Sponsored The funding model that could bring high-speed rail within reach

The funding model that could bring high-speed rail within reach

There's one thing getting in the way of a one-hour train between Melbourne and Sydney. Photo: Getty
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It’s the holy grail of infrastructure projects: a high-speed rail line linking Australia’s east coast capital cities.

It rears its head every five or 10 years, everyone agrees it would be a great asset, nobody agrees on how to pay for it, and then all is silent for another five or 10 years.

In 2012, a government-funded feasibility study on a link between Melbourne, Sydney and Brisbane estimated it would cost $114 billion.

One recent iteration – with two former state premiers on its board – is a proposed $200 billion line which would see travelling time between Sydney and Melbourne reduced to three hours.

Meanwhile, US company Hyperloop One, with billionaire inventor Elon Musk at the controls, is proposing a one-hour link between Melbourne and Sydney in which passengers and freight would travel in levitating capsules inside a tube.

Both companies gave evidence at the federal parliamentary committee on infrastructure, transport and cities in October.

But so far every consortium has failed to get out of the station, with money being the seemingly impossible hurdle.

High-speed rail is far from the only major infrastructure project mired in a money pit.

It’s estimated Australia faces a $300 billion infrastructure deficit, and many experts believe part of the problem is the usual bidding process inflates costs and keeps a major source of possible investment on the sidelines.

Currently on most major projects step one is finding a consortium to build the asset.

Once it’s built, the consortium departs with its fee.

The long-term operation and sustainability of the infrastructure asset is not necessarily a motivating factor for the consortium, but providing optimistic forecasts to give them a better chance of winning the bid is.

As it stands, Australian superannuation funds – one of the top five pools of retirement savings in the world – often stay on the sidelines when major infrastructure projects are put out to tender, because the current model promotes long procurement timeframes, sporadic deal flows and high bid costs.

But there’s an alternative which promises to bring significant savings to government and by extension, taxpayers and would see super funds enter the fray.

The IBM was developed by ISA to support investment in Australian infrastructure by long-term equity investors
The IBM was developed by ISA to support investment in Australian infrastructure by long-term equity investors.

The Inverted Bid Model (IBM) sees the traditional process is turned on its head, with an initial tender to seek equity partners who will make their returns via the long-term management of the asset, not short-term investors looking to hit pay dirt from the build.

This equity partner would then be responsible for overseeing a tender process to engage every other contractor to build the asset.

The long-term nature of the arrangement means the equity partner has an incentive to identify, price and allocate risk accurately, and the fact they’re signed up for the life of the asset means they have a stake in ensuring it’s built to a high standard.

Proponents of this model say it could cut the cost of bids from an average of 1.5 per cent of the total project value, to 0.8 per cent, and speed of delivery by up to 30 per cent.

Industry SuperFunds are already a major infrastructure investor and support the IBM, and has presented the concept to governments, citing projects including a Melbourne airport rail link, NSW’s Port Botany freight rail duplication and, yes, the high speed rail link as perfect options for its use.

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