2020 Australian Federal Budget - infrastructure commentary

In the 2020 Federal Budget, the Commonwealth Treasurer announced an additional A$10bn in funding for infrastructure projects over the next four years, increasing the post COVID-19 infrastructure commitment to A$14 billion in ‘new and accelerated’ projects. Importantly, the revised plan is designed to create an additional 40,000 new jobs and stimulate the economic recovery.

The key infrastructure developments highlighted in the Budget include:

• A$7.5bn to the transportation sector across all states;
• A$3bn to ‘shovel ready’ projects on a ‘use it or lose it’ basis; and
• A$2bn for new projects under the National Water Infrastructure Development Fund, taking the total commitment to A$3.5bn.

Some points to make in relation to the commitments are:

(1) All infrastructure spending is good infrastructure spending!

Improving the nation’s economic arteries

Firstly, investment in the nation’s infrastructure improves the economy’s ‘arteries’, aiding economic growth and job creation. As we look to emerge from the COVID-19 recession, this will be critical in the economic recovery. The spending announced in this Budget is very much designed to achieve the goal of making the economy more efficient and productive. Projects such as the A$560m New England Highway Singleton Bypass in NSW, the A$750m Stage 1 of the Coomera Connector in Queensland and the A$528 million in upgrades to the Shepparton and Warrnambool rail lines in Victoria should all contribute to improving the nation’s economic efficiency and productivity, while also creating jobs during and after construction.

Developing a pool of privatisation candidates

Government infrastructure spending also lays the groundwork for a pool of potential future privatisation candidates once the assets are fully developed, leading to growth in the infrastructure investment asset class. While this Budget did not announce any headline-grabbing new ‘mega’ projects, there are a couple of announcements worth noting.

• The AFR reports the 2020 Budget disclosed a future equity injection (no dollar amount provided) into the Australian Rail Track Corporation (ARTC) to deliver the A$10 billion Melbourne-to-Brisbane Inland Rail project. The inland rail will be principally freight, and there are freight-oriented private railways all over the world.
  
  The ARTC is a Commonwealth owned statutory corporation, established in July 1998, that manages most of Australia's interstate rail network – around 8,500 kilometres of track. The ARTC charges ‘above track’ rail companies for the track ‘service’ provided. It is a clear ‘User Pays’ asset that could be a privatisation candidate in the future, particularly if the Inland Rail is completed.

• Outside the Budget, the recently announced A$4.5 billion NBN upgrade to make the network almost 100% fibre suggests the Federal Government has a real privatisation agenda here. Making the service all fibre should considerably improve its potential sale value. However, it should be noted that this upgrade largely restores it to a specification very similar to what was originally proposed by the Rudd/Labor government before it got a haircut at the hands of Tony Abbott and Malcolm Turnbull. So the Government did endure a short amount of political pain as a result of this decision. However, this would be well and truly forgotten if a successful privatisation is achieved.

Other potential privatisation candidates from previous Budgets include the:

• A$5.3 billion Western Sydney Airport (the ‘Nancy-Bird Walton Airport’),which is under construction.This will be Sydney’s second major airport and is an obvious candidate for privatisation. Airports have been privatised all over Australia and indeed all over the world. While COVID-19 has obviously hurt air travel in the short term, by the time this asset becomes available for sale it is likely the COVID-19 air travel dip will be confined to the history books;

• A$2 billion Melbourne-to-Geelong Fast Rail – depending on the economics of this project it is a possible candidate for privatisation; and

• A$0.8 billion Gateway Motorway Extension in Brisbane: Transurban already runs tolled motorways in Brisbane and this may be a logical extension.

(2) Big Government Debt: using privatisation capital to reduce public debt in ‘big chunks’

There is no doubt this very expansionary Budget was warranted given the COVID-19 recession we face. Budget papers forecast gross government debt will reach A$1.138 trillion by 2024, or 51.6% of GDP. While this is very high by Australian standards, it is not excessive on a global basis as shown below. For a selection of countries this table reflects public debt as a percentage of GDP as at 2019, and therefore prior to any COVID-19 stimulus flowing into the sovereign debt numbers. So Australia, at 51.6% in 2024 (i.e. including our COVID debt), is not excessive by international standards.

However, this is not to suggest that public debt levels won’t be a focus of future Australian governments. Indeed, this is exactly where public sector asset privatisations will come in to play, potentially providing government big licks of fresh capital to repay public sector debt in an accelerated manner.

(3) Finally, a word of caution on government infrastructure spending promises

In the 2018 Federal Budget, an A$75 billion 10-year infrastructure investment program was announced; an A$100 billion 10-year program was announced in the 2019 Budget; and this has now increased to A$110bn. More broadly, big infrastructure investment plans have been a ‘staple’ in virtually every Commonwealth and State Budget for the last 20-30 years. We understand the announced spending in last night’s Budget is incremental to earlier commitments.

However, unfortunately public sector reporting generally does not provide clear accountability for these promises, and the question is always if or when the money actually gets spent. More recently, expenditure/progress appears to be lagging expected timetables, although things are slowly getting done (e.g. the Sydney Light Rail and Sydney Metro). Importantly, in this Budget the Government prioritised accelerated spending, with a number of initiatives designed to stimulate investment over the next four years including ‘use it or lose it’ programs. We hope this fast tracks the much needed infrastructure investment pipeline.

We at 4D believe there is no economic growth recovery without roads, railways, pipelines, power transmission networks, communication infrastructure, ports and airports. Infrastructure should be a key component of the post COVID-19 stimulus and we were happy to see the new and accelerated initiatives last night.

Invest across the globe

4D, a Bennelong Funds Management boutique, invests in listed infrastructure companies across all four corners of the globe. For more insights on global infrastructure, click the 'FOLLOW' button or visit 4D’s website.