Morrison needs to be upfront about infrastructure funding
Published by the Sydney Morning Herald, Monday 7 May
It feels like Sydney’s CBD has been a construction site for ages: if you’re not dodging the drilling and hoardings on the south-east light rail, it’ll be the trucks and workers from the Sydney Metro. A fast-growing Sydney wants big new infrastructure.
Treasurer Scott Morrison wants new infrastructure too. But he wants it all – infrastructure, tax cuts and a budget surplus. So he’s planning to push spending “off-budget”. That way it doesn’t hit the underlying cash balance figure that the media spotlights on budget night. But the problem is that if the investment ends up going sour, we taxpayers won’t get to know about it until it’s too late, if at all.
It used to be that most transport infrastructure spending by the Commonwealth took the form of grants to the states. But that started to shift last budget. The Commonwealth made a fairly typical commitment of grant funding, of $8 billion, but it added two massive new “equity” investments, of $8.4 billion to Inland Rail, and $5.3 billion to Western Sydney Airport.
So the Commonwealth will build and own Western Sydney Airport, via an equity investment of $5.3 billion. The Commonwealth made this decision after Sydney Airport Corporation declined its right of first refusal to build the airport on the grounds that the Commonwealth offer to it was “deeply uneconomic”.
That was last year. This year, the Commonwealth’s commitment will be Western Sydney Airport’s rail link. Step one is developing a business case for the $7 billion project, due to be ready when the airport opens in 2026. Yet the only part of this project that Infrastructure Australia has classified as high priority is preservation of a rail corridor, in a yet-to-be determined location. Rather than rail from day one, the Commonwealth’s independent infrastructure adviser envisaged the much cheaper initial option of buses.
It looks like Western Sydney airport rail will be an equity investment like the $5 billion the Commonwealth is allocating for Melbourne’s airport rail. Yet these airport rail options are very expensive, and they stand no chance of generating the kind of return that would allow them to pay back their capital costs. Urban passenger rail in Australia typically earns around a quarter of its operating costs; it is valuable not so much because of the revenue as the access and mobility it provides.
So there’s a real risk that these equity investments will end up not even making a positive rate of return, never mind a commercial rate. The politicians are promising to build these projects before the due diligence. Once they’re promised, politicians and the public tend to demand that these projects get built, no matter what they end up costing. But any future write-down would not appear in the underlying cash balance figure that we focus on each budget night.
The Treasurer may well argue that the Commonwealth should get a say if it puts up the money, and that’s why its moving to funding projects via equity investments rather than grants. That would be fair enough if it waited for advice from its own advisory body. But these projects are being promised well before Infrastructure Australia has provided advice.
If infrastructure projects are never going to make a commercial return, the government should stop pretending they will. And if they are worth building at all, the government should fund them transparently on-budget.