Key Points:

Infrastructure Australia wants the Federal Government to drive reforms by making its funding for a project contingent on the other government's delivery of reform.

Infrastructure Australia, the Federal Government's infrastructure policy advisory body, calls its most recent Australian Infrastructure Plan a "reform document", and it's clear its primary interest is in wide-ranging reforms to the way we invest in, deliver and use our infrastructure.

Like many observers of the Australian economy, Infrastructure Australia is frustrated by the level of reform achieved by successive governments, at all levels, over the last two decades. It says "we need to re-establish our reform credentials... If we don't, we face a future of congestion and constraint. Increasing bottlenecks and costly delays will mean it takes longer for Australians to get to work or home, our goods will take longer to reach port or shops, and the many services we rely on from infrastructure will decline." And no-one disagrees with this.

The problem is, in Australia most public infrastructure projects - roads, passenger railways, light rail, ports, water, electricity, hospitals, schools, courts, prisons, stadiums and entertainment precincts - are procured and delivered by State and Territory Governments, with or without federal financial assistance. Accordingly, it is generally the state and territory governments that determine how infrastructure will be funded, delivered, used and regulated.

Because of our three levels of Government, long history of private sector participation in public infrastructure, and short electoral cycles, meaningful reforms to the ways we invest in, deliver and use our infrastructure have proved to be very difficult. Looking just to the Commonwealth Government (even though it often holds the purse strings), let alone an advisory body like Infrastructure Australia, to bring about reform therefore won't work.

For example, the Asset Recycling Initiative attempts to encourage state and territory reform by recycling - new language for privatising - publicly owned infrastructure, and investing the proceeds in new, productive infrastructure, but take-up has been limited. While the New South Wales Government was able to get a mandate for its program, the Newman Government was defeated on a no asset sales platform. And we haven't seen much asset recycling elsewhere. So, carrots have been less than appetizing.

But Infrastructure Australia has a new strategy, involving a stick. It wants the Federal Government to drive (force) the delivery of reforms by making its funding for a project contingent on the other government delivering required reforms. The concept of tying federal funding to conditions aimed at implementing the then Commonwealth Government's reform agenda is not new - we have seen it before, but not in relation to infrastructure policy.

Although the Federal Government is yet to respond, we can expect it will embrace this concept, especially when it comes to additional funding, above existing projected allocations. Indeed, it's already flagged that State Governments might have to employ "value capture" - one of the reforms advocated by Infrastructure Australia - to qualify for Federal infrastructure funding.

So what are the reforms that State and Territory Governments may need to commit to if they're to receive Federal infrastructure funding?

The first type would be project-specific conditions, such as user-charging mechanisms (e.g. toll roads), value capture, wider land use outcomes (such as greater housing density or new public spaces), sustainability and resilience outcomes (such as emissions reductions from electricity generators and transport modes, or infrastructure that withstands extreme weather events), and the use of Building Information Modelling.

New governance tools would become mandatory. The National Governance Principles, to be developed by Infrastructure Australia, will articulate best practice planning and project decision-making processes (such as long-term infrastructure plans, minimum infrastructure service standards, project development studies and publication of full project business cases, meaningful community engagement, post-completion reviews throughout the lifecycle, and corridor preservation mechanisms). So no more rushed project announcements without decent business cases.

A national Infrastructure Performance Measurement Framework would provide routine measurement and publication of the performance and efficiency of projects, networks (eg. road networks) and systems (eg. public transport system).

Financing could be improved by more effective use of federal, state and territory balance sheets through public sector borrowing, and more transparent reporting of "good" verses "bad" debt.

Finally, wider reforms not specifically related to a project could also be in the mix. An obvious one would be improving the governance and operation of our cities by reducing urban sprawl, council consolidation, and updating long-term land-use plans. But they could also include microeconomic reforms in energy, telecommunications, water and transport: greater private sector involvement in owning and operating infrastructure; more flexible electricity tariffs; full deregulation of electricity and gas retail prices; whole-of-system road user charging; corporatized road network model; increased cost recovery on public transport services, or franchising them to create contestable markets.

No one imagines that this wish list will be simple to implement, but this new regime will be very attractive to the Federal Government, and State and Territory Governments should prepare themselves for change.

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.