Australia
The private side of public investment

 


The private side of public investment

Public infrastructure is an essential part of our economy.

And it's time for Australian governments to hand over more responsibility for its provision to the private sector.

However, while there has been increased recognition in the benefits of private sector involvement over the past decades, the sector's involvement remains cautious.

This has to change and governments need to lead the way; because with targeted investments, the short and long-term economic benefits can be profound.

But first, both business and government must determine if our existing tax framework can attract infrastructure investment (and if not, how).

 

Angus Wilson
"The right tax framework will ensure that Australian infrastructure continues to offer attractive investment opportunities and certainty for private sector investors."

Angus Wilson
Partner, Tax

A look at today's investment activity

On the 13th of March 2014, the Australian Government's Productivity Commission released their draft report into Public Infrastructure, which examined the:
  • provision, funding and financing of public infrastructure projects
  • scope for reducing infrastructure costs, and
  • potential benefits of private sector investment.

It is a timely reminder of today's level of infrastructure activity and a rallying call for the private sector and Federal and State Governments (who should be aligned on their priorities) to strive together to unravel the complexities and better evaluate the issues involved.

All of which, we believe, will increase as our population, cities and freight tasks grow, as urbanisation and climate change influence infrastructure development, as the need for year-on-year productivity growth continues, and while governments continue to reduce infrastructure spending because of debt and budget deficits.

Only once these challenges are addressed can everyone make the most of the opportunities that efficient infrastructure projects can deliver. And the opportunities and reasons for private investment are there, as relevant observations and recommendations contained in the report highlight: 

  • Private capital markets will finance most projects at the 'right price'.
  • Subject to appropriate processes to ensure value for money, governments should privatise electricity generation, network and retail businesses and major ports.
  • Governments should invest more in the initial concept design specifications to help reduce bid costs.

These are particularly relevant; especially for organisations in the infrastructure and mergers & acquisitions space; given the volume of Public Private Partnerships, government divestment, and foreign and domestic private investment transactions currently taking place.

Investing in the right framework

This all raises a key question: how can Australia’s existing tax landscape achieve many of the Productivity Commission’s recommendations?

One fundamental step that Australian governments can take to support private investment in infrastructure assets (particularly foreign sourced and often from pension funds), is to ensure an appropriate tax policy is in place.

With the right tax framework; which is balanced to ensure foreign and domestic investors can bid competitively; Australian infrastructure can continue to offer both investment opportunities and increased certainty for private sector investors.

Examples of areas that may require further consideration include:
  • domestic restrictions on superannuation fund investments
  • treatment of certain trust income (i.e. tax deferreds)
  • appropriate managed investment trust withholding tax rates
  • level and administration of thin capitalisation gearing limits.

Going forward, it is essential to keep it mind that there is no 'one-size-fits-all' approach or 'quick fix' to improve infrastructure provision.

Solutions to Australia's infrastructure challenges will ultimately come from a combination of effective planning, prioritisation, new government funding and policy updates (that reduce the high cost of provision) and increased private sector investment.

We cannot (and should not) underestimate the importance of infrastructure to Australia's economy and social prosperity. For all governments, ensuring private investment is encouraged must be a priority.

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