Infrastructure funding methods

Budget Review 2016–17 Index

Rob Dossor

Generally the Commonwealth funds infrastructure through the states and territories. Typically, this assistance is provided by grants or loans.

Grants

A longstanding arrangement is for infrastructure funds to be provided to states and territories for specific projects. These are known as ‘specific purpose payments’.

Funds may also be made available generally to states and territories for projects that meet specific criteria. The Asset Recycling Initiative (ARI) is an example.

In the 2016–17 Budget, all infrastructure grants are made though the COAG Reform Fund Special Account.[1]

The ARI

The ARI provides states and territories with an incentive to ‘recycle’ (privatise) existing public assets, such as electricity distribution networks, and use the proceeds to fund new infrastructure. Under ARI, the Commonwealth will pay to the state or territory, as a grant, an amount equal to 15 per cent of that which the state or territory reinvests in infrastructure from the proceeds of privatisation or sale.[2]

The advantages of the ARI are:

  • that the cost to the Commonwealth is small—being only 15 per cent of the amount reinvested by the state or territory, yet the potential impact, in terms of investment in infrastructure is large.
  • that states and territories benefit because they can avoid taking on more, or substantially more debt, by using the equity of existing assets to invest in new infrastructure.
  • that the Commonwealth will derive tax revenues from the assets once in private ownership.

A novel feature of the ARI is that it draws on existing, ‘earmarked’ funds and so has no impact on the underlying cash balance.[3] $5.0 billion of the $5.7 billion received from the sale of Medibank Private was, in effect, hypothecated to the ARI.[4]

Some payments that the Commonwealth will make through the ARI include:

  • $1,466 million to NSW for its sale of TransGrid, Ausgrid and Endeavour Energy which NSW is re investing in the Sydney Rapid Transit project and the Western Sydney Rail Upgrade programme.[5]
  • $58.9 million to the ACT for the sale of ACTTAB and various public properties (such as the Dame Pattie Menzies House, the Dickson Motor Registry and Macarthur House) which the ACT will re-invest in Capital Metro.[6]

Despite these advantages the sale of existing public assets aspect of this measure has been unpopular, with one commentator arguing that it was a key contributing factor to the LNP party’s loss in the 2015 Queensland election.[7]

Loans

In the last two years, the Commonwealth has committed to provide some states and territories with loans to build particular infrastructure. Although the details of these arrangements are not available, it seems likely that the attraction of these loans for the states and territories is that they will leverage the Commonwealth’s AAA credit rating.

Concessional loans feature prominently in the 2016–17 Budget due to their minimal effect on the underlying cash balance. Their budgetary treatment differs from grants which are treated as an expense. Loans are treated as investments. The cost to the government, in terms of impact on the underlying cash balance, is the difference between the Commonwealth’s cost of funds and the rate at which it lends funds to a state or territory.

The budgetary treatment of loans means that large outlays can be made with a much smaller impact on the underlying cash balance being recorded. For instance, for the $2.0 billion concessional loan for the WestConnex project the effect on the underlying cash balance is only $96.2 million (from 2014–15 to 2017–18).[8] Where there is no differential, no cost is recorded (such as for the National Water Infrastructure Loan Facility).[9]

Any loan, while treated as an investment in the budget, is also recorded as a contingent liability.

State and territory arrangements

It should be noted that state and territory governments also frequently raise their own finances to fund infrastructure. Commonwealth funding can add to the funding raised under these arrangements.



[1].          Australian Government, Portfolio budget statements 2016–17: budget related paper no. 1.16: Treasury Portfolio, pp. 24–30.

[2].          R Dossor, Asset Recycling Fund Bill 2014 [and] Asset Recycling Fund (Consequential Amendments) Bill 2014, Bills digest, 90, 2013–14, Parliamentary Library, Canberra, 17 June 2014.

[3].          See Ibid. Note, the Asset Recycling Fund Bill was amended in the Senate. These amendments were not accepted by the House of Representatives and it lapsed when Parliament was prolonged in April 2016. Consequently, the Building Australia Fund and the Education Investment Fund were never abolished with the funds moved to the Asset Recycling Fund. Parliament of Australia, ‘Asset Recycling Fund Bill 2014 homepage’, Australian Parliament website.

[4].          Australian Government, Budget measures: budget paper no. 2: 2014–15, 2014, p. 216. ‘Medibank Private sale earns Government more than $5.6 billion: proceeds to be reinvested in infrastructure’, ABC News, 23 November 2014.

[5].          Council of Australian Governments (COAG), National Partnership Agreement on Asset Recycling: New South Wales Asset Divestments and Projects, COAG, 5 March 2015.

[6].          Council of Australian Governments (COAG), National Partnership Agreement on Asset Recycling: Australian Capital Territory Asset Sales and Projects, COAG, 17 February 2015.

[7].          A Ferguson, ‘The brutal politics of privatisation’, The Age, 3 February 2015, p. 21.

[8].          Australian Government, Budget measures: budget paper no. 2: 2014–15, 2014, p. 176.

[9].          Ibid.

 

All online articles accessed May 2016. 

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