praveen thakur kpmg

© 2014 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International.

Infrastructure matters


Key Messages

1. Infrastructure Matters

2. The Right Tools Are Needed

3. The Right Approach Needs the Right Structure

1

3

2


Infrastructure and Productivity

The efficient delivery of both economic and social infrastructure have fundamental productivity implications. These implications vary across :

1. The capacity to unlock new opportunities to deliver new products and services.

2. The capacity to more efficiently deliver existing products and services through:

1. Agglomeration benefits that bring people, employment and supply chains closer together; and

2. Improvements in human capital through the provision of the right mix of infrastructure in the right location with the optimal supporting mix of social infrastructure.

1

a

2

b



“...the widely held view that deficiencies in certain aspects of Australia’s infrastructure ... are holding back productivity growth and affecting the

amenity of our cities and regional areas.

This gives rise to notions of an infrastructure ‘deficit’.”

(Productivity Commission)



The policy response that will need to form the focus for our governments and the private sector will therefore need to be:

“How can we prioritise infrastructure investment to maximise the productivity return on available funding?”

This response will need to take account of:

• The outcome metrics against which planning will be framed and prioritisation will be facilitated.

• The terms and conditions necessary to facilitate private funding and investment in traditionally “public” infrastructure assets.

1

2

Infrastructure Matters

That is why effective planning and prioritisation is critical to

maximise the return on infrastructure investment to

the community and economy.

Key Message 1


“...improved project selection is critical to improve economic performance associated with infrastructure investment.”

Prioritising for Productivity

Productivity Commission in its report identified a number of practical improvements to project appraisal processes including:

• transparent cost–benefit (or efficiency) analysis

• consideration of risk allocation

• consideration of full range of options for government and private involvement

• looking for potential cost savings in the delivery of projects.



If productivity is the key objective, then we need to go beyond the scope of conventional CBA to:

1. Consider the real economy impacts of infrastructure investment; and

2. Prioritise infrastructure investment accordingly.

This approach builds on the lessons learned by Central Government in the United Kingdom, which have led to a national transition toward ‘City Deals’ to deliver regionally significant infrastructure projects.

1

2

9 © 2014 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International.


Appraisal of Transport Infrastructure under the UK City Deal • solely focuses on real economy

• forecasts employment and productivity impacts explicitly

• includes economic impacts which result from land use change

Traditional Appraisal of Transport Infrastructure

• focuses on benefits to users and other externalities (e.g. value of time savings, improved safety, reduced CO2 emissions)

• assumes that transport improvements do not influence work / home / business location decisions



£0

£1

£2

£3

£4

£5

£6

£7

£8 Impacts of redistributing employment

Impacts of expanding employment

Impacts from influencing sectoral mix

Impact from cost savings and agglomeration

Evidence in the UK has indicated that traditional appraisal may capture only £1 in £7 of the benefits of high quality transport to a city region.

Not captured in standard transport

appraisal


The United Kingdom has selected Gross Value Added (GVA) as the metric against which infrastructure benefits will be measured, and projects will be prioritised. This has been selected because GVA (equivalent to GDP) represents:

• A strategic measure of a City Region’s economic success

• A key driver of tax receipts and hence of the long term return to government expenditure

• An estimate of the net impact (it is genuinely additional rather than simply a measure of redistribution)


1

2

3



TRANSPORT INVESTMENT

HOUSING INVESTMENT

REGENERATION

INVESTMENT

GVA / TAX UPLIFT

CHANGES IN CONNECTIVITY

INDUCED LOCAL EMPLOYMENT

CONGESTION ALLEVIATION TRAVEL

TIME SAVINGS

DISPLACEMENT OF ACTIVITY

Increased Productivity

CHANGES IN CONNECTIVITY

DISPLACEMENT OF ACTIVITY

CHANGES IN CONNECTIVITY NEW & MORE PRODUCTIVE

BUSINESS ATTRACTION

NEW & MORE PRODUCTIVE BUSINESS ATTRACTION

NEW & MORE PRODUCTIVE BUSINESS ATTRACTION



What does the UK experience teach us?

1. We need to align our infrastructure investment decision criteria with the outcomes that we are seeking from that investment. If productivity is a core objective, then our approach to prioritisation needs to reflect this.

2. CBA represents a tool for measuring the welfare outcomes of project investment. If productivity is a core objective, new or right tools are needed to specifically measure productivity outcomes.

3. When considering prioritisation, private funding is critical to a project’s ranking, as it enables a greater ‘bang for buck’ when considering the benefits of the project, relative to public investment.

1

2

3

The Right Tools Are Needed

There is a need to go beyond the traditional CBA to

effectively articulate the impact of infrastructure investment.

This enables better prioritisation on the basis of

the outcomes that matter.

Key Message 2


Innovation in Funding

Infrastructure funding represents greatest challenge facing policy makers.

• In the United Kingdom, user charging, value capture, and special purpose financing mechanisms have all been applied to maximise regional contributions to a collective infrastructure fund.

• This fund is then topped up by the Central Government to deliver a prioritised program of infrastructure.

• The benefits of this infrastructure investment (i.e. GVA and tax uplift) are then leveraged through a tax increment finance deal between the two government entities to ensure a share of tax uplift is reinvested into the infrastructure fund for future investment.

Collectively , this payment by results mechanism has proven integral to effective prioritisation, funding and stakeholder buy-in.


Embedding Processes for Delivery

As highlighted by the Productivity Commission:

“Reforming governance and institutional arrangements for the provision of public infrastructure is essential to promote better decision-making in

project selection and the efficient funding, financing and delivery of public infrastructure services.“

This implies the need for transparent, quantitative decision criteria to be embedded in:

• Financing decisions for public infrastructure investment; and

• Published prioritisation decisions on forward infrastructure programs.

These decisions then need to be embedded in strategic and statutory planning systems to reinforce and communicate the outcomes based decision process.

1

2

The Right Approach Needs the Right Structure

Realising the productivity benefits that infrastructure can

deliver requires productivity considerations to be embedded in the governance, funding and

planning processes.

Key Message 3


Implications for Project Planning & Delivery

Australia can learn from global experience in infrastructure project prioritisation, funding and governance to ensure that:

1. Project decision making and prioritisation account for the real economy impacts that the infrastructure can be expected to deliver.

2. Infrastructure financing arrangements are structured to reinforce prioritisation decisions, and deliver greatest ‘bang for buck’ for public investment.

3. The right metrics (i.e. productivity) form the cornerstone for transparent, quantitative decision making around infrastructure investment.

1

2

3

© 2014 KPMG, an Australian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.

The KPMG name, logo and ‘cutting through complexity’ are registered trademarks or trademarks of KPMG International Cooperative (KPMG International).

Praveen Thakur +61 3 9288 5808

[email protected]

KPMG Contact:


Disclaimer

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. The views and opinions contained in the presentation are those of the author and do not necessarily represent the views and opinions of KPMG, an Australian partnership, part of the KPMG International network. The author disclaims all liability to any person or entity in respect to any consequences of anything done, or omitted to be done.

Please note that the forecasts included within the presentation are based on a number of assumptions and estimates and are therefore subject to contingencies and uncertainties. The forecasts should not be regarded as a representation or warranty by or on behalf of KPMG or any other person that such forecasts will be met. Forecasts constitute judgment and are subject to change without notice, as are statements about market trends, which are based on current market conditions.

praveen thakur kpmg

Business