Transcript of Question & Answer Session How Infrastructure Fits In


Thank you very much for that address. I think it's interesting to reflect on things that we do well in, and this is a common challenge across the world, and there're things that we do well in, and this is across the world, and things like financing and infrastructure where we've been world-leading, the creation of Infrastructure Australia, which I know from personal experience we were forever getting requests from people around the world to come and talk to us about what we were doing, but there's also things that we can learn from elsewhere as well. So it's a useful time to reflect, and the key one, the difference between funding and financing, which is often misunderstood. I just keep saying it, just keep telling people. This is a room of people that know, but there's others who don't. So Luci's kindly offered to take some questions from the room, so please pop your hands up. There's some microphones around to take your questions. Rob?


That was a great presentation. My question was around you mentioned certainly the productivity benefits of infrastructure in Australia. Between states, there's a real difference in how much work is going at the moment off the back of certain policy decisions around asset recycling and others. Do you have any concerns around, say, the economic impacts of having perhaps a two-speed economy in New South Wales and Victoria, and then a slower investment in infrastructure in other parts of the country?

Luci Ellis

Thanks, it's a really good question, and I think the way I'd frame it is they're the two states where the strength in population growth is at the moment. The underlying issue for Australia, I mean, I was referencing the McKinsey study earlier that said our infrastructure gap is not that great compared to even quite a number of advanced economies, let alone a number of emerging market economies. But what we do need to do is consider that we actually have one of the fastest growing populations of all advanced economies and therefore need to accommodate that growth as that continues. And we have to accommodate that in the places where the people are moving, and at the moment that is increasingly Sydney and Melbourne, whereas Perth population growth has slowed. Western Australia generically population growth has slowed quite drastically relative to the mining investment boom era. These are big shifts in population, and so in some sense this is really meeting the demand, and so it's not so surprising to me that it's the south-eastern states that are finding themselves wanting to do this because they're the ones that are having to meet the needs of really rapidly growing populations. Thanks for your question.

Jenny Wiggins, AFR

Hi Luci. You showed a nice chart of transport infrastructure projects, which I'm sure everyone here is familiar with, there are a lot happening at the moment, earlier on in your speech. But we also know that a lot of companies are struggling to find enough skilled people to actually build the transport infrastructure that we need, and to what extent do you think the lack of skilled labour currently in Australia is hampering companies' ability to invest?

Luci Ellis

Thanks, that's a very, very good question. We are hearing stories about difficulties attracting suitable labour in very specific areas, and certainly ensuring that you sequence your infrastructure projects and don't all clump them together at once is important. You don't all want to be rushing in trying to do the same thing at once. It is worth noting that a lot of the skills are the same skills that are involved in large-scale building construction, so apartments. So to the extent that there's some hand-off, that the apartment sector is no longer growing across the nation, that frees up some. But what we're hearing from our contacts is it's still relatively specific skills. I think one of the things is about lags is we've gone through a long period where maybe those skills were not being developed. They're not things that you learn at school. It's like how to be a project manager. There are qualifications in that, but it's not something you learn at school or even in most university or TAFE courses. It's something you build up over time and so then you come to 15 years down the line and there isn't a project manager with 15 years' experience. Well, maybe you might have to take someone with five years' experience.

The other thing we're not seeing is wide-scale increases in wages growth for this. We're at the stage where there are concerns about shortages of certain types of skilled labour, but it is quite contained to certain occupational groups, and at the moment what we're not seeing is employers trying to solve that problem by paying people more. And you can always poach someone from someone else, and they're not doing that. We're not seeing that in the numbers.

Jenny Wiggins

So are you suggesting that because we're not seeing the jump in wages like we saw during the mining boom that potentially then it's not as severe the lack of skills as we saw in the mining boom.

Luci Ellis

Well it depends on whether you frame it as a lack of skill or a strength in demand. I think certainly during the mining investment boom, it was more common to just go overseas and get those skills. The rules have changed. That's a little bit more onerous now. It's still possible, but it is not as easy as it had been. And I think it is simply: well, if you can't find somebody at the current wage, well maybe offer something higher and see if someone who's got a job somewhere else jumps. Because that's how this happens, and then sooner or later someone else will say, well this person doesn't have any experience, but I'm going to take them on because they seem smart and I'm going to train them up. And that's how the process works, and it just takes a while for that realisation to dawn.


Further questions?

Adrian Hart, BIS Oxford Economics

Thanks for the great speech, Luci. What we're seeing at the moment seems to be another boom. We had the boom in mining. Now we're having this boom in infrastructure, in particular areas like Sydney and Melbourne, but potentially elsewhere as well. What strikes me, what you said in your speech about the timeliness is also important, that we seem to go through these cycles, and we seem to have these big swings, ups and downs in the project pipeline. And the earlier speech today from Infrastructure Australia talked of ways of reforming that we can introduce to try and create a more sustainable funding, I suppose, for infrastructure over time. How do you feel about some of the reforms that were suggested and ways … because it seems that we go through state governments having very large cycles in their own revenues, and they spend it on infrastructure when they can, when what we want to achieve really is a consistent increasing level of infrastructure to match our demand over time. And how will those reforms from Infrastructure Australia help that regard?

Luci Ellis

Thanks for the question. I am not a microeconomic expert. I'm a macroeconomist. I don't feel I can talk with any expertise about the costings or the effects or the modelled benefits of the reforms that were discussed in Julieanne's speech. I don't think that's something I can provide any expertise on, but just let me give you one reflection. There is this belief that ‘oh well there was this boom, and then there was this other boom, and then was another boom’, and it all seems convenient, but one of the things economics teaches us is that people respond to price incentives.

Of course, the mining industry was putting in a lot of construction when the price incentives in bulk commodities were telling them that this was an incredibly profitable thing to do and that was bidding up the price of the inputs to that. So everybody else quite wisely said, ‘well I'm not going to do that while it's expensive.’ So as the mining investment boom turns down, the price of those inputs starts to come off, and yet we still have very strong population growth so it's very profitable to build some apartments, well then people then say, ‘It's very profitable for us to build apartments.’ Similarly, now that that's come off, although we still do have very strong population growth, we do seem to have finally started to catch up to that in terms of housing construction. There's a clear incentive, and it's a little bit different in the infrastructure space because, of course, it's not an obvious price incentive, but wouldn't you choose to build your infrastructure at a time when the mining industry isn't wanting to build lots of infrastructure?

So the beauty of economies is you don't actually have to talk to the other people to know what they're doing. You just have to look at the prices, and that can be a large part of how you make your decisions. One aspect that you did mention is sort of the cyclicality in state government revenue and you're referring specifically to stamp duty which is very cyclical, as indeed is capital gains tax revenue, and anything that leverages off an asset price and an asset turnover cycle. That's true, and that's why you have debt financing as well, in order to smooth through those cycles.


Julie-Anne Mizzi.

Julie-Anne Mizzi, AMP Capital

Hi Luci. I want to ask you a very RBA question. There are some parts of the investor community who think that there is an infrastructure asset bubble and prices have been a bit frothy, and that really depends upon your view of whether or not interest rates are going to continue lower for longer. So if you can comment on whether or not you think there's an asset bubble, and are we in a ‘lower-for-longer’ phase.

Luci Ellis

That was a really nice way of asking me what's going to happen to interest rates and I'm going to find a really nice way of not answering, because I can't improve on what the Governor said two days ago. We are in a world where interest rates have been low for some time, and around the world, low bond rates in particular and low term spreads in particular, have then fed into higher asset valuations and if those interest rates stay where they are, then those asset valuations make perfect sense. When people talk about bubbles, they normally talk about people buying things purely with the expectation of capital gain. But what you're talking about is saying at a particular discount rate this all makes sense and it's the discount rate we currently have. The question is will the discount rate rise? That's not the same thing as a bubble.

That doesn't mean it won't be painful if there is a rapid repricing of assets but it's not, specifically speaking, a bubble. What you're talking about is whether the fundamentals that are currently in play will be in play for a long period of time. And that's really talking about long rates not the policy rate, and one of the things that's been holding long rates low across the world has been low term spreads as well as expectations of low monetary policy rates. Of course, we've seen, including this week, around the world there are actually countries that are saying, well we're now in a space where unemployment is very low, inflation is starting to pick up, it's time to get interest rates off the troughs where they had been in those countries. Australia is in a different situation, firstly because our interest rates never got so low here, but also, we're still in a world where there is spare capacity. So I think it really comes down to what you think about the global interest rate structure more so than what's happening to the specific policy decisions here.


Hi Luci, a quick question. You spoke to the need for private funding. What are your views on the ATO integrity measures? ATO integrity measures on stapling, removing gearing, do you think that's creating some sovereign risk, a bit of gap, and is there enough local appetite to fill that gap, do you think?

Luci Ellis

I'm not qualified to speak specifically about the tax measures that you're referring to. I think, as always, Australia is an attractive investment destination because of the quality of its institutions, because of the comparative advantages that it has, because of the skill base of its people, because we have resources that other people don't have often times and one particular regulatory mechanism may or may not make that difference. My observation from my own dealings in the G20 and so forth, is there's a huge sector of particularly, life insurance and pension funds both here and around the world that really like the idea of a steady income flow over very long-lived assets, and these are institutions that are trying to fund very long-lived liabilities, and even the bond markets that we're talking about, although there has been issuance at the very long end of the curve by some countries, it's not universal, there's not that much out there for them to buy.

If you've got a liability horizon that's 20, 30, 40 years, the bond market won't help you that much. You need something longer, and that's exactly where an infrastructure asset seems to have the right kind of lifetime to be compatible. So is it a knife edge that will make everybody suddenly run away? I suspect not.




Luci the elephant in the room for all governments in Australia is of course, how to fund the infrastructure. And when Queensland was downgraded … its credit rating from triple-A to double-A plus, I understand its borrowing costs increased by about 50 basis points. Whilst the Commonwealth still maintains its triple-A credit rating, this year's budget confirms how it's understandably favouring concessional loans or equity injections rather than traditional grant funding just to lower the burden of its own balance sheet. When the Reserve Bank is looking at interest rates generally, is the size of the Commonwealth's debt burden something you take into account or do you leave that to the Department of Treasury to wrestle with rating agencies?

Luci Ellis

I'm not in the business of opining about fiscal policy, but it is a very good question and I think the way I would frame it is actually to look at the actual debt to GDP ratios of Australia versus some other countries. In my prior role, I was the Head of Financial Stability and one of the things that we grappled with in the immediate aftermath of the global financial crisis was how to implement the Basel III rules here in Australia when the amount of government debt that was out there was much, much lower than in other countries and therefore that affected how much liquid assets the banks had to hold. It's very instructive to compare debt levels relative to other countries. I mean certainly there are countries out there with very large government debt levels, which are becoming a problem for them, but Australia is just not in that category, and it has a much lower level of debt than many other countries.


I'm afraid that probably concludes the time we have for questions. Thank you very much for your candour and insights today. Ladies and gentlemen please join me in thanking Luci Ellis.