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Budget breakdown 2017: infrastructure in focus


The recent federal budget outlined a $75 billion program of infrastructure spending over the next 10 years.



The government’s latest announcements regarding the pipeline of infrastructure projects are also in line with Infrastructure Australia’s most recent priority list1. As Infrastructure Australia’s Australian Infrastructure Plan notes, the population is expected to grow to more than 30 million by 2031. This will support demand not just for existing infrastructure, but also for new facilities to help drive the economic growth that the rising population will generate.

In handing down the budget, Treasurer Morrison said, “It is important to invest in infrastructure, but we have to make the right choices on projects, as part of a broader economic growth strategy.”

The federal government’s support for Sydney’s second airport at Badgerys Creek in western Sydney, the inland Melbourne to Brisbane rail freight corridor and other transport-focused projects suggests the government is serious about making choices.

Greater federal involvement marks a significant departure from previous government policy on infrastructure development. The traditional approach involved providing grants to state governments to build infrastructure, while leaving the choice of project to the states.

The federal government will require state government co-operation in the development of connecting infrastructure to ensure a smooth rollout of its infrastructure program.

While the budget announcement provides no specific guidance, the federal government’s focus on infrastructure development should seed a pipeline of valuable future infrastructure projects.

Such assets, when developed, are likely to be attractive to private sector investors. Future asset sales would help take the pressure off the federal government’s budget down the track by recycling sale proceeds which can be used to fund future infrastructure projects.

As the budget papers outline, “The government has finalised or committed to agreements with four states and territories under the Asset Recycling Initiative, worth $3.3 billion.”

This will support $23 billion in additional infrastructure investment in projects including the Sydney and Melbourne Metro, the light rail in Parramatta, regional road and rail freight corridors across NSW and Victoria, and flood mitigation works in the Northern Territory.

Until now asset recycling has previously been largely a state government led initiative, limited by state balance sheets. Using the federal government’s larger balance sheet could have a much greater impact on reducing Australia’s infrastructure backlog.

Another significant announcement concerned a proposed purchase of the Snowy Hydro scheme from the Victorian and NSW governments. This would likely allow a $2 billion expansion program to take place, providing greater energy security in the eastern states.

In exchange, the federal government will ask the two state governments to reinvest funds procured through the sale of Snowy Hydro in priority infrastructure projects.

As Morrison noted when he handed down the budget, “The Commonwealth is open to acquiring a larger share or outright ownership of Snowy Hydro from the NSW and Victorian state governments, subject to some sensible conditions.”

Among other initiatives Mr. Morrison also announced:
  • A $2 billion Water Infrastructure Loan Facility that will provide new investments in dams and pipelines. This is an extension of the existing National Water Infrastructure Development Fund and the Northern Australia Infrastructure Facility.
  • $1.6 billion in infrastructure funding to hospitals in Western Australia.
  • Assistance for a range of significant rail projects in Queensland, Victoria and South Australia.

In AMP Capital’s view, the implicit change in policy, whereby the federal government will take a more central role in national infrastructure development, is more important than the headline numbers.

The pragmatic approach the federal government has proposed to removing logjams in the development of nation building infrastructure projects is expected to materially assist Australia’s future growth and prosperity. From an infrastructure investor’s perspective, investment opportunities from an expansion of asset recycling will take some time to emerge. Down the track, however, this may well drive additional opportunities for private sector investors.

However, in the shorter term, existing investments should benefit from the economic stimulus from the construction phase of the projects.

1Australian Infrastructure Plan: Priorities and reforms for our nation’s future, February 2016

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