infrastructure funding and financing

BC: Joe, in a nutshell, what did this project involve? 

JC: We were commissioned to consider how infrastructure should be funded and financed. That’s a huge question. And that brief came about in a pretty interesting way. 

A state planning minister commissioned an expert panel to look into a specific question about how particular aspects of residential and commercial development are financed. Think of, for example, the roads linking a new subdivision. Or more wastewater capacity to support infill housing. Who should pay for that? How much should they pay? And who should raise the capital needed for the infrastructure build? 

The panel acknowledged that there were a number of issues with the status quo arrangements. Including that it has been built out over time, bit by bit. That often leads to some complicated and inconsistent arrangements. I guess part of the reason they commissioned us is because they wanted to be part of the solution to that, rather than reinforce the problem. They recognised that any recommendations needed to fit into a broader picture, of how government should arrange funding and financing for all infrastructure. 

So, our task was to come up with a logical, defensible, first-principles framework for funding and financing all kinds of infrastructure, from the very small to the very large. I guess you could say we were their wide-angle lens. 

BC: How did you start the project when the brief, and the question, was so large?  

JC: Well, we looked at what other people had done in similar contexts, and we played with a bunch of different options that didn’t work.  We thought about breaking it into different categories of infrastructure e.g. transport, utility etc. This didn’t work for us because, although they are both technically transport infrastructure, bike paths are very different to airports. We also tried to break it down into what form of government was responsible for that funding at the time. We found there was no logical breakdown of why these types of funding’s fell into different levels of government.  

So we started to think about the underlying characteristics of different kinds of infrastructure that define them. We looked into the lifetime of the asset, the scale, level of cost etc. We had a breakthrough when we conceptualised the problem from a private vs public benefits perspective. This way of thinking led us to a very useful frame of reference by applying a market failure lens to work through the project because the underlying features of the infrastructure helped reveal the real problems we were trying to tackle through government involvement. Was this a matter of a natural monopoly? Maybe there were externalities, or public goods. 

I’ll (reluctantly!) spare you the economics lesson. But we did find that applying some pretty simple economic ideas was a good starting point for a logical framework. That’s not to say we were completely bound by the market failure lens, though. For example, we also looked at situations where rather than responding to market failure, government might want to invest ahead of demand to stimulate new patterns of development. Like, say, a new highway or railway line that encourages population to grow in a particular way. 

We also found that length of life of the asset was particularly influential in our thinking about financing. We preferred debt as a way to smooth costs over the lifetime of an asset. 

BC: What made dandolo’s approach to this project unique? 

JC: This project is the first of its kind that dandolo had tackled. So, we weren’t bringing existing views / sector expertise to the table. What we did bring was a really good first principals, problem solving skill set. What the client found refreshing was that our approach was genuinely from first principles. We were prepared to consider, and then discount, more conventional ways of thinking about infrastructure. Firms who are deep in the weeds on their thinking about infrastructure may have struggled to see the woods from the trees, whereas we were able to be clean and conceptual with fresh first principals thinking to the problem.  

Additionally, at dandolo we don’t pretend to be specialists at everything, we’re prepared to bring people in from other contexts. I brought in a colleague from a former life consulting in New Zealand. We’d worked together on government financing for infrastructure, and he’d gone on to do wider infrastructure advice. We had always worked well together and it was great to reconnect. And then we also had Dan Norton who is a regular, and incredibly valued, dandolo project partner. Dan had recently come off the Board of Infrastructure Australia. His experience meant he gave great, insightful feedback. He always shares his considerable wisdom generously. 

BC: What do you expect the broader impact of dandolo’s work on this to be? 

JC: I know it was a very useful and important framing tool to help this expert panel. I know it confirmed some of their hypothesis and suspicions, but also provided them with challenge. And I know it gave them a sense of coherence and a strong frame in which to view their smaller scale recommendations.  

I don’t think it was necessarily a direct line between our work and a change in government action. However, I think it did have an important framing impact and gave our clients confidence to make recommendations that were more significant / heroic than they would’ve done if they had just done the traditional, bottom-up stakeholder perspective.  

BC: What about this project makes you proud? 

JC: It’s a demonstration of what we always say about dandolo but don’t always get an opportunity to test. That you can throw us at any problem, no matter how new or conceptually difficult, and we will work hard and find a way forward through sheer force of intellectual will (understanding from all angles, testing hypothesis). We managed to do that on this project and for that I’m really proud.