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Why Budget infrastructure spending matters

In the Federal Budget delivered last week, Treasurer Josh Frydenberg outlined $100 billion in infrastructure spending over the next decade, mostly on road and rail projects.

Two days later Opposition leader Bill Shorten said a Labor Government would spend more than $100 billion on the roads and rail network.

They were big numbers and there was spending for all states and territories, but is it enough for Australia to fulfil its long-term economic potential?

Invest in infrastructure, invest in economic prosperity

At a macro level, investment in infrastructure is an investment in the economic future of a country. It provides a major stimulus for economic activity and throughout history has has been a fillip for many poorly-performing economies.

The most famous modern-day example was the New Deal in the United States, announced by President Franklin D. Roosevelt in 1933 in the midst of the Great Depression. The New Deal was a broad package of reforms, including government spending on highways, bridges, schools and parks.

The New Deal established the Tennessee Valley Authority to provide electricity (and jobs) to seven of the most impoverished states in the south of the country. To this day, it remains one of the nation’s largest public power providers.

The New Deal also created the Works Progress Administration to employ mostly unskilled labour. It built more than 4,000 school buildings, 130 new hospitals, laid 9,000 miles of drains and sanitary sewer lines, planted 24 million trees, constructed 29,000 bridges and paved or repaired 280,000 miles of road.

But while President Roosevelt was overseeing a depressed economy needing substantial fiscal stimulus, Australia is a long way from that. Nevertheless, what the New Deal taught the world was that broad spending across major public projects can have profound effects for decades to come.

The New Deal spending transformed the economy and US society. It was the birth of the US road system that is still in place today, opening up cities and markets across the country.

Whoever is in government in Australia in the years to come has the same opportunity.

Spending on projects such as the so-called ‘high speed’ rail link between Melbourne and Geelong, with its intended 150 km/hr speed, will allow Geelong residents to quickly commute to jobs in Melbourne. The Government has promised $2 billion to the project, and the ripple effects are expected to be substantial, from stimulating regional growth through to putting both upward and downward pressure on house prices and taking cars off the road in urban areas. This can be genuinely game-changing for the city of Geelong.

Its success (or otherwise) will be closely watched, and it could become the model for many more hub-and-spoke rail projects around major cities across the country.

But despite the merits of this and the other projects announced, the promised spending on infrastructure from both the Coalition and Labor is still below the long-term average of infrastructure spend as a percentage of Gross Domestic Product, and is focussed on big-ticket spending on roads and rail.

More than roads and rail needed

In Australia, with our vast distances and relatively sparse population, it makes sense for government and the private sector to work together to provide a modern infrastructure network that goes beyond just our transportation needs.

In the US and Europe, there is enormous investment going into power generation, from natural gas power plants in the Ohio Valley through to wind farms across Scandinavia. Water utilities and waste processing plants are being developed attracting billions of dollars in investment.

Power and water, just like in the 1930s, remain central to infrastructure programmes that benefit society but the modern model now sees them funded by a mix of public and private spending. Other infrastructure projects include data centres and telecommunications towers and small cells for the roll-out of the 5G network.

When compared to roads and rail, there was relatively little spending on these types of infrastructure projects in both the Government’s announcement and the Opposition’s response. An exception was the Snowy Hydro 2.0 expansion which will receive $4 billion, most of which had already been announced.

Each state received funding for “roads of strategic importance”. New South Wales received $3.5 billion for the Western Sydney rail line and $1.6 billion for the M1 Pacific Motorway. In Victoria there was $1.1 billion promised for suburban roads upgrades, alongside the Melbourne to Geelong rail link. South Australia was promised $1.5 billion to build a north-south road corridor.

There was also funding for a national road safety package and to develop business cases for a future fast rail line running down the east coast of the country. The Urban Congestion Fund increased from $1 billion to $4 billion, to fund projects aimed at removing congestion from urban areas.

The opening of investment opportunities

From a private sector investor’s point of view, many public infrastructure projects will eventually be privatised. This has already occurred at airports, ports and utilities across Australia and is expected to occur with other infrastructure assets.

And while the increased funding provides a pathway to the delivery of much-needed infrastructure, questions will linger about whether it is broad-based enough, and large enough for Australia to fulfil its long-term economic potential.

 

John Julian is Fund Manager of the Core Infrastructure Fund at AMP Capital, a sponsor of Cuffelinks. This article is for general information only and does not consider the circumstances of any investor. 

For more articles and papers from AMP Capital, please click here.

 

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