Treasurer Joe Hockey.

Treasurer Joe Hockey. Photo: Peter Braig

It was October 22 and the NSW fires were raging when Treasurer Joe Hockey announced he was raising the national debt ceiling and establishing a National Commission of Audit.

The legislative limit on Commonwealth government debt was lifted to $500 billion, ostensibly to avoid a US-style crisis once the current limit of $300 billion was reached, forecast to happen by December 2013.

The Treasurer claimed the primary purpose of the NCA would be to examine ways of reducing Commonwealth government debt, primarily by reducing service provision and reviewing the ''scope, efficiency and functions'' of the government.

The NCA is asked to identify areas where there is or is not a compelling case for federal government activity or whether it could be undertaken more effectively by the private sector. It is tasked with reviewing ''the extent, condition and adequacy'' of Commonwealth-sector infrastructure according to principles such as respect for taxpayers, living within means and doing for people ''what they cannot do, or cannot do efficiently for themselves, but no more''.

Yet, if government debt is going to be reduced so radically by government service cuts, increased user charges and a sell-off of assets, why should the government need to increase the debt ceiling? And it is not a small increase - it is a hefty $200 billion, an increase of 67 per cent.

To get an answer we need to set these proposals in the context of other pro-corporate strategies being rolled out by government, including rights of foreign corporations to dispute legislation that undermines their profits under the Trans-Pacific Partnership Agreement.

The corporate sector has made no secret of its desire for an infrastructure boom (i.e., roads, buildings, airports, power and communication networks). As Tony Shepherd (chairman of the NCA) and president of the Business Council of Australia said in 2012: ''As the construction boom associated with the resources boom tails off, infrastructure can sensibly fill the gap.''

Infrastructure Partnerships Australia, a corporate lobby group, and Citibank have stated that Australia's ''infrastructure deficit'' is about $700 billion.

Assuming they are correct, or the appropriate bodies to so advise, how do you raise an investment pool of $770 billion? Selling public assets could be supplemented by increasing the debt ceiling and pushing superannuation funds to invest part of their ''balanced'' portfolio in infrastructure.

Under the model for infrastructure projects such as the Sydney Harbour Tunnel, Cross City Tunnel and AirportLink rail, corporations borrowed capital and sank it into the construction phase of projects. But that exposed them to high risk and miscalculations. So a new public-private partnership model is beginning to emerge.

The government has a AAA credit rating. It can borrow money more cheaply than the private sector, at a low interest rate and spend it on building roads and railways. But this leaves the government with debt. Solution - they sell the debt to the private sector in the form of government bonds. These are then traded on the markets such as the cover bond market.

Because it is a government bond, it is pretty much guaranteed, making it a safe investment, so plenty of investors are rounded up to buy the debt. The bonds are called ''converting infrastructure bonds'' because once a toll road or hospital is built, the bonds convert to private equity (shares) held in the main by private corporations and superannuation funds that then manage and gain profits from the ongoing utilisation of the infrastructure.

Yet, in time, investors will want to cash in their bonds. The government has to pay them out. They can do that through asset sales, say $400 billion, which can also be used for more construction.

But the resulting budget hole created by lost ongoing asset revenue has to be filled by higher taxes, such as raising the GST. The latter move was recently recommended by West Australian Premier Colin Barnett to cope with his state's infrastructure debt.

Many corporation may elect to have the government buy back the asset after 25 years, by which time it will cost a bit to keep going or replace. For superannuation fund investors, a problem is that infrastructure (road tunnels, rail lines, hospitals) often makes for poor return on investment compared with banks or mining companies. Yet, if the government's debt burden never actually goes away, if taxpayers have to pay more tax to fill revenue gaps and if superannuants are left to sit on poor investments in their super funds, why would such a model be adopted?

One possible reason is the foreign-owned and domestic corporations that are paid with taxpayer funds to build the infrastructure (such as Halliburton and Lend Lease) also will operate the infrastructure once it is built, backed by transnational consultancies such as McKinsey and KPMG, and law firms specialising in asset transfers and mergers and acquisitions. Hence a major problem with the TPPA giving such foreign corporations greater rights to challenge legislation than local businesses.

Asset management corporations such as State Street and investment banks such as Goldman Sachs like this new infrastructure model because once an asset is in private hands the collateral on the asset can be sold and sold again on the markets - similar to housing before the 2008 global financial crisis. Collateral and government debt linked to infrastructure money-spinners indeed is a public policy area to watch over the next few years.

  • Caroline Colton and Thomas Faunce are at the Australian National University. This topic will be discussed at a workshop at the Innovations Theatre, Eggleston Road, at 5.30pm on December 4.