whether the project is at the local, state or federal level, to name a few.



34

tabl

e 3.

2

Fund

ing

and

finan

ce m

etho

ds –

stre

ngth

s and

wea

knes

ses

Fund

ing

and

fin

ance

met

hods

Stre

ngth

sW

eakn

esse

sSi

tuat

ions

whe

re m

ost a

ppro

pria

te

Gen

eral

bud

get

appr

opri

atio

ns

•in

crea

sed

scru

tiny

prom

otes

ac

coun

tabi

lity

and

tran

spar

ency

fo

r usi

ng p

ublic

fund

s.

•lo

w tr

ansa

ctio

n co

sts c

ompa

red

to m

ost

othe

r fina

ncin

g m

etho

ds.

•u

ncer

tain

ty in

the

avai

labi

lity

of c

ash

requ

ired

for t

he m

ost e

ffici

ent a

ppro

ach

to b

uild

ing

the

asse

t. n

on-d

iscr

etio

nary

sp

endi

ng c

ould

take

pri

ority

thus

redu

cing

av

aila

ble

fund

s.

•in

effici

ent a

nd c

ould

redu

ce in

cent

ives

to

exp

lore

oth

er m

ore

effici

ent f

undi

ng

optio

ns su

ch a

s use

r cha

rges

.

•Fu

ll pu

blic

fund

ing

coul

d re

duce

scop

e to

al

loca

te p

roje

ct ri

sks t

o th

ose

best

abl

e to

m

anag

e th

em.

•d

epen

ds o

n w

heth

er th

e pr

ojec

t is t

o be

fu

nded

thro

ugh

taxe

s, bo

rrow

ings

or

user

cha

rges

.

Taxa

tion

reve

nue

•H

as n

o im

pact

on

cred

it ra

ting.

•St

ate

tax

dist

ribu

tes t

he c

ost o

f in

fras

truc

ture

bro

adly

and

is

the

fair

est m

eans

of fi

nanc

ing

infr

astr

uctu

re if

the

bene

fits a

re

shar

ed w

idel

y.

•lo

cal g

over

nmen

t tax

es is

abl

e to

ha

rnes

s the

rela

tions

hip

betw

een

incr

ease

d pr

oper

ty v

alue

resu

lting

fr

om in

fras

truc

ture

pro

visio

n an

d al

low

for t

he sp

read

ing

of c

osts

acr

oss

gene

ratio

ns b

enefi

ttin

g fr

om th

e in

fras

truc

ture

(e.g

. ass

umin

g ra

te

hike

s are

per

man

ent)

and

over

all

prop

erty

ow

ners

with

in a

spec

ific

area

.

•ta

xes c

an d

isto

rt e

cono

mic

out

com

es

and

do n

ot m

erel

y re

dist

ribu

te m

oney

an

d re

sour

ces.

tax

has l

ittle

impa

ct o

n en

cour

agin

g effi

cien

t lev

els o

f use

of

infr

astr

uctu

re se

rvic

es.

•ta

xatio

n re

venu

e m

ay v

ary

depe

ndin

g on

go

vern

men

t pol

icie

s and

mac

roec

onom

ic

cond

ition

s e.g

. bus

ines

s cyc

les.

•m

ost s

uite

d fo

r inf

rast

ruct

ure

proj

ects

w

ith b

road

bas

ed b

enefi

ts, w

here

such

be

nefit

s are

real

ised

ove

r the

shor

t to

med

ium

term

.



35

Fund

ing

and

fin

ance

met

hods

Stre

ngth

sW

eakn

esse

sSi

tuat

ions

whe

re m

ost a

ppro

pria

te

Bor

row

ings

•c

an b

e us

ed to

acc

eler

ate

or b

ring

fo

rwar

d de

liver

y of

key

infr

astr

uctu

re

proj

ects

.

•in

curs

a lo

wer

cos

t of c

apita

l co

mpa

red

to p

riva

te se

ctor

fina

ncin

g.

•a

ligns

cos

t of i

nfra

stru

ctur

e m

ore

clos

ely

to th

e be

nefit

s tha

t acc

rue

over

tim

e, im

prov

ing

dyna

mic

effi

cien

cy.

•m

ay h

ave

som

e im

pact

on

cred

it ra

ting

if it

exce

eds d

ebt t

hres

hold

s set

by

ra

ting

agen

cies

.

•Fo

r pro

ject

s whe

re b

enefi

ts o

utw

eigh

the

cost

s so

that

mac

roec

onom

ic e

ffici

ency

is

impr

oved

.

•d

ebt c

an b

e vi

ewed

as a

tax

on th

e fu

ture

ge

nera

tions

and

is, t

here

fore

, sui

ted

to

proj

ects

with

long

term

ben

efits

(i.e

. deb

t fin

anci

ng a

llow

s for

the

mat

chin

g of

be

nefit

s and

cos

ts o

ver t

ime)

.

•Pr

ojec

t mus

t pas

s str

inge

nt te

sts (

as

outli

ned

abov

e), i

nclu

ding

that

it is

not

ab

le to

be

done

on

a co

mm

erci

al b

asis

and

th

at d

ebt i

s abl

e to

be

fund

ed o

ut o

f the

op

erat

ing

budg

et.

Use

r cha

rges

•eq

uita

ble

as it

bas

ed o

n th

e us

er p

ay

prin

cipl

e to

fund

infr

astr

uctu

re.

•effi

cien

t as i

t enc

oura

ges b

est

allo

catio

n of

reso

urce

s thr

ough

effi

cien

t pri

cing

.

•d

eman

d fo

r goo

ds a

nd se

rvic

es m

ay v

ary

from

wha

t was

ant

icip

ated

at t

he p

lann

ing

stag

e, th

us a

ffect

ing

finan

cial

retu

rns.

•d

ifficu

lt to

ach

ieve

effi

cien

t pri

cing

, use

rs

char

ges a

re u

sual

ly se

t too

hig

h (e

.g.

mon

opol

ies)

to e

ncou

rage

opt

imal

use

or

too

low

er to

cov

er th

e co

st o

f cap

ital (

to

enco

urag

e us

e to

obt

ain

a co

mm

erci

al

retu

rn).

•c

ould

hav

e hi

gh a

dmin

istr

atio

n co

sts.

•Fo

r pro

ject

s whe

re th

ere

is a

link

bet

wee

n th

e se

rvic

e pr

ovid

ed a

nd th

e fe

e ch

arge

d fo

r the

serv

ice.

•So

me

exam

ples

are

road

pro

ject

s and

m

aint

enan

ce fu

nded

thro

ugh

vehi

cle

regi

stra

tion

fees

.



36

Fund

ing

and

fin

ance

met

hods

Stre

ngth

sW

eakn

esse

sSi

tuat

ions

whe

re m

ost a

ppro

pria

te

Dev

elop

men

t co

ntri

buti

ons

•lo

ng h

isto

ry o

f use

in a

ustr

alia

and

m

ore

polit

ical

ly a

ccep

tabl

e th

an

high

er ta

xes a

s a w

ay o

f fina

ncin

g ne

w in

fras

truc

ture

.

•c

ontr

ibut

ions

coi

ncid

e w

ith th

e po

int i

n tim

e at

whi

ch in

fras

truc

ture

in

vest

men

t is r

equi

red

–typ

ical

ly a

t de

velo

pmen

t or c

onst

ruct

ion

stag

e.

•in

clud

es in

fras

truc

ture

cos

ts in

to

the

pric

e of

land

whe

ther

is p

asse

d ba

ckw

ards

to th

e se

ller o

r for

war

ds to

th

e bu

yer.

The

pric

e si

gnal

impr

oves

al

loca

tive

effici

ency

and

enc

oura

ges

the

deve

lopm

ent o

f lan

d th

at is

re

lativ

ely

low

cos

t to

deve

lop.

•le

ss sc

rutin

y of

pro

ject

s as i

t doe

s not

in

volv

e pu

blic

fund

s.

•g

over

nmen

t mus

t fun

d th

e ga

p be

twee

n th

e co

st o

f inf

rast

ruct

ure

requ

ired

and

de

velo

pmen

t con

trib

utio

ns.

•tr

ansa

ctio

n co

sts c

an b

e hi

gh if

the

cont

ribu

tion

syst

em is

com

plex

and

whe

re

long

neg

otia

tions

or d

ispu

tes o

ccur

.

•c

harg

es a

ffect

reso

urce

allo

catio

n in

clud

ing

disc

oura

ging

dev

elop

men

t in

loca

tions

whe

re se

rvic

e pr

ovis

ion

wou

ld

be e

xpen

sive

hen

ce d

evel

oper

s hav

e st

rong

in

cent

ive

to fo

cus u

pon

low

er c

ost a

reas

.

•Th

ere

are

split

ince

ntiv

es b

etw

een

deve

lope

rs w

ho w

ant t

o pr

ovid

e m

inim

um in

fras

truc

ture

and

gov

ernm

ent

plan

ners

who

wou

ld li

ke to

ove

rbui

ld

infr

astr

uctu

re.

•g

over

nmen

t pla

nner

s mor

e lik

ely

to a

llow

gre

enfie

ld d

evel

opm

ents

to

fund

infr

astr

uctu

re b

uild

inst

ead

of

cons

olid

atin

g ur

ban

deve

lopm

ent.

•u

sed

for l

and

deve

lopm

ent s

uch

as

gree

nfiel

d sit

es, u

sual

ly in

hig

h-gr

owth

an

d lo

w se

rvic

e pr

ovis

ion

cost

regi

ons.



37

Fund

ing

and

fin

ance

met

hods

Stre

ngth

sW

eakn

esse

sSi

tuat

ions

whe

re m

ost a

ppro

pria

te

Publ

ic p

riva

te

part

ners

hips

(P

PPs)

•Su

ppor

ts in

crea

sed

prov

isio

n of

in

fras

truc

ture

with

out a

ddin

g to

go

vern

men

t bor

row

ing

or d

ebt.

Effici

ent

•a

lloca

tes r

isk

to w

here

it is

bes

t m

anag

ed.

•u

se o

f pro

ject

fina

nce

crea

tes

ince

ntiv

e to

del

iver

pro

ject

on

time

whe

n ca

sh fl

ow g

ener

ated

is re

quir

ed

to re

pay

debt

.

•Bu

ndlin

g al

l bui

ldin

g ac

tiviti

es

from

des

ign

to m

aint

enan

ce a

ligns

in

cent

ives

for l

ow c

ost c

onst

ruct

ion.

Th

is m

inim

ises

the

lifet

ime

cost

s of

oper

atio

ns, t

hus c

onta

inin

g w

hole

-of-

life

cost

s.

•le

ss sc

rutin

y of

pro

ject

s as p

ublic

fund

s ar

e no

t inv

olve

d. a

ccou

ntab

ility

to th

e Pa

rlia

men

t and

pub

lic is

als

o re

duce

d.

•c

ost o

f cap

ital c

ould

be

high

er th

an

trad

ition

al fi

nanc

ing

due

to th

e co

mpl

ex

proj

ect fi

nanc

ing

arra

ngem

ents

invo

lved

.

•H

igh

tran

sact

ion

cost

s ass

ocia

ted

with

co

ntra

ctua

l dev

elop

men

t.

•lo

nger

lead

tim

es d

ue to

the

time

asso

ciat

ed w

ith te

nder

ing

and

cont

ract

de

velo

pmen

t.

•u

sed

to a

ccel

erat

e or

bri

ng fo

rwar

d th

e de

liver

y of

a w

ide

rang

e of

key

in

fras

truc

ture

pro

ject

s.

•V

icto

ria

has u

sed

PPPs

to b

uild

and

fu

nd h

ospi

tals

, cor

rect

iona

l fac

ilitie

s, w

aste

wat

er tr

eatm

ent f

acili

ties,

com

mun

icat

ion

netw

orks

, sch

ools

, de

salin

atio

n pl

ant,

cour

ts a

nd to

llway

s.

Spec

ific-

purp

ose

secu

riti

sed

borr

owin

g

•ex

posu

re to

mar

ket-b

ased

dis

cipl

ines

–

fund

s are

rais

ed fr

om c

ompe

titiv

e de

bt m

arke

ts h

ence

pro

ject

s are

as

sess

ed b

ased

on

com

mer

cial

mer

it.

Effici

ent

•St

rong

er li

nk b

etw

een

perf

orm

ance

of

ass

et a

nd se

rvic

ing

of d

ebt l

eadi

ng

to g

reat

er d

ue d

ilige

nce

on v

iabi

lity

of

proj

ect b

y in

vest

ors.

•Ba

sed

on u

ser p

ays p

rinc

iple

. re

venu

e fr

om a

sset

is u

sed

as b

ond

repa

ymen

ts th

us im

prov

ing

effici

ency

in

the

plan

ning

and

ope

ratio

n ph

ases

of

the

asse

t. en

sure

s the

ben

efici

arie

s of

the

asse

t pay

and

pre

vent

s in

terg

ener

atio

nal t

rans

fer o

f deb

t.

mar

ket d

isto

rtio

ns a

risi

ng fr

om

tax-

exem

pt st

atus

:

•co

mpe

titio

n an

d in

nova

tion

impl

icat

ions

;

•al

loca

ting

reso

urce

s aw

ay fr

om n

on-t

ax

exem

pt in

vest

men

ts; a

nd

•ta

x bu

rden

impl

icat

ions

.

use

of t

ax-e

xem

pt b

onds

enc

oura

ges r

ent-

seek

ing

activ

ities

.

•Fo

r all

type

s of e

cono

mic

infr

astr

uctu

re

whe

re th

ere

is a

reve

nue

sour

ce th

at c

an b

e us

ed to

repa

y bo

nds.

•a

lso

suita

ble

for s

ocia

l inf

rast

ruct

ure

whe

re ta

xatio

n is

the

sour

ce o

f deb

t re

paym

ent.

in th

is c

ase,

it is

con

sider

ed a

fo

rm o

f pub

lic b

orro

win

g.

•n

o lo

nger

favo

ured

by

aus

tral

ian

gove

rnm

ents

as c

urre

ntly

pub

lic

borr

owin

g is

und

erta

ken

thro

ugh

bond

s is

sued

by

cent

ral b

orro

win

g au

thor

ities

(c

Bas)

in e

ach

juri

sdic

tion,

and

bon

ds a

re

not l

inke

d to

spec

ific

asse

ts o

r act

iviti

es.

•c

ertifi

cate

of p

artic

ipat

ions

are

how

ever

us

ed b

y m

unic

ipal

gov

ernm

ents

in th

e u

S to

fund

con

stru

ctio

n of

cap

ital f

acili

ties a

t th

e m

unic

ipal

leve

l.



38

Fund

ing

and

fin

ance

met

hods

Stre

ngth

sW

eakn

esse

sSi

tuat

ions

whe

re m

ost a

ppro

pria

te

Val

ue c

aptu

re le

vyEq

uita

ble

•c

aptu

res w

indf

all g

ains

from

in

divi

dual

land

/pro

pert

y ow

ners

at a

po

int i

n tim

e an

d re

dist

ribu

tes i

t to

man

y ac

ross

tim

e.

•d

isin

cent

ive

for l

ando

wne

rs to

bri

ng la

nd

to m

arke

t if l

evy

is n

ot p

erm

anen

t or i

f le

vy ra

te is

too

high

.

•re

quir

es a

legi

slat

ive

fram

ewor

k an

d m

echa

nism

in p

lace

to c

aptu

re b

ase

land

va

lue

(bef

ore

deve

lopm

ent)

and

calc

ulat

e th

e va

lue

of th

e le

vy.

•Su

itabl

e in

cir

cum

stan

ces w

here

land

is

bei

ng re

zone

d, d

evel

opm

ent h

as

been

app

rove

d or

whe

re b

enefi

cial

in

fras

truc

ture

has

bee

n co

nstr

ucte

d th

at

incr

ease

s lan

d va

lue.

•Th

e va

lue

capt

ure

levy

is ty

pica

lly u

sed

to

fund

urb

an in

fras

truc

ture

pro

ject

s.

•a

pplic

able

for a

defi

ned

area

or w

hole

ju

risd

ictio

n.

Spec

ific

purp

ose

levi

esEff

ecti

ve

•r

aise

s fina

nce

thro

ugh

regu

lar a

nd

easi

ly a

ltere

d m

eans

.

Ineffi

cien

t

•d

isto

rts r

esou

rce

allo

catio

n de

cisio

ns a

nd

may

be

levi

ed o

n a

narr

ow b

ase.

Ineq

uita

ble

•d

epen

ds o

n re

latio

nshi

p be

twee

n th

ose

levi

ed a

nd th

ose

bene

fitin

g fr

om u

se o

f fu

nds.

unl

ess S

Pl is

bro

ad b

ased

, it w

ill b

e ge

nera

lly in

equi

tabl

e.

•la

ck o

f com

mun

ity su

ppor

t as i

t is o

ften

view

ed a

s a ta

rget

ed ta

x w

ith n

o as

sura

nce

that

reve

nue

rais

ed w

ill b

e us

ed fo

r sta

ted

purp

ose.

•n

eed

to p

ass s

peci

fic le

gisl

atio

n w

ith

maj

ority

supp

ort f

rom

par

liam

ent i

n or

der

to im

plem

ent.

•a

d ho

c le

vies

to ra

ise

finan

ce fo

r a sp

ecifi

c pu

rpos

e.

Exam

ples

:

•Q

ueen

slan

d flo

od le

vy fo

r inf

rast

ruct

ure

reco

nstr

uctio

n.

•la

ndfil

l lev

ies i

n V

icto

ria

for f

undi

ng

was

te m

anag

emen

t inf

rast

ruct

ure.



39

Fund

ing

and

fin

ance

met

hods

Stre

ngth

sW

eakn

esse

sSi

tuat

ions

whe

re m

ost a

ppro

pria

te

Gro

wth

are

a bo

nds

(GA

B)Eff

ecti

ve

•in

fras

truc

ture

if se

lf fu

nded

and

doe

s no

t im

pact

on

hous

ing

affor

dabi

lity

upfr

ont.

Effici

ent

•in

crea

se in

wea

lth o

f tho

se w

ithin

the

ga

B di

stri

ct is

in p

ropo

rtio

n to

the

incr

ease

in a

sset

val

ue.

•Pr

ovid

es m

arke

t dis

cipl

ine

in th

at

infr

astr

uctu

re se

lect

ed fo

r fun

ding

m

ust p

rodu

ce b

enefi

ts th

roug

h in

crea

sed

prop

erty

val

ues.

•u

ncer

tain

ty in

ear

ly st

ages

ove

r lik

ely

incr

ease

in p

rope

rty

valu

es a

nd th

eref

ore

taxa

tion

reve

nue

avai

labl

e to

fund

the

ga

B.

•H

igh

adm

inis

trat

ion

cost

s, as

it n

eeds

a

ga

B au

thor

ity to

be

in p

lace

to a

dmin

iste

r th

e g

aB

dist

rict

.

•a

pplic

abili

ty d

epen

ds o

n th

e ta

xatio

n po

wer

of t

he lo

cal g

over

nmen

t.

•a

ppro

pria

te fo

r lan

d/ar

ea d

evel

opm

ent,

whe

re n

ew p

ublic

infr

astr

uctu

re w

ill

enco

urag

e ne

w p

rope

rty

deve

lopm

ent a

nd

resu

lt in

hig

her p

rope

rty

valu

atio

ns.

•g

aBs

are

usu

ally

issu

ed b

y lo

cal

gove

rnm

ent a

nd a

re c

omm

on th

roug

hout

th

e u

nite

d St

ates

.

Busi

ness

im

prov

emen

t di

stri

cts

Effec

tive

•r

aise

s fina

nce

volu

ntar

ily a

nd is

use

d fo

r spe

cific

mea

ns.

Effici

ent

•Fu

nds u

sed

for s

peci

fic n

omin

ated

pr

ojec

ts th

at in

divi

dual

bus

ines

ses

wou

ld n

ot b

e ab

le to

affo

rd.

•Fe

es ra

ised

may

not

be

used

for s

peci

fied

purp

oses

and

cos

t of p

rovi

sion

may

not

be

kep

t und

er c

ontr

ol re

quir

ing

incr

ease

in

fees

.

•re

leva

nt o

nly

to lo

cal g

over

nmen

t pr

ovid

ed in

fras

truc

ture

.

•Fo

r ser

vice

or i

nfra

stru

ctur

e im

prov

emen

ts w

ithin

a p

artic

ular

dis

tric

t, ab

ove

and

beyo

nd w

hat i

s alr

eady

pro

vide

d by

the

coun

cil.

Sour

ce: A

CG

200

3, C

han

et a

l. 20

09, P

CA 2

010a

and

the A

llen

Cons

ultin

g G

roup

.



40



41

Current approach to infrastructure funding in Victoriain Victoria, pubic infrastructure investment in both the general government and public non-financial corporations (PnFc) sectors is funded from a combination of the sources mentioned above and through a variety of means, including:

• operating cash flows;

• revenue from asset sales;

• State and commonwealth government funding;

• borrowings; and/or

• private finance e.g. PPPs (dtF 2011b).

a number of capital projects are procured through Partnerships Victoria, which is a framework that provides a whole of government approach to the provision of infrastructure and services through PPPs. The majority of PPP projects in Victoria are government funded through availability payments and financed by the private sector.

at present there are 21 Partnerships Victoria projects contracted, with a capital investment of approximately $10.5 billion. Fifteen of these projects have been commissioned and are now operational and six are under construction. in addition to these, a further project also exists which is currently at the procurement stage (dtF 2011b).

Victoria’s future choice of financing methods for public infrastructure are likely to be influenced by the findings of the independent review of State Finances currently underway in Victoria.

Funding sources for the Property Council’s shortlist of infrastructure projectsTable 3.3 provides a shortlist of infrastructure projects that are regarded as being of highest priority in terms of meeting the most pressing needs of Victoria from an economic perspective. These projects are all rail or road related and involve benefits that accrue over the long term. most of the projects also involve the potential for user charges or some other ongoing revenue source, including potential hypothecation of property development revenues. in light of these aspects, and consideration of the circumstances under which different funding approaches are most appropriate (see Table 3.3), it is determined that the shortlist of projects would best be funded through public borrowing, user charges, PPPs or a mix of these.

in relation to PPPs, it is important to reiterate the point that the private sector has found it difficult to raise debt finance for large infrastructure projects over recent years. That is, given the effects of the global financial and european sovereign debt crises.

in light of this, and the fact that the Victorian government’s borrowing costs are likely to be lower than those faced by the private sector in the current financial climate, the funding approach for these projects should involve at least some degree of public borrowing. That is, on the assumption that each project has a high social benefit-cost ratio and is not able or appropriate to be done on a commercial basis.

Potential funding sources for each of the Property council’s shortlisted projects are listed in Table 3.3.



42

table 3.3

Property Council’s assessment of Victoria’s top infrastructure needs with potential funding and finance sources

Project Estimated cost ($b) Potential funding sources

melbourne metro $13.0 • infrastructure australia, state government borrowing, PPP, Potential hypothecation of property development revenue

east West road link $12.0 • infrastructure australia, state government borrowing, PPP, Potential hypothecation of property development revenue

north east link $6.0 • infrastructure australia, state government borrowing, PPP, Potential hypothecation of property development revenue

melbourne airport mass transit access

$3.5 • infrastructure australia, state government borrowing, PPP, Potential hypothecation of property development revenue

Western interstate Freight terminal

$2.3 • Freight industry, state government borrowing, PPP

melton rail line duplication and electrification

$1.3 • State government borrowing, Potential hypothecation of property development revenue

dandenong rail corridor grade Separations

$1 • infrastructure australia, state government borrowing, PPP, Potential hypothecation of property development revenue

melbourne international Freight terminal

$0.26• Freight industry, state government

borrowing, PPP

Total $38.9




43

Delivering infrastructure in tough economic times continues to be a challenge but it is a challenge we have to face head on if Victoria is to retain its liveability and attractiveness.



44

deliVering inFrAStruCture For ViCtoriA’S Future

Planning for, funding and delivering infrastructure will be the key to retaining Victoria’s economic competitiveness in the face of tough economic challenges. greater integration is required within government and between the public and private sectors if infrastructure is to be delivered effectively in Victoria. Victoria’s budget position as well as the impact of domestic and global fiscal challenges means that governments need to be smarter about engaging the private sector in order to deliver infrastructure.

increasingly, innovative funding and delivery models will be required to effectively complete infrastructure projects and fulfil community expectations. melbourne metro and the east West road link provide examples of the challenges ahead in delivering infrastructure of such a physical and economic scale.

The different effects of public and private funding models for delivering infrastructure has enormous impacts and must be fully considered in order to achieve the highest positive outcome.

Victoria’s budget position and outlookVictoria’s budget position has been relatively strong since the mid-1990s with budget surpluses being achieved over the entire period. moreover, figures provided in the 2011-12 Victoria Budget Papers indicate that the Victorian government will meet its budget surplus target of at least $100 million in each year over the forward estimate period.

nonetheless, growth in expenses over the last decade has outpaced growth in revenues and recent surpluses (including those in the forward estimates) have relied on temporary capital grants from the commonwealth, as highlighted in Table 4.1.

Victoria’s budget position also contains some underlying weaknesses and external financial impacts that have not previously been identified.

These include (dtF 2011a and 2011d):

• project cost pressures, including in relation to myki and the Wonthaggi desalination Plant (approximately $2 billion over four years);

• a reduction in Victoria’s goods and services tax (gSt) following recommendations by the commonwealth grants commission ($2.5 billion over four years) ;

table 4.1

effects of removing one off commonwealth grants on Victoria’s budget position - general government ($ millions)

2008/09Actual

2009/10Actual

2010/11Revised

2011/12Estimate

2012/13Estimate

2013/14Estimate

2014/15Estimate

net result from transactions 251.2 643.6 249.4 140.4 149.7 160.6 181.0

one-off commonwealth grants 319.3 1,594.3 1,395.2 657.2 589.0 925.0 567.0

Operating Surplus in the absence of Cth. grants*

-68.1 -950.7 -1,145.8 -516.8 -439.3 -764.4 -386.0

Notes: *this adjusts the operating surplus for the impact of one off commonwealth grants for specific capital projects reflecting regional rail link, Victorian comprehensive cancer centre, nation Building – economic Stimulus Plan Social Housing component and Building the education revolution.

Source: DTF (2011a), p. 24.



45

•gSt grants reductions due to weaker than expected gSt receipts ($1.6 billion over four years);

• further delays in the commonwealth’s funding contribution to a number of projects ($0.55 billion over four years); and

• repair and reconstruction costs associated with the 2009 bushfires and the 2010-11 floods in Victoria.

in total, these underlying weaknesses and external financial impacts will have an impact on Victoria’s budget of around $6.65 billion over four years.

according to the Victorian government, these challenges were an important aspect of the 2011-12 Budget and will continue to be so in future budgets. moreover they, ‘will have implications for the levels of spending and key fiscal aggregates’, (dtF 2011d, p.2).

indeed, in responding to these challenges, the Victorian government’s approach is to rely primarily on restraint in recurrent expenditure, rather than raising state taxes for example (Fitzgerald 2011). in particular, expenditure has been constrained to grow by a forecast annual average rate of 3.2 per cent over the forward estimates (dtF 2011a). This restraint in expenditure is highlighted in Figure 4.2.

Figure 4.2

growth in total expenses – general government sector

Source: ABS 2011, DTF 2011c

0.0%

5.0%

10.0%

15.0%

2001-02 2003-04 2005-06 2007-08 2009-10 2011-12 2013-14



46



47

Net debt and net financial liabilitiesProjections of net debt and net financial liabilities for the general government sector, including ratios to gSP, are provided in Table 4.3. net debt to gSP is forecast to be 5.0 per cent in 2011-12 and will stabilise at around 5.9 per cent thereafter (dtF 2011a). This highlights the Victorian government’s intention to ensure that net debt plateaus rather than continues to rise (Fitzgerald 2011). The factors contributing to higher debt to gSP are the impact of the reduction in forecast gSt grants and additional infrastructure funding allocated to deal with cost pressures and future investment (dtF 2011a).

The ratio of net financial liabilities to gSP is forecast to peak at 14.2 per cent at 30 June 2013 before declining to 13.5 per cent by 30 June 2015. This reflects the impact of a gradual decline in the defined benefit obligations of the State’s superannuation schemes as a proportion of gSP (dtF 2011a).

table 4.3

general government fiscal aggregates and measures

2011/12Budget

2012/13Estimate

2013/14Estimate

2014/15Estimate

net result from transactions ($m) $140 $150 $161 $181

net debt ($m)a $16,800 $20,800 $22,000 $23,200

net debt to gSP 5.0% 5.9% 5.9% 5.9%

net financial liabilities ($m)b $46,000 $50,200 $51,700 $52,800

net financial liabilities to gSP 13.6% 14.2% 13.9% 13.5%

Notes: *The sum of borrowings, deposits held and advances received less the sum of cash and deposits, advances paid, and investments, loans and placements. btotal liabilities less financial assets (excluding investments in other sector entities). total liabilities include net debt, superannuation liability and other liabilities (net). other liabilities include other employee entitlements and provisions and other non-equity liabilities, less other non-equity assets.

Source: DTF (2011a).



48

Figure 4.4

net infrastructure investment as a share of gSP in Victoria

Source: ABS 2011, ABS 2011b, DTF 2011c, DTF 2011f

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

2000-01 2002-03 2004-05 2006-07 2008-09 2010-11 2012-13 2014-15

Net infrastructure investmentnet infrastructure investment by the Victorian government has been relatively high over the last five years increasing from $2.0 billion in 2005-06 to $6.7 billion in 2010-11.

However, projections indicate a gradual decline over the forward estimates — partly due to

the unwinding of commonwealth stimulus — falling to $3.9 billion in 2014-15. nonetheless, the Victorian government intends to maintain net infrastructure investment at no less than 1 per cent of gSP. This is slightly above the average level achieved earlier last decade, as highlighted in Figure 4.4.

This projected decrease in net infrastructure investment is not unique to Victoria. as indicated in Figure 4.5, real per capita net infrastructure investment is projected to decrease in all of the major states over the forward estimate period.

Figure 4.5 also provides an indication of the level of infrastructure investment per capita in Victoria relative to the other major states. at present, per capita net infrastructure

investment in Victoria is lower than in Queensland and Western australia but is higher than in new South Wales. in real terms, this pattern remains into the forward estimate years noting, however, that the gap between Victoria and new South Wales narrows. The fact that real per capita net infrastructure investment is higher in Queensland and Western australia reflects significant investment that has occurred during the mining boom.



49

Figure 4.5

real per capita net infrastructure investment*

Notes: *Figures are expressed in 2011 prices. Figures for 2010-11 for Qld and nSW are excluded as they are heavily skewed downwards due to major state asset selloffs that occurred in those states in 2010-11.

Source: ABS 2011, ABS 2011c, ABS 2011d, state budget papers (various).

Independent Review of State FinancesThe Independent Review of State Finances (the review) was announced by the Victorian government in January 2011. The final report of the review was expected in February 2012 and is expected to provide further advice to the Victorian government on possible strategies to transition to a sustainable budget position, particularly in light of recent fiscal shocks. This advice will include opportunities to improve the efficiency and effectiveness of public sector service delivery, infrastructure, governance and transition strategies.

a key finding outlined in the review’s interim report is that the current trajectory of net infrastructure investment is insufficient to deliver high quality public services to Victoria into the medium and longer term (dtF 2011c).

in particular, the level of infrastructure investment is insufficient to meet population

pressures, maintain competitiveness and support growth. However, the report also finds that Victoria’s finances are, at present, particularly vulnerable to changes in economic circumstances and are not well placed to absorb another material financial shock (dtF 2011c).

in order to address the challenges facing the Victorian government, the interim report outlines a number of financial management targets, as summarised below (dtF 2011a).

•over rolling five-year periods, the general government net operating balance is at least equal to the medium term sustainable level of net infrastructure investment.

•over rolling five-year periods, general government net infrastructure investment is at least equal to 0.5 per cent of the historical five-year average of gSP.

•general government net debt is equal to zero on average over a 10-year rolling period.

$0

$500

$1,000

$1,500

$2,000

$2,500

2000-01 2002-03 2004-05 2006-07 2008-09 2010-11 2012-13 2014-15

$ m

illio

n

QLDWAVICNSW



50

•Victorian government superannuation liabilities are equal to zero by 2035.

•When revenue growth exceeds the rolling five year average, the Victorian government preserves the excess in the form of cash reserves or equivalent financial assets.

in relation to the first of these targets, the interim report states:

•The implication of this target is that net infrastructure investment should be funded, over the medium term, only from a positive net operating balance [i.e. budget surpluses].

•observing this target may require governments to increase revenue, or decrease recurrent expenditure, in order to ensure that the sustainable level of infrastructure spending is funded over the medium term.

• Failing to do so would fund recurrent public services at the expense of the infrastructure required to deliver them over the longer term. it would also mean that, for the current level of revenue, an unsustainable level of recurrent services is being funded.

• Supporting this target through a build-up of debt is inconsistent with the [review’s guiding] principles.

Source: DTF 2011c p. 13

The interim findings of review’s Panel highlight the conflicting challenges facing the Victorian government at present. However, in response to these challenges, the Panel has recommended an approach to infrastructure spending that is conservative — one that could potentially result in a suboptimal level of infrastructure investment, at least over the medium term.

dr Vince Fitzgerald of the allen consulting group expressed such a view in his response to the 2011-12 Victorian State Budget. in particular, he noted that the review’s interim proposal for net infrastructure investment to be funded entirely out of operating surpluses ‘would be a straitjacket that could lead to underinvestment, slower gSP growth and, for long-lived infrastructure, an unfair burden on the present generation vis-à-vis future generations’ (Fitzgerald 2011, p.18).

Victoria’s credit ratingThe State of Victoria is rated by two international rating agencies — Standard & Poor’s (S&P) and moody’s investors Service (moody’s). Both rating agencies conduct an annual review of the state’s:

• economic structure and prospects;

• financial performance and outlook;

• balance sheet position;

• liquidity and debt management strategy; and

• fiscal strategy.

Victoria has enjoyed a state credit rating of aaa from moody’s since January 2000 and a aaa rating from S&P since 1998.

Moody’s Investors Serviceon 4 may 2011, moody’s confirmed that the 2011-12 state budget was consistent with the state’s aaa rating. debra roane, moody’s investors Service Vice President provided the following comments regarding Victoria’s Budget:

• ...the state’s financial performance also reflects a higher level of current expenditures related to the election commitments of a new administration as well as planned increases in capital spending.

• ...the state recognises that it will need to make budgetary adjustments in future years to return to a balanced budget and has set up a panel to undertake an independent review of state finances this year. The panel’s final report will be released in February 2012 followed by state adoption of specific budgetary measures to be implemented in the 2012-13 budget.

given Victoria’s historically prudent financial and debt management practices which have led to its positive financial position, we believe that the state will implement the necessary reforms to produce better-than-projected outcome (moody’s investor Service 2011a).

moody’s performed its most current credit analysis of the State of Victoria in February 2011 and re-affirmed Victoria’s baseline credit assessment (Bca) of 1 on a scale of 1 to 21, where 1 represents the lowest credit risk. a Bca of 1 is equivalent to an aaa credit rating (moody’s investor Service 2011b).

moody’s found that Victoria had a low debt burden, strong record of financial performance and prudent fiscal management underpinned the state’s aaa rating.



51

in its rating rationale, moody’s commented that Victoria’s credit quality reflected its long-term record of sound financial performance underpinned by the Victoria’s prudent fiscal practices along with historically strong growth in tax revenues and commonwealth grants. it recognised that Victoria’s general government moved into a deficit position, but the deficits are forecast to decline sharply over the next several years as Victoria plans to pull back on capital and current spending. even though the deficits will lead to a rise in Victoria’s debt burden, Victoria is well placed to absorb the projected rise in indebtedness given its low starting point. Victoria’s sizable and diversified economic base bolsters the rating as it amply supports its financial and debt obligations (moody’s investor Service 2011b).

moody’s also noted that Victoria’s aaa rating is well placed compared with other australian states and territories, whose ratings range from aa1 to aaa.

With regard to Victoria’s debt profile, moody’s commented that Victoria has a modest debt burden, reflecting many years of positive cash operations and the application of debt reduction of proceeds from privatisation of state electricity corporations in the 1990s. Victoria embarked on a large capital improvement program resulting in debt mount to a still moderate 43.5 per cent of revenues and 6.4 per cent of gSP in 2009-10, up from 37.2 per cent of revenues and 4.9 per cent of gSP in 2007-08 (moody’s investor Service 2011b).

Victoria’s four-year capital improvement plan currently amounts to $35.8 billion (including $6.2 billion in Private-Public Partnership projects) and is expected to require a 64 per cent rise in Victoria’s total direct and indirect debt to $42 billion by 2013-14.

moody’s estimates that the debt burden could rise to a maximum of 65.6 per cent of revenues and 9.6 per cent of gSP by 2011-12 and stabilise at that higher level over the medium term, which moody’s view as manageable. moody’s further commented that the rating would only be impacted in the instance that there is a significant change in the Victorian government’s prudent fiscal policies. in such an instance, plans to restore budget balance would be derailed and this would lead to a greater accumulation of debt than is currently envisaged (moody’s investor Service 2011c).

Standard and Poor’son 3 may 2011, Standard and Poor’s confirmed that the 2011-12 State Budget was consistent with Victoria’s aaa rating. in its press bulletin, it noted:

•While budgetary performance is somewhat weaker than forecast at the time of the dec. 21, 2010, mid-year budget update, due primarily to lower gSt transfers from the commonwealth of australia (aaa/Stable/a-1+), Standard & Poor’s expects savings measures to partly mitigate the impact of these lower revenues. as a result, Standard & Poor’s expects the general government to record accrual operating surpluses while the non-financial public sector will record small accrual operating deficits over the forward estimates period. gross debt is forecast to rise modestly through the budget year and forecast period, with non-financial public sector net financial liabilities peaking at about 112% of operating revenues next year. Standard & Poor’s considers that the state has the capacity to carry this increased debt burden at the current rating level.

Standard & Poor’s 2011aS&P’s credit analyst anna Hughes added that the downside potential to the rating remains low, with the budget forecasts and Victoria’s commitment to a sustainable medium-term fiscal strategy supporting the rating.

S&P performed its latest ratingsdirect® report of Victoria in november 2010 (Standard & Poor’s 2011b). S&P affirmed Victoria’s domestic currency debt and foreign currency debt ratings of aaa/Stable/a-1+. The rating outlook remains stable. The report cited that the key strengths behind Victoria’s rating include a strong institutional framework, capable and conservative management, a resilient and diversified economy, and a robust operating position. The only weakness listed was that Victoria, like all australia states, has a degree of structural imbalance between revenue powers and expenditure responsibilities (Standard & Poor’s 2011b).

The rationales behind its assessment are (Standard & Poor’s 2011b):

•The Victorian government governs in a supportive financial environment.

•The Victorian government’s very strong financial management provides ongoing financial stability. Victoria’s strong fiscal



52

strategy of maintaining government net financial liabilities (S&P’s broadest measure of debt) at levels consistent with a ‘aaa’ rating and good financial transparency aids the State’s credit quality.

•Victoria’s economy is strong and diversified, with high per-capita income. Victoria’s economic performance has been the best of the non-resource states. Victoria is also less exposed to a downturn in mining activity. Victoria will also continue to benefit from stronger population growth relative to other states, which will support its property markets that are an important source of economic growth and government revenues.

•Victoria’s budgetary performance is strong and provides support to the aaa rating.

• limited budgetary flexibility is a credit weakness of the australian states, including Victoria, but this has not impeded strong fiscal outcomes.

Credit rating comparison across the major statesa comparison of credit ratings across australia’s major states indicates that, with the exception of Queensland, all major states currently hold the credit rating of aaa with ‘Stable outlook’ from S&P. of the minor states, South australia’s rating is aaa ‘negative outlook’ whereas tasmania’s is aa+, according to S&P.

Queensland’s rating was downgraded in February 2009 due to an anticipated deterioration of its budgetary performance and increasing net financial liabilities. The anticipated deterioration in budget performance was due to both declining revenues and structural operating expenditure weaknesses. S&P had previously warned that the rating would be under pressure if net financial liabilities as a proportion of operating revenue reached 100 to 110 per cent (Standard & Poor’s 2009). This threshold was exceeded in 2009.

Figure 4.6

gross debt to gSP – general government sector

Source: ABS 2011, ABS 2011b, state budget papers (various).

QLDWAVICNSW

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

2000-01 2002-03 2004-05 2006-07 2008-09 2010-11 2012-13 2014-15



53

as for South australia, its outlook was recently downgraded in September 2011 to ‘negative’ by S&P. The outlook revision reflected S&P’s concerns that the South australian government’s ambitious savings measures would not be achieved, and that its budgetary position will not improve as forecast over the medium term. S&P indicated that a return to a stable outlook would be possible if the South australian government reached its savings targets while slippage in the delivery of the savings targets may result in a ratings downgrade (courier mail 2011).

Potential for credit rating downgradein determining the potential for a credit rating downgrade in Victoria, two fiscal measures are assessed: gross debt to gSP and net debt plus superannuation to operating revenue.

Gross debt to GSPgross debt to gSP in Victoria’s general government sector is forecast to be 8.0 per cent in 2011 12 and will stabilise at around 8.8 per cent thereafter over the forward estimate period. as indicated in Figure 4.6, Victoria’s level of gross debt to gSP is currently around the same level as new South Wales, but is projected to increase above new South Wales over the forward estimate period. despite being the same

as Victoria’s in 2007-08, Queensland’s level of net debt to gSP has grown rapidly in recent years and is now significantly higher than the other major states.

Net debt plus superannuation liability to operating revenue

according to Standard and Poor’s, Victoria’s credit rating will be under threat if the ratio of net debt plus superannuation liability to operating revenue exceeds 130 per cent (Standard & Poor’s 2011b). Table 4.7 provides estimates of net debt plus superannuation liability to revenue for Victoria’s non-financial public sector over the period 2010-11 to 2014-15. as indicated, these estimates are below the threshold trigger point (130 per cent) that would put Victoria’s aaa credit rating under threat.

table 4.7

net debt plus superannuation liability (non financial public sector)

2010/11Revised

2011/12Estimate

2012/13Estimate

2013/14Estimate

2014/15Estimate

net debt plus superannuation liability ($ billions) $42.7 $53.7 $58.1 $59.8 $61.4

net debt plus superannuation liability to revenue 88.0% 106.9% 112.1% 111.4% 110.6%

Source: DTF (2011a), p. 44.



54

The threshold trigger point for determining a rating downgrade in other jurisdictions varies depending on the state, as follows (and summarised in Table 4.8):

•new South Wales’ credit rating would come under pressure if the net financial liabilities as a proportion of operating revenue reached 120 to 130 per cent (Standard & Poor’s 2010).

•Victoria’s credit rating would come under pressure if the net financial liabilities as a proportion of operating revenue exceeded 130 per cent (Standard & Poor’s 2011b).

•Western australia’s credit rating would come under pressure if the net financial liabilities as a proportion of operating revenue exceeded 90 per cent (dtWa 2011).

table 4.8

rating downgrade threshold trigger points - select states (2011)

State S&P Credit Rating Threshold Triggera

Victoria aaa with Stable outlook > 130%

new South Wales aaa with Stable outlook Between 120% to 130%

Western australia aaa with Stable outlook > 90%

Queensland aa+ with Stable outlook exceeded 110%

note: athe threshold trigger is based on net debt plus superannuation as a proportion of operating revenue.

Source: States’ Department of Treasury and Finance websites and Standard & Poor’s Global Credit Portal, RatingsDirect (various reports).

Figure 4.9 provides a comparison of net debt plus superannuation to revenue (non-financial public sector) across the four major states over time. as indicated net debt plus superannuation liability to revenue in Victoria is lower than in new South Wales and Queensland and is projected to remain so over the forward estimate period. net debt plus superannuation to revenue in Western australia was the same as Victoria’s and new South Wales’ in 2006-07, but is now much lower due to relatively slower growth over the subsequent period.

Queensland lost its aaa credit rating in 2009 when it was anticipated by S&P that net debt plus superannuation liabilities to revenue would increase above the state’s threshold trigger point of 110 per cent.

in new South Wales, net debt plus superannuation liabilities to revenue is currently pushing into the state’s threshold trigger range

of 120-130 per cent, with forecasts indicating that it might hit the top of that range by the end of the forward estimate period. net debt plus superannuation liabilities to revenue in Western australia is well below its threshold trigger point of 90 per cent, but is projected to get close to 80 per cent over the forward estimate period.

This analysis suggests that the risk of a credit rating downgrade is perhaps lowest for Victoria, as the forward estimates indicate a buffer in net debt plus superannuation liabilities to revenue of around 20 percentage points, which is larger than the buffer for the other major states.

Potential implications of Victoria losing its AAA credit ratingThe united States experienced a credit rating downgrade from aaa to aa+ in august 2011. at the time, the impact of the downgrade to aa+, according to terry Belton of JPmorgan,



55

Figure 4.9

net debt plus superannuation liability to revenue (non financial public sector)

Source: ABS 2011, ABS 2011b, state budget papers (various).

QLDWAVICNSW

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

140.0%

160.0%

2000-01 2002-03 2004-05 2006-07 2008-09 2010-11 2012-13 2014-15

was thought to be an increase in treasury yields (and therefore the nation’s borrowing costs) of between 60 and 70 basis points over the medium term. as a result of that, mr Belton estimated that an extra $100 billion would be required to cover the higher borrowing costs (Bloomberg 2011).

Queensland experienced a similar credit rating in February 2009. The then Queensland treasurer, andrew Fraser, noted at the time that the downgrade would result in Queensland having to pay an extra 40 basis points in annual interest, equal to around $200 million (Sydney morning Herald 2011).

Based on the uS and Queensland experience, it is estimated that, if Victoria were to experience a credit rating downgrade from aaa to aa+, its borrowing costs could increase by between 0.4 and 0.7 per cent.

Scope for increased debt financing of infrastructure investmentVictoria’s budget position is in relatively good shape, despite the impacts of the global financial

crisis. nonetheless, growth in expenses over the last decade has outpaced growth in revenues and the budget position is facing a number of challenges that were not previously identified.

in responding to these challenges, the Victorian government’s approach is to rely primarily on restraint in recurrent expenditure, rather than raising state taxes. The Victorian government has also sought to stem the growth in net debt such that it plateaus at around 6 per cent of gSP (general government sector) over the forward estimate period.

consistent with this, net infrastructure investment is set to decline back to pre-2006 levels (when expressed as a share of gSP) by 2014-15.

The interim report of the Independent Review of State Finances finds that the current level of infrastructure investment in Victoria is insufficient to meet population pressures, maintain competitiveness and support growth.

This suggests the need for further infrastructure investment above what is projected in the 2011-12 Victorian Budget. However, in light of other



56

table 4.10

indicative analysis of the impact of increased borrowings on the ratio of net debt plus superannuation liability to revenue

2012/13 2013/14 2014/15

Victorian budget forward estimates

net debt plus superannuation liability ($m) $58,038 $59,700 $61,293

total revenue ($m) $51,958 $53,765 $55,597

Net debt plus superannuation to revenue 112% 111% 110%

Additional debt scenario 1 (below S&P threshold for a ratings downgrade)*

increased borrowings (cumulative, $m) $3,000 $6,000 $9,000

interest cost of borrowings (cumulative, $m)# $0 $180 $540


total revenue ($m) $51,958 $53,765 $55,597


Additional debt scenario 2 (above S&P threshold for a ratings downgrade)*

increased borrowings (cumulative, $m) $5,000 $10,000 $15,000

interest cost of borrowings (cumulative, $m)# $0 $300 $900


total revenue ($m) $51,958 $53,765 $55,597


notes: the current S&P threshold for a ratings downgrade is a ratio of net debt plus superannuation liability to revenue of 130 per cent. #assumes a 6 per cent interest rate on additional borrowings. For simplicity, the interest cost of additional borrowings is reflected in the borrowings component of the net debt plus superannuation liability.

Source: ACG analysis of information in the Victorian Budget Papers 2011-12 (DTF 2011e)

pressing fiscal challenges, the review’s Panel has proposed that, over the medium to long term, general government net debt should be equal to zero on average and that, over the medium term, net infrastructure investment should be funded only from a positive net operating balance (i.e. budget surpluses).

The Panel’s recommended approach to infrastructure spending is conservative and runs the risk of a suboptimal outcome in terms of infrastructure investment, at least over the medium term. indeed, dr Vince Fitzgerald of the allen consulting group has publicly argued that projected debt and debt servicing amounts

and ratios in the 2011-12 Victorian budget are well within prudent limits and, as such, there is no strong case for a target of zero net debt (Fitzgerald 2011).

if the Victorian government were to consider taking on additional debt to fund new infrastructure projects, an important consideration would the impact on Victoria’s aaa credit rating. according to S&P, Victoria’s credit rating will be under threat if the ratio of net debt and unfunded superannuation to operating revenue exceeds 130 per cent.

However, the implications of Victoria losing its credit rating may not be that serious, with



57

borrowing costs potentially increasing by only 0.4 to 0.7 per cent (based on the Queensland and uS experiences). indeed, it could be argued that the benefits associated with further investment in productivity enhancing infrastructure may outweigh the costs associated with a higher borrowing rate.

an indicative analysis of the potential for further borrowing by the Victorian government and the impact on net debt plus superannuation liability to revenue is provided in Table 4.10.

although only indicative, this analysis suggests that, if the Victorian government were to borrow an additional $3 billion per year over the period 2012-13 to 2014-15 (a total of $9 billion), the ratio of net debt plus superannuation liability to revenue would reach 127 per cent in 2014-15 — assumed to be stable after that point consistent with the current forward estimates.

This suggests that $9 billion is the absolute maximum that the Victorian government might borrow without experiencing an S&P rating downgrade to aa+.

This analysis also suggests that, if the Victorian government were to accept the likelihood of a rating downgrade and borrow an additional $5 billion per year over the period 2012-13 to 2014-15 (a total of $15 billion), the ratio of net debt plus superannuation liability to revenue would reach around 140 per cent in 2014-15. although not clear, this is likely to be under the threshold of a further rating downgrade.

it is important to note that this analysis is indicative only. in reality, such high levels of borrowing would likely occur over a longer time period, as would the impacts on the ratio of net debt plus superannuation liability to revenue.



58

Challenges posed by the recent macroeconomic environment

Post-gFC environmentalthough australia avoided the worst of the global Financial crisis (gFc), the effects of the crisis are still having an impact on the nation’s finances and banking system. While financial markets are functioning again, they remain fragile. Furthermore, the financial rescues of greece, ireland, and Portugal are reminders that the consequences of the gFc are still being resolved. continuing international difficulties, particularly concerns over the european sovereign debt crises, are a source of ongoing instability.

Credit constraintscredit is necessary to meet normal levels of economic activity and investment. credit growth in the australian economy is illustrated in Figure 4.11. immediately prior to the onset of the gFc, credit growth accelerated and peaked at over 25 per cent. The global financial turmoil seems to have been associated with constrained credit growth in the australian economy. in particular, credit growth was squeezed to zero immediately following the gFc. as shown, credit growth is recovering, but it is subdued. even under optimistic scenarios prepared by financial sector analysts, credit growth would be less than 7 per cent into the medium term and under a central case scenario would be around or under 4 per cent.

Figure 4.11

Australian credit growth and future scenarios

Source: RBA, UBS estimates (cited in UBS Investment research, ‘Australian banking sector update’, April 2010).

1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012-5

0

5

10

15

20

25

Per c

ent

Credit growth (actual)

Constraints on term funding (Scenario 2)

NSFR & funding constraints (Scenario 4)

Net stable funding ratio (Scenario 3)

Funding readily available (Scenario 1)



59

Reduced credit supply and competitiona key factor impacting on access to debt capital by the private sector is the reduction in the diversity of debt capital sources. Key issues include the following:

• Fewer domestic banks — the banking sector has become more concentrated following the gFc. commonwealth Bank acquired BankWest while Westpac acquired St george. These mergers have resulted in there being fewer lenders to choose from and less competitors in the market in general (Henry 2010), despite both being approved by the australian competition and consumer commission.

•Withdrawal of regional banks and vigorous competition — the smaller banks, especially regional banks, have been compelled to reduce their lending to the property sector as their funding sources have shrunk.

•Retreat of foreign banks — foreign banks that had a significant source of debt capital in the property sector up to the period 2005 - 2007 have substantially retreated from the market. although there are some that have maintained their presence, these lenders face structural policy related disadvantages in the australian market.

•Constrained Commercial Mortgage Backed Securities (CMBS) lenders — cmBS have been a source of debt capital funds in the past but are currently constrained by the swing of investors away from securitised structures and the overall contraction in the availability of funding in wholesale markets.

taken together these changes result in a radical reduction in the sources of supply of debt capital for the construction and property sectors. They also fundamentally alter the nature of competition within the market. at face value, fewer competitors are normally associated with less competition or a reduction in the intensity of the competitive processes within the market.

Funding constraints within the banking sectora further constraint to credit growth in australia at present is the availability of funds that banks and financial institutions rely upon in order to lend to others, including home purchasers and businesses.

australian banks have to obtain funding in wholesale markets driven by the ‘gap’ between total loans and total deposits that have been increasing steadily over the last 15 years. to fund the gap, australian banks are significant borrowers in wholesale debt markets, domestically and offshore. The gFc radically changed the landscape of global markets. The collapse of lehman Brothers in September 2008 was a key turning point and was associated with a sharp reduction in available liquidity and investor appetite for debt securities. globally, debt investors in general retreated to safe haven assets such as cash and aaa bonds, shunning asset-backed securities.

concern about funding constraints was a key theme in many submissions to the Senate Inquiry into Competition within the Australian Banking Sector. commercial banks, the regulatory authorities, the reserve Bank of australia and others have noted that uneasy wholesale markets following the gFc has raised challenges and resulted in many changes.



60

Scenario analysis melbourne metro and the east West road link

The allen consulting group has conducted computable general equilibrium scenario modelling to estimate the impact of increased investment in infrastructure on key economic aggregates, including gross state product, employment, investment, household consumption and state taxation revenue. The scenarios modelled are as follows:

• Scenario 1: investment in the melbourne metro project, to be funded via state government debt;

• Scenario 2: investment in the melbourne metro project, to be funded by private sector debt;

• Scenario 3: investment in the east West road link, to be funded via state government debt; and

• Scenario 4: investment in the east West road link, to be funded by private sector debt.

in each scenario, two sets of economic effects were modelled: the construction effects and the productivity effects. The construction effects are the impacts on the Victorian economy of the expenditure involved in each project — $13.0 billion for the melbourne metro project and $12.0 billion for the east West road link project. The construction period for each period is assumed to be three years. Whether this assumption is totally realistic doesn’t really matter as the economic impacts depends more on how much money is spent rather than the time period over which it is spent.

The construction effects of any major infrastructure project, by definition, are only temporary. in contrast, the productivity effects are permanent. The nature and size of the productivity effects are different for each project. With the melbourne metro project, benefits accrue to the road freight industry and private vehicles, principally time savings and operating cost savings, such as in fuel efficiency, from more freely-flowing traffic.

The melbourne metro project is modelled to add $4.3 billion per year over three years to public

investment in Victoria, an increase of 26 per cent to the current level of public investment. a conservative reading of the evidence presented earlier suggests that the output elasticity of infrastructure investment is about 0.1, so a 26 per cent increase in infrastructure investment should lead to an improvement in the productivity of the rail freight and rail passenger industries of around 2.6 per cent. on the reasonable assumptions that about 1/3 of this productivity benefit shows up as labour productivity, and given the interconnectedness of the transport system, implies a gain in labour productivity in Victoria of around 0.9 per cent.

The productivity benefits of the east West link are estimated in a similar way. This project is estimated to increase labour productivity by 0.8 per cent. This is slightly smaller than the melbourne metro project, because it is a smaller project ($12 billion versus $13 billion). additionally, as is standard with roads projects, operating costs for vehicles are reduced due to more freely flowing traffic. This is another source of productivity benefit.

a key characteristic of the modelling is that the projects have to be funded, one way or another and this reduces the positive economic impacts. in both the publicly and privately funded cases revenue is required to pay for the interest on the debt. in the scenarios where the projects are funded by government debt, we assume that revenue to pay the interest is funded by increases in payroll tax (one of the very few taxes available to the Victorian government). in the scenarios where the projects are funded by private debt, we assume that revenue to pay the interest is funded by user charges.

This distinction turns out to be very important. The publicly funded projects have a much larger net economic impact than the privately funded projects, because the required user charges for the latter are so high that they lead to very large diversion of users onto uncharged (or lesser charged) rail transport and roads, so the putative economic benefits of the projects are greatly reduced. additionally, private borrowing is assumed in the modelling to be more expensive than public borrowing, by 200 basis points.

The results of the modelling are shown in Tables 4.12 and 4.13.



61

melbourne metro

The melbourne metro project is fundamental to increasing the total design capacity of melbourne’s rail network. it will add two tracks in a 9 kilometre rail tunnel from Footscray to South Yarra travelling from Parkville, under Swanson Street and to St Kilda road to domain and onto South Yarra Station. The increase in capacity will directly benefit the Sunshine and dandenong rail corridors which are experiencing the most significant growth across the network as well as remove other capacity constraints on the network. Five new stations at arden, Parkville, cBd north, cBd South and domain will cater for the increase in the capacity of melbourne’s rail network by around 12,000 passengers every hour and reduce congestion. Stage 1 of the tunnel from dynon to St Kilda road (domain) will cost in excess of $4.5 billion, with Stage 2 to caulfield to be delivered after completing Stage 1.

DeliveryProject requires statutory and environmental approvals and detailed design and pre-construction activities.

Capital ExpensePreliminary estimate $13 billion.

Victorian Budget 2012/13$49.7 allocated to progress planning and development.

Table 4.12

melbourne metro – productivity benefits

Gross State Product ($ million, % increase)

Exports ($ million, % increase)

Investment ($ million, % increase)

construction effect $5933m, 1.87% -$562m, -1.67% $12771m, 15.30%

Pure productivity effect $2932m, 0.92% $589m, 1.75% $689m, 0.83%

Productivity effect with public funding $1373m, 0.43% $299m, 0.36% $403m, 1.20%

Productivity effect with private funding $144m, 0.05% $193m, 0.57% -$113m, -0.14%



62

east-West link

melbourne has an over reliance on the Westgate Bridge and m1 as the only high capacity east –west road connection providing access to the Port of melbourne, industrial areas and interstate highways. congestion, despite recent widening constrains productivity growth. The east–West link will provide an additional high capacity means of moving freight between the west and east of the city as well as facilitate high speed passenger bus movement into and out of the city with potential connections to tullamarine airport from doncaster. community amenity in the inner suburbs of Fitzroy and carlton will be improved significantly.

Deliveryrequires planning and statutory approvals with business case development followed by detailed design.

Capital ExpensePreliminary estimate $12 billion.

Victorian Budget 2012/13$15 million allocated to deliver business case.

table 4.13

east West road link – impact on Victorian economy

Gross State Product ($ million, % increase)

Exports ($ million, % increase)

Investment ($ million, % increase)

construction effect $5438m, 1.71% -$515m, -1.53% $11707m, 14.02%

Pure productivity effect $2698m, 0.85% $531m, 1.58% $446, 0.53%

Productivity effect with public funding $1251m, 0.39% $359m, 1.07% $83, 0.10%

Productivity effect with private funding $284m, 0.09% -$48m, -0.14% -$247, -0.30%



63



64

Scenario analysis – key outcomes•The construction phases of both melbourne

metro and the east-West link yield very significant positive impacts for the Victorian economy, with gSP increasing by $5-6 billion. This is less than the spend on the projects ($12 billion to $13 billion) but this is to expected as much of the direct spending on each project would be sourced from interstate and overseas, and the flow through effects of increased gSP will always include significantly higher imports (of about $4 billion, for each project).

• if the projects didn’t have to be paid for, they would yield permanent increases in gSP each year of $2932 billion for melbourne metro and $2698 for the east West road link. These are shown as Pure Productivity effects in the tables. They would also lead to significantly and permanently higher exports ($589 million and $531 million) and business investment ($689 million and $446 million).

•However, the projects do have to paid for and how they are paid for makes a big difference. as tables 4.12 and 4.13 show, in the publicly funded case when the interest on the debt is sourced with a state-wide tax (an increase in payroll tax), the impact on Victoria’s economy is still strongly positive. However, in the privately financed case, when the interest on the debt is financed by charges on the users of the infrastructure, the positive impact all but disappears. This is because directly charging users deters them from using the infrastructure and they substitute to uncharged (or lesser charged) rail and roads. The reason this happens to such a large degree is because these are very expensive projects which will require a lot of debt and debt servicing, and so the required user charges will be high.

•While the two projects are about the same size, and both are transport projects, and both have about the same overall effects on the Victorian economy, there are still some interesting differences in their economic impacts, due to

the differences in their productivity effects, and the fine detail of their flow through effects on different industries. The melbourne metro project will have a significantly bigger impact on business investment, while the east-West link project will have a larger positive effect on Victoria’s exports.

•The most important point from the modelling lies in the different effects of publicly and privately funding the infrastructure. in reality, projects of this magnitude are likely to be funded by a combination of public and private finance. as modelled, the greater the proportion of funding through private sources, the lower will be the positive economic impact of the projects. However, this need not be the end of the story. if private investors can gain value through other means, such as increases in land values along the transport corridors, then the need for user charges will be correspondingly lessened, and the positive economic impacts correspondingly increased.



65

REQUIRE HI RESOLUTION IMAGE

Infrastructure delivery must be better coordinated within government to increase public and private sector confidence.



66

SummArY And reCommendAtionS

Victoria is at a key turning point in its history that will define the state’s future successes and its ability to remain nationally and globally competitive. our cities and towns hold the future of the state’s population growth and cities such as melbourne, geelong and other regional centres, have a key role to play in australia’s future prosperity as a nation.

Victoria’s next productivity leap will be achieved by building efficient urban areas, optimising land use and minimising travel and congestion costs. But Victoria needs a clear program to plan, fund and deliver infrastructure and to secure its future.

in response to a call from industry and community stakeholders, the Property council has developed a melbourne metropolitan Pipeline and a regional Victoria Pipeline of infrastructure based on known projects, their status, costs and timelines.

The Property council urges the Victorian government to use these Pipelines as templates for the development of comprehensive, solid and transparent infrastructure plans. Without a pipeline for infrastructure investment, industry and community expectations will continue to remain out of step with government priorities and certainty and transparency will not be achieved.

Failure to provide sufficient or appropriate infrastructure undermines the competitiveness of a place and its social and economic sustainability. With the increasing dominance of the mining and resources sector in australia’s economic landscape, Victoria needs to take a good look at how it will meet future demand, provide for population growth and continue to effectively deliver infrastructure that contributes to its economic competitiveness.

greater integration is required within government and between the public and private sectors if infrastructure is to be delivered effectively in Victoria. The Victorian government is currently faced with significant fiscal and public sector resource challenges but has an opportunity to increase efficiencies and to better integrate the public and private sectors.

Victoria’s budget position as well as the impact of domestic and global fiscal challenges means that governments at all levels need to be smarter about engaging the private sector in order to deliver infrastructure.

The means by which infrastructure is funded and financed has a significant impact on the dividends it will produce. investment in public infrastructure can be funded by:

• the public sector through revenues or savings; or

• capital markets through borrowings or equity contributions from the private sector.

different types of finance models are appropriate for different types of infrastructure projects depending on their characteristics. The choice of the most appropriate funding approach will depend on a number of factors including:

• the type of infrastructure being financed;

• the timeline of costs and benefits; and

•whether the project is at the local, state or federal level.

There are different effects of publicly and privately funded infrastructure. The greater proportion of funding through private sources, the lower the positive economic impact. in reality, a mix of funding and finance models should be applied to infrastructure projects in order to maximise the public benefit of infrastructure investment.

There is great scope for further exploration into the opportunities for private investors to gain value through other means such as increases in land values along transport corridors, to ensure that the economic impacts of infrastructure investment are maximised.

increasingly, innovative funding and delivery models will be required to effectively complete infrastructure projects and fulfil community expectations.

The Property council has established a shortlist of infrastructure projects that should be prioritised based on the productivity and economic dividends they would produce. The Property council believes that these projects will deliver significant short, medium and long term benefits for Victoria and urges the Victorian government to consider the full list of projects and a comprehensive mix of funding and finance models when assessing Victoria’s infrastructure needs and priorities.



67

table 3.3

Property Council’s assessment of Victoria’s top infrastructure needs with potential funding and finance sources

Project Estimated cost ($b) Potential funding sources

melbourne metro $13.0 • infrastructure australia, state government borrowing, PPP, Potential hypothecation of property development revenue

east West road link $12.0 • infrastructure australia, state government borrowing, PPP, Potential hypothecation of property development revenue

north east link $6.0 • infrastructure australia, state government borrowing, PPP, Potential hypothecation of property development revenue

melbourne airport mass transit access

$3.5 • infrastructure australia, state government borrowing, PPP, Potential hypothecation of property development revenue

Western interstate Freight terminal

$2.3 • Freight industry, state government borrowing, PPP

melton rail line duplication and electrification

$1.3 • State government borrowing, Potential hypothecation of property development revenue

dandenong rail corridor grade Separations

$1 • infrastructure australia, state government borrowing, PPP, Potential hypothecation of property development revenue

melbourne international Freight terminal

$0.26• Freight industry, state government

borrowing, PPP

Total $38.9




68

Victoria must invest in infrastructure that will enhance the state’s productivity and competitiveness in addition to maintaining core infrastructure services. This will be essential to the future of Victoria and of its towns, cities and communities.

if Victoria as a state is serious about its future, we must establish a Program to Plan, Fund and Deliver Infrastructure.

PlanVictoria needs an infrastructure pipeline that is solid, transparent and that transcends the short term, immediate nature of the political cycle.

if Victoria is going to remain competitive in the national and global context, an infrastructure pipeline must be established that:

• outlines government priorities;

• provides investor and market certainty;

• instils confidence in the private sector to invest in Victoria; and

• is updated and reviewed regularly by government and is well integrated within government processes so as to deliver short, medium and long term outcomes.

Fundinfrastructure cannot be funded solely out of budget surpluses. if Victoria is to retain any competitive advantage, alternative funding methods must be considered.

innovative funding models such as PPS, growth area Bonds, Business improvement districts, government borrowings, and the use of superannuation funds must be explored by the public and private sectors so that a mix of funding mechanisms can be applied in order to deliver infrastructure.

deliverinfrastructure delivery must be better coordinated within government so as to achieve:

• a cohesive approach between government departments and agencies working toward delivering shared outcomes;

• a framework for delivery that transcends the electoral cycle; and

• greater confidence in the ability of the public sector to operate in an efficient and transparent manner.



69

As an input to business and provider of essential services, investment in public infrastructure can significantly improve the productivity of an economy.



70

Productivity and infrastructure – literature review

Public infrastructure links with productivity growthin addition to its significance as an economic activity in its own right, as an input to businesses and provider of essential services to the community, investment in public infrastructure can significantly improve the productivity of the economy. This in turn can deliver higher growth in output and employment.

Early work highlighting the linkThe relationship between infrastructure provision and productivity was made prominent by empirical work by aschauer (1989a). in

particular, aschauer examined the contribution of public infrastructure in the uS to economic growth and to private productivity at the economy-wide level. His research showed large direct and spin-off benefits to productivity.

aschauer’s initial work resulted in a flurry of research which, in general, was unable to refute the underlying thesis that positive spill overs are associated with investment in public infrastructure. aschauer reviewed the large literature that followed his initial paper and found that, on the whole, his findings were still valid (Bie 1992).

around the same time, the World Bank found that on balance, aschauer’s research confirmed that the role of infrastructure as a contributor to growth is substantial, significant, and frequently greater than that of investment in other forms of capital (World Bank 1994). The World Bank’s summary of studies of infrastructure

table AA.1

results from early studies of infrastructure productivity

Sample Elasticitya Implied rate of returnb Author/year Infrastructure measure

united States 0.39 60 aschauer 1989 non-military public capital

united States 0.34 60 munnell 1990 non-military public capital

48 states, united States 0 0 Holtz-eakin 1992 Public capital

5 metro areas, united States 0.08 – duffy-deno and eberts

1991 Public capital

regions, Japan 0.20 96 mera 1973 industrial infrastructure

regions, France 0.08 12 Prud’homme 1993 Public capital

taiwan, china 0.24 77 uchimura and gao 1993 transportation, water and communication

Korea 0.19 51 uchimura and gao 1993 transportation, water and communication

israel 0.31-0.44 54-70 Bregman and marom 1993

transportation, power, water and sanitation

mexico 0.05 5-7 Shah 1988, 1992 Power, communication and transportation

multi-country, oecd 0.07 19 canning and Fay 1993 transportation

multi-country, developing 0.07 95 canning and Fay 1993 transportation

multi-country, oecd and developing 0.01-0.16 – Baffes and Shah 1993 infrastructure capital stocks

multi-country, developing 0.16 63 easterly and rebelo

1993transportation and

communication

APPendiX A



71

productivity clearly highlights the significant benefits from investment in public infrastructure (see Table AA.1).

The early work of aschauer (1989b) and others also indicated that cross-country differences in productivity growth can be partly explained by differences in levels of infrastructure spending. more recent studies provide further evidence of a statistically significant positive relationship between productivity and infrastructure and that infrastructure appears to be a key determinant of comparative advantage between countries (Yeaple, and golub 2002).

Australian studies also support the linkThe relationship between capital investment and private sector productivity in the case of the australian economy has also been examined in a number of studies (see Table AA.2).

The assessment of productivity impacts of infrastructure with respect to roads was taken further in a study conducted by otto and Voss (1996). Their study indicated that investments in economic and social infrastructure generate positive macroeconomic benefits and, on a comparative basis, the returns from road investment are higher than for almost all other infrastructure types.

later empirical work for australia by Kam (2001) also found evidence that the accumulation of public infrastructure can have positive short to long term effects through inducing permanently higher levels of output and private investment. Work by Song (2002) — with data sets from 1968–2001 for the australian economy — similarly concluded that there are significant positive output elasticities from investment in public infrastructure. He found positive spill overs in the order of 0.27 to 0.38 for public infrastructure.

table AA.2

Some studies of infrastructure ‘spillovers’ in the australian economy

Sample Output elasticitya Author/year

australia 0.27 The allen consulting group 1993

australia 0.40 otto and Voss 1994

australia 0.17 otto and Voss 1996

12 oecd countries inc. australia

1.80 (for aust.) demetriades and mamuneas 2000

12 oecd countries 0.17 (for aust.) Pereira 2001

australia 0.10 Kam 2002

australia 0.27-0.386 Song 2002

notes: athe percentage increase in private output generated by a 1 per cent increase in public capital.

Source: The Allen Consulting Group & the Australian Automobile Association 1993, Land Transport Infrastructure: Maximising the Contribution to Economic Growth, Canberra.



72

Recent workThere have been several more recent examinations of the link between public infrastructure and productivity growth (see Table AA.3).

mussolini and teles (2010) analysed the relationship between infrastructure and total factor productivity (tFP) in the four major latin american economies: argentina, Brazil, chile and mexico. They tested the cointegration between tFP and physical measures of infrastructure stock, such as energy, roads, and telephones. They concluded that infrastructure is correlated with tFP. However their results do not provide evidence of a robust long-term relationship.

mizutani and tanaka (2008) investigate a number of infrastructure issues in the context of the Japanese economy, including whether public infrastructure contributes to production in the private sector; whether political economy factors such as political situation affect the allocation of public infrastructure investment; and what the government’s investment behaviour is. They develop a production function which shows that public capital is related to productivity.

mamatzakis (2007) offers analysis which measures the effects of infrastructure on economic performance in mexico, in terms of gains in profits, cost savings, and productivity growth enhancement. He concludes that the observed slowdown of productivity growth since the mid-1980s can be attributable to decreased investment in public infrastructure, and that investing in infrastructure capital could enhance overall economic performance.

Victoriaour findings, regarding both the link between infrastructure and productivity and the long term infrastructure pressures that Victoria is likely to face, are supported by research undertaken by acil tasman for the Victorian competition and efficiency commission as part of its inquiry into a State-based reform agenda (2011).

Productivity and infrastructure typeWhen considering the benefits of potential investment in individual projects it is useful, if not necessary, to consider what types of infrastructure that yields the greatest productivity benefits. While much of the early literature tends to examine the effects of aggregate public infrastructure, there have been many studies which divide it into smaller sub-categories.

For example, mussolini and teles (2010) examine the productivity benefits or energy, road and telecommunications infrastructure individually. other studies, such as garcia-mila and mcguire (1992) disaggregate public infrastructure into ‘Highway’ and ‘education’ components, while munnell (1990) and evans and Karras (1994) used ‘Highway’, ‘Water Supply’ and ‘disposal’ as their components. other studies, such as those done by mitsui and tanaka (2004) and aschauer (1989) disaggregate public infrastructure into ‘core’ and ‘non-core’ infrastructure.

a notable aspect of this area of research is that the studies often reach different conclusions about productivity benefits in different sectors (mizutani and tanaka 2004). This is particularly the case when examining sectors across different

table AA.3

results from recent studies of infrastructure productivity

Sample Output elasticitya Author/year

latin america (argentina, Brazil, mexico, chile)

0.04-1.4 mussolini and teles 2010

Japan 0.073–0.086 mizutani and tanaka 2008

mexico 1.01-1.03 mamatzakis 2007



73

countries, given the idiosyncrasies of those countries’ economies. Furthermore, studies that do show a significant productivity effect of aggregate public infrastructure on productivity may not be able to account for this effect where the same public infrastructure is disaggregated.

While it is difficult to single out individual sectors as universally demonstrating a positive link between investment in infrastructure and productivity, the relationship generally holds in

studies that disaggregate public infrastructure into larger, more inclusive, sub-categories such as core and non-core. in particular, these studies find that the productivity effect is stronger in the case of core infrastructure (mizutani and tanaka 2004).

aschauer (1989) defines core infrastructure as including highways, mass transit, airports, electrical and gas facilities and water infrastructure. alternatively, non-core infrastructure consists of office buildings, hospitals, conservation and development and educational buildings for example.

While it is not explicitly defined as such, the tenets of core infrastructure are consistent with the definition of economic infrastructure, while non-core infrastructure is consistent with the definition of social infrastructure. Therefore, it is concluded that investment in economic infrastructure is more likely to have a positive impact on productivity than investment in social infrastructure.



74

international Public debt Comparison (2011)

Table AC.1 compares the level of public debt incurred by selected countries around the world and provides comments on the reasons that led to some countries losing their aaa credit rating or further downgrades in their sovereign-debt credit rating.

The comparison demonstrates that downgrades in national ratings are generally the result of extreme adverse economic conditions impacting on a country’s ability to repay its public debt. it also shows that it is possible to maintain a high level of public debt as a proportion of gdP or a

high debt per capita while maintaining a aaa credit rating, such as the case of germany and Singapore. The requirement for maintaining a high credit rating is the condition under which a country is governed and how it affects its ability to repay this debt.

as indicated, Victoria’s gross debt to gSP ratio is 5.5 per cent for the general government sector. When compared with the gross debt to gdP ratios for the countries listed in Table AC.1, the figure for Victoria is low. it is important to note, however, that a more appropriate fiscal measure to determine the risk of a ratings downgrade is net debt and unfunded superannuation to revenue, discussed below.

APPendiX B



75

tabl

e A

B.1

inte

rnat

iona

l pub

lic d

ebt c

ompa

riso

n (2

011)

Cou

ntry

Tota

l ($M

) (a)

% o

f GD

P (a

)Pe

r cap

ital

($) (a

)S&

P ra

ting

Cre

dit r

atin

g co

mm

ents

uni

ted

Stat

es10

,450

,951

6933

,531

aa

+•

dow

ngra

ded

on 5

th a

ugus

t 201

1 fr

om a

aa

.

•Fi

scal

con

solid

atio

n pl

an th

at c

ongr

ess a

nd th

e a

dmin

istr

atio

n ag

reed

to

fell

shor

t wha

t wou

ld b

e ne

cess

ary

to st

abili

ze th

e go

vern

men

t’s

med

ium

-ter

m d

ebt d

ynam

ics.

•Th

e eff

ectiv

enes

s, st

abili

ty, a

nd p

redi

ctab

ility

of a

mer

ican

po

licym

akin

g an

d po

litic

al in

stitu

tions

wea

kene

d at

a ti

me

of o

ngoi

ng

fisca

l and

eco

nom

ic c

halle

nges

.

•o

utlo

ok o

n th

e lo

ng-t

erm

ratin

g is

neg

ativ

e. r

atin

g co

uld

low

er to

‘aa’

w

ithin

the

next

two

year

s if t

here

is le

ss re

duct

ion

in sp

endi

ng, h

ighe

r in

tere

st ra

tes,

or n

ew fi

scal

pre

ssur

es re

sulti

ng in

a h

ighe

r gen

eral

go

vern

men

t deb

t tra

ject

ory.

ital

y2,

247,

230

120

37,3

08a

•d

owng

rade

d on

19

Sept

embe

r 201

1 fr

om a

+.

•it

alia

n ec

onom

y’s w

eake

ning

gro

wth

pro

spec

ts w

ill m

ake

the

gove

rnm

ent’s

revi

sed

fisca

l tar

gets

diffi

cult

to a

chie

ve.

•it

alia

n go

vern

men

t’s te

ntat

ive

polic

y re

spon

se to

rece

nt m

arke

t pr

essu

res s

ugge

sts c

ontin

uing

futu

re p

oliti

cal u

ncer

tain

ty a

bout

the

mea

ns o

f add

ress

ing

ital

y’s e

cono

mic

cha

lleng

es.

•it

alia

n go

vern

men

t’s p

roje

ctio

n of

€60

bill

ion

savi

ngs m

ay n

ot c

ome

to fr

uitio

n du

e to

wea

keni

ng e

cono

mic

gro

wth

pro

spec

ts, r

elia

nce

on

furt

her t

axat

ion

for r

even

ue ra

isin

g an

d an

ticip

ated

mar

ket i

nter

est

rate

s ris

es.

gre

ece

377,1

7013

534

,296

cc

•d

owng

rade

d on

27t

h Ju

ly 2

011

from

cc

c.

•S&

P co

nclu

ded

that

the

prop

osed

rest

ruct

urin

g of

gre

ek g

over

nmen

t de

bt w

ould

am

ount

to a

sele

ctiv

e de

faul

t und

er th

eir r

atin

g m

etho

dolo

gy.

•Th

e pr

opos

ed re

stru

ctur

ing

is v

iew

ed a

s a ‘d

istr

esse

d ex

chan

ge’

beca

use,

bas

ed o

n pu

blic

stat

emen

ts b

y eu

rope

an p

olic

ymak

ers,

it is

lik

ely

to re

sult

in lo

sses

for c

omm

erci

al c

redi

tors

.

•o

utlo

ok o

n th

e S&

P’s r

atin

g is

neg

ativ

e.



76

Cou

ntry

Tota

l ($M

) (a)

% o

f GD

P (a

)Pe

r cap

ital

($) (a

)S&

P ra

ting

Cre

dit r

atin

g co

mm

ents

irel

and

160,

065

8638

,589

BBB+

•d

owng

rade

d on

1 a

pril

2011

from

a-.

•Th

e ra

tiona

le fo

r the

cut

was

the

risk

that

bon

d in

vest

ors c

ould

be

hit

if ir

elan

d ne

eds t

o bo

rrow

from

a n

ew e

urop

ean

bailo

ut fu

nd, s

et to

be

up a

nd ru

nnin

g in

201

3.

•S&

P ex

pect

s the

iris

h ec

onom

y w

ould

gra

dual

ly re

cove

r afte

r a th

ree

year

con

trac

tion

and

its re

lianc

e on

ext

erna

l tra

de m

eant

that

it h

ad

bett

er g

row

th p

rosp

ects

than

Por

tuga

l and

gre

ece.

•o

utlo

ok fo

r rat

ing

is st

able

, ind

icat

ing

no fu

rthe

r dow

ngra

des i

n th

e pi

pelin

e.

Port

ugal

179,

401

8916

,847

BBB-

•d

owng

rade

d on

29

mar

ch 2

011

from

BBB

.

•Th

e do

wng

rade

refle

cted

S&

P’s c

once

rns t

hat t

erm

s to

acce

ss th

e ne

w

eu b

ailo

ut fu

nd, t

he e

urop

ean

Stab

ility

mec

hani

sm, a

gree

d at

an

eu

sum

mit

wou

ld b

e to

the

detr

imen

t of c

redi

tors

.

•o

utlo

ok is

neg

ativ

e.

Spai

n89

4,62

870

19,4

13a

a•

dow

ngra

ded

on 2

8 a

pril

2010

from

aa

+.

•Sp

ain

is li

kely

to h

ave

an e

xten

ded

peri

od o

f sub

dued

eco

nom

ic

grow

th, w

hich

wea

kens

its b

udge

tary

pos

ition

. rea

l gd

P gr

owth

fo

reca

st to

ave

rage

0.7

per

cen

t ann

ually

in 2

010-

2016

inst

ead

of

prev

ious

exp

ecta

tion

of 1

per

cen

t.

•n

egat

ive

outlo

ok re

flect

s the

pos

sibi

lity

of a

dow

ngra

de if

Spa

in’s

budg

etar

y po

sitio

n un

derp

erfo

rms t

o a

grea

ter e

xten

t tha

n w

e cu

rren

tly a

ntic

ipat

e.

chi

na1,

097,

316

1781

7a

a-

•u

pgra

ded

on 1

6 d

ecem

ber 2

010

from

a+.

•S&

P ci

ted

chi

na’s

larg

e fo

reig

n re

serv

es, s

tron

g fis

cal p

ositi

on a

nd

posit

ive

grow

th o

utlo

ok a

s rea

sons

for t

he u

pgra

de. i

t als

o co

mm

ente

d on

the

chi

nese

gov

ernm

ent’s

mod

est i

ndeb

tedn

ess,

a st

rong

ext

erna

l as

set p

ositi

on, a

nd th

e ec

onom

y’s e

xcep

tiona

l gro

wth

pro

spec

ts.

•Th

e up

grad

e am

ount

s to

a vo

te o

f app

rova

l for

chi

na’s

resp

onse

to th

e fin

anci

al c

risi

s.



77

Cou

ntry

Tota

l ($M

) (a)

% o

f GD

P (a

)Pe

r cap

ital

($) (a

)S&

P ra

ting

Cre

dit r

atin

g co

mm

ents

new

Zea

land

41,1

9529

9,36

3a

a+

•d

owng

rade

d on

30

Sept

embe

r 201

1 fr

om a

aa

.

•S&

P be

lieve

s new

Zea

land

’s ex

tern

al p

ositi

on “w

ill d

eter

iora

te fu

rthe

r at

a ti

me

whe

n th

e co

untr

y’s fi

scal

sett

ings

hav

e be

en w

eake

ned

by

eart

hqua

ke-r

elat

ed sp

endi

ng p

ress

ures

and

fisc

al st

imul

us to

su

ppor

t gro

wth

”.

•n

ew Z

eala

nd’s

stre

ngth

s - it

s fisc

al a

nd m

onet

ary

polic

y fle

xibi

lity,

ec

onom

ic re

silie

nce,

pub

lic p

olic

y st

abili

ty a

nd so

und

finan

cial

se

ctor

- “a

re m

oder

ated

by

its v

ery

high

ext

erna

l im

bala

nces

, whi

ch

are

acco

mpa

nied

by

high

hou

seho

ld a

nd a

gric

ultu

re se

ctor

deb

t, de

pend

ence

on

com

mod

ity in

com

e, a

nd e

mer

ging

fisc

al p

ress

ures

as

soci

ated

with

its a

gein

g po

pula

tion”

.

ger

man

y2,

301,

890

7727

,745

aa

a

Sing

apor

e22

2,92

797

42,8

17a

aa

aus

tral

ia26

7,69

123

11,9

26a

aa

Vic

tori

a(b)

17,2

425.

53,

050

aa

a

Sour

ce: A

Econ

omist

.com

, The

Glo

bal D

ebt C

lock

, acc

esse

d 27

th S

epte

mbe

r 201

1 (h

ttp://

ww

w.ec

onom

ist.co

m/c

onte

nt/g

loba

l_de

bt_c

lock

), St

anda

rd &

Poo

r’s G

loba

l Cre

dit P

orta

l, Ra

tings

Dire

ct (v

ario

us re

port

s) a

nd V

icto

ria

2011

-12

Budg

et P

aper

s No.

2, S

trat

egy

and

Out

look

.



78

referencesacil tasman 2011, Victoria’s productivity, competitiveness and participation: Interstate and international comparisons, Prepared for the Victorian competition and efficiency commission, June.

allen consulting group (acg) 2003, Funding Urban Public Infrastructure – Approaches Compared, report to the Property council of australia.

allen consulting group (acg) 2004, Financing Public Infrastructure in Victoria: A comparison of approaches, report to the Property council of australia Victorian division, Sydney.

aschauer, d a, 1989a, Is public expenditure productive?, Journal of monetary economics, 23:177–200.

aschauer, d a, 1989b, ‘Public investment and productivity growth in the group of Seven’, Economic Perspectives, Federal reserve Bank of chicago, 13 (5):17–25, Ford, r and Poret, P, 1991, infrastructure and private sector productivity, Working Paper 91, oecd department of economics and Statistics.

australian Bureau of Statistics (aBS) 2011, Government Finance Statistics, australia, 2009-10, cat. no. 5512.0.

australian Bureau of Statistics (aBS) 2011b, Australian National Accounts: State Accounts, 2009-10, cat. no. 5220.0.

australian Bureau of Statistics (aBS) 2011c, Australian Demographic Statistics, mar 2011, cat. no. 3101.0.

australian Bureau of Statistics (aBS) 2011d, Consumer Price Index, australia, Jun 2011, cat. no. 6401.0.

australian Bureau of Statistics (aBS) 2007, Population Projections, australia, 2006 to 2101, canberra.

Bloomberg, ‘u.S. loses aaa credit rating as S&P Slams debt levels’, Political Process, dated 27 august 2011, <http://www.bloomberg.com/news/2011-08-06/ u-s-credit-rating-cut-by-s-p-for-first-time-on-deficit-reduction-accord.html>, accessed 20 october 2011.

Bureau of industry economics (Bie), 1992, Private provision of economic infrastructure: Proceedings from the Bie infrastructure forum 1-2 June, agPS, canberra.

chan, c., Forwood, d., roper, H., and Sayers, c. 2009, Public Infrastructure Financing – An International Perspective, Productivity commission Staff Working Paper, march 2009.

Courier Mail 2011, ‘Sa at risk of losing aaa rating’, dated 24 September 2011, <http://www.couriermail.com.au/ipad/sa-at-risk-of-losing-aaa-credit-rating/story-fn6ck4a4-1226144843332>, accessed 21 october 2011.

cSiro, maunsell australia and Phillips Fox 2006, Infrastructure and Climate Change Risk Assessment for Victoria, aspendale.

department of climate change and energy efficiency (dccee) 2011, Climate Change Risks to Coastal Buildings and Infrastructure, Supplement to the First Pass national assessment, canberra.

department of education, employment and Workplace relations (deeWr) 2010, Skill Shortages Victoria, labour economics office Victoria, canberra.

department of treasury and Finance (dtF) 2007, Mythbusters: Facts and fictions about Public Private Partnerships, Victoria.

department of treasury and Finance (dtF) 2011a, Strategy and Outlook 2011-12, Budget Paper no. 2, Victoria.

department of treasury and Finance (dtF) 2011b, State Capital Program 2011-12, Budget Paper no. 4, Victoria.

department of treasury and Finance (dtF) 2011c, Independent Review of State Finances: Interim Report, Victoria.

department of treasury and Finance (dtF) 2011d, Victorian Economic and Financial Statement April 2011, Victoria.

department of treasury and Finance (dtF) 2011e, Statement of Finances 2011-12, Budget Paper no. 5, Victoria.

department of treasury and Finance (dtF) 2011f, Macroeconomic Indicators 2011-12 Budget, <http://www.dtf.vic.gov.au/ca25713e0002eF43/Webobj/macroeconomicSeries2011-12Budget/$File/macroeconomicSeries2011-12Budget.XlS>, accessed 12 october 2011

department of treasury Western australia (dtWa) 2010, Budget 2011-12 Fact Sheet: Importance of the Triple-A Credit Rating, Western australia.

engineers australia 2010, Victoria infrastructure report card 2010, north melbourne.

evans, P. and g. Karras 1994, Are Government Activities Productive? Evidence from Panel of U.S. States, the review of economics and Statistics, Vol.76, no.1, pp.1-11.

Fitzgerald, V. 2011, Wells/Baillieu government Budget no. 1, presentation to attendees of the iPaa Victoria State Budget Briefing 5 may 2011, melbourne, <http://www.vic.ipaa.org.au/document/item/529>, accessed 3 october 2011

garcia-mila, t., t. J. mcguire, and robert H. Porter 2002, ‘the contribution of Publicly Provided inputs to States’ economies’, Regional Science and Urban Economics, Vol.22, no.2, pp.229-241.

infrastructure australia 2011, Communicating the imperative for action, a report to the council of australian governments, canberra.

infrastructure charges taskforce 2011, Recommended reform of local government development infrastructure charging arrangements, Final report, march 2011, Queensland.

infrastructure Partnerships australia (iPa) 2009, Financing Infrastructure in the Global Financial Crisis, march 2009.



79

Kam, t c Y, 2001, Public infrastructure spillovers and growth: Theory and time series evidence for Australia, <http://www.economics.unimelb.edu.au/research/workingpapers/wp00_01/811.pdf.>, accessed 19 September 2010

mamatzakis 2007, An Analysis Of The Impact Of Public Infrastructure On Productivity Performance Of Mexican Industry, <ceSiFo WorKing PaPer no. 2099, accessed at http://ssrn.com/abstract=1018340>, accessed 19 September 2010

mizutani and tanaka 2008, ‘Productivity effects and determinants of public infrastructure investment’, The Annals of Regional Science, Vol 44. no. 3.

mizutani and tanaka 2004, What Type of Public Capital Contributes to Private Production?, erSa conference papers, european regional Science association.

moody’s investor Service 2011a, announcement: moody’s comments on State of Victoria’s 2011/12 Budget, 4 may 2011.

moody’s investors Service 2011b, credit analysis Victoria (State of) australia.

moody’s investors Service 2011c, credit opinion: Victoria (State of) australia.

munnell, a. 1990, ‘How does Public infrastructure affect regional economic Performance?’, New England Economic Review, September/october, pp.11-32.

mussolini and teles 2010, ‘infrastructure and Productivity in latin america: is there a relationship in the long run?’, Sao Paulo School of Economics, Sao Paulo.

otto, g d and g m Voss, 1996, The Macro-economic Benefits of Public Infrastructure Investment, nrma, Sydney.

PriceWaterhousecoopers (PWc) 2008, Tax Increment Financing to Fund Infrastructure in Australia, draft report, PriceWaterhousecoopers, Sydney, nSW.

Productivity commission (Pc) 2009, Public Infrastructure Financing: An International Perspective, commonwealth of australia, canberra.

Property council of australia (Pca) 2010a, Financing Pubic Infrastructure in Queensland, Queensland.

Property council of australia (Pca) 2010b, Pre-Budget Submission 2010: Increase Infrastructure Investment and Improve Strategic Planning.

Property council of australia (Pca) 2009, Growth Area Bonds: New Solutions for Funding Infrastructure, new South Wales.

Queensland government 2011, State Budget 2011–12; Budget Strategy and Outlook, Budget Paper no. 2, Brisbane.

russell, B. 2009, Assessing the infrastructure issues of Victoria’s population growth, australian centre For governance and management of urban transport (gamut) university of melbourne, Victorian infrastructure Summit.

Sinclair Knight merz 2011, Infrastructure Plan and Program Report, prepared for the Property council of australia, melbourne.

Song l l, 2002, Public Capital, congestion and Private Production in Australia, melbourne institute of applied economic and Social research, the university of melbourne, november.

Standard & Poor’s (S&P) 2011a, Bulletin: ratings on australia’s State of Victoria unchanged after State Budget announcement, global credit Portal ratingsdirect, may 3 2011.

Standard & Poor’s (S&P) 2011b, Victoria (State of), ratingsdirect report, global credit Portal ratingsdirect, 8 november 2010.

Standard & Poor’s (S&P) 2010, State of new South Wales ‘aaa/a-1+’ ratings affirmed on Strong operating Position; outlook Stable, Press release, november 26, 2010.

Standard & Poor’s (S&P) 2009, research update: ratings on State of Queensland lowered to ‘aa+’ With Stable outlook on expectation of Weaker Budgetary Performance, ratingsdirect report, global credit Portal ratingsdirect, 20 February 2009.

Sydney Morning Herald 2009, ‘Fallen credit rating to cost Qld $200m’, dated 21 February 2009, <http://news.smh.com.au/breaking-news-national/fallen-credit-rating-to-cost-qld-200m-20090221-8e0g.html>, accessed 20 october 2011.

Victorian auditor-general’s office (Vago) 2009, Use of Development Contributions by Local Government, Victoria.

Victorian department of Planning and community development (dPcd) 2008. Melbourne 2030: A planning update – Melbourne at 5million, melbourne.

World Bank, 1994, World Development Report 1994: Infrastructure for development, oxford university Press.

Yeaple, S and S golub 2002, International productivity differences, infrastructure, and comparative advantage, november, <http://www.econ.yale.edu/seminars/ trade/tdw02/yeaple-021216.pdf.>, accessed 19 September 2010.

securing victoria’s future - parliament of victoria - home€¦ · victoria is in the midst of an...

Documents