SYDNEY—With countries running out of fiscal bullets to fend off a global economic downturn, Australia is in the enviable position of having little debt, a triple-A credit rating—and a glaring need to build new infrastructure.
If the resource-rich nation is to compete with the fast-growing, diverse economies of Asia and not serve merely as a supplier of raw materials, the government needs to fund new highways, high-speed rail networks, ports and utilities that will serve its growing population and help it to diversify away from a worrying dependence on mining.
For a nation that aspires to be the Switzerland of the region, Australia fares poorly against its peers. Global cities like Hong Kong, Dubai and, to a certain extent, Shanghai boast state-of-the-art transport systems, some of the best airports in the world and sparkling skyscrapers to house international companies. But Sydney's transport system and crumbling roads highlight a lack of investment, and its skyline has changed little over the past decade. Even in Perth, the nation's emerging west coast mining and resource hub, infrastructure is struggling to keep pace with the demands of a rapidly growing population.
According to the World Economic Forum Global Competitiveness Report 2010-2011, it ranks 22nd in terms of infrastructure, well below its overall ranking of 16 against 139 other countries measured. Hong Kong, Singapore, the United Arab Emirates and Japan are all ranked higher on infrastructure.
Poor infrastructure figures highly as one of the biggest obstacles to doing business in Australia, with nearly 12% of executives surveyed for the report citing the shortfall in transport, communications and utilities as a problem.
But building new infrastructure will require vast investment and the political will in Canberra to divert funds to capital projects instead of meeting an election pledge to return the nation's finances to surplus over the next two years. Australian government debt, at about 7% of gross domestic product, is modest and could be expanded to fund projects instead of paid down. Restoring a cash surplus is increasingly viewed by many economists, as a short-term political luxury that ignores the country's infrastructure needs.
Bankrolling a nationwide spruce up of Australia's infrastructure could provide a timely Keynesian stimulus to the economy in the event of a global downturn that would inevitably hit mining and resource industries, the key drivers for growth and existing investment into new infrastructure.
"The federal government has the capacity to invest in infrastructure if needed," said Shane Lee, senior economist at Australia & New Zealand Banking Group. "A long period of underinvestment for 30 years has left ageing infrastructure older than other nations."
In a recent report, ANZ estimates that Australia needs to spend about 600 billion Australian dollars (US$626 billion), or the equivalent of 8% of GDP, over the next five years to bring its infrastructure "up to acceptable standards." It argues that the country needs to invest around 1% of GDP annually just to improve its road network over the medium term.
But funding this infrastructure will require greater cooperation between the federal government and state legislatures, which in many cases have financial problems. Queensland state, on the country's east coast, is still recovering from devastating floods that hit earlier this year and Fitch, which gives the state a double-A-plus credit rating, has warned it could downgrade that view unless its finances improve. In New South Wales, the country's most populous state, a new government is grappling with how to fund new infrastructure and contain A$60 billion of total borrowing.
According to Brendan Lyon, executive director of Infrastructure Partnerships Australia, keeping pace and in some cases closing the gap with fast-growing Asian nations will require the government to match fiscal responsibility with greater flexibility over how best to use its balance sheet. "You need to walk and chew gum at the same time," said Mr. Lyon.
To be sure, the need to update Australia's infrastructure is already partly being addressed. Three years ago, the government established Infrastructure Australia to prioritize key projects and areas for investment. New South Wales, which arguably has the greatest need for investment in its major cities, has restructured its own approach by setting up a new body headed by Nick Greiner, the chairman of advisers at Rothschild in Australia, to secure funding for infrastructure.
Some ambitious projects are already under way, like the recently approved US$36 billion plan to build a nationwide high-speed Internet system known as the National Broadband Network. The government is studying a US$116 billion proposal to build a 1,000-mile high-speed railway along the east coast, but hasn't made a decision.
As markets react Monday to the prospect of another global financial crisis in the wake the downgrade of U.S. government debt by Standard & Poor's, Australia has enough assets at its disposal to build its way out of trouble if needed.
Write to Andrew Critchlow at email@example.com