The Infrastructure Footrace: Why Australia is Way Ahead

Many governments around the world tout their infrastructure credentials, promoting their plans to increase spending on the sector and escalate the contribution from private investors.

David Cook
May 16, 2019 · 7 min read
Aerial view of Sydney airport

The degree of success of these plans, however, is mixed. For instance, Europe has seen investment in the sector stagnate in recent years despite an extensive need for new and updated infrastructure (The Infrastructure Footrace: Why is Europe Stuck in Neutral?). And infrastructure investment in the US, even with a huge backlog of crumbling roads, bridges, and other assets, along with a current administration that has made the sector a priority, is going backward (The Infrastructure Footrace: Why is the US Stuck in Reverse?).

Yet Australia continues to power way ahead. As can be seen in the chart, the value of its infrastructure sector has been well above many of its peers over the past several years, with outperformance expected to continue over the medium term.

What’s driving the ongoing robust investment in the infrastructure sector?

Positive Demographics

A substantial portion of the increases are due to net immigration into Australia. Over one quarter of the country’s residents were born overseas, one of the highest percentages in the OECD. In the last 15 years up to 2005, natural increase made up the bulk of population growth, particularly during the last recession in the early 1990s. However, in the subsequent ten-year period to 2015, net overseas migration contributed most of the increase in every year.

Strong growth is expected to continue over the coming decades, with the Australian Bureau of Statistics (ABS) projecting that population will increase from the current 25 million to more than 42 million in 2066. And the greater number of people will naturally translate into greater demand for infrastructure, particularly since the growth is concentrated in urban areas where many transportation assets are already at capacity. The chart illustrates the substantially higher proportional increases in the number of residents in Australia’s four largest cities as compared to the national growth rate.

Robust Economic Growth

In terms of economic strength Australia is again an outlier among developed countries, going 27 years since the last recession. Over that period Australia’s economy grew at an average annual rate of 3.3%, as measured by real GDP. The rate of increase has slowed somewhat since 2000, but has been well above economic growth in many other developed economies as shown in the chart below.

While many other countries were suffering recessions during the global financial crisis in 2008–2009, Australia was buoyed by the resources boom driven in large part by continuing strong demand from China. The government also increased its level of spending in order to avoid the downturn experienced in other parts of the world. After running budget surpluses for nine of the ten years through FY07 (the year ending 30 June 2007), the federal government incurred a deficit of 2.1% of GDP in FY08, increasing to 4.2% in FY09. The deficits have continued through the current fiscal year (FY19), but Fitch expects that the budget will return to surplus in FY20. Fitch also forecasts solid economic growth to continue, with real GDP growth of 2.0% in 2019 and 2.5% in 2020.

Government Support for Private Sector Participation

This lengthy track record of private investment in infrastructure has produced substantial resources to facilitate future projects, including well-established frameworks and policies as well as embedded transaction experience in both the public and private sectors. There are a number of government and private organisations that have been created to promote and monitor infrastructure investment, including Infrastructure Australia, Infrastructure NSW, Partnerships Victoria, and Infrastructure Partnerships Australia. These bodies are sources of information on successful transactions but also on projects that have run into trouble, since not all assets in Australia have had smooth sailing. Between 2006 and 2013 four greenfield road tunnel projects, two in Queensland and two in New South Wales, became insolvent, largely as a result of overly-optimistic traffic forecasts. The current Sydney light rail PPP project is reportedly running more than a year behind schedule and more than AUD1bn over an initial budget of AUD1.6bn. The difficulties of such assets are closely scrutinised, with the lessons learned being taken into account for future projects.

Continuing Momentum

The transport sector doesn’t show any signs of slowing down. In the March 2019 election campaign in NSW, each of the two major parties pledged to build between AUD50bn and 70bn of new rail and road projects. With the federal budget expected to move back into surplus next year, the Commonwealth government is also keen to make a contribution. As part of the FY19 budget it committed AUD75bn towards new and upgraded transport infrastructure over the next ten years.

The energy sector has also seen a pick-up in activity in the last two years, with considerable demand for renewable energy including wind, solar, and hydro generation. While overall energy consumption is not growing quickly, the requirements are also driven by the closure of older fossil fuel generators, including the 1,600MW Hazelwood brown coal fired power plant in Victoria that was decommissioned in 2017. The charts below illustrate the proportion of electricity that was generated from renewable energy in FY18 as compared to FY08, with the increase almost entirely from wind and solar power. However hydro generation is expected to jump by 2024 as the federal government has approved the 2,000MW expansion of the Snowy Hydro pumped hydro scheme in New South Wales at a cost of around AUD5.1bn.

With half of the ten largest infrastructure fund managers globally based in Australia as of 2017, the country also benefits from knowledge gained in overseas markets. In particular, Macquarie Infrastructure and Real Assets (MIRA) and IFM Investors have each been active in the infrastructure sector for more than twenty years, and now have offices across APAC, Europe, and the Americas. The transfer of skills and experience within such firms helps share best practices and lesson learned across all regions of the world.

Conclusion

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