Client Update: Refreshing user charges in infrastructure funding
10 October 2012
In brief: A burgeoning national infrastructure deficit, and a growing, ageing and rapidly urbanising population, is causing a rethink about the role of user charges in funding Australia's infrastructure. Partner David Donnelly (view CV) and Lawyer Fiona Borrelli report.
The Infrastructure Finance Working Group report Infrastructure Finance and Funding Reform, released in June 2012, seeks to address the $700 billion shortfall in infrastructure funding facing Australia. The report has recommended the implementation of targeted measures, such as user charges, to increase the funding available for infrastructure investment. In doing so, the group has expressly recognised that increasing the role of user charges in the funding of infrastructure projects will require an informed public debate.
A number of well-publicised project failures stemming from 'ambitious' patronage forecasting has resulted in a reluctance on the part of the private sector to take full patronage risk for particular assets; most notably, roads. The report recognises the need for more flexibility in allocating patronage risk. It proposes an approach that will enable risk sharing to be customised to individual projects, and will enable private sector participants to assume a manageable exposure to patronage risk, based on the economics of the particular project.
Economic infrastructure (such as roads and ports) is suited to user charges. In such cases, the economic benefit derived from the asset (ie quicker and cheaper movement of goods) can be more easily translated into a financial benefit to the user (and a charge reflecting the value of the benefit).
Such charges increase the funding pool available for new infrastructure, and should aid the efficient allocation and use of assets by internalising, or allocating, the cost of the asset (or part of it) to users who are deriving the benefit from it.
The tailored use of user charges in order to assist in meeting Australia's infrastructure funding shortfall is likely to be well received by private sector participants. Users' reactions will be closely tied to the perceived benefits that the relevant infrastructure delivers.
Social infrastructure (such as hospitals and schools) is less suited to user charges and more suited to indirect subsidisation. For example, the cost of providing a public hospital may be subsidised through revenue derived from integrated private medical suites, car parks or food outlets.
The relationship between use (of the social infrastructure) and contribution (through the integrated economic infrastructure) is weaker in the case of subsidisation. Users of a public hospital may not use the integrated car park and users of the car park may not use the public hospital.
While less direct than user charges, subsidisation increases the funding pool available for new infrastructure, through commercial ventures that private sector participants are experienced in assessing and managing. This means that projects that might otherwise have struggled to be financially viable can offer adequate returns.
Infrastructure NSW's State Infrastructure Strategy, which was released last week, acknowledges that user pays models will be a necessary source of funding, and recommends that user charges should be adopted by the NSW Government, particularly by tolling motorways. The report recognises that user charges can be opposed by some sectors in the community and suggests that this might be overcome by providing clear linkages between the charge and a specific infrastructure improvement. It also suggests that the NSW Government reconsider patronage risk allocation for greenfield toll roads, by either sharing traffic risks, or blending greenfield and mature revenue streams to enable private participants to manage their risk exposure.
The report goes further and proposes that where necessary, tolls be introduced on roads which are currently free and are not the subject of upgrades, but which are part of a larger network in which upgrades are taking place. This proposal is likely to be more controversial than the traditional model where a toll is introduced to fund a specific upgrade (and which provides a clear link for the community between the road upgrade and introduction of a charge). Nevertheless, such an approach is not unprecedented in Australia, given that existing roads had tolls introduced for the development of Citylink in Melbourne.
By contrast, the Victorian Government has recently announced that despite Infrastructure Australia's recommendations, it is strongly opposed to introducing tolls on existing roads, including for funding a proposed East-West road link. Suggestions that it might do so have also been the subject of public backlash. However, debate regarding tolls on proposed new or upgraded roads is more measured, which is to be expected given the prevalence of toll roads in Victoria.
There is a role for user charges in funding appropriate infrastructure. The extent to which public-sector participants are able to accept patronage risk will vary from project to project, and flexibility and appropriate allocation of patronage risk is needed – an approach which governments appear to be taking on board. Public acceptance of user charges will be dictated by the apparent benefits delivered by the relevant infrastructure as well as the quality of the public debate surrounding the project.
- David DonnellyPartner,
Ph: +61 3 9613 8112
- Emma WarrenPartner, Sector Leader - Infrastructure & Transport,
Ph: +61 3 9613 8856
- Anthony ArrowPartner,
Ph: +61 3 9613 8723
- Leighton O'BrienPartner,
Ph: +61 2 9230 4205
- Nigel PapiPartner,
Ph: +61 2 9230 5179
- Ren NiemannPartner,
Ph: +61 7 3334 3005
- Michael HollingdalePartner,
Ph: +61 8 9488 3708