Hewett: Infrastructure used to be one of those words where people’s eyes glaze over only a few years ago really and now it’s totally changed and infrastructure has become very sexy. So we’ve got Angus Taylor to talk about what he wants to do with infrastructure and I thought we’ve heard a lot from both Darren and Paul Fletcher today but one of the things that people have talked about that we have glanced on and holds a great deal of interest is the role of the new Infrastructure Projects and Financing Agency. I’m afraid we’re going to have another acronym called IPFA I suppose. So people seem to be interested in it but not to really understand what it’s going to do and how it’s going to operate, so perhaps I could start off with you talking about that.
Taylor: So Jen if you look at our policy and agenda on cities which the Prime Minister has taken a very strong personal interest in. I’m the Assistant to the Prime Minister. There’s two very big ideas behind it. One is the shift toward bringing in the cities - connecting jobs, transport and homes together - and that means integrated planning and thinking about infrastructure as much more than moving people from A to B, it’s about the suburbs and urban centres we create as a result of that infrastructure. That’s one part. That opens up a whole lot of opportunities for how you finance infrastructure and how you fund infrastructure in different ways as to how we have in the past.
The second part is saying look we’ve been talking for years about this wall of money for infrastructure and about this desperate need to get more investment into infrastructure as our cities are changing and evolving and we have failed again and again to connect those two things together. Now a lot of people say well you just need a bank, well there’s lots of banks, that’s not the problem. The fact that the Government itself has lots of banks, we’ve got the CEFC, EFIC, lots of acronyms, the Northern Australia Infrastructure Fund. So there’s lots of banks. I decided to step back and look at why that connection wasn’t really happening - because the Federal Government didn’t have the skills. We just don’t have the people who know how to create investable projects, bankable projects, that can attract that capital that desperately wants to get into infrastructure, and fill those infrastructure backlogs and the housing backlogs that we so desperately need to fill.
So this is actually about filling primarily a capability gap. So of course you say, so what does that look like? Well it’s a classic corporate advisory function really. It’s a relatively small team of people, up to 20 people, who have deep skills in infrastructure financing, an ability to innovate on creating revenue models, and this is a really key part, who can attract happily and preferably from the private sector. Now it may well be because of risk profiles and particularly political risk profiles that in some case we need to have some public sector finance. But our focus will always be to prioritise private sector financing over public and a team that can create those structures.
Now the tricky bit, the hardest bit of this, is innovating on revenue models. So we’ve done a little bit of this in Australia, we’ve led the world in thinking about toll roads, and that will remain a source of revenue for someone who wants to invest in an infrastructure project, but what we’re seeing around the world is a proliferation of new sources of revenue that can attract capital into these high impact infrastructure projects. So whether it’s making better use of developer contributions that are already there, business levies that are used in the UK, and so on, there’s a range of different models, working through how you do that. Using land, using government owned land, state, federal or local government owned land. So the uplifts from that are a source of funding. So there’s a range of different ways you can do this. But we need most of all a team of people who can actually deliver.
Hewett: Well of course the states and including NSW, your colleagues in the NSW Government, have been, I wouldn’t even say sceptical, I’d say downright hostile to this idea and they say they’ve got plenty of expertise and what you’re doing is a distraction and what they really need is funding and they’ve got all this financing. Similarly it’s not just the states, it’s also industry, the entire industry is against this idea.
Taylor: Well that’s not right. Let’s be clear about that. There are a few noisy vessels. But think for a moment about what they’re saying. They’re saying we do want the Federal Government to invest in projects with the NSW Government, we’re investing in the Western Sydney Airport, but we don’t want them to have any financial capability. We want them to be financiers but without any financial capability. It’s a crazy notion and of course the state governments increasingly have teams like this themselves. In fact I had dinner with members of the NSW team last night.
Hewett: Would that be Andrew Constance the Minister for Infrastructure who says this is not necessary?
Taylor: Well no, the state government, the NSW Government has a team that does this, the UK Government has a team that does this, the Canadian Government is setting up a team that does this, so look, if we are going to get more money into infrastructure, we have to have the people with the skills to do it and we as a Federal Government are major funders and financers of infrastructure already. We plan to be more significant in that. We don’t plan to scale down grant funding but we want to complement that with financing, particularly financing coming from the private sector, so it follows, as night follows day, that we need to have a team that has the skills.
Hewett: Chris Heathcote from Global Infrastructure said this morning that he thought that the new body would focus more on funding than financing. You’re saying that’s not right.
Taylor: Well look, it will always fund and finance. But we’re financing Badgerys Creek, we’re financing Moorebank, we’re financing WestConnex, so we’re already doing this. We’re already in this game. So that means the taxpayers of Australia need to know and should demand when we finance we do it well and we do it in their interests as taxpayers, as well as in the interests of the people who are going to use that infrastructure. That all seems to me to be so patently obvious that I think it can almost go without saying. But it is important it seems for us to be saying that. This is so crucial for Australian taxpayers, particularly at a time when money is short. We are squeezing every last dollar out so we have to make sure we are attracting in private sector capital wherever we can and when we do funding and finance we do it very well.
Hewett: Now in terms of funding and finance and building up that expertise, I think the new body is supposed to start operating July 1, is that right? So can you tell us who’s going to be involved in that and leading that?
Taylor: Yeah, so the aim here and my background with these things is to get a small, high calibre team, people with background in financing of major infrastructure projects and we have interim team members working away now from other parts of the Federal Government, other agencies that are already in this space, (inaudible) so we’ve got people moving into those roles now. We’re in a recruitment process right now for a chief executive, so if anyone out there has any desire to do this with that kind of background, come on forward. We’re seeing some fantastic applications by the way and we really look forward to appointing a permanent CEO as quickly as possible.
Hewett: So you’ve got an interim CEO at the moment?
Taylor: Well, we’ve got an interim team in place there and we’ll announce some of those names in the very near future.
Hewett: Okay. Well you could announce them here if you wished to. Now you said that the industry is not opposed to this but obviously there has been and we’ve bene reporting on this quite a lot in the Australian Financial Review, there has been particular criticism from Infrastructure Partnerships Australia. So again why is this all so logical? They understand the infrastructure industry pretty well.
Taylor: Look many in the infrastructure industry, let’s be honest here, they love that the Federal Government has an automatic teller machine, that’s what they like, put the card in, put in the pin, and out comes the money. What a fantastic model - who couldn’t wish for that? The trouble is, the automatic teller machine only has so much money a year and it’s not enough. My electorate – southwestern Sydney down to Canberra – that area in southwest and western Sydney, the infrastructure deficit there is crippling. It is crippling people’s lives. Unaffordable housing, too far from jobs, not enough density around our key infrastructure hubs. We have to have this investment going in, combined with changes in land use rezoning and all those sorts of things, but anyone who is going to hold back our ability to make and attract these investments is really putting middle Australia through real pain that they shouldn’t have to go through.
So for me this is incredibly important that we get it right. It’s just not possible for the Federal Government to continue doing this as an automatic teller machine. The states know, they’re using these models all the time, I see it all the time. Often people don’t even actually realise they’re using these models and I think everyone will get over their little grumblings that we should stay as an automatic teller machine really quickly and we’ll get on with the job and work together.
Hewett: Now some of the things that you did announce in the Budget obviously particularly Western Sydney Airport and Inland Rail, they’re said to be investments, but they still require huge amounts of Government equity. Is that how it’s going to be in future?
Taylor: No. So there’ll be a range. There are obvious reason why Western Sydney Airport is Federal Government capital because of the structure of the arrangement with the existing airport of Kingsford Smith. That was necessary. But look the preference Jen will always be to attract private sector capital. That’s the PM’s preference, it’s my preference and it’s the Government’s preference because for two reasons. We put less pressure on the Government’s balance sheet and you only have to speak to the Treasurer for five minutes to know he doesn’t want to put pressure on the balance sheet if he doesn’t have to. And secondly and this is crucially important, when you start attracting finance from the private sector you’re also attracting innovation. You’re also attracting new ways of doing things and we desperately need to be porous, to bring those ideas into government, we need to encourage people to innovate in the way we are delivering infrastructure and integrating infrastructure with housing and jobs centres and that means we want private sector investment.
Hewett: But how do you use this agency to leverage private sector finance? As we know there is a huge amount of finance out there and you’ve said there’s this gap. But how does this agency make up that difference?
Taylor: So there’s a couple of critical points here. One is that what’s been missing with infrastructure projects, particularly transport infrastructure and less so in other areas, is the creation of these revenue models that can attract investment. At the end of the day, it’s a pretty obvious thing to say, but it’s often missed – if you want to attract private sector investment, you have to create a revenue model. That’s it. And Government, its innovations so far have extended about as far as tollroads. Well we’ve got to get beyond that and so that is a skillset that is not trivial to create these revenue streams that can be bankable, that can be investable, that can be sufficiently de-risked and have the right risk profile if you like to attract private sector investment. So that’s a skillset that we need in this team, that we need in Government.
The second point I’d make is that sometimes it is the political risks that deter private sector investment. That’s an area where an agency like this can say, look, we’ll provide one layer of finance through the Government, through whatever banking source is relevant…
Hewett: You mean a guarantee or something?
Taylor: So an example could be a guarantee and then the rest can come from the private sector. If you look at the Thames Tideway for instance, the Infrastructure Projects Authority in the UK which is very close to what we’re talking about here, provided a construction risk guarantee to waive some of those construction risks which had pretty significant political and commercial risks associated with them, and then could attract in private sector capital to fund the project, to finance the project. So there may be clever ways of doing this. My broad point is we should do as little banking as possible, as a Government, as is necessary to attract in that private sector investment. B ut that does require us to have the skillset.
Hewett: And to know what the risk is in terms of providing guarantees?
Taylor: Exactly right.
Hewett: Okay. Now we talked earlier and you said for example the nightmare that people are living with in terms of transport, people in your electorate. One of the big issues obviously is rail and yet rail, how can that possibly return revenue?
Taylor: Right and this has been a challenge particularly in Australia. If you go to the UK, the Tube for instance gets close to, roughly covering its costs. It just depends, you need more density to be able to get public transport to be able to work in general. But there are a lot more sources of potential commercial revenue for rail than just fares. Obviously the really big impact of rail because of the depth of the commitment you’re making when you’re building a railway station is in the land values around the railway station and along the corridor. That’s a potential source of revenue which of course again the UK Government was using in its Cross Rail project and I think is going to be crucial for rail projects right across the world in the coming years. In Hong Kong of course it’s used very effectively. When it’s government owned land, whether it’s local government, state government or Federal government which owns land, that’s obviously easy because the uplift is completely captured by Government. Where it’s owned by the private sector then you have to look at other ways of doing it but we do know there are very significant uplifts in land if you combine simultaneously rezoning and infrastructure rail investments. That’s ultimately how I think everyone will be looking at investing in rail in the coming years and already are.
Hewett: So the value capture argument?
Taylor: Yeh but you’ve got to think of this as a broad range of tools. I can think of an example of a developer building a road through a new suburb just off the Hume Highway and where they built the road themselves. That’s value capture, the developer capturing the value themselves from that road. There’s a lot of ways that value capture can be done and we shouldn’t restrict ourselves to any one model.
One of the biggest costs for developers in building a house is holding a piece of land while you wait for the rezoning, the planning and the infrastructure. So a lot of developers will say to you if I can get this done faster, then obviously the costs are then significantly lower. Those holding costs can be significant. In fact I was talking to a major developer not long ago who was saying the price of an apartment in Sydney now, they think that on average, delay is responsible for $50,000 per apartment. That is an enormously big impact because of delays. So if we can accelerate the pace at which we can rezone, build infrastructure, get approvals done, I think we can take significant cost imposts away.
Hewett: Well I’m sure that would be correct and of course most of that is from either state or local government, really not to do with the Federal Government. So again how do you deal with that?
Taylor: Well let’s be clear about that. If you are talking about a major piece of infrastructure, then you are automatically in a world where all three layers of government are involved and this is an absolutely crucial point. We of course invest in infrastructure whether it’s through grants or financing, state governments and local governments are involved in planning. And so the key to this is aligning those three levels of government to do things quickly and effectively.
That’s why we’re doing these City Deals where we’re actually bringing the three levels of government together, whether it’s at a precinct level, suburban level, or city level. My own view for a long while has been if we’re going to get this right we’ve got to get the three levels of government much more aligned around this whole range of decisions all of us make, take the pressure off the time, the delays and the costs involved, by streamlining those processes and that’s exactly why we are doing these City Deals.
The first big one of these we’re doing in Western Sydney which is of course all about exactly the issues we’re talking about.
We’ve done two City Deals already. One in Launceston, one in Townsville. The thing about Western Sydney where we’re doing our first major capital City Deal is it is about aligning the infrastructure investment, the Airport development, housing developments, all the amenities around there in a way that Federal, State and Local government are aligned and agree on who’s doing what and the timelines involved to accelerate these processes and take the costs out of a very slow approach we’ve had to these things at the moment.
Hewett: Obviously there’s been a lot of criticism with the Airport development that there’s no rail for example there. How is that going to work?
Taylor: Well, we’re doing the rail work now. That’s a criticism that I think has come from the Opposition who are a quarter funding or partially funding a rail link that they haven’t really made a huge commitment to. I think we’re doing the work on the Western Sydney rail. It is a crucial part of the development of Western Sydney and I’m sure Paul Fletcher has talked about this.
Hewett: So how optimistic are you, we talked a lot about what the future of mobility is going to look like, as the Assistant Minister for Cities - and some would say quite possibly not the Assistant Minister in the near future, but anyway we’ll see how that goes, that’s politics - but um that in five years time, that rather than having this whole issue as Sydney grows, this whole congestion, that we’ll actually have gone a long way to fixing that or do you think we really do have to spend a lot more money on that?
Taylor: Well we do have to spend a lot more. The scale of the problem we’ve faced is really extraordinary. So I’m fond of saying if we were just to keep up with population growth in Sydney we needed to build about 35,000 houses a year in the decade up to 2015. In fact we built 17,000 homes, half. And a big part of that was the failure to invest in infrastructure to support those houses. There was also failure to rezone and do enough development approvals. Now some of those people, let’s say that was a backlog of about 200,000 houses or thereabouts, some of those people have clearly gone elsewhere. The census today or yesterday showed us a lot of those younger people are living at home. Some of them have gone to Melbourne, some of them have gone to regional centres around Sydney. But we’ve got still a backlog to go and that is supposedly about 100,000 homes. So we’ve still got a long way to go until we peel back that backlog and really start getting ahead.
Now the good news is we are investing absolutely unprecedented amounts in Sydney. The Federal Government alone, $10 billion in Western Sydney, just in roads around the Airport before we even get to rail and of course the state government is investing enormous amounts. I think in the next few years, you’ll see us move from catch-up to getting ahead and that’s where we need to get to.
Hewett: I know you’ll say there are lots of ways of getting the value from things, but in terms of actual dollars to the states, in the short term, (inaudible) going down over the next 10 years, not withstanding the $10billion rail fund but most of that is back-ended. So you’ve got quite a few years here…
Taylor: So that’s not right. Over the forwards we are investing an extra $2billion a year to what we have historically. Grant funding is holding at about $6billion a year and so there’s a significant increase on what there has been historically. Now it’s true that a layer of that now is financing, not just grant funding, but I would like to think in the very near future we will see a lot more private sector investment over and above all that. They key is we do more investment in infrastructure. It has to be good investment, it has to be investment that connects housing, jobs and transport and you know I think we need to use the broadest range of tools available to us to achieve that.
Hewett: So when you’re looking at this agency, it starts on July 1 officially. What type of timeframe are you actually looking at for people to actually see a difference, either in projects that are about to be funded or underway?
Taylor: Obviously one of the great challenges with infrastructure for governments, politically, is that they’re long dated and the (inaudible) of politics these days is shorter and shorter. However, look I think we can make a real difference on our decision making very quickly and the real reason is because we are making a lot more decisions now about investing than we ever have in the past. Western Sydney Airport, a major investment for us of over $5billion, Inland Rail and of course there is a financing element to it. The agency will be looking at how we can finance the terminals in particular, we think there’s real potential there with intermodal terminals which are absolutely crucial to get the economics of Inland Rail really working. Western Sydney Rail is a very obvious one where financing is a very realistic option so we’ll be working on those projects immediately.
Hewett: Those three big projects and then what a lot of other smaller ones?
Taylor: There’s a whole range of other ones. Look in most capital cities now there are rail projects that are either in the pipeline or starting to happen. All of those are potential candidates for financing. Some state governments are more willing to work with us than others. (inaudible)
Hewett: Obviously there’s a lot of stuff to talk about and we could go on…if anyone has a question, please sing out.
Questions from audience
Hewett: I was wondering if you could join with me in thanking Angus Taylor for what has been a terrifically interesting chat. Thankyou.