Principles for Australian Infrastructure Finance

Major infrastructure projects pose inherent difficulties because of the size of the investments and the range of risks involved. At first glance government is best placed to develop major infrastructure itself, because of its deep pockets, ability to spread risk, and portfolio of potentially related activities. However governments have weaknesses with managing debt, and poor track records in managing costs and delivering desired outputs. As a result government should focus their ability to bear risk on early stage risk and routinely pass mature assets on to private investors thereby creating more space for public involvement in the riskier phases of development. In their turn private investors have problems funding infrastructure: equity investors require high returns to compensate for risk; debt investors require low risk to justify investing. This leaves two broad options for new and immature assets: they can be developed in the public sector or with the public sector assuming most early stage risk; or they can be developed in the private sector with the state providing revenue enhancement, cost reduction, and risk amelioration. Revenue enhancement can take the form of revenue guarantees, availability payments or regulatory holidays; cost reduction can take the form of policy changes which deepen the pool of investors, reduce bid costs through shared data rooms etc, or subsidised borrowing. Recent proposals in NSW and Victoria around the development of major new roads appear to conform to current best practice. The Federal government is the natural insurer of state-government infrastructure risk since it has the deepest pockets and the greatest ability to spread risk. Rather than fund projects directly, the Federal government might better adapt its role and provide insurance