Insights

In brief - Public policy needs to shift to the development of an integrated infrastructure planning and funding model

We believe we are paying too much attention to the small details of the infrastructure framework and that we must focus instead on the bigger picture, being the development of a new integrated infrastructure planning and funding model.
 
Infrastructure planning and funding is critical to the construction and property development sector and is having an enormous effect on our state.
 
In this article we would like to provide some broad policy guide posts for the future of infrastructure planning and funding for development in south-east Queensland over the next 20 years. We work from the premise that you have to understand the past to know the present and plan for the future.

To develop these policy guide posts for the future, we first must take a step back in time to remind ourselves of Queensland's economic models in the past.

Queensland's economic model historical foundation

Queensland's current economic model was established by the Bjelke-Peterson coalition government of the 1970s and was based on the simple principle of lower taxes and charges being funded by mining royalties (Knox 2012).

The economic model involved five elements (Eadie 2014:19):
  • First, mining royalties were distributed to the regions and cities and towns as state government grants for development infrastructure;
  • Secondly, local governments used state government grants together with rates revenue to build development infrastructure for future development;
  • Thirdly, local governments levied future development with infrastructure charges to recover the rates revenue but not the state government grants expended by local governments in building development infrastructure;
  • Fourthly, the resulting cheap residential land and lower taxes attracted population growth, resulting in Queensland experiencing an 88 per cent increase in population over 20 years, compared to the 50 per cent Australian average; and

Finally, many of the new Queenslanders brought retirement savings and set up a small business, which drove growth in south-east Queensland and Brisbane in particular.


The Beattie and Bligh Labor governments subsequently utilised the economic model to fund increased expenditure on education and health services.

This increased expenditure on education and health services (as opposed to economic infrastructure) was predicated on rising mining royalties, in particular from coal mining in Queensland's regions.

Challenges to the economic model

By 2009, the Queensland economic model was coming under significant challenges from two areas:
  • First, the global financial crisis significantly reduced coal prices and exports;
  • Secondly, the Labor Federal government introduced taxes, in particular the mining tax and the carbon tax, which created significant uncertainty in mining investment, particularly in coal in Queensland.

The resulting damage to the Queensland budget in terms of reduced revenue from mining royalties was in the order of $400 million by 2011 (see Table 1).
 
Year

Budget coal royalties

($ million)

Actual coal royalties

($ million)

Gap

($ million)

2008 1,020 1,035 15
2009 3,213 3,103 -110
2010 1,433 1,786 353
2011 2,766 2,357 -409
2012 2,755 2,386 -369

Table 1: Queensland's mining royalty gap - 2008 to 2012

Bligh government's policy response

The Bligh government was, therefore, confronted with increasing spending on education and health services (as opposed to productive economic infrastructure) with increasing deficits.

Its policy response to the impending fiscal crisis was fourfold:
  • First, the privatisation of state government assets;
  • Secondly, the cutting of state government grants to local governments to fund development infrastructure. For example, the average annual subsidy was reduced from $480 million in the period from 2002 to 2010 to $225 million in the period from 2011 to 2013 (LGAQ 2013a:iii);
  • Thirdly, local governments were empowered to levy infrastructure charges under priority infrastructure plans from developers to recover the abolished capital subsidy program of the state government. In effect the state government's subsidy of up to 50 per cent for development infrastructure was passed on to developers;
  • Fourthly, the resulting significant increases in infrastructure charges when combined with suppressed housing demand and reduced financing in the context of the global financial crisis adversely impacted on development feasibility and housing affordability, resulting in the introduction of capped infrastructure charges and capped water charges for SEQ water businesses.

Queensland's economic model broken

The Bligh government's policy responses had the effect of breaking the Queensland economic model in four respects:
  • First, state government per capita investment in development infrastructure dropped significantly below that of other Australian states. This is shown in Table 2
State Investment per capita ($)
New South Wales 76.35
Victoria 9.25
Queensland 3.95
•Secondly, the abolition of the capital subsidy program, capping of infrastructure charges and reduced income from SEQ water businesses is estimated to have reduced local government revenues by $800 million a year (LGAQ 2013a:iii);
  • Thirdly, capped charges were also utilised unwisely by some local governments, particularly in rural and regional areas, to increase their infrastructure charges beyond the short term marginal cost of the provision of that infrastructure, such that their capped charges functioned as a tax on development;
  • Finally, the political fallout of privatisation brought down the Bligh government in March 2012, while the combination of local taxation increases and reduced economic activity in the construction and property development sector resulted in 44 mayors being voted out of office in the April 2012 elections — the largest turnover in local political leaders since World War II (LGAQ 2013a:2).

Newman government's challenges

The Newman government confronted five significant challenges:
  • First, Queensland did not have an integrated state and local government infrastructure planning model;
  • Secondly, Queensland did not have a sustainable or feasible infrastructure funding model;
  • Thirdly, the residential property industry was dead as a result of poor public policy;
  • Fourthly, the Queensland economic model was consequently broken;
  • Finally, the Queensland fiscal position was unsustainable and urgent budget consolidation was required.
The Newman government's Queensland Commission of Audit made three fundamental recommendations (QCOA 2013):
  • First, fiscal consolidation - to be achieved by reducing expenditure (some $5.5 billion in the 2012/2013 budget) and by reducing debt (by some $25-$30 billion) to regain the state's AAA credit rating;
  • Secondly, reducing the role of government - to be achieved by privatising government assets and providing for greater private sector delivery of public services;
  • Thirdly, long-term financial planning - to be achieved by improved budget, cash and asset management practices underpinned by an Inter-Generational Report for the state with a 40-year perspective and a 10-year State Infrastructure Plan.

Guideposts for the future

Just prior to publication, some details of the state's infrastructure charges reform package were released. In our opinion, these reforms do not appear  to have delivered a long-term solution.
 
If our policy goal is the rebooting of the Queensland economic model through a revived construction and property development sector, which we believe it should be, then, in our opinion, the following are considered as critical preconditions for the achievement of that goal:
 
1.First, an integrated infrastructure planning model - as recommended by the Queensland Commission of Audit, a 10-year State Infrastructure Plan linked to the financial capacity of the state to fund that infrastructure should be complemented by a 10-year Local Infrastructure Plan, which is also linked to the financial capacity of local governments to fund local development infrastructure.
 
2.Secondly, an integrated infrastructure funding model based on four principles:
  • Infrastructure charges should be linked to the funding of essential development infrastructure at affordable design standards (i.e. water supply, sewerage, transport and local parks), with social infrastructure such as district and regional sport, recreational and community facilities being funded through local government rates
  • Infrastructure charges should be calculated on the short run marginal cost, that is, the incremental cost of the provision of additional development infrastructure to fund future development (PCA 2014:123);
  • Infrastructure charges can be capped by the state government to achieve state economic objectives such as the promotion of the construction and property development sector, or state social objectives such as housing affordability;
  • State government subsidies through affordable capped infrastructure charges should be funded by the state government through compensatory grants to local governments, or as in the case of New South Wales, through a Priority Infrastructure Fund which is used to fund local development infrastructure (PCA 2014:149).
3.Thirdly, state and local government owned property should increasingly be used to fund development infrastructure (PCA 2014:147). Examples include:
  • The development of airport lands to fund airport and transport infrastructure, as has occurred with Brisbane and other Australian airports;
  • The development of land and airspace around railway stations to fund railway infrastructure, such as has occurred at the Toowong and Central railway stations in Brisbane, Chatswood railway station in Sydney and Melbourne Central railway station;
  • The development of land around road transport infrastructure to fund associated road transport infrastructure.
We are of the view that the focus on public policy needs to move away from debates over infrastructure charges, offsets and refunds and instead shift to the critical issues of the development of an integrated infrastructure planning and funding model and the rebooting of the Queensland economic model.
 
If we remain focused on fighting over infrastructure charges, offsets and refunds, we will truly be missing the woods for the trees.
 
The original version of this article was first published in Urban Developer, the magazine of the UDIA (Qld).

This article has been published by Colin Biggers & Paisley for information and education purposes only and is a general summary of the topic(s) presented. This article is not specific legal or financial advice. Please seek your own legal or financial advice for any questions you may have. All information contained in this article is subject to change. Colin Biggers & Paisley cannot be held responsible for any liability whatsoever, or for any loss howsoever arising from any reliance upon the contents of this article.​

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