On 12 May 2009, Federal Treasurer Wayne Swan, guided by advice from Infrastructure Australia, unveiled the Rudd Government's commitment to outlay $8.4 billion over the coming years for transport infrastructure. Along with the infrastructure funding, the Government also announced its intention to amend the GST rules applicable to the transportation of goods and subsequently released a discussion paper on the proposal. In this article we look at these two Budget initiatives and whether they are likely to deliver the long-term benefits needed to place Australian industry in a strong position for the future.
Why the big spend?
Australia has made substantial progress in reforming its transport infrastructure markets over the last few decades. However despite the fact that government investment in infrastructure, as a proportion of GDP, has traditionally been high, over the last decade evidence has emerged of inadequate provision of road, rail and port infrastructure in key areas of the Australian economy1. A 2004 study by the Australian Council for Infrastructure Development found that a lack of investment in public infrastructure is costing the economy some $6.4 billion per annum in lost production2. Moreover, industry has recently expressed the following concerns:
- The demand on land freight infrastructure is forecast to double by 20203. Urban traffic congestion, without appropriate reform, is projected to cost the Australian economy around $20 billion by 20204 and currently costs approximately $16 billion per annum or 2% of national GDP5 – a cost especially significant given that transport directly accounts for about 5% of GDP6.
- It has been suggested that poor quality rail infrastructure has been delaying transit times and reliability of shipments. Insufficient investment into track and rolling stock infrastructure has resulted in rail networks across the country operating at above or close to capacity7.
- Long queues of bulk-carriers off the Australian coast at key facilities, evidencing suboptimal marine port capacity and transport bottlenecks servicing these ports. Further, increases in vessel sizes and needs for channel deepening have also put pressure on port capacity. The issue of port-side capacity has also reached critical levels8.
These problems have been exacerbated by the global financial crisis. With several States facing budget deficits and private enterprise paring back investment, the Federal Government has been called upon, for the first time since Federation, to lead the national coordination and funding of Australia's transport infrastructure9. Its answer has been to allocate $8.4 billion over the coming years to help fund projects on metropolitan rail networks ($4.6 billion), road ($3.4 billion) and port infrastructure ($0.4 billion). The funds will be drawn from monies set aside for the purpose of 'nation building', including the Building Australia Fund. The spending is aimed at supporting jobs in the shortterm while lifting the efficiency and capacity of Australia's transport networks for the long-term.
Where will the money go?
Metro Rail Networks
- Regional Rail Express – A 40km dual-track link from West Werribee to Southern Cross Station in central Melbourne via Sunshine. Construction is expected to commence in 2010 and is scheduled for completion in 2014. The Government is providing $3.2 billion towards this project over six years, which is worth $4.3 billion in total.
- East-West Rail Tunnel – $40 million over two years from 2011-12 will go towards pre-construction planning, design and engineering works. Construction is expected to commence in 2012 and is scheduled for completion in 2018.
- Gold Coast Light Rail – $365 million over 2009-10 will go to developing a 13km light rail transit system for the Gold Coast. The new rail system will run from Griffith University (Gold Coast Campus) to Broadbeach via Southport. The total cost of this project is $894 million with further investment to be provided by the Queensland Government, Gold Coast City Council and the private sector. Construction is expected to commence in 2011 and is scheduled for completion in 2013. The Government is proposing to take an equity stake in the project.
- Brisbane Inner City Rail Feasibility Study – Two new rail tunnel corridors through inner city Brisbane have been identified to meet growing demand for rail services in Brisbane. The Government is committing $20 million towards a detailed feasibility study to help determine the optimal rail route and business case for the project. The study is expected to be completed in 2010.
- Gawler Rail Line Modernisation – The Gawler line is an important part of Adelaide's metropolitan rail network, carrying around 34% of Adelaide's rail passengers. The Government is investing $294 million over five years towards the acceleration of renewal projects on the Gawler line which has 24 stations.
- Noarlunga to Seaford Rail Extension – $291 million over five years will go towards extending Adelaide's rail line to the south of the city from Noarlunga to Seaford. This project will provide access to public transport for households in Adelaide's growing southern suburbs. Both projects are expected to commence in 2010 and are scheduled for completion in 2013.
- Northbridge Rail Link – The Government is investing $236 million over six years to sink the central city section of the Perth to Fremantle railway line and construct a new rail platform. Finalisation of tenders is expected in late 2009 with construction to be completed mid-2014.
New South Wales
- West Metro – The Government is investing $91 million this financial year in the 25km Sydney West metropolitan rail line from Central Station to Westmead Hospital. Funding will be provided for pre-construction, planning, design and engineering works. This should ensure the project is ready for public tender in 2010.
- Bruce Highway – Cooroy to Curra (Section B) Duplication – The Government will provide $488 million over four years to upgrade the Bruce Highway. This will address capacity, safety and route reliability issues relating to a 12-kilometre section between Cooroy and Curra in south-east Queensland. Construction is expected to commence later this year and is scheduled for completion in 2012.
New South Wales
- Kempsey Bypass – The Government is investing $618 million over five years for the construction of a 14.5km dual carriageway bypass of the Kempsey and Frederickton townships on the mid-north coast of New South Wales. This means building a new road to the east of the existing Pacific Highway. Construction is expected to commence in 2010 and is scheduled for completion in 2014.
- Hunter Expressway – The Hunter Expressway will receive $1.5 billion in funds over six years for a new dual carriageway between the F3 and the New England Highway near Branxton. The Government estimates that the total cost for this project will be $1.7 billion. The New South Wales Government is contributing $200 million to this project. Construction is expected to commence in 2010 and is scheduled for completion in 2013.
- Ipswich Motorway – The Government will provide an additional $884 million over six years to undertake additional works on the Ipswich Motorway to improve road safety and relieve congestion. Construction of the project is underway and is scheduled for completion in late 2012.
- O-Bahn Track Extension – $61 million over four years will go towards this Adelaide track extension – the most highly used public transport corridor in metropolitan Adelaide. Construction is expected to commence in 2009 and is scheduled for completion in 2011.
- Oakajee Port – The Government is committing $339 million for the development of Oakajee Port. The total cost of the development is $4 billion. Construction is expected to commence in 2010-11 and to be completed in 2013-14. DLA Phillips Fox is presently advising on this project.
- Darwin Port Expansion – $50 million has been allocated towards the development of the Darwin Port to accommodate large ships suited to the transportation of bulk resources and commodities.
Like with the Gold Coast Light Rail project, the Government's investment into these port projects is proposed to be in the form of an equity investment, pending recommendation by Infrastructure Australia and the establishment of an appropriate equity vehicle.
The way forward
The Government has made a commitment to deliver the type of infrastructure that should assist Australia's recovery from the current economic challenges and put Australia in a strong position to seize opportunities when the global economy begins to recover. According to the Budget papers, the Government's investment in nation building infrastructure will support an average of around 15,000 jobs each year, peaking at around 18,000 in 2011-12.
However, many challenges lay ahead. Further to the problems mentioned at the outset, a report soon to be released by Infrastructure Partnerships Australia predicts that as the population increases over the next thirty years, Australia's freight demands will treble. This will require some $62.5 billion to be spent each year on transport infrastructure to meet additional demands10. Infrastructure Australia has also noted that the way government works with the port industry requires urgent changes – reform is particularly needed to unify regulations among different States which cause businesses unnecessary complications11. Similar reform is required in road and rail12.
The fact that the Government was unable to provide funding to all projects identified as 'priorities' by Infrastructure Australia, and many more in the pipeline, signifies that there is much to be done on the road to recovery and that the Government cannot do this alone. The $8.4 billion will go some way towards successful delivery of the projects, but represents only a fraction of the total cost. A major challenge for the Government will be to instil sufficient confidence in States (several facing budget deficits) and the private sector (cautious amid tight debt and credit markets and recent high-profile failures of Public Private Partnerships) to pick up the balance. Going forward, the Government may need to provide greater incentives, especially to the private sector, to spur investment.
Notably, despite port infrastructure being allocated a relatively small portion of the Government's $8.4 billion outlay, the Government's commitment towards developing the nation's port infrastructure is clear. Funding for the Oakajee Port and Darwin Port Expansion came amid Infrastructure Australia being 'not persuaded that public investment in port...capacity is currently justified'13. The Government's proposal to obtain an equity stake in these projects also signifies that it wishes to play a more active role in the projects.
Overall, the Budget has provided an important opportunity to significantly reform and develop transport infrastructure across Australia. Cooperation between governments at State and Federal level will be essential if the Budget's ambitious transport vision is to be fully realized, as will the public sector's ability to engage the innovation and capital of the private sector.
Proposed GST amendments to crossborder transport arrangements
GST has been in place in Australia for almost nine years and it continues to raise difficult and complex issues. One problem area has been the international transport of goods. So many may welcome the Government's announcement on Budget night that it will amend the GST rules applicable to the transportation of goods. The changes will primarily impact customs brokers and freight forwarders and are proposed to apply from 1 July 2010. A discussion paper on the proposal has been released with submissions due by 17 June 2009.
There are proposed amendments for both the import and export of goods.
Under current GST rules, the international transport of goods is generally GST-free. However, GST-free treatment only applies to the transport of goods from a place outside Australia to the port or airport of final destination in Australia. This causes problems for goods delivered under DDP or DDU terms.
To illustrate the problems, assume an international transport company is contracted to deliver non-postal goods from London to Canberra under DDP terms. The international transport company's supply of transport would be GST-free from London to the point of consignment (say, Sydney airport). However, the company's supply of transport services from Sydney to Canberra would be taxable. This requires the international transport company to conduct a complex apportionment exercise to determine its GST liability. Further, the international transport company (which may not have any presence in Australia) must register for GST, charge GST to the client, issue a tax invoice and remit GST in its GST return.
In addition, the international transport company normally uses a domestic transport company to undertake the domestic leg. Under current rules, the domestic transport company's supply of transport services to the international transport company is taxable.
Many international transport companies were unaware of these obligations and did not charge GST to their customers.
The Government proposes to amend GST law so that this domestic leg is now GST-free. This treatment will apply to both the domestic leg of the services provided by the international transport company to its customer and the domestic transport company's services.
At this stage, the amendments are not retrospective, meaning many international transport companies will continue to have a significant GST exposure going back a number of years.
In addition, rather than tax the domestic transport leg, it is instead proposed that GST will be paid on the value of the domestic transport by including this in the import value of the goods (GST on importation of goods is calculated on the import value). This means that the importer will account for GST on the value of the domestic transport when it imports the goods. Accordingly, under the proposal, the import value of the goods will increase, which will result in a higher GST liability for the importer (although, where the importer is a business, it normally claims back the GST, so the GST will not be a real cost in these circumstances).
The discussion paper indicates the proposal will require some changes to Customs' Integrated Cargo System and related recording systems.
The current GST rules also create complexities for exports of goods. As discussed above, the international transport of goods is generally GST-free. However, only the transport of the goods after they are packed in a freight container is GST-free. The transport of goods before this point is taxable. This requires the international transport company to conduct a complex apportionment exercise to determine its GST liability. Further, it must register for GST, charge GST to the client, issue a tax invoice and remit GST in its GST return.
To resolve this problem, the Government proposes to amend the rules so that the pre-containerisation leg of the transport will be GST-free.
Problems also arise for domestic subcontractors involved in transporting goods, some of which are ultimately exported and others that are for domestic consumption. The subcontractor currently needs to apportion the transport into taxable and GST-free components.
To avoid this outcome, the Government proposes to amend the rules so that the domestic transport leg of an export chain provided by a domestic transport subcontractor will be subject to GST. This change will remove the need for the domestic subcontract service supplier to know the ultimate destination of goods (that knowledge currently only being required for GST purposes).
1 Report by Infrastructure Partnerships Australia (July 2007): Australia's Infrastructure Priorities: Securing Our Prosperity, pp 19, 28-29.
2 Australian Government, Media Release AA024/2008 (20 March 2008).
3 Above n 1, p 21.
4 Australian Government, Nation Building for the Future (May 2009), p 5.
5 Above n 1, p 33.
6 Australian Government, A Report to the Council of Australian Governments (December 2008), p 22.
7 Above n 1, pp 21, 33.
8 Above n 1, p 21.
9 Australian Government, Media Release BUDGET-IBFRA 09/2008 (13 May 2008).
10 Report by Infrastructure Partnerships Australia, Meeting the 2050 Freight Challenge (release date not yet available); Adele Ferguson, Big-ticket projects point way to resurgence, The Australian Newspaper (May 13, 2009).
11 Australian Government, National Infrastructure Priorities (May 2009), p 18.
12 Above n 1, p 37.
13 Above n 11.
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