In the same way as a telecommunications carrier enjoys a regulated monopoly return, the same logic could be applied to the provision of substantial economic infrastructure.
Historically, infrastructure delivery is planned, delivered and funded by governments, but with the constraints now affecting government budgets, new forms of financing are being explored.
Since public infrastructure shares many characteristics with telecommunications carriers, the infrastructure policies of telecommunications carriers could be a solution.
Defining Australia's public infrastructure problem
Historically governments have taken the lead role in providing and funding infrastructure in Australia. Although the private sector has become more involved in financing and running infrastructure, generally privatisation of important public assets has been and continues to be politically unpopular.
The recent budget cuts highlight the Federal Government's reduced appetite for debt, which will inevitably constrain its capacity to invest in new infrastructure projects and maintain existing infrastructure assets.
There is now a clear trend towards reducing government ownership of infrastructure assets, and ensuring that government investment in infrastructure be tied to transparent cost benefit analysis, and charging users for the services provided by infrastructure.
There are two main parts to Australia's public infrastructure problem.
The first part of the problem is reflected in public infrastructure deficiencies. The nation's infrastructure is in decline, and with it, the efficient functioning of its cities and regional areas.
The second part that, while State Governments are best placed to deliver public infrastructure, because of their connection with the communities to whom they supply relevant services, they simply don't have enough money to do it, given the vertical fiscal imbalance between them and the Federal Government.
Infrastructure assets' similarity to telecommunications assets
Public infrastructure assets share many characteristics with the infrastructure assets of telecommunication carriers, which provide a basis for State Governments to act like telecommunications carriers in making infrastructure investment decisions.
Part of a network
A telecommunication carrier's infrastructure is a network of copper and fibre optic cables and related technology. In a similar way, public infrastructure can be viewed as a network too, one made of electrical wires, gas lines, water pipes, roads and rail.
Most public infrastructure assets are natural monopolies. Natural monopolies occur when no competitive market exists because it is more efficient for one provider to supply the relevant market than for two or more providers to do so.
The sheer size and cost of most infrastructure means that large economies of scale are required to produce an efficient outcome, and duplication is wasteful. These characteristics create a natural barrier to competition, and are why providing public infrastructure has traditionally been the domain of government.
However, being a natural monopoly doesn't have to mean that a public infrastructure asset is destined to be the sole domain of governments, as is arguably demonstrated by telecommunications carriers.
A telecommunications carrier provides the infrastructure which is used to provide telecommunication services. It has the characteristics of a natural monopoly because it is inefficient to duplicate the infrastructure in order to create a competitive market. However there is clearly a free market in telecommunications services, because multiple telecommunications service providers are allowed to share the existing infrastructure to provide telecommunications services to their respective customers.
As a result of their natural monopoly, the Federal Government imposes a regulated market on the telecommunications carriers.
Public infrastructure is not subject to a regulated market per se, but political necessities, such as the need to provide equitable access to basic services to users regardless of their ability to pay, potentially have the same effect on access and price.
Approach to investing in infrastructure
Telecommunications carriers continually invest in new and existing infrastructure – if they didn't, they couldn't maintain service levels, reduce costs and satisfy current and future customers. Failure to invest in public infrastructure has a similar effect on a city's population, cost efficiencies and economic growth.
A telecommunications carrier benefits from agglomeration economies which occur when a large number of users are able to share the same infrastructure thereby reducing the cost of delivery to each user. The telecommunications carrier is then able to provide the service to more remote locations. Although the provision of telecommunications infrastructure to rural areas is less efficient because there are less users and delivery costs are higher, there is a recognition that absorbing the higher cost of providing that service has many benefits such as broadening its market, creating loyalty and providing an expanded service to its customers. It is the infrastructure which services the many which provides the opportunity to provide infrastructure to service the few.
The same principle applies to governments, because it is the provision of public infrastructure to the cities that provides the opportunities to provide infrastructure to the regional areas, because of the economic growth it generates and despite the higher cost of providing regional infrastructure there are economic and social benefits in doing so.
... and the differences
There are two significant points of difference in telecommunications carriers' approach to investing in infrastructure, and it is these points of difference which are exactly the issues a response to Australia's infrastructure problem needs to address.
The first is that the vertical fiscal imbalance discourages State Governments from investing in public infrastructure, because increased revenue flowing from economic growth bypasses the States and goes straight to the Federal Government.
The second is that the telecommunications network is supplied on a user-pays basis. For some infrastructure assets, user charges are appropriate. As they are capable of generating a commercial return, these assets can attract private sector involvement.
In some cases, user charges will not be appropriate, however, the service will still provide net economic or social benefits. In these cases, user charges, even with transparent pricing with hypothecation funding, will not be appropriate. Value capture mechanisms provide an innovative way of linking delivery with use of an asset beyond the direct user to a broader group of beneficiaries and spreads the cost of service delivery across them.
Investments in infrastructure by a telecommunications carrier will be funded from its profits, or where existing profits are deficient, from future profits (the projections of which can be used to obtain finance from banks or investors). It is therefore reasonable to consider funding public infrastructure from future increases in tax revenue.
However the application of these approaches will always be problematic because of the different taxes levied by different levels of government in Australia.
Economic infrastructure underpins the performance of Australia's economy. It is imperative that we continually invest in and maintain our stock of infrastructure to ensure Australia remains globally competitive.
In the same way as a telecommunications carrier enjoys a regulated monopoly return, the same logic could be applied to the provision of substantial economic infrastructure. Hypothecation of those user charges to the investment in and maintenance of the asset means that the community is more likely to recognise the benefit of investing in and paying for that asset.
The public prefers a more transparent link between the two. Politicians undoubtedly will be attracted to propositions which electorally are more compelling.
The challenge is that purely having a linkage between revenue and expense doesn't necessarily account for externalities (such as environmental impacts).
Not all infrastructure is capable of hypothecation, but certainly where it is it should be required to be considered in making investment decisions.
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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.