2.4 Commonwealth funding to State and local governments for infrastructure

The Commonwealth has a major involvement in funding infrastructure through its provision of grant payments to the States and to local governments.

These grants make a major contribution to the construction and maintenance of infrastructure in those jurisdictions. The Commonwealth has provided funding for State infrastructure since the 1920s, but its road funding role significantly expanded in the 1970s.

The Commonwealth provides around $5 billion per annum to the States and local governments for economic infrastructure. This funding is directed mostly to road (71 per cent) and rail (25 per cent) as shown in Table 2.2, delivered via two programmes.

The Nation Building Program is providing some $3.8 billion in 2013-14 to improve the performance of land transport infrastructure.

Funding is provided under the Nation Building Program (National Land Transport) Act 2009 in a number of categories, including for: projects related to the National Land Transport Network; other projects not part of the Network; the maintenance of local road assets under the Roads to Recovery Program; and improvement of safety at locations with a high incidence of motor vehicle accidents under the Black Spots Program.

In the 2013-14 Mid‑Year Economic and Fiscal Outlook, the Government announced it would provide an additional $8.2 billion over six years for land transport infrastructure projects, including a new Bridges Renewal Programme. It has also introduced legislation to streamline the operation of the Act and extend the Roads to Recovery Programme.

Table 2.2: Commonwealth infrastructure related payments to the States
 

$ million

Nation Building Plan for the Future (Building Australia Fund)  
Road 58.0
Rail 891.0
Nation Building Program  
Investment - National Land Transport Network  
Road 2,722.7
Rail 297.8
Off-network projects  
Road 116.3
Rail 170.6
Roads to Recovery 373.2
Black spot projects 64.5
Heavy vehicle safety and productivity 40.0
Interstate road transport 80.8
Managed motorways 24.4
Regional Infrastructure Fund 163.3
Local road grants 349.3
Liveable cities 7.0
Total 5,358.9

Source: 2013-14 Budget, Budget Paper 3.

A separate source of funding is provided under the Nation-building Funds initiative. There are three Nation-building Funds, though only the Building Australia Fund funds economic infrastructure.

The remaining two — the Education Investment Fund and the Health and Hospitals Fund — fund social infrastructure. These are financial asset funds consisting of cash and investments and were established on 1 January 2009 by the Nation-building Funds Act 2008.

The Act gives responsibility for managing the investments to the Future Fund Board of Guardians. Both the capital and the investment earnings of the Nation-building Funds are available for government to spend.

As shown in Table 2.3, as at 31 December 2013 a total of $26 billion in credits and earnings had accrued since establishment with around $19 billion of commitments (of which $15 billion has been disbursed). The Nation-building Funds had an uncommitted balance of $6.7 billion.

The rationale for establishing the Funds as separate accounts, rather than simply providing funding through the usual Budget processes, was to ensure the allocated money was clearly committed to future expenditure on new infrastructure.

Table 2.3: Nation-building Funds, as at 31 December 2013
 

Building Australia Fund
($ million)

Education Investment Fund
($ million)

Health and Hospitals Fund
($ million)

Total
($ million)

Total credits and net earnings 12,609.8 7,641.6 5,874.7 26,126.1
Commitments since establishment 10,245.6 4,207.5 4,949.8 19,402.9
Uncommitted balance 2,364.2 3,434.1 924.8 6,723.2

Source: Department of Finance, 2014.

Expenditure of the Funds is subject to assessment by an independent advisory board (Infrastructure Australia in the case of the Building Australia Fund, except for National Broadband Network projects which are not independently reviewed), consideration by the government, and approval by the Minister for Finance. Thereafter, a series of transfers of funds occurs from the Future Fund to the eventual recipient.

Expenditure from the Building Australia Fund has predominantly funded significant projects, including $2.4 billion for the National Broadband Network, $3.2 billion for Victorian regional rail and $1.5 billion for the Hunter Expressway.

The vast majority of projects funded under the Education Investment Fund and the Health and Hospitals Fund have been of relatively small size. Commitments have been made to 302 projects, of which 188, or 62 per cent, have a Commonwealth contribution of less than $25 million. In the case of the Health and Hospitals Fund, 75 per cent of committed projects involve Commonwealth contributions below $25 million.

A weakness in current infrastructure funding arrangements between the Commonwealth and the States is that Commonwealth funding is generally focused on investing in new projects.

Less emphasis is given to maintaining and improving the condition of existing assets. This can undermine an integrated planning approach to the road network for example, by encouraging a focus on new projects rather than on the network as a whole.

The current arrangements for the three Nation-building Funds, with funding only able to be directed to capital expenditure, leads to an undue emphasis on ‘ribbon cutting’ opportunities generally associated with new projects, at the expense of periodic maintenance and of small-scale improvements that could postpone or even avoid the need for costly asset expansions.

Further, there are significant management and governance costs associated with the Nation-building Funds.

The Commission considers that the Government may wish to re‑examine the need for the Nation-building Funds in their current form. Instead, the Building Australia Fund could be rolled into a single economic infrastructure payment that could be provided to the States. This possibility is discussed below.

In relation to the Education Investment Fund and the Health and Hospitals Fund, consideration should be given to the long-term structures for education and health infrastructure funding, consistent with the Commission’s Phase One recommendations in relation to progressive reform to health sector funding, and funding for research infrastructure, vocational education and training.

Possible future arrangements

Infrastructure provision is an essential part of the role of the States and local government and they should be responsible and accountable to their citizens for delivery of essential public infrastructure assets.

In its Phase One Report the Commission recommended reducing the degree of vertical fiscal imbalance within the Federation to increase the States’ revenue capacities.

With access to an improved source of revenue — for example through the personal income tax system — the States will be in a better position to fund their own priorities, including in relation to infrastructure. In this situation the need for separate tied funding from the Commonwealth for infrastructure will diminish.

Recognising reforming the Federation will take time, the Commission recommends consolidating existing infrastructure funding arrangements between the Commonwealth and the States in the interim under a single ‘parent agreement’.

Funding could be provided in a single pool and allocated to the States on a formulaic basis including appropriate funds for maintenance and disaster mitigation. While the formula would need detailed work it could be based on a simple approach, for example taking account of population, size of road network and geographic area.

The Commonwealth would not be involved in the selection of projects. However, for this approach to work the Commission notes that there must be strong project evaluation processes including appropriate cost benefit analyses. Too few project evaluations are made fully public and no Australian Government has in place adequate processes for ex-post review of cost benefit studies.

To address this problem, States’ access to the infrastructure funding pool would be conditional on them having transparent and robust evaluation processes that meet criteria set by Infrastructure Australia.

Financial Assistance Grants paid to local governments through the States as untied local roads funding, which totalled $349.3 million in 2013-14, should also be included in this arrangement to achieve greater targeting of Commonwealth infrastructure funding.

As discussed above, a role would remain for the Commonwealth to help deliver nationally significant infrastructure where there are clear spillover effects between jurisdictions of their infrastructure decisions.

Consistent with the requirements for funding to the States, any direct Commonwealth funding of nationally significant infrastructure or other projects where there is a clear public interest case for Commonwealth involvement should also be subject to proper project evaluation and compete with other spending proposals for funding via the normal Budget process.


Recommendation 5: Infrastructure funding for the States and local governments

The Commission's Phase One recommendations on addressing the degree of vertical fiscal imbalance within the Federation propose that the States have access to the personal income tax system so they are in a better position to fund their own priorities including infrastructure. In this situation, the need for separate tied funding from the Commonwealth for infrastructure will diminish.

Recognising that reforms to the Federation will take time to develop and implement, the Commission recommends in the interim that existing infrastructure funding arrangements between the Commonwealth and the States be consolidated, with:

  1. a single funding pool to be set aside and available for allocation to the States on a formulaic basis, including appropriate funding for maintenance and disaster mitigation with the Commonwealth having no involvement in project selection;
  2. eligibility for access to the funding pool would be conditional on each State having in place robust project evaluation and governance processes including cost benefit analyses that meet relevant criteria set by the Commonwealth;
  3. Financial Assistance Grants paid to local governments for local roads and made through the States should be included in this arrangement; and
  4. as part of the consolidation, the Government should reconsider whether the Nation-building Funds should be maintained in their current form or instead rolled into the single funding pool.