Value For Money: Procuring Infrastructure

Introduction

Along with many other developed countries, Australia is suffering from a backlog of infrastructure that threatens to undermine productive capacity and efficiency. As part of the Federal government’s strategy to address this backlog, The Infrastructure Australia Act 2008 came into effect on 9 April 2008, effectively establishing Infrastructure Australia. Infrastructure Australia advises all levels of government in Australia and one of its primary functions concerns the evaluation of Australia’s current and future needs and priorities relating to nationally significant infrastructure. To indicate the scale of Australia’s infrastructure backlog, Infrastructure Australia received over 600 submissions requesting funding support for specific projects from the Federal government’s $20 billion Building Australia Fund (BAF). Of these submissions, Infrastructure Australia identified 94 projects (with a total value around $200 billion) that are subject to further rationalization (Australian Government, 2008). Infrastructure Australia explains, however, that ‘Commonwealth funding does not have all or nothing – Commonwealth funding for projects is often provided in partnership with the states and territories’. This can be interpreted as an indication that the BAF can be used to leverage private finance towards infrastructure development.

If estimates of the $800 billion needed to construct Australia’s infrastructure in the next decade are anywhere near realistic (Ferguson, as cited in Forward & Aldis, 2009), this approach to expending the BAF can be both justified and appreciated. Apart from a backlog in infrastructure, interest amongst all levels of government Australia-wide has been heightened by the global financial crisis (GFC). The GFC is causing a severe contraction of debt and equity markets and this appears to be negatively impacting on government attitudes towards funding their desired programs of infrastructure – both in terms of governments directly financing infrastructure, as well as their ability to attract private finance. Hence, the impression is that all levels of government in Australia are clamoring to obtain a part of the BAF that is small relative to estimated demand.

The other key supply constraint concerning infrastructure is construction capacity. Only two of the world’s largest 225 multinational contractors are Australian-based (ENR, 2008). This restricts the pool of contractors that can afford the high costs involved in bidding for major infrastructure and which can form consortia to privately finance infrastructure. This lack of construction capacity may also be affecting prices. For example, the Federal minister responsible for infrastructure, was reported as saying ‘that the world’s biggest construction companies needed to be attracted to Australia to cut the costs of building infrastructure’ (Cameron, 2008).