The challenge of building Australia’s gateway to the Indo-Pacific

Kate Robertson is a lawyer and was a delegate at the 2015 Australia China Youth Dialogue.

Aidan Lavin is a Senior Associate at Corrs Chambers Westgarth and was an organiser of the 2015 Australia China Youth Dialogue.

In June last year, the Commonwealth Government unveiled its plan for the large-scale economic development of Northern Australia.

The release of the White Paper on Developing Northern Australia was met with relatively little fanfare. In some ways, this is unsurprising. The scale of other recent development initiatives such as China’s ‘One Belt, One Road’ initiative and the Asian Infrastructure Investment Bank somewhat dwarf the Commonwealth’s plan for the north.

Nonetheless, the Commonwealth’s plan is ambitious. The policy measures in the white paper are designed, in part, to develop the north into the country’s next trade and investment gateway, and particularly into the Indo-Pacific region (which stretches from South Asia to East Asia and the Pacific).

Agricultural products, tourism, energy and resources are all earmarked as key sectors that will underpin the economic development of the north. Demand from China, Indonesia and other emerging markets in the region will be critical to the growth of those sectors.

The north’s proximity to key markets like China and Indonesia makes it a natural choice as a trade ‘gateway’ and yet, while its significant potential has long been recognised, the vision of Northern Australia as an economic hub has never been fully realised.

Two critical factors — infrastructure development and the private sector investment required to underpin it — will be essential to realise this vision. These two factors are inextricably linked. Significant private sector investment from both domestic and international sources will be needed to deliver the backbone infrastructure required to unlock Northern Australia’s potential.

An enhanced network of large-scale infrastructure, such as roads, rail, airports and ports will be critical to ensuring that the goods and commodities produced in the north can be efficiently and cost-effectively transported, both within Australia to target markets in the Indo-Pacific. This will be particularly vital to maximising Northern Australia’s international competitiveness in the target agricultural, energy and resources sectors.

What are the challenges of attracting private investment in northern Australian infrastructure projects?

Northern Australia faces significant challenges on this front. As a geographical area, it is unique. While the north represents 40 per cent of Australia’s total landmass, only around one million people live there.

Regional centres and communities in the north are also widely dispersed, making it both difficult and expensive to provide businesses with the infrastructure they need. For example, some remote areas still lack a reliable connection to essential utilities like power and water.

Australia’s recent resources boom has driven some growth in population and industry in the north, and there have been resultant improvements in existing and new infrastructure. However, there is much more to be done to overcome the deficiencies in Northern Australia’s existing infrastructure networks.

Northern Australia’s low population density and dispersed industry mean it costs more to deliver projects there, potentially resulting in lower returns to investors. The difficulty of accurately predicting long-term demand for infrastructure may also affect investor confidence in the north as an investment destination. These characteristics have the potential to adversely affect the bankability of infrastructure projects, and therefore their ability to secure sufficient private sector investment.

However, the establishment of the north as a legitimate economic hub, and the creation of meaningful connections with growing markets in the Indo-Pacific region, will only be possible with a significant improvement to the north’s existing infrastructure networks. Attracting the level of investment required for that improvement will be critical if the Commonwealth’s plan for the North is to succeed.

A new way forward?

Recognising this, a key element of the Government’s plan for the north is the creation of the Northern Australia Investment Facility (NAIF). The NAIF will provide up to $5 billion in concessional loans (rather than grants) towards the development of the economic infrastructure required to facilitate Northern Australia’s economic development.

Importantly, NAIF funding is intended to complement, rather than replace, private sector funding. It is proposed that the NAIF will provide finance for no more than 50 per cent of the total debt for an infrastructure project.

The potential funding available through the NAIF should go some way towards building private sector confidence in the North as an investment destination. As the recent leasing of the Port of Darwin to Chinese-owned Landbridge Group demonstrates, there is already an existing level of enthusiasm among Australia’s neighbours to invest in major infrastructure that will help to strengthen economic ties in the region.

Yet, as the controversy surrounding the Port of Darwin lease demonstrates, foreign investment in Australian infrastructure — particularly in strategic assets such as ports — brings its own challenges. If concerns regarding foreign ownership or control of major infrastructure assets in Northern Australia are not well managed, they could become a hurdle to the implementation of the Commonwealth’s plan.

Foreign investment has always been essential to Australia’s development. This has not changed. There is no doubt that transforming the north on the scale contemplated by the White Paper will need investment from overseas.

The recent establishment of a one-stop shop for stakeholders and investors in the form of the Office of Northern Australia, based in Darwin, is a step in the right direction. Changes to the foreign investment regime to legislate oversight by the Foreign Investment Review Board (FIRB) for all significant government asset sales and long term leases to foreign investors — even if FIRB and other agencies have been involved informally behind the scenes on recent transactions including the Port of Darwin lease — would also help alleviate perceptions that foreign investment in Australian infrastructure is not being appropriately managed.

Managing the concerns and critics of foreign investment will be a test that Australia’s government must pass. The immense potential of Northern Australia as a gateway to the Indo-Pacific depends on it.

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