China’s Asian Infrastructure Investment Bank, with 42 countries on board including Australia, has landed in the regional development world like a rock thrown into a pond.
Australia will now be chasing a chunk of the action that will surely flow from the new establishment.
But our infrastructure expertise is at the same time seeking to make more of a splash in another pretty important pond, that of the world’s third-biggest economy, Japan.
The key that the Australian infrastructure sector is seeking to use to prise open the immense opportunities of operating in and with Japan, is that of public private partnerships (PPP), which have become widely used around the Australian states in recent years.
Bob Seidler, the chairman of Hunter Phillip Japan, a Sydney- based transaction and advisory business, says there are three chief objectives for this engagement with Japan — encouraging Japanese investment in Australian infrastructure, opening up the market in Japan using Australian-style PPP, and working together with Japanese companies in the rest of Asia.
The first objective has already been met successfully. Five years ago, the only substantial involvement in Australian development was through Japanese banks. Now, almost every major project coming to market has Japanese participation — through a role in equity, construction and most other elements, contributing technology, skills and funding.
The second aim, taking our PPP to Japan, is steadily but slowly taking shape. It’s now entering a crucial stage, as Tokyo appears on the cusp of starting to adopt the Australian brand of PPP — compared with those of our strongest competitors in the market, including Canada and Britain.
The timing is important, because Japan is now run by its most decisive government in a couple of decades — the Shinzo Abe administration — and is determined to renew the vast amount of infrastructure put in place for the 1964 Tokyo Olympics and inadequately, or not at all, renewed since then.
The deadline to get this under way is ticking closer — the Rugby World Cup in 2019, and following that, the 2020 Olympics.
But the government lacks access to the funding it needs to tackle this infrastructure directly, with a public debt level reaching 240 per cent of gross domestic product.
The private sector is by comparison fairly liquid, but lacks expertise in assembling the elements needed to implement public projects on behalf of the government, which has previously locked business out of them.
Now the government has no choice, if it wishes both to complete the reconstruction following the 2011 tsunami and to present Japan’s best face to the world for the Olympics.
One of the longest-standing tests of this shift towards PPP is whether the government can find a private consortium ready to take on the considerable debt burden of Kansai, one of Osaka’s two airports, in order to buy or lease the business and develop it.
Most of the legislative changes needed for PPP have now been passed, but Seidler points out that success requires the right tax and regulatory as well as legal structures to be conducive.
Australia used to comprise different markets in each state, and with a typical success rate for tenderers for big projects being about one in four, this acted as a disincentive against bidding, especially when there was no nationwide pipeline.
Today the environment has largely become unified, and the Infrastructure Australia website provides a pipeline of projects.
There is also a need for culture change, Seidler says. The government attitude — in the past in Australia, and as lingers in Japan today — has been one of suspicion of, and a desire to subjugate, the private sector, targeting only the cheapest price.
“But partnership means both parties profiting,” says Seidler. “And respecting each other, and having common objectives.”
The Australian use of trusts to build infrastructure has been useful, when partners are involved that have varying tax status.
Australia has in the last few years sent experts to Japan, run seminars across the country, and brought Japanese officials to Australia to work in the sector.
Seidler says Japan and other countries in the region ask how quality can be maintained if the private sector is involved.
He cites Melbourne’s East Link PPP, where penalties for infringing set criteria are accumulated. Once they reach a trigger point, all users of the road system gain a day’s free travel — thus compensating users directly.
Sometimes he is asked in Japan about Sydney’s Cross City Tunnel, and whether this comprises a failure for PPP. He responds that the public gained excellent new infrastructure at no cost, that the private sector took all the risk, the ownership has consequently been restructured, “and life went on, facilitated by our bankruptcy laws”.
Japan’s shrinking population is adding pressure for increased productivity in its services sector, he says — with PPP an obvious answer. Demography is also forcing companies to seek growth markets outside Japan.
There, Australian and Japanese companies are starting to work together — especially in Indonesia and India — to open up markets for projects within a PPP environment shaped in the Australian style.