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Down Under Looking Up: Financing Transport Infrastructure in the Land of Oz Cameron Gordon, Ph.D. Associate Professor of Economics University of Canberra Faculty of Business, Government and Law hIp://www.canberra.edu.au/faculKes/busgovlaw Director, Transport Ideas Network hIp://www.TransporKdeas.org Principal InvesKgator City University of New York Social Policy SimulaKon Center hIp://www.cunyspsc.org

What can Canada learn from Australia in transport privatisation?

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Transport Futures in Canada invited me to participate in an event discussing transport finance options for Greater Toronto (http://www.transportfutures.ca/funding/agenda) These were the slides I presented

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Page 1: What can Canada learn from Australia in transport privatisation?

Down  Under  Looking  Up:    Financing  Transport  

Infrastructure  in  the  Land  of  Oz  Cameron  Gordon,  Ph.D.  Associate  Professor  of  Economics  

University  of  Canberra  Faculty  of  Business,  Government  and  Law  

hIp://www.canberra.edu.au/faculKes/busgovlaw  

Director,  Transport  Ideas  Network  hIp://www.TransporKdeas.org  

Principal  InvesKgator  City  University  of  New  York  

Social  Policy  SimulaKon  Center  hIp://www.cunyspsc.org      

Page 2: What can Canada learn from Australia in transport privatisation?

PresentaKon  Overview  

•  Australia  v  Canada:  basic  comparisons  •  Australia  v  Canada:  transport  challenges  •  Australia’s  infrastructure  ‘gap’  •  Financing  transport  in  Australia  –  current  methods  

•  Transport  finance  policy  challenges  in  Australia  •  A  way  forward?  •  Prognosis  

Page 3: What can Canada learn from Australia in transport privatisation?

Australia  v  Canada:  government  •  Both  the  Canadian  and  Australian  legal  systems  are  based  on  English  common  law.  

•  Queen  Elizabeth  II  is  the  official  head  of  state  in  both  countries  and  is  represented  by  a  governor  general.    

•  Both  Australia  and  Canada  are  parliamentary  democracies  headed  by  prime  ministers.    

•  Both  countries  are  members  of  the  Commonwealth.  •  Both  countries  are  federal  systems  with  shared  powers  allocated  across  central  and  State  (Australia)  or  Provincial  (Canada)  governments.  

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Australia  v  Canada:  Economy  source:  2011  IMF  

         AUSTRALIA          CANADA  

•  GDP  (nominal)        $1.54  trillion          $1.77  trillion  

•  GDP  per  Capita            $66,371              $50,496  

•  GDP  Growth  Rate          2.1%            2.4%  •  InflaKon  Rate            3.4%            2.9%  

•  Public  Debt  (%  of  GDP)      26.7%            87.4%  

•  Labor  Force          12,050,000          18,700,000  

•  Unemployment  Rate        5.1%            7.5%  

•  Investment  (gross  fixed  %  of  GDP)  26.8%            22.5%  •  Industrial  ProducKon  Growth  Rate  -­‐0.1%            3.7%  

Page 5: What can Canada learn from Australia in transport privatisation?

Australia  v  Canada:  size  and  populaKon    source:  2012  CIA  Factbook  

AUSTRALIA    CANADA  

•  Total  Area  (sq  km)    7,741,220    9,984,670  •  PopulaKon        22,015,576    34,300,083  •  PopulaKon/sq  km        0.36        0.29      

•  Median  age          37.9        41.2  •  Life  Expectancy        81.9        81.48  •  PopulaKon  Growth  Rate  1.13%      0.78%  

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Australia  v  Canada  transport  system  characterisKcs    

AUSTRALIA  CANADA      NOTES  

•  Aircraj  departures    388,700    291,800    2005  CIA  

•  Air  transport,  freight              (million  tons  per  km)      2,444    1,526    2005  WDI  

•  Cars  per  1,000  people          485        459    1999  WDI  •  Vehicles  per  populated            land  area  (km2)      47.91    34.91    2001  WDI  •  Port  traffic  (TEU)    4,830,254  4,163,424    2005  WDI  

•  Goods  (mn  tonne-­‐km)      415,500              423,296    2010  OECD  •  Passenger-­‐kms  (mn)      296,058          507,587                2010  OECD  

•  Road  fataliKes  (per  mn)    61      65    2010  OECD  

•  CO2  emissions  from  fuel  combusKon        383            537    2010  OECD  

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Canada’s  NaKonal  Road  Network  

•  hIp://www.tc.gc.ca/eng/policy/acg-­‐acgd-­‐menu-­‐highways-­‐map-­‐2151.htm  

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Australia’s  NaKonal  Road  Network  

http://www.infrastructure.gov.au/department/annual_report/2003_2004/casestudies.aspx

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The  tyranny  of  distance  •  The  OECD  (2008)  

esKmates  that  distance  to  markets  and  natural  resource  endowments  have  a  significant  impact  on  GDP  per  capita  in  OECD  countries  (Table  2).  Taking  Australia  as  an  example,  the  OECD  finds  that  the  distance  from  Australia  to  world  markets  contributed  to  lowering  Australia's  GDP  per  capita  by  10.6  per  cent  on  average  between  2000  and  2004  relaKve  to  the  average  OECD  country.  Australia  is  the  OECD  country  most  disadvantaged  by  its  distance  from  world  markets,  while  the  centrally  located  countries  of  Belgium  and  the  Netherlands  benefit  the  most.4  

•  hIp://archive.treasury.gov.au/documents/1421/HTML/docshell.asp?URL=01%20Economic%20geography%20and%20economic%20performance%20in%20Australia.htm    

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PT  use  Canadian  v  Australian  ciKes  

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PT  use  (conKnued)  

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Australia’s  infrastructure  ‘gap’  •  One  recent  study  by  property  and  construcKon  consultancy  Davis  

Langdon  into  projected  growth  in  the  infrastructure  sector  examines  the  future  needs  aggregate  investment  in  road,  rail,  electricity  generaKon  and  distribuKon,  water  storage  and  supply,  sewerage,  telecommunicaKons,  ports  and  heavy  industry  and    reveals  annualised  investment  needs  by  2050  could  be  as  high  as  350  percent  of  today’s  annual  investment  (assuming  a  high-­‐end  populaKon  target  of  40  million).  (with  current  GDP  around  $1.5  

trillion).      

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Even  medium-­‐term  esKmates  of  required  Commonwealth  transport  spending  show  doubled  levels  required  in  the  next  5  to  10  years  and  these  are  minimum  esKmates.    

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How  to  pay?  

•  How  will  Australia  pay  for  its  investment  transport  needs  over  the  next  generaKon?  

•  This  is  a  big  quesKon  since  many  current  requirements  are  not  being  met.  

•  How  does  Australia  finance  its  current  system?  

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Australian  Transport  Federalism  •  Australia’s  current  transport  finance  system  is  inherently  local.    The  Commonwealth  government  invests  relaKvely  liIle  in  transport  (for  roads  about  23%  of  total  govt.  spending  in  2004-­‐05)  

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The  GST  •  Australia  adopted  a  Goods  and  Services  Tax  (GST)  in  2000.  This  is  a  Commonwealth  tax  but  under  the  Intergovernmental  Agreement  on  Commonwealth-­‐State  Financial  RelaKons,  all  the  GST  revenue,  minus  administraKon  costs,  goes  to  the  States.    

•  Thus,  the  States  do  have  access  to  this  revenue  but  the  tax  and  the  tax  base  itself  remain  under  Commonwealth  control.  Moreover,  as  in  the  US,  The  Commonwealth  Parliament  can  give  states  Ked  or  unKed  grants.    

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•  TradiKonally,  States  have  reigned  supreme  in  transport  policy.    

•  The  Commonwealth  government  has  expanded  its  role  over  the  past  twenty  years  through  providing  grants  and  GST  revenue  to  aid  transport  programs,  both  of  which  are  sKll  allocated  on  an  ongoing  basis.    

•  The  Commonwealth  also  provides  strategic  investment  on  an  ad  hoc  (and  ojen  poliKcal)  basis  for  specific  transport  projects.  

•  And  more  and  more  guidance  is  being  issued,  e.g.  on  urban  planning  (to  make  sure  local  plans  account  for  climate  change).  

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Australia:  a  leader  in  PPPs  •  Much  of  Australia’s  UPT  has  private  parKcipaKon,  parKcularly  in  Melbourne  and  Perth;  many  roads  are  privaKsed  and  all  major  airports  are  operated  by  private  firms.      

•  Australia  has  probably  one  of  the  most  extensively  privaKsed  transport  systems  in  the  world.  At  the  naKonal  level  the  rail  network  was  spun  off  into  the  Australian  Rail  Track  CorporaKon  which  now  maintains  and  operates  that  network  on  behalf  of  private  operators.    Similarly,  airports  were  corporaKsed  and  then  privaKsed  by  the  Commonwealth  Government,  mainly  in  the  form  of  sales  of  very  long-­‐term  leases  to  private  companies.      

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Tri-­‐parKte  investment  

Source:  OECD  Economic  Surveys:  Australia  2010  

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Source:  OECD  Economic  Surveys:  Australia  2010  

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A  long  history  of  land  taxes  •  Property  taxes  have  been  used  in  Australia  since  the  19th  century  and  consist  primarily  of  state  land  tax  and  municipal  rates.  The  state  land  tax  makes  revenue  available  for  the  state  with  no  direct  reimbursement  to  local  government,  while  municipal  rates  are  the  prime  source  of  revenue  to  local  government,  and  levied  on  a  range  of  tax  bases,  namely  unimproved  land;  land  value  or  site  value;  improved  value  of  land  and  buildings;  and  rental  value  of  land  and  buildings  (McCluskey,  Lim  and  Davis,  2007).    

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However,  relaKvely  limited  tying  of  land  value  to  transport  investment  

•  Perhaps  because  of  the  heavy  use  of  PPPs,  Australian  State  and  local  governments  have  done  relaKvely  liIle  with  mechanisms  such  as  value  capture,  value  uplij,  TIF’s  etc.  

•  Most  States  have  Development  CorporaKons  which  use  land  tax  revenues  to  help  pre-­‐fund  residenKal  and  commercial  building  but  have  not  used  this  mechanism  to  fund  transport  investment.  

•  The  NSW  government  considered  value  capture  to  finance  the  New  Southern  Rail  Line  (airport  rail  link)  and  the  ParramaIa  Rail  Link  (now  the  Epping  to  Chatswood  rail  line)  but  this  approach  was  not  proceeded  with.  

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Transport  policy  challenges  •  #1:  the  sheer  magnitude  of  needed  investment,  an  amount  that  is  well  over  poliKcally  or  even  economically  feasible  general  revenue  finance.  

•  #2:  PPProblems.  Since  States  run  ciKes,  it  is  States  that  have  been  responsible  for  privaKsing  most  urban  transport  hubs,  not  the  Commonwealth  Government.  This  has  created  a  patchwork  transport  system  driven  by  States  and  concentrated  in  municipaliKes.      

•  Moreover  not  all  investments  will  be  desirable  to  private  investors.    

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•  #3:  Complexity  and  perverse  incenKves.    The  current  transport  finance  and  governance  system  in  Australia  has  the  advantage  of  allowing  for  local  flexibility  but,  like  many  federal  systems,  also  creates  complicated  funding  flows.  

•  Matching  costs  with  beneficiaries  (and/or  cost-­‐imposers)  is  tenuous  and  thus  exisKng  transport  capacity  is  not  efficiently  used  and  new  capacity  is  ojen  not  invested  in  except  as  a  crisis  stop-­‐gap.  

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Australian  transport  funding  (for  roads)  

•  Source:  COAG  Road  Reform  Council  2011  

Page 26: What can Canada learn from Australia in transport privatisation?

•  #4:  Can’t  pay,  won’t  pay.    Of  course  Australia  is  like  every  other  democracy  in  that  consKtuents  generally  do  not  like  to  pay  for  things  if  they  can  avoid  it.  

•  This  tendency  is  perhaps  exacerbated  in  Australia  by  the  fact  that  there  are  many  high  tolls  on  urban  roads,  i.e.  those  built  by  PPPs.    So  travelers  ojen  think  that  they  are  paying  enough  already.  

•  Moreover  private  toll  road  operators  are  not  very  popular  with  the  public.    

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A  way  forward?  

•  Infrastructure  Australia  (IA)  was  launched  by  the  Commonwealth  Government  in  2008.    IA’s  mission  is  to  “develop  a  strategic  blueprint  for  our  naKon's  future  infrastructure  needs  and  -­‐  in  partnership  with  the  states,  territories,  local  government  and  the  private  sector  -­‐  facilitate  its  implementaKon”  and  to  “provide  advice  to  Australian  governments  about  infrastructure  gaps  and  boIlenecks  that  hinder  economic  growth”  

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Infrastructure  Australia  •  As  a  statutory  authority  of  the  Commonwealth  Government  of  Australia  IA  has  three  major  funcKons:  (1)  to  provide  a  list  of  “naKonally  significant  infrastructure  prioriKes;”  (2)  to  issue  guidance  on  “policy  and  regulatory  reforms  desirable  to  improve  the  efficient  uKlisaKon  of  naKonal  infrastructure  networks;”  (3)  and  to  assess  “opKons  to  address  impediments  to  the  development  and  provision  of  efficient  naKonal  infrastructure,  the  needs  of  users;  and  possible  financing  mechanisms.”  

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Focus  on  pricing  •  Much  early  aIenKon  focused  on  IA's    infrastructure  investment  prioriKes  list.    This  list,  arrived  at  ajer  an  infrastructure  audit,  idenKfied  a  total  of  $A60  billion  in  priority  projects  across  various  infrastructure  sectors.  However  now  IA  has  turned  towards  trying  to  begin  a  naKonal  dialogue  on  the  use  of  congesKon  pricing  to  finance  new  projects  and  manage  exisKng  capacity.  

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COAG  •  Also  very  acKve  has  been  the  Council  of  Australian  Governments  (COAG)  which  is  the  main  authority  through  which  Commonwealth  and  State  and  local  governments  plan  and  coordinate  various  iniKaKves.  

•  This  body  is  designed  to  do  forward  thinking  and  is  also  the  forum  where  leaders  meet  to  design  and  do  ‘deals’  on  major  federal  policies.  

•  COAG  has  an  acKve  agenda  on  road  finance  reform  –  though  no  major  breakthroughs  yet.  

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Prognosis  •  Whither  Australian  transport?  

•  Australia  has  a  great  deal  of  experKse  in  PPPs  and  these  will  need  to  be  a  major  part  of  the  funding  soluKon  there.  

•  However  its  public  sector  has  not  been  especially  proacKve  or  innovaKve  on  public  revenue  enhancements  outside  of  private  parKcipaKon.      There  is  much  room  for  growth  there.  

•  There  are  also  sound  and  respected  governmental  bodies  doing  good  thinking  –  but  liIle  take-­‐up  by  poliKcal  leaders.  

•  The  pieces  of  a  soluKon  are  there  but  nobody  wants  to  take  the  hard  knocks  to  put  them  together.