Economic infrastructure comprises physical structures which are used by a wide range of economic players in the course of their daily activities. The users include individuals, non-profit organisations, government organisations and businesses. Such assets include transport and communications networks as well as electrical, gas, water supply and waste facilities, and are distinct from social infrastructure, which includes the facilities and equipment used to satisfy the community’s education, health and community service needs.
More technically, infrastructure can be defined as assets which have significant positive spillover impacts, particularly on the productivity of general business assets. Positive spillovers arise when businesses and consumers receive benefits that they do not pay for, while negative spillovers involve uncompensated costs. Where an asset generates net spillover benefits, there is a case for government action to ensure greater provision than the market will provide; when it generates net spillover costs, it does not count as infrastructure and there may be a case for regulation to limit investment.
Assessing the adequacy of Australia’s Infrastructure
Despite a decade of increased investment in economic infrastructure, the 2010 Engineers Australia report card deemed Australia’s economic infrastructure to be adequate (‘C’) but requiring significant investment to meet present and future needs.
Incomplete or deficient investment has been identified in such areas as telecommunications, mass transit, ports, peri-urban schools and hospitals. Evidence for key infrastructure shortages includes water shortages and traffic congestion. Engineers Australia (2010) identified a $700 billion economic infrastructure shortfall while Infrastructure Australia (2010, 2013) identified a $300 billion nationally significant economic infrastructure shortfall.
In order to address this gap as well as future requirements estimates from Infrastructure Australia and Engineers Australia confirm a need for additional investment in economic infrastructure (transport; electrical; gas; telecoms; water) of between $300 and $700 billion. This includes backlog removal and the avoidance of future capacity for future growth.
The estimated shortfalls take into account the fact that Investment levels in economic infrastructure, as defined by Infrastructure Australia (transport, water, energy, communications), increased rapidly post 2004, rising most rapidly in WA and QLD.
Despite the spending increase the shortfalls have persisted or increased because a significant proportion of infrastructure stock has been at the end of its economic life (especially social infrastructure) and, more importantly, because shifts in geography, climatic conditions, demography and economic base have added to the new infrastructure required.
Investing in Infrastructure
As its name implies, infrastructure underlies economic activity. Without roads and other transport capital, without telecommunications and without electricity modern economies would collapse. It is inherent in the technology of these public utilities that they yield economic and social benefits of greater value than the revenue which can be raised by user charges. These positive spillovers justify greater provision than the private sector can finance, hence the case for government investment.
Government investment in infrastructure can be financed directly from tax revenue, or indirectly by taking loans which will be serviced by future tax revenue, or through private public partnerships (PPP’s). Up to financial deregulation in the mid-1980s governments (principally the Commonwealth) had first call in taking loans from the flow of national savings and used this privilege to finance a steady flow of investment in infrastructure. Since deregulation the financial sector has had first call and the resulting squeeze on government loan raising has reduced the flow of infrastructure investment. This has now reached the point where Australia suffers from serious deficiencies in its infrastructure capital stock.
Governments – local, state, even federal – are gradually becoming aware of the seriousness of the deficiencies and have tried to raise their investment levels. However, our calculations show that there is scope for them to redouble their efforts. The most promising investment opportunities in Australia at present, assessed from a long-run point of view, lie not in the private sector but the public.
This raises several crucial questions.
- Does Australia have the physical capacity to undertake a program of infrastructure investment?
- How would such a program be financed?
- How should projects be selected?
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The 2014-15 State of the Regions Report describes many of these issues and is available through the ALGA site.