FUNDING FOR TRANSFORMATIONAL INFRASTRUCTURE IN SOUTH AUSTRALIA - 2015 AND BEYOND

Introduction 

We have come through a period of amazing infrastructure investment in South Australia. Great things have been achieved and projects like Adelaide Oval (how quickly we forget the tedious drive to AAMI stadium and back) and the tram extension have transformed life in Adelaide. The new SAHMRI building has changed the North Terrace landscape, while the activities inside have the potential to be life transformational in other ways.

In regional and city fringe areas of our state, whilst there is still much to be done, highways have been duplicated, overtaking lanes have been built, and roads have been improved.  Have you checked out the Dukes Highway lately?

The multimillion redevelopment of Nystar at Port Pirie will help sustain the State’s economy and the New Royal Adelaide hospital, when completed sometime next year, will also be a great new addition to our State.

While government infrastructure programs and benefits can be debated, history shows that major projects contribute to the fabric of our state’s economic growth and social equity. They improve our quality of life and the efficiency of the way we do business.

It has been reported by some that Jay Weatherill rolled into another term in government largely on the back of our big infrastructure build over the past few years.

But the bucket of public funds available for future projects now has surely dried up.

And as a mendicant state, where we are given a generous hand-out of GST revenue, well above what our State contributes to the overall national economy, we are under pressure to hold onto these current revenues.  My former interstate colleagues often reminded me how we are being allocated money that should be theirs. They happily pointed out to me that a fair proportion of the cost for the South Australian Government’s rebuild of Adelaide Oval was funded by their state’s taxpayers.

In the circumstances, and given the Commonwealth’s own budget pressures (not to mention our State Government's repeated efforts at antagonising the Coalition Federal Government), any thoughts that our national government will generously step into the void for us are totally unrealistic.

The question I am asked frequently is “How can South Australia keep on replacing, improving or building new infrastructure, considering the fiscally challenging times for State and Federal governments?”  

The Immediate Future

In the short-term there is a good range of publicly funded major projects planned or underway.

From a transport perspective, the Weatherill government proposes to deliver major upgrades to the north-south corridor in partnership with the Commonwealth Government.  In particular, funds are currently allocated for projects to upgrade South Road at Torrensville and Darlington.

The State Government has available $160 million in its own capital budget to deliver an upgrade to the city end of the O’Bahn.  Let’s hope it can develop a solution, with worthwhile benefits, that makes that investment value for money. 

Government funding is still allocated to rebuild the original plenary convention centre building on the Riverbank, and the government has somehow found another $180 million to put towards works within the Adelaide Festival Centre and some unspecified measures in the area of the Hajek plaza and Festival Drive north of the railway station. 

Our universities are already underway with new buildings in the bio-medical precinct on North Terrace and our new hospital is continuing to take shape.

The public infrastructure program outlined above is good news for the state.  It means ongoing construction jobs.  Activity on these major multi-million dollar projects over the next few years will serve to boost confidence in South Australia. We surely need it.

But looking beyond the next few years, what comes next? 

Challenges

The state now has to find a means to fund the next tranche of projects needed to keep this state moving.  (See the State Government’s own Integrated Transport and Land Use Plan 2013.)

New approaches are required.  

State governments around Australia are proactively chasing innovation, including private sector involvement and financing mechanisms, regardless if they have labor or liberal values.

From a government perspective, creativity, innovation and a willingness to enter commercially viable deals with the private sector, including property and financing arrangements, need to be on the agenda.  

From the perspective of the private sector, there must be a process where developers can confidently put forward their ideas to government on a confidential basis, without those ideas being freely offered to all and sundry on the open market. 

We need our government to be out there, batting, on the front foot, embracing new opportunities.  Other states are.  For example, funding for the Gold Coast light rail project involved the private sector and all three levels of government. Consider also NSW’s approach to its social housing assets and urban growth agenda. 

Role of the Private Sector

We all of course still want to see more cranes occupying the skyline of our CBD and it surely is time for some complementary investment in South Australia’s regions.

Investment by the private sector will be necessary to secure at least some of the new round of infrastructure projects here in South Australia. It will be essential to keep our construction industry active and support the ongoing employment of our substantial construction workforce.

Tellingly, investigations have been underway for the past two years on deals to attract private sector participation in redevelopment projects on two publicly owned CBD strategic sites.

The premise for both projects is that the government has the need but not the balance sheet to invest. 

In the Riverbank area the government’s need is for the crumbling Adelaide Festival Centre car park to be rebuilt.  Further south on Victoria Square the government needs to rebuild its dilapidated courts precinct. Both projects offer opportunities for the private sector.

These opportunities, involving once-in-a-lifetime real estate, were always going to be a significant test of the government’s resolve to maintain the impetus of continuing to build this state, and willingness to negotiate practical and innovative solutions with the private sector.

In both cases the expectation has been that the government should be able to secure a good deal, one that represents ‘value for money’ for the taxpayer, for the rights given to private sector parties to develop on public land.  

The multi-million dollar proposal by Lang Walker to develop on the land behind Old Parliament House (including rebuilding the Adelaide Festival Car Park and the plaza above) has been released for public comment. At the heart of the Walker proposal is a 24 storey tower and other lower level commercial activities, as well as the provision of additional car parks for both the Festival Theatre and Casino.  This in turn will allow SkyCity to realise its $350 million expansion proposal. 

These developments look set to proceed, although it is intriguing the government has somehow managed to negotiate to contribute another $90 million of public money from our state’s impoverished balance sheet to either prepare the way for, or complete the landscape around, these two private sector projects (namely by Walker and SkyCity) on public land. This is in addition to the $90 million announced for festival centre refurbishment works.

Hopefully the government will be able to provide a detailed explanation how taxpayers have benefitted from the deal it has negotiated.  At this stage it appears that Walker is getting paid a full commercial deal for the car parks he is building for the government and SkyCity, including developer’s margins and profits.  We then give away our own strategic public land to Walker and SkyCity for them to build their high level projects.  Walker then puts $40 million on the table for public realm enhancements and we pay a further $90 million of our own money to top it up.

Irrespective, with this money on the table and this deal if it is landed, we should anticipate an amazing outcome, with vibrancy, activity and a world-class public domain.

The other outstanding opportunity for private sector participation is in the court’s precinct. It has involved the long awaited and much needed upgrade to the State’s key court infrastructure to co-locate the Supreme Court, District Courts, registries and services and the Attorney General’s Department and Courts Administration Authority. 

This project proposed to provide significant operating efficiencies through the use of shared facilities, with costs partly offset by the sale or lease of surplus land and buildings, some iconic and ripe for adaptive reuse.

It appears the government has abandoned this process. It has walked away from the opportunity to negotiate a sensible deal and work with the private sector to plan, build and finance (at least in the short-term) a facility to meet the urgent needs of our court system.  This in my view is a missed opportunity. From what I can see the State Government is happy for the outdated state of the courts infrastructure to remain with us for some time, possibly pending a public sector build at a future date. Let’s hope this is sooner rather than later.

We have also seen some recent positive, albeit speculative announcements, involving the investment of private sector capital in other parts of our city, namely for hotel and apartment developments.  It is good to see the private sector investing in our state.

Makris has released his latest proposals for North Adelaide. Given the scale of residential development proposed, I would assume that this project would need pre-commits from the market to proceed.  With this in mind I hope we see a robust planning process that quickly and efficiently resolves an outcome that is both good for the urban environment and the State’s economy.

Adelaide Airport Limited has announced a $2 billion plan for further development of our airport including commercial office space and an international hotel.  This major development is forecast to generate 20,000 much needed jobs for this State over the next 20 years.

Several other privately funded projects are underway or on the drawing board. Some of these may be facilitated through to approval, by the office of the coordinator-general.

Opportunities will no doubt also become available for the private sector to participate on the redevelopment of the current RAH site on North Terrace after it becomes vacant later in 2016.

Large, privately funded development projects are desperately needed in the immediate future.

But apart from the projects listed above, the pickings for the longer term still look thin. The private sector will only invest when there is a market, or where there is confidence about an acceptable return-on-investment.

We must also acknowledge that the appetite for significant investment is generally not here in South Australia.

When risks need to be taken, industry is looking towards the larger population centres and more proactive approaches in other places. We need to get ourselves onto that agenda.

Our state administration clings to the notion that we should negotiate outcomes where risks are transferred to the private sector.  (presumably apart from the Riverbank). They want outcomes that are risk free for government and then get surprised when the private sector wants to hit Government with a bill for these risks. A new approach from government in this state is needed if we want to bring the private sector to the table and work with them in a serious way, to help address South Australia’s infrastructure needs.

The key for our government is to find ways to de-risk projects to create an environment within which the private sector can invest in this state with a degree of certainty.   

Public Private Partnerships 

Many good projects have been delivered over the past decade through a partnership between government and the private sector. Deepening of the Outer Harbor channel is one that comes to mind.

As a state we have talked a lot about the virtues of the formal public private partnership (PPP) process as a means to attract up-front private sector funds into an infrastructure project.

Whilst these have been on the agenda around Australia and overseas for a number of years, South Australia has taken only limited steps in this direction. 

Some police stations, court houses, a few schools and possibly some water treatment plants qualify. A proposed prisons PPP was scrapped, triggering compensation payments.

Now we have our new major city hospital under construction as a PPP.

The theory of PPPs is that efficiencies can be achieved over the life of a project, as the private sector partner delivers and offers a fully-maintained facility for the contract period, generally lasting several decades. 

Closer scrutiny, however, shows that the government does not always achieve value for money out of these deals. I have some doubts about whether South Australia got value from its schools PPP and the prison’s PPP has cost us money, with no return.

My personal view is that PPPs are not the panacea for all South Australia’s ills.

The conundrum is that governments are still often the best placed entity to finance infrastructure development.

No matter how we package it, governments still have access to the lowest cost of finance and, short of philanthropy from the private sector, they can also point to a wider range of community and social benefits arising out of a project, even if the returns on investment are less than anticipated. 

Nevertheless the PPP process does allow for capital or build costs, which are traditionally paid up-front by the government during construction of a capital project, to be spread out over an operating contract period and therefore be paid progressively by the next generation in future budgets.  This is handy for governments when a state desperately needs infrastructure but budgets cannot afford large capital investments.

The most sobering aspect of this for South Australians is that, on our biggest project, the new Royal Adelaide Hospital on North Terrace, we haven’t even started to make payments yet.

Those payments, are reported to be approaching $400 million per year - give or take any resolution of cost extras – and will start to become due when the hospital is open for business, hopefully sometime in 2016.

So the question remains. If the government does not have capacity for major new infrastructure projects, and the pipeline of private sector investment and new PPPs is limited, what other options are available?

Alternatives

It was my good fortune late last year to have been invited to participate in discussions interstate with some highly credentialed and impressive people on new and innovative ways of funding infrastructure.

Other state Ministers and people from around Australia and overseas with experience in infrastructure funding and delivery were present. The following topics were on the agenda and will be explored further in this paper.

• User charges

• Capital recycling

• Value uplift

It is clear governments may rise or fall on some of these initiatives, but surely all opportunities need to be placed on the table.  I was disappointed, particularly given the Commonwealth’s public position on future infrastructure funding, that no representatives from the South Australian Government were in attendance.

Opportunity to apply additional user charges?

The concept of user charges is essentially about capturing tomorrow's revenue to support investment today.

It has its challenges. Solutions that just increase costs to the community, by adding user charges to what we already pay, without commensurate benefits aren’t the answer. We must be looking for outcomes that increase efficiency and reduce costs.

We are aware of course that much of our infrastructure is already funded through user charges. We are used to paying water and sewage rates and power costs on a monthly or quarterly basis.

Toll roads are another example where user charges may apply.  Build a new road and offer industry and or community a benefit around reduced travel times and the obligation to pay for the service may be accepted.  It happens interstate.

If the toll road becomes congested to the stage where it resembles a car park and the benefits are not being realized, or if the choice for the motorist is diminished by other road closures, the community’s willingness to pay quickly dissipates.

Network charges are also being discussed particularly in situations where GPS technology is increasingly available.  This is an arrangement where motorists are charged a variable fee for the roads they travel on, the time of travel and the kilometres travelled.

In many respects this arrangement is more equitable than selective tolls as motorists pay for their use of the whole network. A driver who travels to the local supermarket once a week will pay less than drivers who are in their car 24/7. A driver who travels off-peak will pay less than drivers accessing major roads during peak periods. 

While network charges may be realistic for heavy vehicles in the foreseeable future, motorists generally will rightly point out they already pay more than their fair share for use of transports infrastructure via registration and licensing fees, and fuel excise.  If network charges are to be given any currency in this State, in my view they must be considered against a reduction in these other costs.

At this stage in South Australia, parties of both persuasions have not been game to even take on a discussion about toll roads or network charges.

The bottom line is that user charges should be considered but again I do not believe they are necessarily the panacea for all the challenges this State is facing.

Opportunity for capital recycling projects?

Capital recycling may also contribute, but South Australia has already been active in this space and from one viewpoint hasn’t a lot left to sell. 

We have already outsourced most of our infrastructure, most notably our power and our ports. And the government here has ruled out selling SA Water.

Nevertheless the point remains, wherever we have an opportunity to sell a current or potential revenue stream to the private sector, I believe we should at least be looking carefully at it.  In particular for public assets and services that could be delivered better by the private sector. 

The current thinking is that South Australia can sell the Motor Accident Commission with its considerable revenue stream. A number of government buildings are also on the market, with sell and lease back arrangements in place where required. The revenue will improve the shape of our state budget in the short term.

It is relatively easy to list a number of other government assets that have the potential to be sold to the market and leased back, if the deal is right.

To encourage this initiative, the Commonwealth Government has put on the table that it will add 15% value to any deal done by a state government where an asset is sold and the return is invested in a new infrastructure project. 

Nevertheless, this is only an acceptable option for our state if it adds real value to a new initiative.  We should ensure this is not seen by the Commonwealth as an opportunity to reduce the overall level of its contribution to the states.

Selling an asset to pick up a 15% uplift works if it is ‘over-and-above’ the Commonwealth’s current 50, 70 or 80% share of infrastructure projects assessed through Infrastructure Australia.

Are value uplift projects achievable? 

Value capture offers another potential opportunity for new infrastructure investment to be brought forward. 

Maximising opportunities for value capture can give rise to an outcome where responsibility to pay may be distributed more widely, with the benefits of the infrastructure investment being realised earlier.

Land values are influenced by a range of factors such as zoning, views, proximity to water, proximity to the CBD and access to services. 

Government actions to rezone land or build new infrastructure can contribute to a substantial unearned increase in land values.

From an infrastructure perspective, I believe there is scope to strike a deal where the beneficiary of a land value increase should contribute to the cost of the very infrastructure investment that brings that increase about.

Consider the form of infrastructure built for transit access to a new urban land market.

In our highly car dependent society, urban land markets are of course generally well serviced with a network of road corridors, including collector and arterial roads, expressways and freeways. These are essential for marketability of the land. Developers accept responsibility to contribute to the cost of building the road network. However, in terms of land values, the uplift in the vicinity of a major road may be curtailed by the negative impact of associated road noise and pollution. 

Now introduce a rail transit corridor and the debate changes. It is widely accepted that investment in new rail transit infrastructure provides a substantial uplift in value of the land being serviced. 

The most obvious example in Adelaide was the project to extend the Glenelg tramline from Victoria Square to North Terrace in 2007 and then the further extension to the Entertainment Centre in 2010. 

The value of the real estate along the tramline increased, and redevelopment projects quickly surfaced. As a consequence the rate-able return on the property also increases.

Benefits flow to the property owners and the local government rating authorities.

Under our governance structures, unless we are extending the system through to land owned by the State, a commitment of funds by the State Government to extend the transit system provides an uplift in returns to other parties, namely parties who are not contributing to the cost of constructing or operating the system. 

This raises the concept of the willingness of the beneficiaries to pay.

Whether land owners, developers and local government will see the State Government offering its largesse in the way it has in the past, still remains to be seen.  

Irrespective of the State’s willingness to fund rail transit corridors I believe the time is right for all parties and all beneficiaries to come to the table and explore how they can contribute to the solution.  

Studies interstate have estimated land market increases of up to 40% can be achieved where rail transit extensions are on the agenda.

If this is the case, there may be a strong incentive for the developer and the local authority to contribute equity towards a transit project, given the potential for a return on their investment.

Let’s find a way

I like most people living in this wonderful state want to see a prosperous future for my kids and grand kids.  Why would you want to live anywhere else? 

To guarantee our future we need some innovative thinking and creative solutions, to make our visions and priorities a reality.

The opportunity is here. Other states are doing it.

I want South Australia to be following their lead!

I personally want a government taking responsibility for our current circumstances and taking the initiative. Blaming others might squeak you an election here and there, but it doesn’t solve the state’s problems. We, the citizens of South Australia deserve more.

Further reading

For those interested I recommend the following reading of publicly available information which expand on the matters and projects raised in this article.

The Bays Precinct Sydney International Summit 2014 material -

http://www.urbangrowthnsw.com.au/news/the-bays-precinct-sydney-international-summit-2014.aspx

Securing Investment in Australia’s Future “Infrastructure Funding and Financing” by the Business Council of Australia (2013) -

New Models for Addressing Demand Risk - http://www.pwc.com.au/industry/infrastructure/assets/New-Models-for-Addressing-Demand-Risk-Jun10.pdf

NSW social housing initiatives –

http://www.nsw.gov.au/innovate/social-housing-assets

NSW urban transformation projects -

http://www.urbangrowthnsw.com.au/work/urban-transformation-projects.aspx

The Commonwealth’s Infrastructure Finance and Funding Reform Report -

http://www.infrastructure.gov.au/infrastructure/iff/

Infrastructure Partnerships Australia and Deloitte Road Pricing and Transport Infrastructure Funding: Reform Pathways for Australia Discussion Paper -

http://www.infrastructure.org.au/Content/MajorReports.aspx

 

The opinions expressed in this article are Rod Hook’s alone, and do not reflect the opinions of Rod Hook and Associates Pty Ltd or any employee and associate thereof. Rod Hook and Associates Pty Ltd is not responsible for the accuracy of any of the information supplied in this article.