BILLS DIGEST NO. 28, 2014–15              19 September 2014

Infrastructure Australia Amendment (Cost Benefit Analysis and Other Measures) Bill 2014

Rob Dossor
Economics Section

Date introduced: 4 September 2014

House:  House of Representatives

Portfolio: Infrastructure and Regional Development

Commencement:  The day after Royal Assent

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill’s home page, or through the http://www.aph.gov.au/Parliamentary_Business/Bills_Legislation.

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the ComLaw website.

Purpose of the Bill

The purpose of the Infrastructure Australia Amendment (Cost Benefit Analysis and Other Measures) Bill 2014 (the Bill) is to amend the Infrastructure Australia Act 2008[1] so that it is a function of Infrastructure Australia to conduct a cost benefit analysis of those infrastructure projects which are nationally significant and which also involve Commonwealth funding of at least $100 million.

Background

Establishing Infrastructure Australia

On 11 May 2005, the Australian Labor Party (Labor) announced that it would establish Infrastructure Australia if elected to government.[2] On 2 August 2007, the then leader of the opposition, Kevin Rudd, detailed Labor’s plans for Infrastructure Australia, stating that it would have three divisions:[3]

•          to deal with policy and regulatory issues, driving reform on legal, tax, planning and infrastructure finance matters

•          to audit the adequacy of the nation’s infrastructure, identify weaknesses and prioritise projects and

•          to evaluate the business cases of projects, project financing options including Private Public Partnerships and manage the probity process.[4]

Consistent with that policy, the Infrastructure Australia Act was enacted, and Infrastructure Australia was established, in April 2008.[5] While the creation of Infrastructure Australia was welcomed,[6] some noted that it was limited to offering advice, rather than making decisions.[7]

Coalition commitment to infrastructure

In the lead up to the 2013 Federal election, the Coalition pledged to ‘ensure better infrastructure planning, more rigorous and transparent assessments of taxpayer-funded projects, and develop a much firmer and clearer infrastructure plan for Australia’s future’.[8] As part of its commitment, the Coalition stated that it would ‘strengthen the role of Infrastructure Australia, to create a more transparent, accountable and effective adviser on infrastructure projects and policies’.[9] In particular, if elected, the Coalition would:

… require all Commonwealth infrastructure expenditure exceeding $100 million to be subject to analysis by Infrastructure Australia to test cost-effectiveness and financial viability. This will include dams, telecommunications, hospitals, educational institutions, energy projects and water networks but will not extend to defence projects.[10]

Improving governance

To this end, in November 2013, the Government introduced the Infrastructure Australia Amendment Bill 2013 (2013 Bill),[11] the purpose of which was to establish Infrastructure Australia as a separate entity under the Commonwealth Authorities and Companies Act 1997 (now the Public Governance, Performance and Accountability Act 2013).[12] The effect of the amendments was that Infrastructure Australia became an independent governing entity that is both legally and financially separate from the Commonwealth.[13]

Whilst the proposed amendments significantly improved the governance structure of Infrastructure Australia, the introduction of the 2013 Bill into the Parliament brought to light a number of concerns about how Infrastructure Australia identified and prioritised suitable infrastructure projects—and that the Government of the day was not bound by Infrastructure Australia’s advice.

Clarifying functions

That being the case, the 2013 Bill was the subject of much debate about Infrastructure Australia’s functions and a number of amendments were proposed in the Senate. That debate was concerned, amongst other things, with the need to depoliticise the process of choosing which infrastructure projects should be given priority,[14] and the increased power which was given to the Minister under the 2013 Bill.[15] In order to achieve greater transparency, amendments were moved (and accepted) to require that summaries of Infrastructure Australia’s evaluations of nationally significant infrastructure proposals be published on the Infrastructure Australia website.[16] In addition, Senate amendments were moved (and accepted) to require that a cost benefit analysis be conducted for all proposals that were to be included on the Infrastructure Plan.[17]

The final result was:

•          Infrastructure Australia’s general functions were amended to include matters such as conducting audits to determine the adequacy, capacity and condition of nationally significant infrastructure and to develop Infrastructure Priority Lists based on the result of those audits;[18] promoting investment in infrastructure and identifying any impediments to investment in nationally significant infrastructure[19]

•          there are three other specific functions:

–      evaluating proposals for investment in, or enhancements to, nationally significant infrastructure and other infrastructure determined by the Minister[20]

–      developing long term Infrastructure Plans to be given to the Minister which specify priorities for nationally significant infrastructure for Commonwealth, state, territory and local governments and which include, amongst other things, a cost benefit analysis of each such proposal[21] and

–      providing advice to the Minister, Commonwealth, state, territory and local governments, investors in infrastructure and owners of infrastructure on various matters which are listed in section 5C of the Infrastructure Australia Act relating to infrastructure.

Importantly, the 2013 Bill did not include specific reference to requiring all Commonwealth infrastructure expenditure exceeding $100 million to be subject to analysis by Infrastructure Australia—which had been the Coalition’s election policy on infrastructure.

Instead, the functions of Infrastructure Australia under the Infrastructure Australia Act relate primarily to nationally significant infrastructure which includes transport, energy, communications and water infrastructure in which investment or further investment will materially improve national productivity.[22] In addition, Infrastructure Australia may evaluate proposals for investment in, or enhancements to other infrastructure determined by the Minister.[23]

The debate continues

Two other infrastructure Bills were introduced into the House of Representatives in 2014:

•       the Land Transport Infrastructure Amendment Bill 2014 on 27 February 2014[24] and

•       the Asset Recycling Fund Bill 2014 on 29 May 2014.[25]

Land Transport Infrastructure Amendment Bill 2014

The Roads to Recovery Program (RRP), a key program for directly funding local governments for road construction and maintenance, was due to cease on 30 June 2014.The Land Transport Infrastructure Amendment Bill was introduced to enable the continuation of the RRP after 30 June 2014, unify the schemes for funding National Land Transport Network projects and enlarge the scope and power to fund infrastructure research, investigation, studies and analysis.[26]

During consideration of the Land Transport Infrastructure Amendment Bill, both Labor and the Greens moved amendments that would require Infrastructure Australia to conduct a cost benefit analysis before the Minister could approve land transport projects with Commonwealth spending of over $100 million.[27] Essentially then, the push was for the Coalition to honour its election promise—that it would require all Commonwealth infrastructure expenditure exceeding $100 million to be subject to analysis by Infrastructure Australia—so that the relevant land transport infrastructure projects were subject to greater transparency.

However the majority of the amendments were not passed on the grounds that they should be made to the enabling legislation.[28] That being the case, the Government committed to making the necessary amendments to the Infrastructure Australia Act.[29]

Asset Recycling Fund Bill 2014

The absence of a requirement for all infrastructure proposals above $100 million to undergo an analysis by Infrastructure Australia was again raised during the debate of the Asset Recycling Fund Bill.

The purpose of the Asset Recycling Fund Bill was to create a new fund—the Asset Recycling Fund—which would provide financial assistance and incentives to the states and territories to create new productive infrastructure.[30]

Labor moved amendments in the House of Representative which, it said, would improve transparency and governance, stating:

These amendments are absolutely consistent with the government’s stated position, which is that for all projects above $100 million there has to be a proper assessment. These amendments are also consistent with the broad call for independence and transparency of project advice from important stakeholders such as the Business Council of Australia, Infrastructure Partnerships Australia, the Urban Development Institute, the Bus Industry Confederation and the Tourism and Transport Forum. They are consistent also with Labor’s foreshadowed amendments to the Infrastructure Australia Amendment Bill and those we have already moved in the Land Transport Infrastructure Amendment Bill. [31]

The amendments proposed that:

•       before an incentive payment could be made:

–                    all projects over $100 million are reviewed by Infrastructure Australia and a cost benefit analysis be conducted

–                    Infrastructure Australia advise the Minister that there are likely to be productivity gains from the project and

•       the cost benefit analysis is tabled in each House of the Parliament.[32]

Although the proposed amendments to the Asset Recycling Fund Bill were passed in the Senate, the House of Representatives rejected them.[33] At the time of writing this Bills Digest, the Bill has not been enacted.

It appears, then, that the Parliament has been, throughout the debates outlined above, seeking consistency in the manner in which infrastructure projects are assessed and greater transparency in the process by which projects are chosen for the requisite funding.

Cost benefit analysis

According to the Australian Transport Council, a former Commonwealth council which comprised Commonwealth, state and territory and New Zealand government members, a cost benefit analysis aims to identify and express, in monetary terms, all the gains and losses (benefits and costs) created by an initiative to all members of society, and to combine the gains and losses into a single measure.[34] If the result, expressed as a net present value (the future value of money assessed in current terms), is positive, that is, total benefits exceed total costs; implementation of the initiative will be an economically efficient use of resources.[35]

While the notion of a cost benefit analysis is intuitively attractive, cost benefit analyses are considered to be controversial by some academics. This controversy centres around:

•       difficulties of data and measurement, for example environmental effects

•       difficulties of allowing for distributional consequences and

•       uncertainty of future costs and benefits.

Cost benefit analyses are, however, better than leaving the analysis to purely political considerations:

CBA is superior to rival methodologies in enabling agencies to evaluate projects according to the extent that they contribute to overall well-being … However, CBA serves these useful proposes only under certain conditions, and agencies should take account of these conditions when evaluating projects.[36]

The New Palgrave Dictionary of Economics states that while a cost benefit analysis may fail to take things like equality and the preservation of human dignity into account, a cost benefit analysis remains a useful method of assessing efficiency in the context of a broader multi-goal analysis.[37]

Committee consideration

Senate Selection of Bills Committee

At its meeting of 4 September 2014 the Senate Selection of Bills Committee deferred consideration of the Bill until its next meeting.[38]

Senate Standing Committee for the Scrutiny of Bills

At the time of writing this Bills Digest, the Standing Committee for the Scrutiny of Bills had not commented on the Bill.

Parliamentary Joint Committee on Human Rights

At the time of writing this Bills Digest, the Parliamentary Joint Committee on Human Rights had not commented on the Bill.

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act.[39] The Government considers that the Bill is compatible.

Policy position of non-government parties/independents

The position of Labor and the Greens is demonstrated by their proposed amendments to the Land Transport Infrastructure Amendment Bill and the Asset Recycling Fund Bill outlined above. It could be of interest that Mr Wilkie, Ms McGowan, and the Palmer United Party in the House of Representatives, and Senator Muir and the Palmer United Party in the Senate voted in support of Labor’s proposed amendments to the Asset Recycling Bill, whilst only Senator Xenophon (and the Greens) voted in support of Labor’s amendments to the Land Transport Bill.[40]

Position of major interest groups

There appears to be almost universal support for the requirement that a cost benefit analysis be undertaken prior to the Government making a commitment to major infrastructure projects. The SMART research institute of the University of Wollongong, for example, states that Australian transport infrastructure projects result in cost blowouts of between $4 and $5 billion annually.[41] Industry experts believe that cost benefit analyses should be conducted and made public to demonstrate that governments have made the right choice on which projects to support.[42]

The Business Council of Australia (BCA) is also a promoter of the importance of using cost benefit analysis to evaluate major public expenditure and regulatory decisions, particularly in relation to infrastructure.[43] The Australian Chamber of Commerce and Industry has a similar view, calling for all infrastructure projects to be subject to a proper cost benefit analysis which takes into account all economic, social and environmental considerations.[44]

Financial implications

The Explanatory Memorandum states that this Bill has no financial impact.[45]

Key issues and provisions

In its current form, section 5 of the Infrastructure Australia Act provides that Infrastructure Australia has a number of general functions including but not limited to:

•          conducting audits to determine the adequacy, capacity and condition of nationally significant infrastructure

•          developing Infrastructure Priority Lists based on those audits and any additional research by Infrastructure Australia, that prioritise Australia’s infrastructure needs

•          evaluating infrastructure proposals and

•          developing Infrastructure Plans.

Section 5B of the Infrastructure Australia Act provides further detail about Infrastructure Plans, which are to specify priorities for nationally significant infrastructure for Commonwealth, state, territory and local governments and be given to the Minister. In particular, paragraph 5B(1)(ba) requires that the Infrastructure Plans are to include a cost benefit analysis of each proposal relating to the specified priorities. The problem with this drafting is that the requirement for a cost benefit analysis only applies to the development of Infrastructure Plans.

Item 4 of the Bill repeals paragraph 5B(1)(ba).

Item 2 of the Bill amends the Infrastructure Australia Act to put beyond doubt that one of the functions of Infrastructure Australia is to evaluate proposals for investment in, or enhancements to, nationally significant infrastructure that involve Commonwealth funding of at least $100 million.

In addition, item 3 inserts proposed section 5AA which relates to cost benefit analysis. The section operates so that:

•          Infrastructure Australia must not include a proposal in an Infrastructure Priority List unless a cost benefit analysis has been prepared: proposed subsection 5AA(1)

•          Infrastructure Australia may approve a method for preparing cost benefit analyses of proposals, which must enable proposals to be compared: proposed subsection 5AA(2)

•          Infrastructure Australia must review a method six months after it is approved and every 24 months after the first review: proposed subsection 5AA(3)

•          that review must consider whether the cost benefit analyses adequately take into account social, environmental and economic cost and benefits: proposed subsection 5AA(4) and

•          the report of the review must be published on Infrastructure Australia’s website within 14 days of being approved by the Board: proposed subsection 5AA(5).

The effect of this amendment is that the requirement for a cost benefit analysis applies to any project which is contained on an Infrastructure Priority List. That being the case it has a more targeted application than the current requirement relating to Infrastructure Plans.

Item 7 inserts proposed section 39E into the Infrastructure Australia Act which provides that the $100 million amount will be indexed in accordance with the method determined by the Minister by legislative instrument. This method must provide for the amount to be indexed first in 2019 and at least every five subsequent years.

Concluding comments

Infrastructure Australia has a range of functions including:

•       conducting audits to determine the adequacy, capacity and condition of nationally significant infrastructure

•       developing Infrastructure Priority Lists based on those audits and any other additional research

•       evaluating infrastructure proposals and

•       developing Infrastructure Plans.

The first thing this Bill does is to make clear that the process of evaluating infrastructure proposals includes evaluating proposals for investment in, or enhancements to, nationally significant infrastructure that involve Commonwealth funding of at least $100 million.

The second thing this Bill does is to make clear that Infrastructure Australia must not include a proposal in an Infrastructure Priority List unless a cost benefit analysis has been undertaken.

What the Bill does not do is fulfil the Coalition’s election promise to require all Commonwealth infrastructure expenditure exceeding $100 million to be subject to analysis by Infrastructure Australia to test cost-effectiveness and financial viability.

This means that the concerns raised during the Parliamentary debate in relation to the Land Transport Infrastructure Amendment Bill and the Asset Recycling Fund Bill—that there should be increased transparency about how infrastructure projects are evaluated and which ones are consequently funded—are still to be dealt with.

Members, Senators and Parliamentary staff can obtain further information from the Parliamentary Library on (02) 6277 2500.

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[1].              Infrastructure Australia Act 2008, accessed 5 September 2014.

[2].              For further details see R Webb, Infrastructure Australia Bill 2008, Bills digest, 69, 2007–08, Parliamentary Library, Canberra, 2008, pp. 4–6, accessed 10 September 2014.

[3].              P Pyburne, Infrastructure Australia Amendment Bill 2013, Bills digest, 33, 2013–14, Parliamentary Library, Canberra, 2014, pp. 3–4, accessed 10 September 2014.

[4].              K Rudd, Rudd details Infrastructure Australia—planning for our future, media release, 2 August 2007, accessed 10 September 2014.

[5].              Parliament of Australia, ‘Infrastructure Australia Bill 2008 homepage’, Australian Parliament website, accessed 10 September 2014.

[6].              A Hepworth and J Breusch, ‘Audit to search out the bottlenecks’, The Australian Financial Review, 21 December 2007, p. 14, accessed 10 September 2014.

[7].              L Tingle, ‘Rudd’s risky road on infrastructure’, The Australian Financial Review, 29 February 2008, p. 91, accessed 10 September 2014.

[8].              Liberal Party of Australia and the Nationals, The Coalition’s policy to deliver the infrastructure for the 21st century, Coalition policy document, Election 2013, p. 2, accessed 5 September 2014.

[9].              Ibid.

[10].              Ibid.

[11].              Parliament of Australia, ‘Infrastructure Australia Amendment Bill 2013 homepage’, Australian Parliament website, accessed 15 September 2014.

[12].              Public Governance, Performance and Accountability Act 2013, accessed 15 September 2014.

[13].              P Pyburne, Infrastructure Australia Amendment Bill 2013, Bills digest, op. cit., p. 13.

[14].              See for example D O’Neill, ‘Second reading speech: Infrastructure Australia Amendment Bill 2013’, Senate, Debates, 23 June 2014, p. 3617, accessed 15 September 2014.

[15].              N Xenophon, ‘Second reading speech: Infrastructure Australia Amendment Bill 2013’, Senate, Debates, 23 June 2014, p. 3624, accessed 15 September 2014.

[16].              Infrastructure Australia Act, subsection 5A(4).

[17].              Infrastructure Australia Act, paragraph 5B(1)(ba).

[18].              Infrastructure Australia Act, paragraphs 5(a) and (b).

[19].              Infrastructure Australia Act, paragraphs 5(g) and 5(f).

[20].              Infrastructure Australia Act, section 5A.

[21].              Infrastructure Australia Act, paragraphs 5B(1)(a) and 5B(1)(ba).

[22].              Infrastructure Australia Act, section 3.

[23].              Infrastructure Australia Act, paragraph 5A(1)(b).

[24].              Parliament of Australia, ‘Land Transport Infrastructure Amendment Bill 2014 homepage’, Australian Parliament website, accessed 15 September 2014.

[25].              Parliament of Australia, ‘Asset Recycling Fund Bill 2014 homepage’, Australian Parliament website, accessed 15 September 2014.

[26].              R Dossor and J Chowns, Land Transport Infrastructure Amendment Bill 2014, Bills digest, 91, 2013–14, Parliamentary Library, Canberra, 2014, accessed 10 September 2014.

[27].              The proposed amendments introduced by Labor in the House of Representatives and the Senate were slightly different, as were those introduced by the Greens in the Senate. The Greens, for example, set the threshold for an evaluation by Infrastructure Australia at only $50 million. A Albanese, ‘Consideration in detail: Land Transport Infrastructure Amendment Bill 2014’, House of Representatives, Debates, 24 March 2014, p. 2847; D Cameron, ‘Speech: Land Transport Infrastructure Amendment Bill 2014’, Senate, Debates, (proof), 28 August 2014, p. 9; J Rice, ‘Speech: Land Transport Infrastructure Amendment Bill 2014’, Senate, Debates, (proof), 28 August 2014, p. 6, accessed 9 September 2014.

[28].              D Johnston ‘Speech: Land Transport Infrastructure Amendment Bill 2014’, Senate, Debates, (proof), 28 August 2014, p. 10, accessed 8 September 2014.

[29].              Ibid.

[30].              For further details about the Asset Recycling Fund Bill 2014 see R Dossor, Asset Recycling Fund Bill 2014 [and] Asset Recycling Fund (Consequential Amendments) Bill 2014 , Bills digest, 90, 2013–14, Parliamentary Library, Canberra, 2014, accessed 5 September 2014.

[31].              A Albanese, ‘Consideration in detail: Asset Recycling Fund Bill 2014, Asset Recycling Fund (Consequential Amendments) Bill 2014’, House of Representatives, Debates, 19 June 2014, pp. 6700–01, accessed 9 September 2014.

[32].              Parliament of Australia, ‘Asset Recycling Fund Bill 2014 homepage’, Australian Parliament website, see Labor amendments introduced by Senator Conroy under ‘Proposed amendments’, accessed 10 September 2014.

[33].              Parliament of Australia, ‘Asset Recycling Fund Bill 2014 homepage’, Australian Parliament website, accessed 10 September 2014.

[34].              Australian Transport Council (ATC), National guidelines for transport system management in Australia: appraisal of initiatives, second edn, 3, ATC, Canberra, 2006, p. 52, accessed 5 September 2014.

[35].              Ibid.

[36].              E Posner, M Adler, ’Rethinking cost-benefit analysis’, Chicago Unbound, University of Chicago Law School, 1999, pp. 245–6, accessed 12 September 2014.

[37].              N Durlauf and L Blume, The New Palgrave Diction of Economics, second edn, 2, Palgrave McMillan, New York, 2008, p. 272.

[38].              Selection of Bills Committee, Report No. 11 of 2014, The Senate, Canberra, 4 September 2014, accessed 15 September 2014.

[39].              The Statement of Compatibility with Human Rights can be found at page 2 of the Explanatory Memorandum to the Bill.

[40].              Australia, House of Representatives, ‘Asset Recycling Fund Bill’, Votes and proceedings, HVP 49, 19 June 2014, p. 587, accessed 9 September 2014; Australia, Senate, Journals, 45, 17 July 2014, p. 1253, accessed 9 September 2014; Australia, Senate, Journals, 48, 28 August 2014, p. 1331, accessed 9 September 2014.

[41].              J Wiggins, ‘Infrastructure blowouts hit $4 billion’, The Australian Financial Review, 13 August 2014, accessed 9 September 2014.

[42].              Ibid.

[43].              Business Council of Australia (BCA), ‘Policy essentials: cost-benefit analysis’, BCA website, September 2012, accessed 9 September 2014.

[44].              Australian Chamber of Commerce and Industry (ACCI), ‘Infrastructure’, ACCI website, accessed 9 September 2014.

[45].              Explanatory Memorandum, Infrastructure Australia Amendment (Cost Benefit Analysis and Other Measures) Bill 2014, p. 1, accessed 9 September 2014.