News & Events

G20 policy on private investment key for infrastructure

December 1, 2013

Australia will take over the presidency of the G20 this week and, with it, the opportunity to advance an important policy agenda for the world's most economically powerful countries, says Arthur Sinodinos in a column that appeared in a recent edition of The Australian.

Top of this agenda will be the promotion of investment, especially for infrastructure. This will include examination of innovative funding models and better risk-sharing arrangements between the public and private sectors, the efficiency and effectiveness of public investment, and the role of development banks in catalyzing private finance.

After three decades of deregulation, Australia has developed a world-class financial services industry, including pioneering work in the development of infrastructure financing models - traditionally the domain of the public sector. The trend towards private-public partnerships accelerated in recent decades. This went beyond drawing on the superior operational and management skills of industry to include incentives for private investment.

Under Australia's G20 leadership, the G20 will release a package of measures aimed at increasing private-sector investment, a key plank of which will assist in the identification and implementation of country-specific actions to improve members' domestic investment environments - a critical precondition affecting the ability to attract private-sector financing for investment.

Without the right policy framework we will not achieve efficient provision of infrastructure. Appropriate charging where possible is fundamental to sending the right signals on what infrastructure to build where and when. A necessity for structural reform to promote competition and reduce barriers to entry is clear. The G20 package also will include an initiative launched by the OECD to encourage institutional investment in longer-term assets, including infrastructure.

The OECD taskforce, which is working with G20 members, sees the growth of this investor grouping as potentially delivering a larger and more diversified source of long-term financing for key drivers of economic growth and competitiveness, such as infrastructure. Pension funds alone managed more than $US20 trillion in assets as of the end of last year, with more than $US1 trillion in net annual inflow of savings, yet only 1 per cent of those assets were invested in infrastructure. Preconditions for long-term investment, such as a clear and transparent government plan for projects, opportunities for private-sector investment via public procurement as well as strengthening the governance of institutional investors, are just some of the high-level principles advocated by the OECD-G20 taskforce as a framework for change.

In Australia, the role that superannuation funds could play in investing in infrastructure has been the source of public debate. While infrastructure investment significantly can benefit the overall economy through higher productivity, any decision to invest in the sector by the super funds should be on a case by case basis in light of their objective of benefiting members.

In recent years we also have become much wiser about the pitfalls of public-private partnerships. Complex financial engineering, monopolistic concessions and over-optimistic demand forecasts have brought some high-profile public-private partnerships undone. Opponents of private financing contend that the public sector can always borrow more cheaply than the private sector and there is no place for private capital (although some companies today have higher credit ratings than nation-states).

That is only half true and not entirely relevant. Cheap access to finance is not a free lunch or an invitation to fund unviable projects. Capital has an opportunity cost, it has alternative uses and society is the poorer when capital is not allocated to maximize its value. As we prepare for the G20, the six-month inquiry by the Productivity Commission into public infrastructure will be a timely investigation into how we can encourage private financing and funding of projects when it releases its report next year.

As with other countries in the region, the cost of infrastructure and involving the private sector are significant economic challenges for Australia. Removing red tape and reducing the cost of building infrastructure will be crucial to ensure private investment is attractive as we build into the 21st century.

Arthur Sinodinos is the Assistant Treasurer

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