1912 future building lowres by Executive Media

The Australian Infrastructure Review Volume 4 Number 1

Infrastructure. Infrastructure. Look closely and you will see a future in it too. Look closely and you will see a future in it too.

Acquiring infrastructure assets, upgrading existing infrastructure and delivering new infrastructure all require considerable commitment of capital expenditure. Investing in infrastructure is a significant Acquiring infrastructure assets, upgrading undertaking, but it’s critical in driving existing infrastructure and delivering improvements in Australia’s national new infrastructure all require considerable productivity. commitment of capital expenditure. That’s whyinANZ is committed to supporting Investing infrastructure is a significant the infrastructure industry. As leading undertaking, but it’s critical in adriving provider of capital and advice to the improvements in Australia’s national infrastructure productivity. industry, ANZ is uniquely positioned to help clients and investors.* That’s why ANZ is committed to supporting the infrastructure industry. As a leading provider of capital and advice to the infrastructure industry, ANZ is uniquely positioned to help clients and investors.*

Our extensive network across 29 markets in Asia Pacific provides access to diverse pools of capital and a wide range of investment and partnering opportunities to assist our clients build Australia’s future. Our extensive network across 29 markets in David Byrne Asia Pacific provides access to diverse pools Global Head and of Infrastructure of capital andofa Utilities wide range investment Phone: +61 3 8655 7552 and partnering opportunities to assist our Email: clientsDavid.Byrne2@anz.com build Australia’s future. David Byrne Global Head of Utilities and Infrastructure Phone: +61 3 8655 7552 Email: David.Byrne2@anz.com

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ANZ’s colour blue is a trade mark1of ANZ. Item No. 85931 07.2013 W353161 353161_Future Building July 2013_85931.indd

16/07/13 3:03 PM

The Australian Infrastructure Review

Editor: Gemma Peckham E: gemma.peckham@executivemedia.com.au Design: Alma McHugh

Contents

Future Building is published by:

Chairman’s Foreword | The Hon Mark Birrell, Chairman,

Infrastructure Partnerships Australia

The Hon Mike Baird MP | New South Wales Treasurer

The Hon Warren Truss MP | Deputy Prime Minister of Australia, Minister for

Infrastructure and Regional Development

Chairman’s Panel

Adrian Hart | Senior Economist and Senior Manager,

Infrastructure and Mining Unit, BIS Shrapnel

Bruce Munro | Managing Director, Thiess

Peter Harris AO | Productivity Commission Chairman

Project Delivery Panel

Lance Hockridge | Chief Executive and Managing Director, Aurizon

Executive Media Pty Ltd ABN 30 007 224 204 430 William Street Melbourne VIC 3000 Tel: +613 9274 4200 Fax: +613 9329 5295 E: media@executivemedia.com.au W: www.executivemedia.com.au Business Development Manager: David Haratsis Tel: +61 3 9274 4214 E: david.haratsis@executivemedia.com.au Printed by: McPherson’s Printing Group

DISCLAIMER: The editor, publisher, printer and their staff and agents are not responsible for the accuracy or correctness of the text of contributors contained in this publication or for the consequences of any use made of the products, and the information referred to in this publication. The editor, publisher, printer and their staff and agents expressly disclaim all liability of whatsoever nature for any consequences arising from any errors or omissions contained in this publication, whether caused to a purchaser of this publication or otherwise. The views expressed in the articles and other material published herein do not necessarily reflect the views of the editor and publisher or their staff or agents. The responsibility for the accuracy of information is that of the individual contributors and neither the publisher nor editor can accept responsibility for the accuracy of information that is supplied by others. It is impossible for the publisher and editors to ensure that the advertisements and other material herein comply with the Trade Practices Act 1974 (Cth). Readers should make their own inquiries in making any decisions and, where necessary, seek professional advice. © 2013 Executive Media Pty Ltd. All rights reserved. Reproduction in whole or in part, without written permission, is strictly prohibited. Volume 4 Number 1

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Foreword I am delighted to introduce the latest edition of Future Building, the journal of Australia’s infrastructure sector. This edition draws on the proceedings of our recent Partnerships conference, distilling the deep policy and reform contributions from a selection of the nation’s most senior policy, business and public sector leaders. This year’s program saw fresh optimism reflected throughout the day’s proceedings, as fiscal challenges drive procurement experimentation and balance sheet reform across Australia’s states and territories. The overlay of a new, majority Federal Government – with strong funding and policy commitments for infrastructure – provided a strong context for ambitious contributions about the requirement for a national infrastructure compact. This year’s keynote, plenary and panel presentations explored the renewed project and policy experiments, as the states approach similar infrastructure problems, using markedly different approaches. The uniting outcome across the day was the benefit and utility that will be provided through a better skilled and mandated Infrastructure Australia. Contributors noted that Infrastructure Australia has the opportunity to interrogate the outcomes, as states trial new models to fund and finance major motorway, health and other infrastructure projects. I was particularly delighted that the newly appointed Deputy Prime Minister, the Hon Warren Truss MP, was able to join us in the immediate aftermath of the Federal election. Mr Truss provided a generous contribution, outlining the philosophy and approach of the Abbott Government as it moves to achieve its infrastructure legacy. As you may be aware, I have also decided to retire as the Chairman of Infrastructure Partnerships Australia, after more than eight years in the role. As such, this will be my last contribution to Future Building.

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I would like to take this opportunity to thank and acknowledge the generous engagement, support and investment from IPA’s members, and particularly my fellow Board Members. I trust that you will find this edition both relevant and thought-provoking, and I welcome any feedback that you may have. In the meantime, my best wishes for a successful 2014.

The Hon Mark Birrell Chairman, Infrastructure Partnerships Australia

The Hon Mike Baird MP

New South Wales has become a strong example to all states and territories of what can be achieved by selling existing assets and using the proceeds to fund new infrastructure, says New South Wales Treasurer, The Hon Mike Baird MP. The challenges I want to address the question: Why isnâ&#x20AC;&#x2122;t more infrastructure being built across the country? What you see is a range of challenges across the states, but I believe that there are some solutions. I want to present some of the challenges, and talk about some of the solutions and the opportunities for those in the sector. When we came into government, the infrastructure deficit, which was determined by Infrastructure NSW, was $30 billion over the next 10 years. The debt profile was $55 billion and rising. Obviously, with that rising profile, both in terms of infrastructure needs and debt, the threat to the AAA credit rating was very apparent. Indeed, our

incoming brief from Treasury made it clear that the AAA rating would be lost unless we took action. Before the global financial crisis, you might have been able to debate the necessity of retaining the AAA rating. After the GFC, there is no debate. The cost is significant. We saw it when Western Australia lost its credit rating just recently, and its 10-year bonds blew out by close to 30 points. Queensland had similar downgrades, and it got up to 60 points. Somewhere between 30 and 60 points for 10-year money, on $60-70 billion in debt, you start to understand the financial challenges. And thatâ&#x20AC;&#x2122;s before you can put a dollar into infrastructure. You would have to find the additional money for the cost of your debt, not to mention the issues that a Volume 4 Number 1

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The Hon Mike Baird MP

downgrade would create with respect to access to capital and the restrictions that might bring. So the imperative remains to maintain the lowest possible cost of debt so that you can invest the maximum amount into infrastructure. Ultimately, the debt levels are where the rating agencies start to focus. If you’re not controlling your debt, and you’ve got no capacity and no plan to reduce it, it’s not long before you lose your AAA rating. At the same time, New South Wales inherited economic growth which was the slowest for any state in 10 years. Jobs growth was also the slowest of any state for 10 years. Business confidence was at the lowest, or secondlowest, level for a big part of the previous five years, and our housing supply was the lowest it had been in many respects for 50 years. It was not exactly a good dashboard of indicators that we inherited. If you don’t have the money, you can’t spend it. That’s the challenge we’ve had. We’ve gone from six per cent revenue growth down to about 4.2 per cent, so it’s almost a 30 per cent reduction in revenue growth during the period. In real terms, that means a loss of about $2.5 billion per year – and those are not the sorts of numbers any state government can sustain. Dealing with an infrastructure backlog is one thing, but what also needs to be done is an analysis

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of the future pressures that are going to be placed on capital spending. Analysis by Infrastructure NSW reveals that by 2031 we will need 5000 extra hospital beds, more than 700,000 additional homes, the capacity to handle a 37 per cent increase in daily train trips within Sydney, and a 98 per cent increase in passenger trips in and out of Sydney by air. When you consider the metrics we inherited – the debt projections, falling revenues and huge infrastructure demands – it’s not what you’d call a rosy picture.

The strategy So what do you do? For a start, tiered and long-term planning, with a clear understanding of where the city and state are going, is essential. Victoria has certainly shown itself to be a leader in this regard. You also need to undertake rigorous project selection – something that was not done well in New South Wales by the former Labor Government. I think governments of all political persuasions have failed this test. When an election comes along, political strategy looks at where the marginal seats are, and what can be built in the middle of these marginal seats. Invariably, these proposals are not costed, and have no economic analysis and no funding allocated. That kind of process has held back this state and this country.

The Hon Mike Baird MP

There needs to be rigour around the projects you’re putting forward; and, once you have that, you need to get on and fund them. New South Wales has taken care to get the planning right by looking at metropolitan and state plans and identifying growth areas where infrastructure is required. We have looked at the projects that are required, and have done extensive economic analysis on them. We established Infrastructure NSW (INSW) under the stewardship of Nick Greiner, and that organisation produced a State Infrastructure Strategy. Governments will come and go, but our hope is that this plan is something that stays. This consistency is important to the infrastructure sector, because you want to work with a government that is constructive, but ultimately you want to have the opportunity to work with successive governments to deliver the projects. Certainly, that’s what INSW has done. It has provided both a short-term plan and a long-term plan for what we can do over the next 20 years that, importantly, will establish the projects that require budget consideration now. We have a five-year, funded plan to attack that long-term infrastructure strategy. Stakeholders have roundly applauded the prioritisation list, and we really thank Nick Greiner for his stewardship of that. It provides a very clear road map. The priorities have been established in different timeframes, and throughout this process WestConnex was identified as a significant project. I’ve said to people across the state that, in terms of economic analysis, WestConnex is a project that can provide investment opportunities and boost productivity. It makes the most economic sense, and that’s why we’re getting on with it. It’s hard to argue with that logic. You then flow onto other projects in the slightly longer term, such as rebuilding Wynyard and Town Hall stations for capacity, and extending the F6 motorway.

The funding Once you have the challenges right and you have the strategy, you need to consider how it can be funded within the budgetary constraints. The first thing we must do is stick to our budget. When you look at the data, you can see that the culture of the former government was one in which budgets didn’t really matter; expenses blew out by an average of $1.3 billion a year over 16 years.

We have changed that culture and come in on average about $1 billion under projected expenses in each of our three budgets. If you’re not controlling your budget, you’re limiting your ability to be flexible in funding infrastructure. Expense growth was more than seven per cent when we came in, but we’ve now brought it down to 2.7 per cent. We have brought expenses down, and we’ve now got the capacity to fund projects, because any uptick in the economy goes straight to the bottom line, helping us to deliver the infrastructure we need. Improving the operating performance has also led to a decrease in net debt: you can see that, relative to the forecast debt we inherited, we’re about $9 billion under by 2014–15. We have taken some of the pressure off our debt metrics, but at the same time we want to put our foot down in relation to building, and increase infrastructure spending over the next four years, when we plan on investing about 38 per cent more than the previous four years. So a key part of our strategy is renewing our balance sheet. This strategy has involved taking an asset on our balance sheet, and using the asset to invest in infrastructure: an asset for an asset. The approach has been called social privatisation by a number of significant industry figures and, importantly, it is moving across the political divide. In fact, Paul Howes, Volume 4 Number 1

Above: The Hon Warren Truss MP and the Hon Mike Baird MP at Partnerships.

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The Hon Mike Baird MP

In relation to tolling, which has historically been a difficult issue politically, I think the battle is largely won the National Secretary of the Australian Workers’ Union, recently supported this approach. We also need to engage superannuation funds with the right assets, ensuring a win-win situation. Eighty per cent of the leases of Port Botany and Port Kembla went to Australian superannuation funds, which now own the assets. So millions of Australians still have a stake in those assets. The state receives the money up-front, so we can invest in additional infrastructure, and the private sector capital gets invested into the ports, driving efficiencies in a way the public sector cannot. The new port owners, without the same constraints on their balance sheet, are mapping the logistic chain, identifying where leakages are and looking for opportunities for improvement. The Port of Newcastle will be assessed using a similar approach, due to the success of the Port Right: The Hon Mark Birrell greets The Hon Mike Baird MP.

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Botany and Port Kembla operations. Newcastle has embraced the transaction and will be revitalised as a result, because we have been honest with the community and told them where we are at financially, and exactly what we want to do. The political class underestimates the intelligence of the electorate and their capacity for an honest debate.

The delivery The final question is what do we do in delivery, once the funding, the strategy and the priorities are in place. As I indicated earlier, the first project we are going to deliver is WestConnex. This project involves 33 kilometres of roadway, the removal of 3000 trucks from Parramatta Road, and a time saving of 40 minutes from Parramatta to Sydney Airport, including 52 sets of traffic lights avoided. It is going to be a revolution for Western Sydney. The financing model we are putting forward shows innovation in project delivery. We are responding to the market’s concern about patronage risk, and our own balance sheet challenge, by bringing the two together and delivering a sustainable model. The Government’s initial contribution of $1.8 billion comes from the port leases and will be used to construct stage one, in collaboration with the Commonwealth contribution. Through these contributions, we’ll prove up cash flows from tolling, which will then be taken to the market. Once those

The Hon Mike Baird MP

cash flows are borrowed against, we’ll build stage two and then repeat the process to build stage three. There is capacity for superannuation funds, and obviously financiers and banks, to participate in the debt side of the arrangement. At the conclusion, we then have the capacity to invite superannuation funds to participate in the equity process, having already eliminated the ‘greenfield’ risk around patronage. We’re excited by the opportunities. Private sector equity is not just a case of the Government handing out money and moving out of the picture – I want a constant dynamic tension as we continue releasing capital. In relation to tolling, which has historically been a difficult issue politically, I think the battle is largely won. We have been honest with the community in telling them that we cannot afford to build infrastructure unless they are able to contribute. In light of this, our policy has been to put a benefit in place before we ask for contributions through tolling. Obviously, we will try to minimise the toll cost, but tolling continues to be part of the critical path when delivering infrastructure. New South Wales has a significant Public Private Partnership (PPP) agenda. We are leading the country on PPPs, because we can see that partnerships are the critical way that we are going to deliver the infrastructure backlog. Another benefit of having the infrastructure pipeline established and laid out on the table is the opportunity

for unsolicited bids. We are able to say to the private sector: ‘You have the list, you know the timing, you know the capital we have – can you think of ideas or opportunities to bring these projects forward?’ For example, the project of linking the M1, which currently terminates in Wahroonga, with the M2 has been around for a long time [formerly F3–M2], but in terms of priority has sat below other projects. An unsolicited proposal from Transurban suggested that the project could be delivered with minimal government contribution. Although the negotiations are not yet finalised, there has been strong progress, and this approach should be encouraged. This is clearly an example where traditional tendering would not have delivered the same innovation. My final point is about the constructive role of the Federal Government, and it’s encouraging that we have one that is committed to infrastructure delivery and that is prepared to provide incentives to the states to invest in infrastructure. One of the incentives I have spoken about previously is in relation to tax-equivalent payments. Governments are starting to unlock their assets, as New South Wales is doing, and taking those proceeds and putting them into new assets, which brings huge benefits. But when a state-owned asset is privatised, there is also the loss of the income stream that currently exists with tax-equivalent payments. This becomes a company tax windfall for the Commonwealth. continued on page 10 Volume 4 Number 1

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Moorebank Units Relocation, New South Wales

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TPI Track Maintenance, Western Australia

Blacktown Hospital, New South Wales

Laing O’Rourke is managing contractor for the $870 million Moorebank Units Relocation project, Australia’s biggest single Defence capital works project since World War II. Thirteen Defence units and four allied facilities will relocate from a Commonwealth-owned Defence-occupied site at Moorebank to Holsworthy Barracks. Laing O’Rourke is designing and delivering a wide range of special-use facilities and infrastructure improvements, as well as additional support facilities.

McLachlan and Ann is Laing O’Rourke’s mixed-use development in Brisbane’s Fortitude Valley, comprising a 12-storey commercial tower, a 21-storey residential tower and a 5-storey mixeduse building with integrated commercial and retail space. Laing O’Rourke delivered the commercial tower earlier this year, which is now its new Queensland headquarters. The residential and mixed-use retail components will be completed in late 2013.

In 2007, Laing O’Rourke built a 250-kilometre, heavy-haul railway for Fortescue Metals Group to service their iron ore export network. Following the successful delivery of the railway, Laing O’Rourke was awarded a six-year maintenance programme, working from Anderson Point Port at Port Hedland to the Cloudbreak Mine to maintain a high standard of railway track and other corridor infrastructure.

Laing O’Rourke has been awarded a $145 million contract for the new Clinical Services Building at Blacktown Hospital in Sydney’s west. The project involves the design and construction of a new five-storey clinical services building, adjacent to the existing Blacktown Hospital, and linked by a fully enclosed “hospital street”. The new building will include comprehensive care centres for cancer, cardiac, respiratory and aged care services in purpose-built facilities.

The Hon Mike Baird MP

continued from page 7 My argument to the Federal Government would be that, if that windfall gain doesn’t sit within their forward estimates, so there’s no recurrent cost, why not take the funds that are released and put them into infrastructure? I know the Federal Treasurer is interested in leading this work, and certainly it is something that I think we should look at, because it provides an additional opportunity and an additional incentive. [Editor’s note: Federal and state governments have since reached an in-principle agreement to look further at the issue of tax-equivalent payments.] As governments face political battles over releasing

assets, the more money that we can secure for infrastructure is not only good for the state, but also good for the nation. What we can’t forget with infrastructure is that, underlying it, we are trying to make a difference to people’s lives. Part of that concept is saying ‘an asset for an asset’. Whether in roads, in hospitals or in a light rail system in Newcastle, I think understanding the connection with day-to-day lives and promoting that is the most powerful way that governments can bring the community along.

The Hon Mike Baird MP, New South Wales Treasurer Following the election of the New South Wales Liberal and Nationals Government on 26 March 2011, Mike Baird was appointed Treasurer of New South Wales, and in September 2012, he gained the Industrial Relations portfolio. Mike had served as Shadow Treasurer since December 2008, and previously as Shadow Minister for Energy, Finance and Youth Affairs. Mike was elected Member for Manly in 2007 after an 18-year banking career incorporating corporate banking, securitisation, debt capital markets and project finance in Australia, London and Hong Kong. Career highlights include managing corporate finance transactions across a range of industries for Deutsche Bank, and being Head of Originations, debt capital markets in London for the NAB. Prior to his election to Parliament, Mike was Head of Institutional Banking for HSBC in Australia and New Zealand.

Right: The long-term leasing of Port Botany (pictured) and Port Kembla was key to the Government’s strategy.

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Network NetworkIntegrity Integrity SERVICE SERVICEDELIVERY DELIVERY The Network Integrity (NI) area of Telstra delivers customer solutions resulted in the pole remaining in the customer’s backyard. The builder for asset relocations and commercial works. We work with our advised the customer they would arrange for the pole to be relocated customer’s back yard. Builder advisedadvised the customer they would arrange The Network Integrity (NI) area of area Telstra customer solutions for Asset incompletion the customer’s yard. The thethis customer would arrange The Network Integrity (NI) of delivers Telstra delivers customer solutions forthe Assetin the stakeholders to minimise damage, including working closely with upon of back theThe house, butBuilder unfortunately didn’t they happen, for the pole to pole be relocated upon completion of the house, but unfortunately this Relocations and Commercial Works. Works. We work with our stakeholders to minimise for the to be relocated upon completion of the house, but unfortunately this Relocations and Commercial We work with our stakeholders to minimise ‘Dial Before You Dig’ (1100) service. We survey the Inter Exchange and the customer was left with the relocation cost. didn’t happen and theand customer was leftwas withleft thewith relocation cost. cost. damagedamage including workingworking closely closely with thewith “Dial Before You Dig” (1100) service. didn’t happen the customer the relocation including the “Dial Before You Dig” (1100) service. Network (IEN) cable routes, which link all major capital cities in We survey Inter Exchange Network (IEN) cable all major We the survey the Inter Exchange Network (IEN)routes cable which routeslink which link all major to identify potential risks risks to Telstra assets. WeWe alsoalso provision capital Australia cities in Australia to identify potential to Telstra Assets. capital cities in Australia to identify potential risks to Telstra Assets. We also HFC (Foxtel/BigPond) network tonew newand andexisting existing multi-dwelling provision HFC (Foxtel/BigPond) networknetwork to Multi Dwelling UnitunitUnit provision HFC (Foxtel/BigPond) to new and existing Multi Dwelling developments, commercial and corporate services. developments, Commercial and Corporate services. developments, Commercial and Corporate services.

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Telecommunications Act 1997 incidents of non standard work practices relating to Telstra pits and manholes. incidents of non standard work practices relating to Telstra pits and manholes. the Network Integrity area,iswe encourage developers and builders to contact us Conscientious developers always always check where existing Telstra assets prior BecauseIn every development is unique, Telstra NI actively encourages all developers, Conscientious developers check the where the existing Telstra are assets are prior Because every development unique, Telstra NI actively encourages all developers, In the Network Integrity area, weand encourage developers andaffected builders us in the Conscientious Telstra recently modified PID or ‘Pit In policy in an effort developers check where the existing to ensure network assets infrastructure areDriveway’ not bytoorcontact included to commencing development. 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A developer recently purchased land in Victoria builders or members of the public to contact Telstra as early as possible relocating Telstra’sTelstra’s assets. parties parties responsible relocating assets. responsible commencing development. developer recently land in Victoria contractors, or members oftothe public toprotect contact Telstra asvaluable early as possible put inbuilders place to avoid damage and to assets. to Telstra – prior to sale of the developed land. Developers can andassets developed it into aA residential estate. Thepurchased site was surveyed, drainage, roads in development process and registerTelstra’s their PID inquiry. • Disruption to services and inconvenience to Telstra customers. • theDisruption to services anddiscuss inconvenience Telstra customers. and developed it access into ainstalled, residential estate. Theabout site(gas, was surveyed, drainage, roads in the development to discuss and register theirtoPID inquiry. NI works to process avoid the risks of: easily obtain to thispromotes information our assetsstrategies, by obtaining and paths were and new utilities electricity, water) were provided. Network Integrity proactively damage minimisation Network Integrity and proactively promotes damage minimisation strategies, and paths were installed, new utilities (gas, electricity, water) were provided. • injury or death to workers or the general public Telstra ‘Dial Before You Dig’ plans. But in this case, the new property Unfortunately the developer did not consult with Telstra about existing Telstra Damage to the Telstra network continues to be an area of concern. In the past with the “Dial Before You Dig” service, to raisetowhat we call we “cable Under no circumstances should should anyoneanyone try to move ormove alteror Telstra’s networknetwork together together with the “Dial Before You Dig” service, raise what call “cable Under no circumstances try to alter Telstra’s Unfortunately the didofnot consult with Telstra about Telstra existingnetwork Telstra (pipe/ Damagefour to the Telstra network continues to be an area of concern. In the of past •infrastructure damage to Telstra’s assets owners now face theWe cost relocating Telstra’s assets. assets. adeveloper result, customers whoconduct bought blocks found financial years Telstra has Under had anthe average 20,000 incidents network in As Australia. frequently cable awareness presentations infrastructure without authorisation. Telecommunications Act 1997 awareness” in Australia. Webought frequently cable awareness presentations without Under theofTelecommunications Act 1997awareness” assets. cable As a result, customers who blocksconduct found Telstra network (pipe/ four financial years Telstra hasauthorisation. had an average of 20,000 incidents of network • the significant costs of repairing damage faced by Telstra and manholes) in their front yards. Subdivision permits usually state the damage nationally. That’s nearly 55 damages per day! In Network Integrity we to Councils, Developers and Utility Companies. This year alone NI have (Cth) only persons authorised by Telstra undertake work onwork Telstra’s assets or to Councils, Developers andyards. UtilitySubdivision Companies. This year alone NI have (Cth) only persons authorised by can Telstra can undertake on Telstra’s assetscable or and manholes) in their front permits usually state the owners. damageensure nationally. That’s nearly 55 damages per day! In Network Integrity we andowned those parties responsible Network Integrity proactively promotes damage minimisation developer must atthan their cost provide “clear title” to prospective property with the strategies put in place to avoid damage and to presented more than fifty Cable Awareness presentations to the industry enter a enter facilitya compliance owned or operated by Telstra. Interfering (including unauthorised presented more fifty Cable Awareness presentations to the industry facility or operated by Telstra. Interfering (including unauthorised developer must at include their cost provide all “clear title”that to prospective property owners. ensure protect compliance withvaluable the strategies put in placetotoavoid avoidthe damage and to This would relocating needservice, to be relocated Telstra’s NIand works risks of: disruption to assets. services to Telstra strategies, together with the ‘Dial utilities Before You Dig’ to raise- including including the new NBN Company. entry or• tampering) with thewith infrastructure is ainconvenience criminal offence under the including the new NBN Company. entry or tampering) the infrastructure is a criminal offence under the This would include relocating utilities that need toland. be relocated - including protect•Telstra’s valuable assets. NI works to general avoid the risks of: assets – prior toall sale ofinthe developed Developers can easily obtain Injury or death to workers or the public CriminalCriminal Code Act 1995 (Cth). customers. whatTelstra we call ‘cable awareness’ Australia. We frequently conduct Code Act 1995 (Cth). Telstra access assets –toprior to sale of theabout developed land.by Developers can easily obtain • Injury or death to workers or the general public this information our assets obtaining Telstra “Dial Before •Developers Damage to Telstra’s assets Developers can avoid expensive rework and costs by contacting NI before cable awareness presentations to councils, developers and utility can avoid expensive rework and costs by contacting NI before access to this information about our assets by obtaining Telstra “Dial Before • Damage to Telstra’s assets You Dig”This plans. Butalone, in this case, the presented new property owners now face the cost of •Under Theno significant costs of repairing damage faced by Telstra andTelstra’s those beginning work. Recently the developer ofanyone a site inatry NSW interfered with circumstances should to move or alter beginning work. Recently the developer of site in NSW interfered with Telstra’s companies. year NI have more than 50 cable You Dig” plans. But in this assets. case, the new property owners now face the cost of • The significant costs of repairing damage faced by Telstra and those relocating Telstra’s parties responsible assets by raising footpath levels without first consulting Telstra in relation to its to its awareness assets by network raising footpath levels without firstauthorisation. consulting Telstra in relation Telstra’s infrastructure without Under the presentations to the industry – including the new NBN relocating Telstra’s assets. parties responsible • Disruption to services and inconvenience to Telstra customers. proposed works. The works significantly reduced access to theauthorised public proposed Theand works significantly reduced access to thetelephone public Telecommunications Act 1997 (Cth),toonly persons bytelephone Company. • Disruption toworks. services inconvenience Telstra customers. Network Integrity proactively promotes damage minimisation strategies, booth and encroached on a Telstra booth and on a pillar. Telstra pillar. assets or enter a facility Telstra canencroached undertake work on Telstra’s Network Integrity proactively minimisation together with the “Dialpromotes Before Youdamage Dig” service, to raisestrategies, what we call “cable Under no circumstances should anyone try to move or alter Telstra’s network owned or operated by Telstra. Interfering (including unauthorised These are just some examples of how developers and canpresentations together with the “Dial Before You Dig” service, to raise whatbuilders we call “cable Under no circumstances should anyone try to move or alter Telstra’s network awareness” in Australia. We frequently conduct cable awareness infrastructure authorisation. Under thewas Telecommunications 1997to In another example, awithout pole with Telstra telephone lines notwas relocated priorAct toprior In another example, a pole with Telstra telephone lines not relocated awareness” incosts Australia. We frequently conduct cable awareness presentations infrastructure without authorisation. Under thecan Telecommunications Act 1997under entry or tampering) with theby infrastructure is a criminal offence avoidtothe of rework and repairs by consulting Telstra Network Councils, Developers and Utility Companies. This year alone NI have (Cth) only persons authorised Telstra undertake work on Telstra’s assets or land being subdivided by a Developer. This oversight resulted in the pole remaining landpersons being subdivided by aTelstra Developer. This oversight resulted in theassets pole remaining to Integrity Councils, Developers and Utility Companies. year alone NIto have (Cth) only authorised by1995 can work on (including Telstra’s or the Criminal Code Act (Cth). about theirthan proposed plans prior This to the commencement presented more fifty Cable Awareness presentations the industry enter a facility owned or operated by undertake Telstra. Interfering unauthorised presented more than fifty Cable presentations to the industry enter aentry facility or operated Telstra. Interfering (including unauthorised of works. NI looks forward toAwareness working with the building industry toincluding the new NBN Company. orowned tampering) with thebyinfrastructure is a criminal offence under the including the new NBN Company. entry orCriminal tampering) with the infrastructure is a criminal offence under the Developers can avoid expensive rework and costs by contacting NI achieve the best outcome for our customers. Code Act 1995 (Cth). Criminal Code Act 1995 (Cth). before beginning work. Recently, theand developer a site inNI New Developers can avoid expensive rework costs by of contacting before Developers canWales avoid expensive and costs by contacting NI footpath before with South interfered withdeveloper Telstra’s assets by raising levels beginning work. Recentlyrework the of a site in NSW interfered Telstra’s These are justare some of how of developers and builders can avoid These justexamples some examples how developers and builders canthe avoid the beginning work. Recently the developer of a sitefirst in NSW interfered with assets by first raising footpath levels Telstra in Telstra’s relation without consulting Telstrawithout in relation consulting to its proposed works. Theto itscosts ofcosts rework and repairs by consulting Telstra Network Integrity about their of rework and repairs by consulting Telstra Network Integrity about their assets by raising footpath levels without first consulting Telstra in relation to its proposed works. Thereduced works significantly access to the public telephone plans prior commencement of works. looksNIforward to working works significantly access toreduced the public telephone booth and proposed proposed planstoprior to commencement of NI works. looks forward to working proposed works. The works significantly reduced access to the public telephone booth and encroached on a Telstra pillar. with thewith building industryindustry to achieve the bestthe outcome for our for customers. encroached onon a Telstra the building to achieve best outcome our customers. booth and encroached a Telstrapillar. pillar. In a pole withwith Telstra telephone lines was notwas relocated Network Integrity is contactable on 1800on810 443810 or 443 or Network Integrity is contactable 1800 In another anotherexample, example, a pole Telstra telephone lines not toprior to In another a pole with telephone lines was not relocated landexample, being subdivided by Telstra a Developer. This oversight resulted in theprior pole remaining email F1102490@team.telstra.com email F1102490@team.telstra.com relocated prior to land being subdivided by a developer. This oversight land being subdivided by a Developer. This oversight resulted in the pole remaining

These are just some examples of how developers and builders can avoid the These are just examples of how developersTelstra and builders canIntegrity avoid the costs ofsome rework and repairs by consulting Network about their costs ofproposed rework and repairs by Network Integrity about their Network Integrity isprior contactable on Telstra 1800 810 443 or plans to consulting commencement of works. NI looks forward to working proposed plans to commencement of works. NI outcome looks forward to customers. working email F1102490@team.telstra.com with the prior building industry to achieve the best for our with the building industry to achieve the best outcome for our customers. Network Integrity is contactable on 1800 810 443 or Network Integrity is contactable on 1800 810 443 or email F1102490@team.telstra.com email F1102490@team.telstra.com

COMPANY FOCUS

IS TENIX BECOMING MORE SUSTAINABLE? Yes, they have just been awarded Australia’s first ever Infrastructure Sustainability (IS) Design rating, achieving an ‘Excellent’ rating level for the design of two sewage treatment plants (STPs) at Cannonvale and Proserpine in North Queensland.

Australia spent more than $60 billion creating infrastructure in 2011/12. This included investment in roads, ports, railways, bridges, telecommunications, water and wastewater, electricity generation, electricity transmission and distribution, and gas pipelines. The IS rating scheme, developed and administered by the Infrastructure Sustainability Council of Australia (ISCA) is Australia’s only comprehensive scheme for evaluating the sustainability of the design, construction and operation of infrastructure, setting a beyond best practice benchmark for sustainability in infrastructure. Tenix was awarded Australia’s first IS rating, for the design of Proserpine and Cannonvale STPs, which they are also constructing and will operate and maintain on behalf of the Whitsunday Regional Council. In using the IS rating tool for the project, Tenix was able to confirm that their treatment plant designs are beyond best practice. The designs achieved the highest possible score in the IS rating tool’s Materials and Innovation categories. Equally, the IS rating process for the STPs allowed and encouraged Tenix to step up and identify and implement best practice and innovative sustainability solutions in other areas to deliver long-term environmental, social and economic benefits for the Whitsunday region. Tenix used a compact membrane bio-reactor (MBR) design for the Cannonvale plant, and a sequence-batch reactor (SBR) at Proserpine, instead of the larger, more complex designs originally proposed to the client. This resulted in systems that require less building materials and have a smaller site footprint compared to the original designs. Both Tenix-designed plants will produce high-quality effluent using as little energy as possible, setting an industry benchmark in the process. As a result, the Tenix designs will achieve estimated annual electricity consumption savings and reduced carbon emissions of 305 megawatt hours and 272 tonnes respectively, compared to typical plant designs. This equates to annual savings of $75,000 in ongoing operational costs. The design also uses less construction materials and incorporates re-use. For example, a cut/fill balance in the earthworks design minimises the import and export of material from each site, saving money and reducing waste charges and the associated emissions generated by transport. The

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design also avoided using asphalt for roads, instead using ‘green’ concrete supplied from a batch plant next to the Cannonvale STP. The ‘green’ concrete used for the project substitutes up to 30 per cent of cement component with fly ash from a nearby power station. The materials specified in the initial design provided to Tenix and Council would have accounted for the equivalent of 5094 tonnes of CO2 emissions. In contrast, Tenix’s design will only generate 3264 tonnes of CO2-e for materials (including the re-use of materials) – a 36 per cent reduction (1830 tonnes) in emissions. As a result of expected operational energy consumption reductions and lower materials use, 15,400 tonnes of CO2-e will be saved in the construction and operation of the plants. As a regional first, the Council and Tenix developed a plan to identify and assess the risks posed by climate change to the design and operation of the upgraded Cannonvale and Proserpine plants. The analysis was based on climate projections sourced from CSIRO, the Bureau of Meteorology, and external consultant modelling. Climatechange related hazards were identified, assessed and risk-mapped for various components of the plants and associated sewage collection and discharge networks over three time periods (present day, 2030 and 2070). A number of very high risks were identified in relation to five components of the plants, including flood impacts (2030 and 2070 years), access to site, heatwave impacts on materials and cyclonic impacts on electrical controls. The risks and adaptation measures – excluding low risks – have been added to the project risk register and will be taken into account when preparing and implementing the site operations and maintenance plans for each of the plants. A local participation plan was also developed to ensure that at least 70 per cent of the project’s procurement budget is spent within Queensland, and as much as possible of this in the local Whitsunday Region. To date, the plan has already been exceeded, with 50 per cent of the project procurement expenditure spent in the Whitsunday region and a further 30 per cent spent in south-east Queensland. Spend outside of Queensland has generally been for specialised equipment not available locally.

A number of other sustainability initiatives were also developed, including a Green IT plan (resulting in annual savings of 10.7 megawatt hours and avoiding emission of 9.5 tonnes of CO2-e) and fuel-efficient vehicles to save fuel and reduce carbon emissions. Site-based initiatives have included using recycled water for hydro-static testing of the tanks (resulting in the saving of two megalitres of potable water – nearly the volume of an Olympic-sized swimming pool) and the installation and use of rainwater tanks for amenities and landscape irrigation. There has also been a significant focus on ‘zero harm’ safety drivers across all project phases. To date, there have been no lost-time injuries recorded on site. In addition, a culture of reporting near-misses has been developed as a basis for developing safety stralegies to avoid possible injuries. Tenix and Whitsunday Regional Council have shown leadership in demonstrating how sustainability of critical infrastructure can bring benefits to the local community and the environment – including in this instance, the Great Barrier Reef Marine Park and the 74 Whitsunday Islands that fringe the coastline. The IS rating scheme is focused on changing industry behaviour and making sustainability a priority in the planning, delivery and operation of infrastructure. Designing and delivering more sustainable infrastructure provides benefits to asset owners, users and society over the long life of infrastructure, including lower environmental impact, enhanced social outcomes, better asset performance, and commercial advantages.

First in Australia to receive an Infrastructure Sustainability rating. “I am proud to be part of a company that is building sustainability into its infrastructure projects and helping to protect the Great Barrier Reef”. Simon Mackenzie, Senior Project Manager

Tenix has been awarded Australia’s first IS (Infrastructure Sustainability) rating for its design of two wastewater treatment plants. The IS scheme is Australia’s only comprehensive scheme for evaluating the sustainability of the design, construction and operation of infrastructure. Simon is overseeing the upgrade of the wastewater treatment plants for the Whitsunday Regional Council in North Queensland. To find out how go to www.tenix.com/whitsunday

Whitsunday Wastewater Treatment Plants Upgrades Tenix has been awarded a contract by Whitsunday Regional Council to design and construct two wastewater treatment plants, at Cannonvale and Proserpine, in North Queensland. Tenix was awarded the contract for the ability to provide end-to-end design, construction and operation of the two plants. Following construction, Tenix will operate and maintain the upgraded plants under a long-term contract with the Council.

Tenix is a leading delivery partner to owners of gas, electricity, water, wastewater, heavy industrial and mining assets across Australia, New Zealand and the Pacific. We design, construct, operate, maintain and manage assets and systems to deliver optimal results for owners and their customers.

www.tenix.com NSW +61 2 9963 9600 VIC +61 3 8517 9000 QLD +61 7 3804 9800 WA +61 8 6595 8000 SA +61 8 8345 8900 NZ +64 9 622 8600

The Hon Warren Truss MP The new Federal Government’s renewed focus on infrastructure investment shows its importance as a driver for economic and productivity growth, says Deputy Prime Minister and Minister for Infrastructure and Regional Development, The Hon Warren Truss MP. It is a pleasure for me to give you some indication of what the Coalition actually plans to do, as distinct from what we were promising to do in the lead-up to the Federal Election. In doing so, I want to assure you there’s no difference between the two, but we are getting on with it now. As the new Coalition Minister for Infrastructure and Regional Development, I have been tasked with the particular responsibility to help Tony Abbott become the ‘infrastructure Prime Minister’ of Australia. Our task, jointly as Prime Minister and Deputy Prime Minister, is to get the country moving again, to get it building again; developing a plan and platform to ensure that we continue to roll out infrastructure into the future in an affordable and effective way.

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Together with [Assistant Minister for Infrastructure and Regional Development] Jamie Briggs, we look forward to implementing the Coalition’s ambitious plan to build the infrastructure of the 21st century. There isn’t likely to be a single solution that’s appropriate to fund infrastructure in every instance. Some projects will lend themselves to a particular funding model that may not work in another instance. What may be very successful in achieving one piece of infrastructure development may not be successfully replicated elsewhere. We will always have to be innovative, and be prepared to be adventurous. But on the other hand, particularly when it comes to Government money, we will be conscious of the need to always ensure that the investments we make are sound, that we

The Hon Warren Truss MP

are protecting the taxpayers’ money, and that we are delivering value for what is funded. Of course, shareholders expect the same, as do superannuation members. They expect their money to be looked after and to return a good investment. To marry those priorities and to be innovative, but also to be conscious of the need to make sound investments and achieve the community’s objective of having better infrastructure to service our nation, is really the challenge confronting incoming governments and, indeed, the public sector. Furthermore, there is a need to ensure that we can meet those hopes and aspirations in a way that is not going to pass future generations a cost burden, an economic burden or a debt that becomes unfundable. This Government is committed to ensuring that Australia has the productive infrastructure we need to meet the challenges ahead, and to reap the rewards of sound investment.

However, our debt and our fiscal constraints hamper the Government’s ability to fund and maintain nationally significant infrastructure, so we are going to have to be creative and prepared to think outside the box. During the recent election campaign, we announced our support for a number of major highway projects in the city and country, and our plan for getting the inland freight rail project back on track. Efficiency gains through improved infrastructure are all-important to unlocking our nation’s potential. Better infrastructure will provide access to new and emerging industries, and will allow us to transport our cost-sensitive goods to markets here, and to ports in far-off markets, as well as to link Australians to jobs, services and opportunities we haven’t dreamt of yet. As I have said publicly many times before, any failure to deliver key infrastructure improvements

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The Hon Warren Truss MP

Knowing that this challenge awaits us requires meticulous planning and investment now, including new ways of attracting investment to make it happen will curb and restrain growth and see national productivity stagnate. Our economy will simply grind to a halt. Spending on infrastructure has a higher return on investment than spending in most sectors, and demonstrates clear value for money. Construction is the fourth-largest contributor to Gross Domestic Product, and employs one million Australians. In fact, the Australian Infrastructure Statistics Yearbook for 2013, prepared by the Bureau of Infrastructure, Transport and Regional Economics (BITRE), makes interesting reading on the subject. For instance, in 2011–12, infrastructure spending by the private sector was 11 times higher than what it was 20 years ago. 16

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Current expenditure has declined slightly from that peak, but investment remains at historically high levels. The growth of expenditure in infrastructure has been particularly strong in the transport sector, with its share of investment growing from 45 per cent one decade ago to 55 per cent today. Once again, private expenditure has led the way, having grown by over 400 per cent in the 10 years since 2001–02. What the Yearbook demonstrates is that our spending on infrastructure is as critical today as it ever has been to support the Australian economy, and to help support growth in productivity. As economic power shifts towards Asia, Australian goods and services face increased competition from rapidly developing low-wage economies – a factor that also creates new opportunities and new markets. In addition, our tax base is declining as our population ages. These and other structural changes, such as increasing demands on the health and welfare sectors and demographic shifts, are placing additional pressure on the economy – including the infrastructure and transport sectors. Given these shifts, getting the infrastructure and transport planning, prioritisation and funding right is critical. The Government is working with state and territory governments to accelerate the delivery of

The Hon Warren Truss MP

major road and highway projects. The first step in achieving this is to provide certainty of funding for our critical infrastructure projects, which include: • $6.7 billion upgrade of the Bruce Highway in Queensland • $5.6 billion to finish the duplication of the Pacific Highway up to the Queensland border • $1.5 billion for the WestConnex project in Sydney • $1.5 billion for the East West Link in Melbourne • $1 billion to continue the Gateway Motorway North upgrade in Brisbane • $700 million for the Toowoomba Second Range Crossing • $686 million to finish the Gateway WA Project in Perth • $615 million to build the Swan Valley Bypass on the Perth to Darwin Highway • $500 million for the upgrade of South Road in Adelaide • $405 million for the M1–M2 Link project in Sydney • $400 million to continue the Midland Highway upgrade in Tasmania. Importantly, we have also committed $300 million to finalise plans, engineering design and environmental assessments for the iconic Melbourne to Brisbane Inland Rail project. When completed, this new freight corridor will link Brisbane to Melbourne through central-west New South Wales. This important initiative will support the national freight task so that industry can readily move freight across and between port, rail and road networks, and onwards to customers both here and abroad. It will also open up opportunities in regional communities along the route. It is true that freight movements in Australia will double over the next 20 years, and treble along the eastern seaboard. Knowing that this challenge awaits us requires meticulous planning and investment now, including new ways of attracting investment to make it happen. It requires planning across all modes to make the most of the efficiencies and advantages each mode offers, and that includes freeing up capacity on Australia’s metropolitan rail networks. To do this requires the separation of freight and passenger traffic and establishing dedicated metropolitan rail freight networks.

In May 2013, NSW Ports signed a 99 year lease for Port Botany, Port Kembla, the Intermodal Logistics Centre (ILC) at Enﬁeld and the Cooks River Intermodal Terminal. These are all essential infrastructure assets which serve as import and export gateways to New South Wales.

Port Botany The $1Billion Port expansion will enable Port Botany to handle the estimated growth in Australia’s largest economy for the next twenty plus years.

Enﬁeld With over 100,000m2 of warehouse space and rail connections to both Port Botany and interstate, the Enﬁeld ILC will assist the ever growing import and export intermodal needs of Sydney.

Port Kembla Planning approval is in place to reclaim approximately 42ha of land in the Outer Harbour which will proceed dependent on customer needs and demand for port development. Cement Australia is the ﬁrst tennant to take up 8ha of this site and have commenced construction of a grinding facility.

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The Hon Warren Truss MP

With that in mind, the Government has made a commitment with Queensland to investigate a new 24/7 dedicated freight connection, mainly by tunnel – from the Acacia Ridge Intermodal Terminal to the Port of Brisbane – as part of the Melbourne to Brisbane Inland Rail project. We do so recognising that developing a network of intermodal terminals in the right places is crucial, so that industry can readily move freight by rail and road networks to customers. The delivery of a major intermodal facility at Moorebank will improve efficiency and productivity for Sydney and for the freight task nationally. The Moorebank Intermodal Terminal will provide a rail shuttle between Port Botany and the southwest of Sydney, and will include warehousing and a separate terminal for interstate freight. In the long run, it will help free up congestion on Sydney’s roads, ultimately creating a more efficient supply chain and breathing new life into other elements of Sydney’s transport system. Another key link in Sydney will be WestConnex – one of Australia’s biggest transport projects. The day after being sworn in to office, Prime Minister Tony Abbott and I joined New South Wales Premier Barry O’Farrell, and New South Wales Roads and Ports Minister Duncan Gay, to release the business case executive summary supporting the construction of WestConnex. The 33-kilometre WestConnex motorway linking the CBD, west, south-west, airport and port is expected to deliver $20 billion worth of economic benefits to the New South Wales economy.

Infrastructure Australia will be asked to develop a 15-year pipeline of major infrastructure projects to be revised every five years based on national, state and local infrastructure priorities 18

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It will improve commute times, create new jobs, boost economic activity in Western Sydney and help breathe new life into the Parramatta Road business and residential areas. As these commitments show, there is, and inevitably always will be, a need for ongoing public investment in infrastructure; however, private sector investment remains fundamental in securing a sustainable future. That is easier said than done. Investor confidence is shaky, with overblown patronage forecasts contributing to some well-reported commercial failures, including the Sydney Cross City Tunnel, Lane Cove Tunnel and Brisbane’s CLEM7. A study of five Australian toll roads found that actual traffic volumes were, on average, 45 per cent less than forecast in the first year of operation. The Government recognises that getting patronage forecasting right, including improved modelling, is one of the keys to boosting investor confidence. BITRE is investigating the causes of these overoptimistic forecasts. Initiatives to reduce the risk of investors being misled by overzealous forecasts are an important step towards restoring investor confidence. These initiatives include: • improving data collection using new technologies • the development of guidelines for toll road modelling • the provision of reference models from state governments • improved commercial vehicle data • further research into the public’s willingness to pay for using toll roads. Looking across the board, levels of private sector ownership and investment in transport infrastructure vary across modes and jurisdictions. Private operators – such as airport owners and some port owners – will need to make significant infrastructure investments to meet the growing freight and transport tasks of the 21st century. And that is part of the reason that we have announced an overhaul of Infrastructure Australia’s structure and priorities. The reforms are designed to better coordinate long-term projects, support better planning and give greater certainty to investors and the construction sector. In line with other government boards, Infrastructure Australia will be led by a Chief

The Hon Warren Truss MP

Left: The proposed alignment for WestConnex

Executive Officer who will be responsible to the Infrastructure Australia Board. The new CEO will be responsible for delivering the strategic objectives of Infrastructure Australia and its policy reform program. The Government will also task Infrastructure Australia with undertaking a new, evidence-based audit of our infrastructure asset base, to be run in collaboration with the states and territories – many of which now have an infrastructure advisory body of their own. Infrastructure Australia will be asked to develop a 15-year pipeline of major infrastructure projects to be revised every five years based on national, state and local infrastructure priorities. The Government believes that Infrastructure Australia should not just rely on submissions from states, territories and others, but should also be working proactively alongside them to identify critical projects across the country. Moving forward, we need to build more modern infrastructure, and to identify the right projects that will best contribute to Australia’s productivity growth over the next decade and beyond. A key plank in the Government’s approach is to maximise private sector investment in infrastructure. The M1–M2 Link is a good example. This project includes an up-front contribution from both the New South Wales and the Commonwealth governments,

and significant capital investment from the private sector, which is supported by user charges. We will also look at how we invest in other projects going forward. There is much to do, and we need to work in partnership with the private sector to deliver the infrastructure that our society expects, our industries need and our people deserve. The fiscal constraints that beset the Federal Government, and those of the states and territories, make private investment a necessity – not an optional extra. Modern projects to launch this country into the next phase of economic prosperity will not be built without private capital. We must be focused on delivering critical infrastructure, ensuring we are getting value for money for our investments, and be dedicated to embracing and increasing innovation in project delivery. The Government will play its part. But to move forward, we must be in partnership with the construction and investment communities. This coinvestment of not only capital, but also of shared will and vision, will be the basis for building our nation and improving the living standards of our people. I look forward to working with you to deliver the road and rail projects to take Australia forward, and to driving the growth and productivity reforms necessary for Australia to meet the challenges and opportunities of the 21st century. Volume 4 Number 1

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The Hon Warren Truss MP

The Hon Warren Truss MP, Deputy Prime Minister of Australia and the Minister for Infrastructure and Regional Development Warren is the longest serving federal leader of any political party in Australia today, becoming Leader of The Nationals in 2007. A third-generation farmer from the Kumbia district near Kingaroy in Queensland, Warren first won his seat of Wide Bay in 1990. He was a minister in the Howard Government for 10 years, serving as Minister for Customs and Consumer Affairs in October 1997, and, a year later, Minister for Community Services. In July 1999, Warren became the Minister for Agriculture, Fisheries and Forestry, where he served for six years. He became Minister for Transport and Regional Services in July 2005 and, in September 2006, was appointed Minister for Trade. Before entering Parliament, Warren was a Kingaroy Shire Councillor (1976 to 1990), including seven years as Chairman. He served as President of the Burnett District Local Government Association and as Chairman of the Fraser CoastSouth Burnett Regional Tourism Board. He was Deputy Chairman of the Queensland Grain Handling Authority, and a member of the State Council of the Queensland Graingrowers Association. Warren is also former State and National President of the Rural Youth Organisation and President of the Lutheran Youth of Queensland. At the 2013 federal election, Warren led The Nationals to the partyâ&#x20AC;&#x2122;s best electoral result in 30 years.

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STRENGTHENING COMMUNITIES THROUGH TRANSPORT As Australia’s leading toll road owner and operator, our vision is to “strengthen communities through transport”. That’s because we recognise that what we do — and how we do it — has a real impact on the daily lives and productivity of our cities and communities.

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ROAD PRICING: CONSIDERATIONS FOR AUSTRALIA As one of the last non-priced utilities, Australian roads are overused and underfunded, which negatively affects the country’s social, environmental and economic outcomes. Charging for all road use (road usage pricing) could help to reduce congestion, provide funds for much-needed transport infrastructure and ensure people use roads more efficiently. However, for broad-scale road usage charging to work successfully, community acceptance is essential.

The case for road pricing Current transport taxation doesn’t provide sufficient funds to support the maintenance and development of Australia’s transport infrastructure. According to Infrastructure Partnerships Australia (IPA), ‘reform of transport taxation could … assist Australia to fund its next generation of public transport and road projects. Furthermore, congestion already costs Australia $9.4 billion every year. Without action, these costs will more than double to $20.4 billion by 2020.’ A new pricing model is needed to help reduce growing congestion, increase infrastructure funding, encourage efficient road use, and potentially improve long-term equity outcomes by providing more funds for alternative transport modes.

Road pricing models Any serious road pricing model will likely involve changes to existing taxation systems, an appropriate measurement of the value of roads to the economy, and an approach to dealing with different circumstances, such as rural versus inner-city environments. It will also need to raise sufficient revenues for transport infrastructure investment and maintenance, be technically simple to implement, reduce congestion and address equity concerns. Although many potential models have been put forward, the majority focus on the average cost to the taxpayer, which inevitably results in ‘winners’ and ‘losers’, and is less likely to gain public support.

Community acceptance Communities appear to show more support for road pricing, such as congestion charging, if the government uses 100 per cent of the revenue raised to improve public transport. The true cost of road transport for commuters is rarely spelled out, and the level of cross-subsidies required to

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finance transport infrastructure is far from transparent. Road tolls do not always collect enough revenue to fund new roads and are often seen by drivers as a penalty to be avoided, rather than a service fee. The first step to community acceptance should be informing road users of the exact cost of their choice of transport and offering alternatives to help them better manage their transport costs.

An unpriced utility Individual transport is in many ways a utility. Energy, water and telecommunications companies have already reformed the way they manage pricing and demand. They also reinvest revenue generated from access to monopoly infrastructure, to improve performance and efficiency. To maximise the usefulness of individual transport and minimise its limitations, we should analyse it in the same way as other utilities. If road users were explicitly paying ‘per use’ on every road, then an appropriate fee/service relationship would emerge. If transport providers, freight operators and commuters could easily compare the costs and value of different modes of transport, they may also make different transport decisions.

An aggregated transport account To ensure community support and help commuters make better transport decisions, Australians need to understand what they spend on every mode of transport. According to Australian Bureau of Statistics data, transport costs in Australia represent 16 per cent of total household expenditure. This is high compared to energy costs, for instance, which represent 2.5 per cent1. It is proposed that demonstrating financial savings is likely to be more effective in reducing road use than highlighting travel time savings. We would suggest that governments could initially introduce a new aggregated transport account as part of an optional road pricing scheme. Transport users could choose to enrol in the scheme to receive financial benefits, such as reduced registration fees, in exchange for explicit charges for every kilometre they drive. As part of this scheme, a transport account aggregator system would provide a combined transport account statement. The statement would offer commuters a clear, comparable analysis of the costs associated with their transport mode choices.

Andrew McKindlay Evans & Peck Principal, Sydney

Items such as fuel and maintenance costs, parking, and public transport usage could be included. This would enable them to make informed transport decisions based on convenience and cost. It could also offer reduced prices for certain services, recommendations for alternative, cheaper transport modes and the ability to pre-pay for trips at a discounted price. The account statement would be updated and available in real time online and via a smart phone app. The app would also potentially enable commuters to use their GPS-enabled smart phone to automatically provide information about the roads and other means of transport they are using, as well as pay for public transport. About Evans & Peck: Evans & Peck is a global advisory firm that provides project and business solutions to clients who develop, operate and maintain physical assets in the infrastructure and resources industries. www.evanspeck.com

1. Australian Bureau of Statistics Year Book Australia, 2012 www.abs.gov.au/ausstats/abs@.nsf/Lookup/ by per cent20Subject/1301.0~2012~Main per cent20Features~Household per cent20income, per cent20expenditure per cent20and per cent20wealth~193

Chairman’s Panel

The Hon Mark Birrell, Chairman, Infrastructure Partnerships Australia Chair: Panellists: Swati Dave, Executive General Manager, Specialised Finance at National Australia Bank; Phil Garling, Non-Executive Director of Networks NSW; Lindsay Maxsted, Chairman of Transurban; James Stewart OBE, Chairman, Global Infrastructure at KPMG; Dr Kerry Schott, Infrastructure Australia board member, Chairman of the Moorebank Intermodal, NBN Co. board member.

The Chairman’s Panel at Partnerships 2013 brings into sharp focus the need for all governments to be innovative and brave in pursuing politically complex reforms to help Australia solve its infrastructure backlog. Mark Birrell: A new Federal Government gives us fresh opportunities. What should be the ambition for the new Government, and what should it be focusing on? Swati Dave: Having a Prime Minister who says he wants to be the ‘infrastructure Prime Minister’ is a really good message to the market, and it indicates a likelihood of momentum, which is great. I also think we’re seeing the priorities emerge through reform of Infrastructure Australia, and if they can deliver those and provide the market with a prioritised pipeline that’s agreed between the Federal and state governments, it creates certainty and clarity, which will be really useful for the private sector to start aligning behind this opportunity. Phil Garling: Well, I think we can do a lot worse than just adopt the Paul Howes manifesto. Paul is the National Secretary of the Australian Workers’ Union, and, importantly, a director of Australian Super.

In a recent Australian Financial Review article, he removed the ideological barrier to privatisation by saying it’s actually in the workers’ interests not to be sitting in traffic jams, and being able to access health care, and having access to all the other infrastructure you’d expect in a First World country. The debate now seems to be about recycling capital. In my view, it’s appropriate for governments to take the up-front risk on development of projects, and then sell them to long-term owners – institutions that have an appetite for that type of investment. Lindsay Maxsted: I think the stars are aligned. It’s the right time to be focused on infrastructure, and it’s important that the Federal Government doesn’t try and reinvent the wheel. I don’t think they will; I think they are well prepared and, for me, the emphasis now should be moving away from the asset side of the balance sheet, in terms of what projects should Volume 4 Number 1

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Above: James Stewart OBE

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be undertaken, to the liability or equity side. In other words, how are the preferred projects funded? What’s the role between government and the private sector? How do you determine which of the projects needs full government backing, which projects warrant full private sector backing, and what’s in between? I think that’s what’s most exciting at the moment – people are starting to talk about these issues meaningfully, probably for the first time. James Stewart OBE: When I was here [the Partnerships Conference] last year, everyone was rather depressed and downbeat. This year, the whole atmosphere is completely different, and there are a significant number of mega-projects that need to be delivered. I think that the job of the Federal Government is to provide some sense of coordination. One of the issues going forward is going to be capacity, and that’s a nice problem to have. By this, I mean capacity on the public sector side to deliver all of these projects, and capacity on the private sector side to respond. One of the big changes is that suddenly the international developers are coming to bid for these projects, so coordinating the program as a whole and making it an attractive proposition for both domestic and international developers is going to be a priority for the Federal Government.

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Dr Kerry Schott: To pick up Lindsay’s point, governments are going to have to get much more efficient with expenditure to be able to free up some money for all of these things. While the private sector is going to be very important, the public sector is going to need to chip in on some of these projects, as we’ve seen. MB: A Commission of Audit is one of the other plans that the new Australian Government needs to implement to get a sense of its financial position. Kerry, you were involved heavily in the New South Wales Commission of Audit – what observations would you make? KS: The states would probably ask that the Commonwealth look at its expenditures, particularly in the areas of education and health, and make sure that the roles and responsibilities and accountability for different layers of government are well laid out. I can tell you that in those two big spending areas, they are not. I sense that there’s an enormous amount of saving to be made at the Commonwealth level. Across the jurisdictions, if they just have a good look at trying to get more efficient in those two areas, then we can better spend that money on other things. MB: James, you’ve obviously been watching both the British and American markets intensely, the way that they’ve looked at their taxation base and their funding base. Have you got some thoughts?

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Left: James Stewart OBE and Dr Kerry Schott.

JS: There isn’t enough money around to pay for these projects from the public purse, so countries all around the world are looking at alternative mechanisms. For example, in the United Kingdom at the moment, everyone is taking a very hard look at the roads – there are pretty much no toll roads in the United Kingdom. There is a lot of revenue coming from roads, which comes from fuel duty and vehicle license duty, but that is not hypothecated to transport – it just goes into the national coffers. One of the problems facing the British Government is that fuel duty is only going to go in one direction, and at some point it is genuinely going to fall off a cliff. National road pricing will come in in the United Kingdom at some point in the future, and at some point beyond that they will privatise the trunk road network. One observation I would make about Australia is that, as you continue to build more toll roads, national road pricing becomes messier to implement because of what was there before. But generally, we’re going to see more user charging across all of the infrastructure sectors. MB: A congestion tax has worked in London. Can you see that morphing into England-wide or Britain-wide transport pricing? JS: Congestion charging is a very tough political sell. It was done in London with a very strong mayor, it failed in Manchester recently, and, interestingly, it hasn’t really rolled out anywhere else in the world. I think that national road pricing, if sold on the back of

replacing fuel duty – which in effect is a pay-as-yougo-tax anyway – would be possible. One of the interesting things in the United Kingdom is that politicians are very wary of saying that they want to introduce national road pricing or some kind of road pricing, and then have to wait two or three years to implement it while they put everything in place. One of the things that is likely to happen is that they will make some structural changes to the way the highway agencies and road agencies operate, such that when they make that difficult political decision, they can implement it very quickly. MB: Lindsay, Transurban’s Chief Executive, Scott Charlton, has previously called for a more full debate on road pricing. Where do you think it’ll head? LM: User-pays has to be an integral part of how we move through this backlog of infrastructure projects. Everyone’s saying the funding cannot possibly all come from the Government’s balance sheet. If user-pays is to work, it will only be on highly utilised assets. Congested roads in our largest cities fall within that category of assets; that’s certainly Transurban’s view. We need to get there. We understand the political limitations and that you have to educate the public along the way. There have been many cases in which politicians have tried to toll roads that were once free to use. The experience in the United Kingdom and elsewhere around the world is that this does not work; rather, the public has to see that there is value for money in what’s being delivered Volume 4 Number 1

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in terms of new infrastructure or other community benefits. Transurban is on the record as having said that eventually we’ll run out of space for existing roads, that we can’t keep building them under the current model, and that a comprehensive user-pays road pricing model is the natural spot to finish. MB: Currently, we’ve got a number of states that have no toll roads at all – a bit like the English experience. Can you see that changing? LM: Yes; for heavily utilised roadways, the question that needs to be asked of the public isn’t whether you’d like to pay a toll or not, but rather, would you like this road and all the benefits it brings, or not? That’s a different question, and you are likely to receive a different answer, together with a greater propensity to accept tolling. MB: I’d like to move to the topic of recycling capital and using the proceeds of infrastructure sales, brownfield assets, to invest in greenfield assets. Swati, the sales of Port Botany and Port Kembla have been well demonstrated; how do you see the availability of capital for future privatisations? SD: We think there’s a pretty active market that’s really hungry for these assets, and there’s a huge opportunity for us here. We all agree that there’s an infrastructure deficit, we all agree that the governments are now much more coordinated, so the creation of a pipeline that’s clear and consistent is something that will attract more equity and debt into the market. There is a lot of pent-up demand, and we’re seeing that when we’re looking at all the bids that are lining up for these assets. The market is actually pretty competitive, so if I were the Government, I’d see this 26

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as the ideal time to bring these kinds of assets to the market, because there is so much appetite. PG: The Infrastructure Australia report, released last year, identified $219 billion of capital tied up in what they called lazy, brownfield, government-owned assets. Monetising that makes sense, particularly when you look at the investment profile of super funds, with $1.7 trillion out there. What those institutional investors are looking for in terms of total return is about 350 basis points above bonds – ideally half of that coming from capital growth, and half coming from yield, and total return on a portfolio basis never going below eight per cent in any year. That defines what infrastructure is – it’s not start-up telecommunications, it’s not power generation with merchant power risk, and we’ve discovered in recent years is that it’s probably not greenfield toll roads, either. The money is there to do it. Look at Australian Super, there’s a $65 billion fund, and they’ve got 10 per cent allocated to infrastructure. Their target is 14 per cent, so that’s a lazy $2.6 billion looking for a home. I’m sure that’s replicated through the whole $1.7 trillion sector, to a degree. There are still funds that don’t have any exposure to infrastructure, because they haven’t been able to get set. So you’ve got increasing allocation, plus people who don’t have any allocation wanting to make a new allocation, and I’d suggest that a strategic asset allocation for most of these funds for infrastructure might average around 10 per cent. At the moment, it’s probably at six per cent. What will happen with that money, if a home isn’t found for it in Australia, is that it will go offshore, and that’s already happened. Australian super funds

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own the whole of the UK water business. They didn’t go overseas because it’s the mother country – they went over there because there were no opportunities to invest that money in Australia. That money comes in every day. The only thing that’s going to stop that is substantial unemployment. LM: I agree that a substantial appetite exists for investment in brownfield, established assets that governments might own today. But, equally, there’s another class of private sector investment that’s more than happy to be involved with government and look to see what can be done in more greenfield operations, or assets that governments and communities would like established. I think that’s equally exciting. There’s plenty of interest if we can generate the right sort of vehicles into which the private developers and investors can invest. MB: Kerry, is the pipeline long enough for the privatisations? Do you think there’s an observable trail of likely project transactions? KS: To get it longer, we probably need some microeconomic reform. The reason that the water industry in Australia hasn’t been sold and can’t be privatised is that the regulatory regime is such that anybody putting any money into it would have no confidence that the pricing was going to continue in an orderly manner. The water utilities are regulated behind the state regulators. There’s an enormous amount of political interference in the sense of politicians not wanting prices to go up at all, certainly before elections, so you don’t get your pricing set in a commercial manner. Infrastructure Partnerships Australia’s Water Taskforce has been suggesting that we probably should

have a national regulator for water, and if you had somebody doing that, like the Australian Competition and Consumer Commission or a regulator in which the private sector has confidence, it would open up the possibility of selling water utilities. But you can’t do it currently, and we’ve got quite a lot of assets in that category. JS: One of the things I was reflecting on the other day is that the privatisations in the United Kingdom, which were around 20 years ago now, were sold in the public markets, and retail and institutional investors took a share in public companies. What has subsequently happened is those public companies have been taken over or bought by institutional investors, by private equity. One of the interesting dynamics for the British Government now is that it’s not dealing with the broad range of investors who are really very passive; it is dealing with very active, influential shareholders, and that has completely changed the relationship, and, to be honest, made the relationship more difficult for the Government. The other point I would make is that privatisation is about recycling capital, but it’s also about taking future investment off the balance sheet of government, and that’s probably a bigger driver, in my view. Certainly, those utilities that have had independent regulation have been able to attract capital at a very low cost because of the Regulated Asset Base (RAB) model, and that has meant that in the United Kingdom, an enormous amount of investment has been funded by institutions and by the corporate bond market, at a very low cost of capital. Take water, for example: I think the figure is £80 billion over the last 20 years, funded Volume 4 Number 1

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Above: Lindsay Maxsted

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off the Government’s balance sheet by mainly institutional debt. MB: Tell us about what’s happening with Royal Mail in the United Kingdom. JS: It has just been privatised, after about 20 years of trying. The pension fund was the biggest problem, and it’s gone down an absolute storm. It’s been sold into the market and I think it’s trading at 40 to 50 per cent over the strike price. So it’s been a great success so far. Royal Mail is a great example of everyone focusing on the initial sale price, the initial raising of capital, but the reality is that what matters is what happens in the 20 years after privatisation – you get genuine operational efficiency and cheap consumer bills, and all the rest of it. MB: Let’s move to finance. There’ve been two different models proposed for financing the two large road projects in Sydney and Melbourne. These are of a scale not before seen in Australia; they’ll certainly be the largest urban projects in the nation when they’re both going, and the seed funding that’s been committed by the Federal Government will mean that those projects will proceed. What do the different models mean, what are the different forms of private finance, and what’s the story that they’re telling us about the way Public Private Partnerships (PPPs) will be done in the future? SD: I think that there are two aspects to it. From a funding point of view, we’re getting to something that’s a bit more sustainable as a model. In the private sector, we have the same challenge around what is a sustainable financing model. Volume 4 Number 1

A lot of the transactions that we are making have tended to be short-term, because it is difficult for banks to provide long-term financing. I think we do need to consider what happens after the transaction or the project has been initially financed by the banks, and what level you’ve got to get to next. There’s scope for development on the banking side in terms of taking these deals to broader markets. Whether it’s the corporate bond markets or offshore markets, there’s quite a bit of evolution that needs to happen. MB: Do you think all state governments have a sense of how innovative they have to be? SD: We’re seeing New South Wales and Victoria lead the way, and that innovation is welcomed by the private sector, but it also needs to be matched by the private sector. I don’t think it’s innovation for innovation’s sake; it’s innovation for the purpose of creating more sustainable financing models. I’m very optimistic that, when the challenge is there, when the pipeline is there, when something needs to be solved, we will actually get to a solution. LM: If I can just comment on the differences between New South Wales and Victoria – New South Wales does have its unsolicited proposals regime, which has become fundamentally important. Victoria is doing a good job in terms of its road infrastructure considerations, but it’s quite clear to me that there’s more scope in New South Wales to achieve better outcomes through some of the more innovative financing, and through more innovative planning for projects, than perhaps would otherwise be possible under strict tender and related probity regimes. MB: So has your experience with the M1–M2 proposal been positive? LM: Yes, it has. It has worked really well, and I hope not just for Transurban, but also for the New South Wales Government. We were able to formulate a proposal, to work with government, to hear from the Premier in terms of what might or might not work, and to adjust our sights accordingly. To be able to come up with a commercial project that still has a way to go, but that is heading in the right direction, is pleasing. It is a project that we have been able to bring to Sydney, and which, if funded solely off the balance sheet of the New South Wales and/or Federal Governments, would most likely not have happened. MB: The business community draws some strength from the fact that the unsolicited proposals are being well handled in this state. It’s a very difficult thing for governments to deal with, because some

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find it hard to cope with that relationship of a single proposal coming forward and being properly aired. It’s a very good step, and not an easy one. James, do you have comments? JS: If you look globally, at the moment, governments are forced to intervene in a massive way in financing markets. In Brazil and India, basically all the money is lent by government-owned banks – BNDES in Brazil, and state-owned banks in India. In Europe – the European Investment Bank – multilateral lending has gone up dramatically. In the United Kingdom, the Government announced a £40 billion guarantee facility to support all infrastructure projects, which applies to both publicly funded and privately operated infrastructure. Now, the reason behind the United Kingdom guarantee is not necessarily a worry about capacity; it’s that the Government wants these deals to happen quickly, and is worried that negotiations around finance will take forever, and slow down the pace of these deals. Part of this is about making things simpler. Something like the WestConnex structure – where government is funding the initial stages of the project, and then when it becomes operational you look to raise the finance – will be a much more efficient way of raising the money, because the fact is, financiers like operational assets and find greenfield assets much more difficult.

MB: The final area I want to move onto is the simple one of taxation reform. I’m interested in any observations about Goods and Services Tax (GST) changes, and thoughts about what should be on the agenda – what should we, as a peak body, be trying to encourage community debate about? KS: There’s little doubt that the scope of the GST needs to be wider, and things that have been exempt need to be brought within it. That’s difficult politically, but the GST revenues are really in significant decline. The other thing that’s really worth looking at is what [New South Wales Treasurer] Mike Baird’s been pushing: taxes that are currently paid to the state government, which, when an asset is privatised, are instead paid to the Commonwealth, leading the state to lose its revenue source. That does make privatising some assets very difficult from a financial point of view for the states. MB: Certainly if the electricity privatisations are received fully in New South Wales, Queensland, and Western Australia, it’d be very valuable to address that. KS: The Networks NSW dividend flow would be quite considerable. LM: It is essential in the first term of this Government that there’s a comprehensive review of the taxation system. The Henry Tax Review in 2010 failed, in my view, because it did not cover a series of issues that needed to be addressed: principally, GST. Left: Dr Kerry Schott at Partnerships

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There’s plenty of scope for a full-scale review, and GST has to be included – noting that I am not in any way suggesting that the Government can or should reverse its promise of no changes to the GST in its first term. The point is a simple one: there should be a comprehensive review. Ultimately, this debate is like the user-pays argument – if you’re eventually going to change the GST, the public has to have a positive view of what they’re receiving in return. MB: James, can we get some observations from you and your international perspective on taxation reform, and what you’re seeing? JS: The point I’d make is that as federal money perhaps dries up for certain projects, states have to fund them in their own right. States will look to receive some benefit from the wider national

economic benefits. A state-funded project will benefit the national tax coffers, and the question you then ask is: at what point do the national tax coffers start to give something back to the state? There’s been a very interesting deal in the United Kingdom just in the last six months: the City of Manchester has done a deal with the Ministry of Finance, the Treasury in London, whereby when Manchester invests a local pound in infrastructure, the Treasury, over time, will make payments to Manchester to reflect the national tax that is generated from that infrastructure investment, and there is a negotiated formula that deals with that. So it’s quite an interesting principle, and, as cities become more self-sufficient for more projects, this issue will begin to raise its head.

Swati Dave, Executive General Manager of Specialised Finance, Products & Markets at NAB Swati is the Executive General Manager of Specialised Finance, Product & Markets at National Australia Bank. She leads a specialist team with responsibility for providing advice and financing solutions across the infrastructure, energy and utilities, and resources sectors in Australia, the United Kingdom, Hong Kong and Singapore. Swati has over 25 years’ banking and finance experience encompassing retail banking, corporate and institutional banking, project and infrastructure finance, project advisory, private capital, strategy and business development. Prior to joining NAB Capital in 2005, Swati held a number of senior roles at Deutsche Bank, AMP Henderson Global Investors, Bankers Trust and Westpac. Swati holds a Bachelor of Commerce degree from the University of Newcastle and is a graduate of the Australian Institute of Company Directors. Swati is a director of Australian Hearing and the Chair of its Audit and Risk Committee.

James Stewart OBE, Chairman, Global Infrastructure, KPMG James joined KPMG in May 2011. He is Chairman of KPMG’s Global Infrastructure practice. Prior to joining KPMG, James was based in the Treasury as the CEO of Infrastructure UK, and was previously CEO of Partnerships UK for 10 years. Before that, James spent 14 years at Hambros and Société Generale. James has been involved in the infrastructure and PPP markets for over 20 years, and now spends his time advising governments and private sector companies around the world.

Dr Kerry Schott, Director, NBN Co., Chairman, Moorebank Intermodal Company, Infrastructure Australia Board Member Kerry Schott is Chairman of the Moorebank Intermodal Company Ltd, a Director of NBN Co., a Director of the TCorp Board in New South Wales, a member of the Infrastructure Australia Board, patron and board member of Infrastructure Partnerships Australia, and a member of the Whitlam Institute Board. Kerry is the Project Director for the New South Wales Treasury, managing the current sales of the government-owned electricity generating plants. Kerry was previously the Project Director of the successful sale and lease of the Sydney Desalination Plant. She completed her role as CEO of the Commission of Audit for the New South Wales Government early in 2012. Previously, Kerry was Managing Director and CEO of Sydney Water from 2006 to 2011. 30

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Kerry spent 15 years as an investment banker, including as Managing Director of Deutsche Bank and Executive Vice President of Bankers Trust Australia. During this time, she specialised in privatisation, restructuring, and infrastructure provision. Kerry holds a doctorate from Oxford University (Nuffield College), a Master of Arts from the University of British Columbia, Vancouver, and a Bachelor of Arts (first-class honours) from the University of New England.

Lindsay Maxsted, Chairman, Transurban Group Lindsay is Chairman of Transurban Group, Chairman of Westpac Banking Corporation, Director of BHP Billiton Limited and BHP Billiton plc, and Managing Director of Align Capital Pty Ltd. He is also a director of Baker IDI Heart and Diabetes Institute, a member of the Advisory Board of Coolmore Australia, and a fellow of the Australian Institute of Company Directors. Lindsay was formerly a partner at KPMG and was the CEO of that firm from 1 January 2001 to 31 December 2007. His principal area of practice prior to his becoming CEO was in the corporate recovery field, managing a number of Australia’s largest insolvency/workout/turnaround engagements, including Linter Textiles (companies associated with Abraham Goldberg), Bell Publishing Group, Bond Brewing, McEwans Hardware, and Brashs. He is also a former director and chairman of the Victorian Public Transport Corporation.

A leader in construction and infrastructure Amanda Davidson is at the forefront of Australian and international construction and infrastructure. The leader of our national construction and infrastructure group, Amanda’s legal expertise and counsel is sought out by industry leaders here and throughout Asia. For smart, commercial and savvy solutions to your construction and infrastructure issues, look no further than to one of the best in the business. Contact Amanda today on +61 2 8083 0333 or find more information at www.holdingredlich.com.

Amanda Davidson | Partner T +61 2 8083 0333 E amanda.davidson@holdingredlich.com

324546A_Holding Redlich | 1912.indd 1

www.holdingredlich.com Melbourne . Sydney . Brisbane

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A NEW PARADIGM FOR ENGINEERING EDUCATION? Innovation is at the heart of great engineering, and the role of design in this process cannot be understated. Why, then, is engineering education in Australia currently aligned more to science than design? With the more traditional manufacturing currently in decline and a cooling of the demand in the mining sector, how will industry respond? Are our engineering graduates ready for the challenge of a digital revolution in manufacturing? Perhaps not. Which is why Professor Guy Littlefair, Head of Engineering in the Faculty of Science, Engineering and Built Environment, is tackling these questions head-on. His response: ‘[to produce] a new generation of engineering graduates adept at creativity-led, innovative thinking and design acumen’. This, in part, is a catalyst in his vision to redefine engineering education. Deakin University’s forthcoming Centre for Advanced Design in Engineering Training (CADET) will provide some of the best design-focused engineering facilities in the Australian university sector. Pulling together the best elements of engineering and design under one roof, CADET will offer programs based on a new curriculum focused on design-based learning. Students will work collaboratively on industry-based projects from the beginning of their studies, using integrated studio-based learning environments, purpose-built laboratories and workshops to access the very latest simulation and visualisation systems. With an equipment investment exceeding $6 million, CADET will house virtual and real prototyping facilities, allowing creative design solutions to be developed almost seamlessly from imagination to reality to manufacture in a

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single journey – be it new wind turbines, medical devices, sustainable infrastructure, alternative vehicles or robotic aids. Research will also flourish in the technology-enhanced environments and provide a pathway for qualified engineers to apply their expertise to design-based industrial projects. This interaction with industry is a prominent feature of the whole philosophy, from project selection to the revolutionised approach to learning and the stimulation of longer-term research activities. CADET is also about engaging with secondary school students in order to demonstrate that engineering is much less about the hard hats, steel-capped boots and dirty hands of the past, and much more about creativity and problem solving that will define the future.

Offering a diverse range of opportunities to engage students from Year 8 through to PhD level, CADET has vision and purpose in shaping where engineering education has to head. Specifically designed to tackle some of the key issues at the heart of the engineering community in Australia, CADET will enable students to ‘imagineer the ultimate solution’ and produce graduate engineers who are as visionary and forwardthinking as CADET is itself.

www.deakin.edu.au/engineering/cadet CADET is a partnership between Deakin University and the Australian Government.

CADET

Deakin University CRICOS Provider Code: 00113B

CENTRE FOR ADVANCED DESIGN IN ENGINEERING TRAINING

Bringing vision and passion to engineering education. deakin.edu.au/engineering/cadet

Adrian Hart As Australia’s economy transitions away from resources-led investment, we can expect an increase in non-mining investment in our capital cities, according to BIS Shrapnel’s Adrian Hart. I’m going to talk about what is going on in the infrastructure market right now, and some of the developments that have happened recently in terms of funding and financing. Working with Infrastructure Partnerships Australia on the Australian Infrastructure Metric gives us a very good understanding of the state of play in terms of how much infrastructure is actually being delivered. When you read the Australian Bureau of Statistics (ABS) data, it’s very surprising to see some of the figures that get bandied around with regard to what you think is ‘infrastructure’, when that may not necessarily be the case. So the

When you read the Australian Bureau of Statistics (ABS) data, it’s very surprising to see some of the figures that get bandied around with regard to what you think is ‘infrastructure’, when that may not necessarily be the case 34

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Adrian Hart

Australian Infrastructure Metric is actually a very good sanity check on what’s going on in the infrastructure market quarter by quarter. Then I want to discuss what the infrastructure outlook is, and go through a few of the risks and challenges that result from this outlook. In the total construction market in Australia over the last couple of decades, we’ve had a tremendous increase in the overall volume of construction work; however, it’s been highly unbalanced. Throughout the 1990s, you could say we were underinvesting in infrastructure. Engineering construction spend as a proportion of Gross Domestic Product (GDP) was between one and three per cent. The 1990s were a period of budgetary consolidation and economic efficiency – trying to squeeze the best use out of our assets. But at the same time, we didn’t really build the assets we needed, so we quickly ran into capacity constraints in the late 1990s and early 2000s that required quite substantial investment in new infrastructure. During the 2000s, we had several factors that drove infrastructure. We started off with the housing boom (from 1997 right up to about 2004–05) and this created a number of infrastructure requirements around the housing market. During the 1990s, we also saw the development of a lot of private sector avenues in terms of attracting finance and building infrastructure, and that continued right up until the global financial crisis (GFC) hit in 2008. Then, suddenly, it became harder to find finance in that way to fund infrastructure. Also driving the infrastructure and construction markets during this period was a virtuous cycle in the Australian economy that saw a lot of taxation revenues (driven through the simultaneous mining boom) being recycled into infrastructure. We saw the development of the AusLink land transport program

from 2004, which later became the Nation Building Program, and suddenly we started to find funding mechanisms for infrastructure that worked. The other interesting thing about the past decade has been the substantial increase in engineering construction. Engineering construction is everything that is built in Australia that isn’t a building (residential or non-residential). You might think that we’re doing a pretty good job and that we’ve managed to boost the amount of infrastructure that is being built – and by a substantial margin. Volume 4 Number 1

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Adrian Hart

But when you dig deeper and analyse a lot of this infrastructure spend, you realise that more and more of it has, in fact, been driven by booming mining investment and not necessarily investment in our cities. What we’ve seen over the past five years is a movement or a rebalancing of investment away from cities and into mining regions to service the mining boom. As the mining construction boom peaks and starts to fall back, we get a mining production boom, but at the same time, we need to rebalance some of our investment thinking back to our cities again. That’s where looking at the Australian Infrastructure Metric can be very useful, because it’s analysing and quantifying the volume of work won each quarter by our contractors. The other thing about the ABS statistics is that engineering construction also includes offshore fabricated components. So when we’re talking about big LNG projects being built in the resources space, you might have to add several billion dollars each quarter for all the imported fabricated components that go into those. Consequently, the ABS engineering construction data is not a great indicator of the health of the local construction industry and the contractors industry, which is much better achieved by looking at the Australian Infrastructure Metric. There’s a big gap between work done and work commenced that has opened up since 2010–11. 36

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We’ve been living off past projects, and we’ve seen a dearth of new projects coming through the pipeline. But looking at the downward trend in the Australian Infrastructure Metric that we’ve been calculating and surveying since 2010, we’re still bouncing around the bottom in terms of winning work for infrastructure, and it’s really important that we nail down some of these infrastructure projects, because we have substantially underinvested in the past. A look at non-mine infrastructure work won shows you that it’s coming back from a low base. Last quarter showed a bump, but we believe it’s only temporary. Some of the most recent data that’s coming through indicates that maybe it was just a blip, and we’re still bouncing around the bottom. It’s a similar story, too, for transport infrastructure, which saw a boom after the GFC, but, really, was probably higher before that. Since then, governments have been trying to pull back, and maintain and improve their budget bottom lines; as a consequence of that, there’s been less and less infrastructure investment. So where do we go from here? Our view is that when we add up the building, non-building, and engineering construction markets in Australia, it’s a downward trend for the construction industry. But within that downward trend, there will be new growth in sectors and in regions. For the engineering

Adrian Hart

construction market, which is the most significant market for civil infrastructure, it’s actually dominated a lot by the downturn in mining-related investment. What we will see over the next five years is a switch away from mining-related construction projects as the mining boom slowly tails off, but a pick-up in non-mining investment – particularly, in our capital cities where we haven’t been keeping pace with infrastructure needs. To give you an example, in terms of the outlook for road construction in Australia, we’ve seen a substantial boom, but that really has been a catch-up from a relative lack of investment right through the 1980s and 1990s. However, while we’re in a downturn at the moment, there is a substantial new pipeline of road infrastructure projects. The scale and size of the projects that are currently being planned is huge. Not all of this can be funded by the private sector, and it can’t all come out of general recurrent government spending, either, so it’s really important that we continue these dialogues around funding and financing, because from here, infrastructure becomes harder and more expensive. In rail and harbours work, what we’re seeing is this switch taking place between non-mine-related and mine-related projects. So overall, they balance each other out. We are sustaining high levels of work in rail and ports, but we will see more city-based rail projects and more freight-based port projects – not necessarily just relating to coal and iron ore, which have been sustaining those increases over the past few years. In terms of the utilities, electricity-related construction will come back for a range of reasons. Water and sewerage works are also easing from the drought-driven increases that we had in the past. Certainly, this was a very generational degree of infrastructure spend in building desalination plants and recycled water grids that we do not expect to see replicated in the near future. Meanwhile, telecommunications expenditure will continue to rise as the National Broadband Network (NBN) continues to roll out. We have a new Federal Government with a different style of NBN plan, of fibre to the node instead of fibre to the premises. Within that, there is still substantial construction work required to roll out this new telecommunications highway over the next four to five years, and that’s one of the strongest growth

markets in the engineering construction space, and our infrastructure space. It’s been really good to see that this degree of innovation is getting new infrastructure projects off the ground. But what’s also important is that we don’t forget the maintenance side. We need funding to develop these assets, and the development cost is huge. One thing that probably hasn’t been focused on is that every asset that we build has to be maintained, and already we have a substantial infrastructure maintenance backlog in Australia. We need the Federal Government’s taxation review to better identify funding sources, so that we can not only build infrastructure for today, but also make sure it’s maintained for tomorrow. The other issue is that of maintaining this sensible project package pipeline. It’s important in those states that are going to see an increase in infrastructure spend that we try to roll out these packages and maintain the skills and contractor base in these states. Providing the right infrastructure mix is also very important. I believe very fervently that we will need all types of infrastructure over the next four to five years – and longer – to meet our requirements over that period. We don’t want to pigeonhole ourselves by saying we will fund roads over rail; we’ve got to take a more holistic view of the infrastructure market and work out the solutions that are best in each market. One size certainly doesn’t fit all in each market individually. The other issue is: once we get to the construction phase, how do we avoid those past mistakes? How do we avoid the scoping issues that we might have had in the past? How do we handle risk better than we did in the past? On that issue, while engineering construction in aggregate might be declining, the actual infrastructure that goes into non-mining applications will be rising from 2015–16, and quite significantly. While for some states the aggregate spend is falling, for New South Wales it’s a different story. Engineering construction in New South Wales is facing a boom over the next five years – and that has to be considered if you’re in the planning stages of these projects. New South Wales will start surpassing Queensland levels of investment in engineering construction over the next couple of years as the mining and resources boom winds down. Volume 4 Number 1

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Adrian Hart

Finally, I’d like to point out that, even within New South Wales, Sydney itself is going to be the hotspot (see graph below). In terms of total construction, Sydney will be a little bit above the New South Wales trend because of a lot of the housing that is required – and a lot of the non-residential building projects, like Barangaroo and the Convention Centre. More particularly, these big civil projects, these big infrastructure projects in road and rail – like WestConnex, the M1–M2, the CBD and South East Light Rail and the North West Rail Link – mean that we are facing a substantial boom in civil construction work in Sydney.

And while that is going to create challenges as we go to and from work and have to get around a few building construction sites, for those involved in developing these projects, we’ve really got to consider whether we have the resourcing right – have we met and ticked all the boxes? Because in the past, when we’ve seen these sorts of issues arise, we have run into issues on costs and resourcing. So we hope it will be front of mind of those planning these projects that we try to get it right this time, and we don’t repeat mistakes of the past.

Adrian Hart, Senior Economist and Senior Manager, Infrastructure and Mining Unit, BIS Shrapnel Adrian Hart is a Senior Economist with BIS Shrapnel, and Senior Manager of the company’s Infrastructure and Mining Unit. BIS Shrapnel is the leading provider of market research, industry analysis and forecasting services in Australia, and a construction sector specialist. Adrian joined BIS Shrapnel in the late 1990s, and has worked across both Economics and Infrastructure and Mining Units within the company. In 2007, he became Senior Manager of the Infrastructure and Mining Unit. The Unit undertakes analysis and forecasts for the civil infrastructure construction, mining and maintenance markets across Australia. Apart from managing a range of regular outlook reports for the civil construction and mining industries, Adrian is also widely involved with privately commissioned research studies and consulting exercises. This includes the analysis of construction costs and development of escalation forecasts, workforce capability analyses, unique BIS Shrapnel estimates and forecasts of activity across all detailed civil construction subcategories, and the development of demand forecasting models for companies with links to the construction and mining industries. Adrian also undertakes presentations and workshops with senior management of organisations operating in the engineering construction, maintenance and mining sectors, discussing the outlook and implications of BIS Shrapnel analyses and forecasts for business planning and strategy. 38

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COMPANY FOCUS

WORKPLACE HEALTH AND SAFETY Health and safety in the workplace is an important consideration for both private enterprise and government organisations. Recent amendments to health and safety regulations aim to further reduce serious accidents and consequently improve productivity. But are these reforms addressing this complex and multi-faceted issue?

Evidence suggests the reforms are succeeding, with reductions in injuries over the past few years. According to the Australian Bureau of Statistics, serious workplace injuries have declined by over 15 per cent since 2003; however, Safe Work Australia estimates that workplace injuries continue to affect Australia’s annual gross domestic product (GDP) by as much as $57.5 billion annually – or 5.9 per cent of our total economy. So what else can we do to reduce workplace accidents? One key component is obviously workplace safety training, but another largely ignored factor is the safety of the equipment being used every day by workers. While the use of personal protection equipment (PPE) such as reflective vests and protective eyewear has skyrocketed in recent years, the utilisation of tools that include safety features has been somewhat limited. Many companies pride themselves on providing products with leadership in safety. Most would be familiar with the automotive industry and its initiatives to improve occupancy safety. The Australian New Car Assessment Program (ANCAP) provides a safety ratings system for new cars marketed in Australia. The ANCAP rating has become a key consideration for Australian consumers when making a purchasing decision on a new vehicle. Automotive manufacturers pride themselves on achieving additional ANCAP ‘stars’, and their continued innovation has made today’s automobiles safer than ever. One company that is heavily involved in the automotive industry, and specifically safety features, is German firm Bosch GMBH. Bosch is the leading producer of automotive components worldwide, and has been a key

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developer of features often taken for granted, such as anti-lock braking systems (ABS). Bosch is currently developing the next generation of safety features, such as collision avoidance and reversing control systems. Another division of Bosch that has become a market leader in safety within its industry is its Power Tools and Accessories Division. One specific power tool the Bosch brand has become synonymous with is the angle grinder. Angle grinders are used to grind, shape and cut various metals, but they are also commonly used on applications such as the grinding and cutting of masonry surfaces. Due to their wide range of uses, angle grinders are used by most tradespeople quite commonly. While these tools are extremely versatile, they are

extremely dangerous when used incorrectly. Utilising its expertise in automotive technology, and specifically ABS, Bosch Power Tools developed the ‘Kickback Stop’ feature for its angle grinders. This industry-leading safety feature protects the user from the ‘kickback’ phenomenon. Kickback occurs during cutting applications when the disc jams. The Kickback Stop is an electrical system that immediately cuts off the power to the machine when a jam is detected. This will significantly reduce the force transferred to the user and thus avoid any serious shoulder, elbow and wrist injuries. Additional features on the Bosch Safety Angle Grinder range include Dead Man Switches, Twist Proof and Multi-Position Guards, ReStart Protection and Vibration Control. While safety features are extremely important, any angle grinder is useless without the cutting and grinding discs they are designed to function with. The Bosch heritage of producing quality angle grinders has recently seen a new addition, with the launch of an Australian-specific range of cutting and grinding discs. These quality Bosch products comply with and exceed all Australian and European quality and safety standards, which include speed and burst tests. Combined with the safety features on Bosch Angle Grinders, they ensure the highest levels of safety possible for end users. The next time you purchase an angle grinder or cutting and grinding discs, ask yourself this question: do they meet the safety standards you desire?

BOSCH HAS SAFETY COVERED

Safety Angle Grinder Features Dead Man Switch a specifically designed switch, which shuts the grinder off once the switch/trigger is released. Kickback Stop a safety feature similar to ABS,

detects if the tool is jammed and immediately switches the grinder off.

Restart Protection prevents the grinder from

restarting automatically after a power cut, the grinder will need to be switched on again to continue working.

Multi Position Locking Guard twist-proof

protective guard – quickly and easily adjustable and provides protection if the grinding disc shatters.

Spindle Lock and Constant Speed Electronics faster, simpler disc/tool change. Power booster for heavy loads – constant speed, even under load.

Vibration Control patented vibration damping system that reduces oscillations and vibrations.

> New comprehensive range covers most applications

> Easy to choose colour coded, application based packaging: Blue: Standard Metal Applications Black: Stainless Steel and Inox Green: Masonry Multi-colour: Multi-purpose > Bosch quality manufactured and tested to Australian Standard AS1788.1-1987 to European Standard EN 12413

> Sizes range from Sizes range from 125 mm (5”) – 230 mm (9”)

For further information please visit: www.bosch-pt.com.au

100 mm (4") ‒ 355 mm (14")

Bruce Munro

Bruce Munro Despite ongoing challenges and signs the construction sector may be slowing as Australia transitions away from the capitalintensive phase of the mining boom, activity remains at historically high levels, according to Thiess Managing Director, Bruce Munro. I think it’s very timely, when we look at new governments, that we bring infrastructure right back to the forefront of our agenda. When I think about the construction industry and how it’s evolved over the years, there’s something very Australian about what we do and the journey our industry has taken. We talk about can-do culture in this country, and that’s very much a part of what construction is about – taking on challenging environments and turning them into what we call landmark legacies for the country, and for the communities in which we live. When we talk about landmark legacies and projects, I always hark back to the Snowy Mountains Hydroelectric Scheme, which is even more appropriate at the moment, because this scheme was built over a 25-year period between 1949 and 1974. This was a nation-building project – I think the first of its kind in this country. Thiess played a vital role – we ended up constructing almost 25 per cent of that project, whereas in the early days it was almost 42

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entirely foreign contractors constructing it, as local contractors were deemed not to have the technology or capability. That’s an interesting scenario in itself – how quickly you learn what needs to be done in these projects. At the time, the cost was a huge $820 million – that’s roughly $6 billion in today’s terms. So this project that we all look back on is, in fact, relatively small in the scheme of things, when you compare it to what is being built around the country today – particularly some of the infrastructure projects and the big investments being made in our resources sector. The Snowy Mountains Hydroelectric Scheme set construction records and was completed on time and on budget, and that in itself also sets it apart from many projects. The project included 1600 kilometres of roads and tracks in quite a harsh environment, seven townships, more than 100 camps, construction of 16 major dams, and seven hydroelectric power stations generating almost 4000 megawatts of renewable

Bruce Munro

power – 67 per cent of Australia’s total renewable energy at the moment. The pump station had 145 kilometres of tunnel and 80 kilometres of pipelines and aqueducts. Only two per cent of that project is visible above the ground; the rest is hidden. But beyond these statistics and facts is an incredible story of the success and endurance needed to deliver a project that has stood the test of time. It’s a reminder of the perseverance required in challenging times, and the impact that these types of projects can have on a country’s culture and psyche – and I think that’s an important issue. The project was notable for its immigrant workforce following the end of World War II. It was the start of a huge surge of immigration to Australia, such that now more than 50 per cent of our population is made up of immigrants or the children of immigrants, which contributes to the true diversity that we see in Australia. The point I’m making is that the implications for Australia of these mega-infrastructure and resources projects go beyond just the commercial imperatives. The spin-offs can be both nation-building and nationchanging. They can change both our culture and the lifestyles of the communities in which we live, and when we look at these projects we need to take that into account. It’s very difficult to put a dollar value on it, but it’s something that is very real with regard to how it impacts on our society. Back to the present, and I’m going to talk about surviving in our industry. Surviving – let alone thriving – in today’s economy has become a real feat in this industry, as construction is very volatile. Official statistics released just a few months ago reveal that, in construction and the building-related sector, two companies per day are collapsing as late payments from debtors worsen, activity dries up and banks tighten funding. Figures on liquidations and voluntary administration, reported in the media, show that between 1 June and 18 July 2013 – approximately

Official statistics released just a few months ago reveal that, in construction and the building-related sector, two companies per day are collapsing as late payments from debtors worsen, activity dries up and banks tighten funding

six weeks – almost 100 companies in the construction and related industries collapsed, including 23 in Victoria, 45 in New South Wales, and 15 in Queensland. Many of these are smaller organisations, certainly, but there have been some other high-profile failures over the past 18 months, including the Hastie Group and Reed Construction. And yet, according to the latest Australian Bureau of Statistics (ABS) figures, the value of total engineering construction work that has been completed fell only 1.6 per cent in the June 2013 quarter, and this is coming down from record highs previously. The total value of engineering construction in 1990 in Australia was $20 billion. By 2000, it was $28 billion, in 2005 it was $48 billion, and in 2008, just before the downturn, it was $71 billion. Then, in 2009, it was $77 billion, and by 2010 it was $79 billion. Volume 4 Number 1

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So, whether it was the government stimulus or other reasons, the engineering construction value in Australia continued to climb even through the global financial crisis. It continued climbing in 2011 to reach $101 billion, and again in 2012, to reach $125 billion. Everyone is now saying that doom and gloom is upon us, but the March quarter of 2013 was higher than the record March quarter of 2012. The June quarter of 2013 has shown half a per cent decline in the values, so we are not saying that it is going to continue to grow. It will flatten off, and without a doubt we will see some decline. But given the record levels we got to – $125 billion worth of engineering construction in 2012, compared to around $70 billion five years earlier – there is just huge growth, and the industry has had the capacity to actually meet the demands of that growth. There is a lot of sentiment across the industry at the moment. The market is coming off peaks in mining, oil and gas, and the transport sectors. Governments at both the state and federal levels are pursuing tighter fiscal policies and a number of major projects have been delayed or put on hold. But I think it’s important to acknowledge that engineering construction in Australia is at record highs. We do expect to see some declines, but we don’t expect to see it crash and burn in the near future. Look at the infrastructure that is going to be built, or that is planned for construction across New South Wales and Queensland. Victoria has been quiet, but there are some major projects coming onstream. There is something else fundamental in our industry, when we talk about all of these liquidations and administrations, that we do need to look at. Certainly it is as a consequence of the slowdown in our industry. According to a Dun & Bradstreet survey, trade payment terms for the construction sector have almost doubled since June 2012 to 55.3 days, and the national average was 54 days. These late payments have had a knock-on effect, further impacting our cash flow. The slowdown is playing out in the listed company space, as well, with a spate of earnings downgrades in the mining services and construction sectors in the past few months. I would suggest that we need to look at the administration efficiencies that go on within our 44

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industry. We’re in a record boom period with a lot of work around, and we’re still seeing these liquidations, and companies going into administration. I think that clients and contractors need to get together to try to understand what can be done, in order to make sure that we bring this to an end. Against these odds, it makes Thiess’s 80-year anniversary in 2014 somewhat remarkable. We’ve survived 80 years, but it’s been a roller-coaster journey over that time. During the Snowy Mountains period, Thiess almost went to the wall. Just a few years ago, a couple of the major projects we had in Victoria and in Brisbane certainly tested our financial capacity, and if we hadn’t been part of a much larger group, it could have been fatal. But, given the dynamic nature of our industry and the current challenges, I decided to share with you a contractor’s view of what it takes to manage this ebb and flow – the ups and downs, the peaks and troughs in our industry. And with this context I’d like to focus on what I see as the vital ingredients that have held us in good stead over some pretty tumultuous years. Firstly, I’d like to talk about vision and agility, and being able to seize the opportunities that come along. As a company, we obviously have our own vision to which we aspire. But as part of a very large industry, we need and rely on organisations like Infrastructure Partnerships Australia and Roads Australia, and governments and government agencies, to drive our country‘s vision forward. As peak industry bodies, they draw together the public and private sectors in a genuine partnership to debate the policy reforms and the priority projects that drive a more productive Australia. They also help us to navigate the challenges of our industry and, importantly, understand the opportunities and set the agenda into the future. I think it was a crucial day when Tony Abbott was elected Prime Minister. He promoted himself as ‘the infrastructure Prime Minister’, and he has already outlined some of the key projects he’d like to get off the ground, including $6.7 billion for the Bruce Highway in Queensland, $1.5 billion for the East West Link in Melbourne, $1.5 billion for WestConnex, and also a determination to continue with the NBN – albeit probably in a different format to that of the previous government. Deputy Prime Minister and Minister for Infrastructure and Regional Development, Warren

Bruce Munro

Truss, has made positive comments about the government’s priorities and funding options, and I welcome Industry Minister Ian Macfarlane’s comments regarding the likely fast-tracking of coal seam gas projects in New South Wales – subject, of course, to the state government’s agreement. Infrastructure, the coal seam gas sector and a whole lot of other opportunities in Australia will create thousands of jobs, boost domestic supplies and be a key driver for our economic growth. But so far, it is all talk. All of us are under obligation to hold the politicians and our governments accountable for the promises they have made. They need to create certainty in the pipeline of work that is coming our way. We shape the vision within our company on the opportunities that are outlined ahead of us. We are looking for a high level of certainty in the commitments and the investments that we make. Infrastructure should not be a political football anywhere in this country. That brings me to the importance of agility. Our industry, more than most, is vulnerable to unpredictable fluctuations that are often outside of

our control. Commodity prices, weather, geotechnical risk, global events – there is a whole raft of them. It’s in these sorts of decisions that to tack or to jibe, or to just bunker down, will ultimately determine our future success or failure. Historically, we have been able to rely on diversification as a strategy. In fact, there was an uncanny counter-cyclicality to the timing of sectors, industries and government spending that Thiess and other companies are well aware of, and you use this in leveraging your position. As contractors, we found comfort in this. It allowed us to redeploy resources and efforts to where there was capital spending occurring. So what is different today? We have just come off a stimulus package from the global downturn. There was plenty of work out there at the time, but that has now come to an end as governments tighten their budgets. We then had continuing strong growth in the new resources projects that replaced this. But in 2013, this has also started to decline as current projects are being completed, but very few new projects are coming onstream. And so we now look to government infrastructure spending to make up that difference. Contractors are

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Below: Hunter Expressway. Image courtesy Thiess

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Bruce Munro

There’s little debate, though, that Australia is under-resourced. Every time there is a boom, we look overseas to bolster our ranks, to fill the gaps, and in doing so we have one of the highest cost bases in the world keen to maintain or rebuild their order books, and we’re seeing fierce competition as prices begin to fall, pressuring margins and putting profitability at risk. This, combined with late payments and cash flow pressures, explains why some of the companies simply haven’t survived. In addition, the past decade has seen a rise in the number of new foreign contractors entering the Australian market. This has further fuelled the intense competition that already exists within Australia, so it demands that local companies be much more cost-effective and innovative in how we do business. We need to stay tuned to our clients, our markets and the global economy if we are going to navigate this industry as we go forward. Many industry forecasts at the moment point to the infrastructure pipeline continuing well above trend over the next decade and beyond, with the total volume of work not expected to fall dramatically. This is quite different to 12 months ago. We also have a new Federal Government that is committed to maintaining infrastructure spending. In all, the 10-year outlook, we believe, is quite positive. As contractors, we need to step up and help shape the program and the timetable that is necessary to create the certainty to set our visions. So this brings me to the second key point that we have within Thiess, and that’s our workforce. As our markets decline, it is a natural response to cut jobs, reduce overheads and ‘de-layer’. That has become a very popular word in the group. However, I can’t stress enough the importance of retaining and building the skills base that we have. Despite advances in technology and automation, our industry still relies very heavily on the quality of the people we employ, and this is why certainty is vital. 46

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Knowing when or where the next project is will help us plan our priorities and mobilise workers to where they are needed most. To give an example, since our work on the Hunter Expressway entered its official demobilisation phase this year, 97 per cent of the 135 Thiess staff have been redeployed to other Thiess projects. Fifty per cent have gone to the Frederickton to Eungai project, nine per cent to another road project, and 38 per cent to other projects, including the North West Rail Link. Having this ability to redeploy staff is a remarkable achievement; it’s well above industry standards and it means that we can take those people and hit the ground running. There’s little debate, though, that Australia is underresourced. Every time there is a boom, we look overseas to bolster our ranks, to fill the gaps, and in doing so we have one of the highest cost bases in the world. Although it’s heartening to see an increase in the number of engineering graduates, permanent and temporary migration continues to be a central factor in meeting Australia’s engineering skills demand. Overseas-born engineers represent approximately 50 per cent of Australia’s engineering labour force, but we also need to take some accountability for the high cost of our industry. We can sometimes be too agile for our own good. We need to be prepared to stay firm on what are realistic costs, and to sit with our clients to make sure that we end up with a win for both of us. Skills shortages will continue to be a significant challenge across our industry, and it’s important that we forge stronger ties between industry, government and educational institutions to promote workforce planning and increase the number of trade professionals and engineering graduates.

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I think education is a key to the success of our businesses. At Thiess, we have formalised a partnership with MEGT Australian Apprenticeship Centre to equip our apprentices and trainees with the skills to meet future project commitments. This nationwide agreement will help streamline systems and processes of education qualifications within a federal Australian apprenticeship framework. An important thing regarding apprentices and graduates is that we all need to maintain these programs through the tough times. Too often, the first thing we do is cut our apprenticeships or cut our graduate programs, so the future leaders of our industry are left wallowing for some years. We also need to increase diversity within our ranks, including the number of women. Construction is very much a blokey business, and it can only be a better industry with more women in it. We need to think about how we will meet the demands of generations Y and Z, and whatever comes next, and the work-life balance that these people are now demanding. We also need to address issues of underemployment and increased workforce participation, and whether 65 really is the right time for very skilled and very experienced people to be encouraged to leave the workforce. We can find some great employees out there at the moment, if we are prepared to work harder on some of these things. We also need to stop blaming the unions for all of our productivity and cost issues. On every Enterprise Bargaining Agreement (EBA) there will be union signatories and employer signatories, so we must accept that some responsibility for where we are at and where we are going is with us. We need to be realistic about what we can achieve, but we also need to understand the changes necessary, and we have a part in that change. We just need to stop blaming the unions for everything that happens. It’s a bit of an industrial relations jungle out there – it has been for many years – but somehow we need to sit down and try to find a compromise that works, not only for us and the unions, but also for Australia as a whole. New, innovative technologies and processes are also in demand to service emerging markets that are linked to our more traditional infrastructurebased business.

The growth in operations and maintenance has been increasing across a number of sectors. In the energy sector, we’ll see enormous growth in the longterm maintenance of Liquefied Natural Gas (LNG) and Coal Seam Gas (CSG) assets, and in the delivery of social infrastructure, such as new hospitals. Alternatively, through the growing capital works programs of the utilities asset base, there will be more operations and maintenance options available. As clients become more sophisticated, they are looking for contractors to become involved from a whole-of-life asset perspective. There is more willingness to consider innovative procurement models that are not limited to the construction of new infrastructure. This includes asset management services and facilities management to drive operational benefits and maximise the lives of the assets. Some of the more important innovations in 21st-century technology include the iPhone, iPad, driverless cars, electric car charging stations, Nintendo Wii, YouTube and Facebook. There are a whole lot of things out there that are going to change how we currently do our business. Technology is critical. I read an incredible fact recently: today, there are more transistors made in a year than there are grains of rice grown in a year. That gives you some idea of where technology is going. The point I’m making, of course, is the importance of the power of information and data. The challenge for us is how we extract information from all of the infrastructure we build in order to extend its useful life. Perhaps our opportunity is to shift our role from just being a construction partner to being a knowledge partner. Innovation, however, is not just limited to some of the technologies available; it includes the processes, the methodologies and the systems that allow us to create value for all of our clients. To summarise, the key challenges and opportunities facing the Australian infrastructure market will demand vision and agility, valuing our people and looking for innovation. Collaboration with clients, governments and the industry overall will provide the insight we need to make the right decisions at the right time. Before I conclude, though, I would also like to share some final observations on how we shore up our infrastructure future. Volume 4 Number 1

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Bruce Munro

Firstly, we need greater visibility and certainty around the pipeline of projects. This insight is critical to ensuring the right planning, the timely mobilisation of skilled workers, and the strategic and cost-effective management of resources. Secondly, we need bold decisions to maximise Australia’s competitive advantage. And, last but not least, we need effective partnerships for delivery of these projects. Governments alone cannot be expected to fund the entire backlog of infrastructure. Within the next decade, we expect infrastructure construction costs to be somewhere in the order of $400 billion, of which as much as 15 per cent is to be delivered, potentially, via Public Private Partnerships (PPPs). We’re all aware of the challenges that PPPs have faced in recent times, but there are also many, many examples of successful PPPs in our infrastructure – both economic and social infrastructure. Melbourne CityLink, EastLink, the Victorian County Courts and the Royal North Shore Hospital in Sydney are all good examples. However, there is a need to find alternative funding models. One model does not fit all, and Thiess is actively exploring options, such as the warehousing model, that offer government greater efficiency with the same risk transfer. Governments can deliver infrastructure with the intention of selling it to the private sector once the project is complete and its revenue is known, in a process sometimes described as capital recycling. What it does, though, is give certainty to all of the parties. Our analysis shows this to be a very efficient model. Materially, governments can achieve the same risk transfer via design-build and maintain, or designbuild-operate and maintain, in their procurement models as on a social PPP. Underlying this whole value chain is a regulatory environment that encourages investment in Australia over the long term, so that a steady pipeline of capital projects can be rolled out. We welcome the new Federal Government’s commitment to reviewing regulatory processes that are stalling the development of major infrastructure projects, and its pledge to streamline project approval processes, at both the state and federal levels. Importantly, governments and industry need to stop gold-plating major infrastructure projects, in order to drive the costs down. Over-engineering 48

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these projects is expensive, and in this environment it is imperative that we get the best value for taxpayers’ dollars. There is more to be done and more that we can all do. Weathering the current storm, which I think is fading over the horizon, will take foresight, and it will need some endurance and belief in our own vision of the future. It will require resourcefulness and an industry that is prepared to look at new technologies and new ways of doing things. If we can overcome some of the problems of the past, particularly with our cost base, then Australia’s construction future is assured.

Bruce Munro, Managing Director, Thiess Bruce Munro was appointed Thiess Managing Director in September 2011 after joining the Thiess Group in 1986. A civil engineer with 36 years’ experience in the construction and mining industries in Australia, South East Asia and India, he has held a number of senior positions within the company. These have included President Director of PT Thiess Contractors Indonesia – a role he held for eight years after his appointment in 1999. Bruce was appointed Executive General Manager in Asia in August 2007, and in January 2010 he took on the role of Thiess’s Chief Executive Mining. Bruce has a long history with Thiess’s parent company, Leighton Holdings, having worked for both Leighton Asia and Leighton Contractors. He is a Non-Executive Director on the board of Sedgman – a leading provider of minerals processing and associated infrastructure solutions to the global resources industry. Bruce is also on the Boards of the Minerals Council of Australia, Australian Constructors Association, Roads Australia and is the Queensland Chair of the Australia Indonesia Business Council.

Photographer: Brett Boardman

We don’t achieve EXCELLENCE by being a contractor. We achieve it by being a PARTNER. EXCELLENCE IS THE STANDARD WE AIM FOR EVERY DAY. It enables us to attract and retain the best talent and to deliver some of Australia’s most high profile projects. And it’s not just something we aspire to; it’s something we achieve. Thiess won the 2013 National Infrastructure Award for Contractor Excellence in recognition of our work on the Royal North Shore Hospital and Community Services Redevelopment in Sydney. As the largest hospital project undertaken in NSW in the past 30 years, we were responsible for the $721m design and construct contract. The integrated campus showcases expert planning and delivery of a complex brownfield health project. Smart design and construction consolidated 53 outdated buildings into a multi-purpose facility with in-built flexibility to accommodate Sydney’s future healthcare needs. We turned a project into a partnership, working alongside our valued client to deliver on time and on budget including facilitating more than 700 meetings with 134 user groups and managing the significant decant process. We’ll continue the partnership by delivering hard facilities management services for the 28-year project period. For more information about this project visit THIESS.COM

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Peter Harris AO Despite broad consensus across the political divide around the importance of infrastructure investment to productivity growth, Productivity Commission Chairman, Peter Harris AO, asks why it is that Australia continues to under-invest. First, let me say, it’s great that infrastructure investment has never been as popular as it seemingly is today. Most of us are commuters, and many of us are also regular airport users, and maybe that makes this renewed interest in infrastructure sound like a more than fair thing. But there is still a need for some structured thinking to intrude on such a rosy scene. The idea that there is an infrastructure gap has persisted for some time, and perhaps there is. But even if there is a gap, the lessons we have learned over the past 10 years about how to address infrastructure suggests that it’s best not to simply rush in and fund the next big project that claims to be ready to go. You don’t fill gaps measured in the hundreds of billions of dollars with an icon project or three, no matter how iconic it is. The better approach is to undertake a review of all the factors that go together to address the infrastructure conundrum. And that conundrum is: we all favour more investment in this basic underpinning of productivity improvement, but we continually seem to be under-investing – why? And since, in my assessment, this question needs to be properly reviewed, I am not going to solve it here today.

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Peter Harris AO

Airports like Perth and Brisbane – not just Sydney – regularly suffer infrastructure-related delays; Melbourne’s airport road access is poor, and Sydney’s is probably not much better But I will give you some context and make some comments on things that I think are tremendously important for creating an effective environment for future infrastructure investment. So first, this bit of context. The Howard Government in 2005 reviewed export infrastructure, and came to the conclusion that there was a bit of a problem with regulators and regulated pricing, but that there were no actual real impediments to this. The Rudd Government in 2008 also undertook a serious infrastructure review, and we ended up with Infrastructure Australia and the Building Australia Fund. The funding has now ended, but the structure at least remains. Both of these processes were quite worthy examinations of the overall question of why we continually seem to be under-investing in infrastructure. But today, five years on, we still have this focus on the iconic infrastructure project as if it is going to solve the problem. And it isn’t going to be sufficient to solve the problem. Moreover, while there is a focus on just one icon project, not only will the conundrum remain unanswered – simply because there is no solution to it from a single funding effort by private partnership or public investment – we also risk squeezing out any focus on how to get the best combination of productivity-enhancing investments. If you look at an aggregation of the projects submitted to Infrastructure Australia by a benefit cost ratio (BCR), it will show you that the very large projects have quite low BCRs, and some of the small projects have very high BCRs.

So the icon project, the very big project, may not necessarily be the best way of solving a productivityrelated issue. Another factor is that infrastructure funding is up. Analysis by the Australian Bureau of Statistics of public sector investment across the country shows quite a large increase as a percentage of GDP in infrastructure spending in recent times. But these numbers do not include anything on the NBN, 4G Mobile, or airport projects, and little, if any, contribution from Public Private Partnerships (PPPs), so even these increases are probably an underestimate. We have more going on in infrastructure than we might think. Nevertheless, the trend increase does not tell you anything about whether or not we are meeting needs. Infrastructure isn’t something we just want to have; its purpose is to meet consumer and business needs. Treasury noted a few budgets ago that the average age of our infrastructure is increasing, suggesting a potential build-up in replacement need. And it is true that a significant part of our major urban transport infrastructure is either Depression-era or immediate post-war – that is, 50 years old or more. Congestion figures are rising. Peak period travel times on arterial roads in urban areas continue to rise. Melbourne and Sydney trains and trams regularly exceed their ‘crush’ crowding levels. Airports like Perth and Brisbane – not just Sydney – regularly suffer infrastructure-related delays; Melbourne’s airport road access is poor, and Sydney’s is probably not much better. At the same time, there is also overinvestment occurring.

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Peter Harris AO

Let’s not forget consumers. They need to be brought squarely into the process in advance of investment commitments

Productivity Commission figures indicate that one of the more notable causes of the productivity declines of the past decade was over-investment, driven substantially by a lack of pricing signals and poor links to early planning intervention in new assets, in areas like electricity and water. With demand not meeting expectations, consumers are still required to pay for all of this via regulated pricing. This exemplifies the important role of pricing, and how poorly-constructed pricing models can get things quite wrong. A helicopter view of infrastructure pricing systems shows something like this: telecommunications has reasonably good links to future needs, freight rail has some links to future needs, electricity and water have weak links to future needs, and roads have virtually no links to future needs through pricing systems. And in water, as I found working on water projects in Victoria, it’s too late to change the pricing system and get better planning signals when you’re just about to pump the mud off the bottom of the dam. In electricity, incentives skewed by regulated pricing often create over-investment in peak period infrastructure. The Productivity Commission put out a report earlier this year, which quite clearly demonstrated just that. And road pricing has the worst structure of all. It skews expectations from consumers, such that current ‘pricing’ systems tell users that the infrastructure is already paid for by fuel excise; so tolling or congestion charging will be seen as ‘double dipping’, and therefore morally wrong. That’s a bad perception to encourage if you want to expand funding beyond the current horizon. And worse, that thinking is flawed because fuel excise and all primarily road-related charges together 52

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fall around 30 per cent short of the amount Australian governments spend on roads annually. Pricing systems across publicly funded infrastructure, in my view, need review if they are to support the aspiration for private partnership funding. But the larger reason to review them is not just about private partnership funding; it’s that too often they seem unable to achieve what pricing is meant to achieve, which is a reliable link between what is supplied and what consumers are willing to pay for. Let’s not forget consumers. They need to be brought squarely into the process in advance of investment commitments. Some of the more spectacular failures in recent infrastructure investment appear to have focused a lot less on consumer willingness to pay, and much more on financing structures. Mentioning financing structures leads to thinking about superannuation investment – another highprofile issue in the infrastructure discussion. There is substantial interest in this, not only in Australia but also globally. The Organisation for Economic Co-operation and Development (OECD) has noted that only about one per cent of pension assets are invested in infrastructure globally. Here in Australia, the percentage is higher, and the interest is stronger because of our relatively advanced superannuation system. The very size of the savings pool, long-term in nature and fixed in inflow, seems to suggest to some that the simple social purpose of funding long-term retirement needs is an insufficient target for super. I find this unpersuasive. Fixing the retirement planning needs of a nation is one of the most pressing policy purposes of governments globally – it should be a sufficient target in itself. And imagine the consequences if a mandate – a forced requirement to invest in infrastructure – was imposed. Large flows of money would be chasing a difficult-to-define target – what is infrastructure? – where planning is generally not well-linked to willingness to pay. Overall, that doesn’t sound too good. But this is not to say that some of the issues in attracting – rather than mandating – super to infrastructure shouldn’t be solved. Let’s start with pricing again. Superannuation is about earning returns for members – so to attract it will require a reliable revenue stream. But opaque charging systems of the kind I referred to earlier – ones prone to ministerial intervention or

Peter Harris AO

where consumer willingness to pay overall is not clear – will not attract support. And locking charges in via today’s cost recovery models tells you nothing about the project’s economic or social desirability. It’s more like, ‘if you build it, they will pay.’ With greater emphasis currently on benefit cost analysis (BCA), the creation of business cases by strong and well prepared accountancy firms, and particularly with the advent of Infrastructure Australia and gateway assessments in most state government processes now, we are improving planning in those inputs. But where they are simply bolted onto an otherwise skewed pricing system, the attractiveness of the investment is likely to be affected. BCAs are curious creatures when they suddenly appear in a world of commercial analytics of private investment. Externalities and network effects are very significant in infrastructure investment. And if they dominate a BCA, there may be very significant differences between the story as told by a BCA and the story as told by a commercial business case. And I make this comment quite consciously, because I regularly see a BCA being thrown around, as if it is the pre-emptive and primary tool for a commercial analysis. Most of you will know that’s not the case, but, frankly, it’s not commonly explained publicly in the commentary.

So adding BCAs to a planning process – a desirable thing in itself, a very desirable thing – does not necessarily help the investment process. Infrastructure Australia has prepared data on the BCAs of projects submitted to them. If you look at it, you’ll see that the very largest projects have quite low BCRs, and the smallest projects appear to have quite high ones (see graph below). There are some reasons for those low BCRs: network benefits are sometimes very difficult to fully capture; transformational gains, like investing where you are trying to change a whole suburb or a whole city landscape, are difficult to fully crystallise. In Sydney, for example, there is clearly a suburban revitalisation that took place as a result of the airport train project. But the train project owners didn’t benefit from that. And the value was almost certainly underestimated in the BCA, simply because it’s hard to calculate that ‘blue sky’ potential when you need to assume that property developers, and, frankly, foreign apartment buyers, are going to be involved in a project over a decade or two. Perhaps, therefore, we can at least agree that explaining BCRs might be very important to an investment case – much more important than is currently imagined in public commentary. And that’s particularly true where consumers are involved, where some of the larger road projects, for example, end up with apparently very low BCRs.

Source: Productivity Commission Volume 4 Number 1

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Peter Harris AO

For superannuation, other aspects of infrastructure that might be considered in order to improve its attractiveness include things like: • how to fix demand risk: particularly low early-life take-up, which is exemplified by toll road projects but not limited to them. Most infrastructure, due to its lumpy nature, is at risk of poor early take-up, if it’s priced. If you get it for nothing, it probably doesn’t matter, but if it’s priced it’s at risk of poor early take-up • illiquidity: the second thing in superannuation that strikes me as being quite important. Because with few buyers at any time for very large projects – and, of course, very few buyers if you are subsequently forced to sell – deep pockets are required; it’s a thin market. We need to address these issues. Fortunately, in this area I think the market is showing signs of solving these problems itself. As funds obtain scale, similar to the Canadian funds we have seen here as active buyers, they can retain the in-house expertise necessary to overcome these information uncertainties; and explain them better to boards for investment cases. They can undertake their own demand assessments, rather than relying on others, and the concept of creating portfolios of infrastructure, rather than single infrastructure assets, can address, in part, the liquidity issue. These, on their own, may not be silver bullets, but they have the dual merits of not being regulated

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solutions, and also of not shifting risk back to the public sector. I mention risk at this point because I think it is fundamentally important – particularly in discussion of PPPs. PPPs are a partnership concept that I have seen through our public transport contracts in Victoria, a number of large water projects in Victoria, and even the NBN–Telstra contracts, which have elements of PPPs at the high level. PPPs are not really something to target in their own right; there are many circumstances in public infrastructure where they will not be suitable. But they are at their best where they offer clear net benefits beyond those of traditional public funding. That sounds like a very simple motherhood statement, but, in applying it, the benefits of PPPs tend to apply the most where risk sharing or risk allocation is the principal subject under consideration. The more difficult it is to define the nature of an infrastructure investment and design it effectively, the more likely it is that a PPP will be a helpful device. Moreover, PPPs apply particularly where those concepts can be well expressed in contract, because if they can’t by definition, you’ll find it very difficult to run a PPP. They must also be well expressed in potential pricing structures. Looking at risk, PPPs are often good at improving risk management in the design phase. Adding a private partner early creates an incentive for the financier and the builder, if the tender process will allow, to advise on how to ensure that the project is deliverable at the chosen cost and time frame, to find efficiencies and to remove contingencies. The result of this is quite evident. There are studies, both in Australia and overseas, that support the idea that PPPs experience lower cost overruns and nearer on-time delivery than alternative systems. PPPs also demand comprehensive whole-of-life costing. Whole-of-life costs need to be crystallised and potentially funded, because if you are an investor, you want to know that the thing is going to be maintained throughout the period in which you are expecting to get your money back. This whole-of-life costing concept is a very welcome development for those of us who have run infrastructure agencies; we are used to begging for maintenance funds. The idea that you can crystallise and contract them up-front is very attractive.

Peter Harris AO

PPPs require a payment stream, but here the outcome is a lot less clear. PPP payment systems often aren’t anything like the sort of pricing systems that I’ve been talking about today. They are not necessarily directly linked to willingness to pay. They may even come straight out of state treasuries, or they may come through regulated pricing outcomes. These are not necessarily demonstrating willingness to pay, and therefore they are leaving you exposed to demand risk. It will be of significant value, therefore, in the future, if increased use of PPPs improves the linkage to consumers and their willingness to pay – and perhaps creates incentives to review this whole area. History will tell you that the development of such reforms generally requires a comprehensive public policy review. And if pricing policies are effectively reviewed and reformed, projects – regardless of who finances them – will be demonstrably more sustainable and, as a result, will put less pressure on public sector balance sheets, which is a primary theme for why governments are looking at PPPs. Also with effective pricing systems, we might see prices emerge that will differentiate between users for different level of use, that will allow people to propose alterations to services, and that will innovate rather than simply have one price for all. These are things that we should all want to see in our future infrastructure.

In conclusion, I posed the infrastructure conundrum as being about why we seem to continually under-invest in infrastructure. And I know I haven’t solved that, but I do think the absence of effective pricing systems is a significant element of under-investment. Introducing private investment, including super funds, either directly or via participation in PPPs, will be a useful tool, particularly for the sort of concepts I mentioned earlier. But this alone will not solve the conundrum. A key reason that we under-invest is almost certainly that we limit both planning and investment to what the cost recovery or the general budget system will bear, rather than encouraging it via better pricing models. We have improved pricing systems before, in interstate freight rail and in airport privatisations, and I think we can do it again.

Peter Harris AO, Chairman, Productivity Commission Peter Harris is Chairman of the Productivity Commission. Peter has previously served as Secretary of the Commonwealth Department of Broadband, Communications and the Digital Economy, and the Victorian Government agencies responsible for Sustainability and the Environmen, Primary Industries, and Public Transport. Peter has worked for the Ansett-Air New Zealand aviation group and as a consultant on transport policy. He has also worked in Canada on exchange with the Privy Council Office (1993–1994). His career with the government started in 1976 with the Department of Overseas Trade and included periods with the Treasury, Finance, the Prime Minister’s department and Transport, and he worked for two years in the Prime Minister’s Office on secondment from the Prime Minister’s department as a member of then Prime Minister Bob Hawke’s personal staff. In 2013, Peter was made an Officer of the Order of Australia ‘for distinguished service to public administration through leadership and policy reform roles in the areas of telecommunications, the environment, primary industry and transport’.

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Project Delivery Panel Project Delivery Panel

Chair: Brendan Lyon, Chief Executive, Infrastructure Partnerships Australia Panellists: Roger Black, Project Director, Projects Queensland, Queensland Treasury and Trade; Rodd Staples, Project Director, North West Rail Link, Transport for NSW; Paul Goldsmith, Project Director, WestConnex, Sydney Motorways Project Office, Roads and Maritime Services; Ken Mathers, Chief Executive Officer, Linking Melbourne Authority

The need for closer collaboration and coordination between and across governments formed a central theme of the Project Delivery Panel at Partnerships 2013. Brendan Lyon: This panel invites project directors who are investing more than $30 billion in current projects to talk about the opportunities that might exist for better coordination and national leadership. Can I ask each of you just to give a little summary of what it is youâ&#x20AC;&#x2122;re actually directing in terms of project investments? Ken Mathers: The entire East West Link is 18 kilometres long, and runs across the top of Melbourneâ&#x20AC;&#x2122;s CBD, going from the end of the Eastern Freeway across to CityLink, and ultimately right across to the Western Ring Road. This is a project that is going to respond to the ever-increasing traffic demand in Melbourne, and particularly the freight industry. The state government has made it clear that its highest priority is the eastern section, running from the end of the Eastern Freeway at Hoddle Street across to

CityLink, and we are currently embarking upon the procurement of that stage. Concurrent with that, we are doing the detailed planning for that part of the project, and also the adjoining section that runs down to the Port. The Linking Melbourne Authority, under the previous government, had undertaken the planning for the western part of the project, but this government has the eastern end as its highest priority. The eastern end is a massive project, somewhere between $6 billion and $8 billion. It is 9.6 kilometres long overall, and that includes twin three-lane tunnels, each 4.4 kilometres long. This project is going to be delivered and financed under an availability Public Private Partnership (PPP) model, and there will be significant contributions to the capital cost of the project by the Victorian Government, both during construction and at the end continued on page 58

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Project Delivery Panel

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of construction when the facility is opened. The state will be acquiring its own tolling system, and it will maintain the traffic and the revenue risk. BL: Paul, do you want to draw out some of the things about the WestConnex program, and the points of difference that are going on between Melbourne and Sydney? Paul Goldsmith: We put together a business case for government earlier this year, and we have had funding commitments from the Commonwealth Government ($1.5 billion) and the state government ($1.8 billion) for stage one of WestConnex. The whole of WestConnex is a 33-kilometre program of works, which is due to be delivered over 10 years, and it has a total value of about $11.5 billion. Stage one consists of two packages. The M4 widening is being fast-tracked, so we are letting that as a design and construct (D&C) contract. We have already submitted a planning application, and have started some industry engagement. We are looking to develop a procurement plan by the end of the year to get that going. [Ed: Expressions of Interest were issued in late November.] The rest of WestConnex, it’s important to realise, is based on a reference design. What that means is that we have a defined scope with a capital cost. We’ve defined a timetable, some tolling principles, and a funding and financing strategy that makes the project viable; but we’re open to developing procurement strategies for the rest of WestConnex over a period of time. BL: Rodd, do you want to run us through your project and where it has come from? Volume 4 Number 1

Rodd Staples: The North West Rail Link is all about delivering a fundamentally different rail service into Sydney’s rail network to bring about a step change in the type and quality of the services offered across metropolitan Sydney. The focus for now is in north-west Sydney, where we are delivering a 38-kilometre railway with 13 stations, running from Rouse Hill through the employment areas of Norwest and Macquarie Park and into Chatswood, and connecting into the rest of the rail network. This will be a fully automated rail system, so that’s something new for Australia. It will have platform screen doors, single deck trains – something Sydney doesn’t have at the moment – and levels of service and reliability that we are not accustomed to here in Sydney, or in Australia. The project will ultimately drive major economic benefits for the north-west of Sydney. We’ve got a commitment to deliver that by the end of 2019. We’ve been working very hard over the last two and a half years to scope that project and get it underway. BL: And the contract types you’re using? RS: The total capital value is $8.3 billion. The land acquisition is done, the planning approvals are largely done, and we’ve got three major contracts to deliver. The first is a 15-kilometre tunnel under a D&C contract. We’ve also got a smaller surface project, a viaduct and some surface civil engineering at the western end, and that should be awarded by the end of this year. The big part of the project is a PPP. It will pick up and convert the existing 14-kilometre rail line between Epping and Chatswood, and it will basically create a new automated rail system, fit out the continued on page 60

COMPANY FOCUS

TIME FOR BUSINESS TO RECONSIDER RAIL An efficient and reliable rail freight network keeps Australia’s businesses moving and Australia’s economy strong, says Australian Rail Track Corporation CEO John Fullerton.

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INVESTING TO MAKE RAIL MORE COMPETITIVE. Fullerton said that an efficient rail system offers new opportunities for Australian business, and that the interstate rail network along the east coast, in particular, is well placed to meet Australia’s growing freight requirements. ‘Our manufacturers, farmers, mining and construction sectors, importers and exporters all need a reliable and cost-effective way of getting their goods where they are needed, when they are needed, every time,’ Mr Fullerton said. Mr Fullerton said ARTC has recently finished a significant program of investment directly aimed at improving rail’s performance and helping meet Australia’s freight demand. The company has completed a $3 billion, five-year upgrade of east coast freight rail lines; providing capacity for as many as three times more trains running on sections of the track between Melbourne and Brisbane. Fullerton said east coast rail reliability is up 20 per cent this year, thanks to projects such as the new Southern Sydney Freight Line, ballast improvements, concrete re-sleepering, curve easing and the removal of several speed restrictions. A 30-hour rail path is also now available between Melbourne and Brisbane, up to seven hours quicker than in 2005 and comparable to the time it takes for single driver trucks to complete the same journey. ‘Through ARTC’s strengthening of the spine of the entire east coast rail network, we’re helping get freight off trucks and onto safer, cleaner, greener freight rail services between Melbourne, Sydney and Brisbane,’ Fullerton said. ‘Every single new train that runs on the upgraded east coast rail corridor takes the equivalent of 110 trucks off highways and community roads, produces three times less carbon, and uses around three times less fuel.’ ARTC will also shortly be introducing a new freight timetable to take advantage of this new rail infrastructure, making rail a better freight alternative for business by leveraging reliability and capacity benefits. ‘This is particularly important along the east coast of Australia, where urban congestion ranks as a top issue for communities, businesses and commuters alike in what is an increasingly environmentally and socially constrained landscape,’ Mr Fullerton said. ‘It all points to rail being better for business, better for motorists, better for the environment and better for communities.’

Over the last ve years the Australian Rail Track Corporation has invested more than $3 billion into the Interstate freight network. Much of this has been directed towards the Melbourne, Sydney, Brisbane corridor because of its importance to Australia’s economy and the businesses and producers supporting that economy. ARTC understands that businesses depend on rail to get their freight to a terminal within a specic availability window. That’s why our investment has targeted projects that release more track capacity and improve the reliability of the journey between Melbourne, Sydney and Brisbane.

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Above: Rodd Staples

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stations, and build the transport interchanges across the whole region as a PPP with a 15-year operating concession beyond completion. That tender closes at the end of this year, and we are targeting an award in the second half of next year. BL: Roger, do you want to give us a flavour of what you’re doing up in Queensland with motorways, but also with health and other areas? Roger Black: Projects Queensland has essentially become the part of Queensland Treasury that deals with complex projects and complex procurements, and compiles business cases and preliminary assessments. It undertakes procurement where there is a high level of complexity and potential for using private finance, and projects range from the Toowoomba Second Range Crossing to the Queensland Schools PPP procurement, which is currently underway. There is also some activity in the social housing space. One of the other topical things in Queensland at the moment is the issue of contestability, and Projects Queensland is involved in some of those opportunities. BL: Given that you all have large projects to deliver, how often have you talked to compare how you are going? PG: Quite often. We’ve had regular discussions with Rodd Staples and some of his people. I’ve been down to Melbourne on several occasions. I think the conversations are very frequent and very open. We’ve stolen a few good ideas from Ken Mathers, as well. Volume 4 Number 1

BL: What’s the forum that helps you do that? PG: For me it’s been mainly informal. The good thing is that we’ve been able to have some very open conversations, and people have been willing to share the bad experiences as well as the good, which is really useful. KM: It’s been a very close relationship over the last 10 years between Victoria and Queensland, particularly with respect to the large PPP road projects. That’s mainly come about through a couple of us knowing each other really well, speaking at forums and developing that relationship. In our former organisation, when we did the deal on EastLink in Melbourne, I rang up Dave Stewart (former Executive Director of Projects Queensland) who was working with Brisbane City Council at the time, and told him that we’d had a very successful outcome and asked would he like to hear about it, and he said, ‘Yeah, that would be fantastic.’ So we spoke to him and his council and his staff, and then they decided to largely adopt our model for the CLEM7 project, and that subsequently continued on with the Airport Link procurement. As Paul said, we have been engaging with him a fair bit. It’s not only him coming down to see us, but it’s us coming to see him, as well, and also some of his Treasury colleagues. And Rodd’s been down to see us, and I think these informal relationships are very good. We’re trying to pull together to develop our skills so that we match the skills and the capabilities of the private sector, because they go from one PPP project in one state to another state. They are always enhancing their skills, and it’s appropriate that we have dialogue so we are up to speed, too. BL: We’ve got a new national government that wants to reform Infrastructure Australia and wants to harness best practice. Is there a role for a Federal Government to start to pull some of these things together, outside of the personal relationships that you have with each other within the small infrastructure community? KM: My view is that when the Federal and state governments become too involved, it becomes overpowered by the bureaucracy. Personally, I like the informal relationships that we have. We all work within bureaucracies and we are all responsible to a department, and to a minister, and we have a lot of dialogue in Victoria with the Department of Treasury and Finance. It has to be that way to deliver these

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massive projects. So we do all work very closely together, but I think this informal arrangement of sharing knowledge and experiences is a very good one. And I think that’s the way I’d like to keep it. RS: Ken and Paul are right that there is a lot of conversation going on. We’ve been down to Victoria, we’ve been up to Queensland. Interestingly, it is coming the other way at the moment, because our project has been going for a while, so we are starting to do a bit of the sharing the other way. But without overdoing it in terms of the framework, there is some opportunity to put a bit of structure and regularity around the sharing of experiences, just to make sure that something is happening. Strategic leadership, rather than getting down and putting too much mechanics into it, would deliver the most benefits – because there are times when you get caught in your own project and you do tend to forget, so just to get that regular reminder would be good. But I would share some of Ken’s reservation that it could turn into quite a bureaucratic process if we’re not careful. So it has to be executed really well. BL: Roger, what do you think about the opportunities to perhaps sequence projects to learn from the opportunities, like you’re doing around public health, or that the other guys are learning on their big motorway, rail, and other projects?

RB: I think the ‘lessons learned’ exercise is really important. I’m with Ken; if we try to control it centrally it just becomes another process, and ultimately we are all bureaucrats delivering projects, and bureaucrats love process, and process becomes a means of ticking another box. But we do need to have more structure around how lessons are shared. At various times, one state or another is ahead with the work they are doing. At the moment, we are probably ahead of everybody else around some of the contestability opportunities, so we need a means of sharing that with everybody so that there is a common understanding of where we are at. This is not something new; around three years ago I was part of a review looking at how we deliver better-value infrastructure, and the need for a structured ‘lessons learned’ system was a theme that kept coming up. And in respect to sequencing, to my mind, getting best value out of infrastructure really depends on getting a decent sequencing system in place. BL: So what do you guys want out of Infrastructure Australia and out of the new Federal Government? What is it that would be useful? PG: During the development of the WestConnex business case, we’ve had good engagement with Left: Roger Black

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the federal agencies, but I think we need to see that dialogue improve so that they understand what we are trying to achieve. BL: So when you went to speak to the federal bureaucrats, did they speak the same language? PG: It took some time to get on the same page about what the project objectives were, but we have made progress. BL: Do you think the Federal Government’s commitment to the appointment of a dedicated funding, financing, project-advancing type function within Infrastructure Australia will give it a more useful, practical edge? PG: I think so. It’s about getting people in the room talking, rather than about filling out forms and sending them in. BL: What other things could the Government be doing to assist projects? We hear things like equity, we hear things like federal procurement and putting people down into state agencies and so on. Where does the efficiency get lost – where does it become more of a confusion? RS: Mine’s quite straightforward at the moment, because it’s all state-funded. But I think there is a real dilemma that, with the Commonwealth putting money in, they will want to have some say and influence. There is a real risk that, in doing that, they don’t quite get what the state is trying to do with the project, and they can actually delay things. Putting people into the teams is a really good thing, but the quality of the people is really important, and they need to be people who are going to be constructive and influence the project in a positive way. PG: Those points are correct. We are looking for more collaboration and a deeper understanding of the projects, rather than an oversight and policing role. KM: The Commonwealth hasn’t been involved in our three road projects in Victoria to date, but they have been significantly involved in the Regional Rail Link Authority, and Lyn O’Connell (Deputy Secretary, Department of Infrastructure and Regional Development) has been involved in the Board. Lyn has participated in Board meetings and monitored the development of that project, and observed how the Commonwealth funds are being spent. We would expect that if the Commonwealth comes forward with $1.5 billion for the East West Link project, then they would have a representative on the steering 62

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committee within government to overview how the project is going – and I’d welcome it. BL: One of the things that’s quite different about this period of procurement, compared to the last decade or so, is that the frameworks are being adjusted in a way we haven’t seen since 2000, when Victoria brought out its Partnerships Victoria framework. How do you incentivise your public sector to be able to put forward these different options, to take risks on procurements like contracting out clinical health – either within a capital structure, like we’re doing in New South Wales, or outside, like in Queensland? How do you entrench that into the approach of procuring agencies and bodies? KM: It’s a fundamental element of our business case. We know that this project is not going to be one that is successful as a toll road until the entire project is delivered. And it’s such a costly project, it’s probably up around $12 billion to $15 billion overall. Naturally, a project of that scale has to be delivered in stages. So it’s not until we get all three stages linked and operating that it will become a viable toll road, and that’s why it’s appropriate that the state government at this stage holds the traffic and revenue risk. That was a fundamental recommendation of the business case to the state government, and Treasury also played a very key role in the development of that business case, so we’ve got to get the fundamentals right. PG: Procurement methodology evolves on each of these big projects. Each of the PPPs have been quite different when there has been a period of time between them. In terms of incentivising the public sector, it’s about looking at lessons learned in other jurisdictions and also overseas, and then looking at the risks on your particular project and building a procurement process that works, with industry engagement to inform that, too. BL: What makes you, as a public sector project director, say, ‘We’re going to try something different; it could blow up, but it could work’? PG: With these major projects, you have to try something different every time, because they are so different. Things change over time: the scope changes, they’re in different locations, they’re not the same. RS: It’s easy to look at a project and adopt the business-as-usual approach. But when you go down that path, you need to look at the downside, as well. You often forget that. You might think it’s a safe approach and that everyone will understand that, but

Project Delivery Panel

there is significant downside to try and do that in any particular project environment. You’ve really got to weigh that up against a new opportunity, and have a crack at doing that. On the North West Rail Link, one of the things that helped was the engagement process with industry. They really helped give us some confidence about some of the directions and decisions we wanted to take. We had enough feedback from industry so that when we were talking to government about the best direction to take, it wasn’t just coming from the bureaucracy, it was actually coming from ourselves and the industry, as a collective view, and that was an important part of giving them confidence to make those strategic decisions. BL: Do you think some of the independent prioritisation functions that you’ve seen come out of Infrastructure NSW or Infrastructure Queensland have led to better procurement and better projects? PG: It’s led to better prioritisation of projects. Looking at WestConnex, we’ve spent a long time trying to do things like the M4 East and the M5 duplication as stand-alone projects, and a different approach looking at the whole of Sydney’s motorway needs has resulted in a successful prioritisation and recasting of those projects. BL: How is the skills issue affecting your ability to scope up projects? Do we have the ability for endless project directors? If we’ve got a lot of similar projects coming through, how do we manage the ability to define the projects, to put them out to market and to run them well, given the size of the infrastructure pipeline that we are seeing? KM: We can’t be too worried about what’s going on in the other states. Not that we’re in competition, but we work for a government, and they’ve got an agenda, and we’ve got to try and deliver on that agenda. I have a strong view that we create the opportunities for the private sector. If we can get that opportunity there, then it’s up to them to respond. When we went to the marketplace with our EOI invitation in late July 2013, the response was fantastic. We were absolutely delighted. We know that those organisations are so positive, and it’s up to them to make the decision about whether or not they are going to participate in the opportunity that we provide. So I don’t have a worry about the skills and resources; I know the private sector can respond to this.

RB: One of the critical drivers of a deep skills base is a consistent and predictable pipeline of projects. A consistent pipeline allows organisations to build their skills and capacity with confidence, in the knowledge that those skills will be used going forward. The biggest risk to the skills base is a pipeline that is inconsistent, and that balloons and then shrinks and balloons and shrinks – essentially a boom and bust cycle. Because every time infrastructure activity shrinks, organisations have to decide whether or not they retain staff; and if they don’t, those staff members either head interstate or overseas, or do other things, like running a cake shop, and it’s really hard to get them to come back. So a consistent pipeline really works to the benefit of everyone – the government and the private sector. BL: Rodd, within New South Wales we are probably seeing a degree of competition, even within transport agencies, for the skills to deliver the very large projects that you and your other colleagues are delivering. Are you confident that you’re going to have the skill that you need to deliver these projects, and the ones that follow on the public sector side? The private sector is obviously responding actively, but there is a lot that’s coming into the market. How are you dealing with it in terms of the North West Rail Link? RS: With a project like North West Rail Link, we cannot afford not to have those skills, especially as we move from what’s been a fairly substantial two to three years of planning and procurement into delivery. We’ve got a significant shift in the type of

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Below: Paul Goldsmith (left) and Ken Mathers

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skills that we need, and there’s a lot of work going on at this stage to draw in those skills. While a lot of work will be done by our private contractors, we’ve got to retain a degree of skill on our side. For example, some of the people that have worked [on the North West Rail Link] in the last two years are going to move on to some other projects around the agency. BL: Paul, you’re trying to poach some of Rodd’s staff, I assume? PG: Well, we’re following in his wake. So in the WestConnex Delivery Authority, there is going to be an expansion of the project team, and we will get some help from the private sector in that, but I think we’ll be looking to some of Rodd’s strategies and will see if there are some people who have had that experience at the early stages who could now be appropriate on our team, too. BL: In closing, I might ask each of you to imagine that you’re talking to Infrastructure Australia. As the agency is reformed, what is it that you want to see most to make your own job of getting things done easier? RB: I’d like to see Infrastructure Australia play the role of a coordinator that encourages collaboration, the sharing of skills, and the sharing of experiences. And I’d also like to see them allocating large amounts of money to infrastructure. That would be a bit of a dream. RS: The earlier point we made about better collaboration across projects in terms of ‘lessons learned’ – I think there is a role in that. Another thing that would help us, particularly at a project level, is for a better understanding of where industry is at broadly, and what the pressures are, so that when we are making decisions in these project phases, we’ve actually got a better context of what is actually happening, and we can make some changes in the way we are looking at things. So better knowledge of that interface between government overall, in terms of projects and industry, would be really helpful. PG: Better two-way dialogue is needed, especially so that Infrastructure Australia has a more thorough and better understanding of the projects and what we are trying to achieve with the projects. KM: They should accept that state governments are pretty well-versed and knowledgeable about prioritising their own projects, and should just come along and give us a big basket of money. And keep Victoria number one [laughs]. 64

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Roger Black, Project Director, Projects Queensland, Queensland Treasury and Trade Roger Black is a Project Director at Projects Queensland, and also a member of Infrastructure Queensland, the body established by the Deputy Premier to advise on issues relating to infrastructure in Queensland. Roger has been active in the financial and commercial advisory services sector for many years, and he has worked with a wide variety of clients in both the public and private sectors. Those clients have been in Southern Africa, the United Kingdom, the United States and Australia, where he has been active in the corporate finance sector for the past 12 years. Roger’s transaction advisory experience includes a strong focus on infrastructure project analysis, business case development, project procurement and procurement options analysis (including PPP and PFI, alliance and traditional procurement options), project and corporate finance, financial modelling, and the development, evaluation and delivery of social and economic infrastructure projects. Roger has been an active supporter and promoter of IPA.

Paul Goldsmith, Project Director, WestConnex, Sydney Motorways Project Office, Roads and Maritime Services Since October 2012, Paul has led the Sydney Motorways Project Office, with responsibility for delivering the business case for WestConnex, Australia’s largest transport infrastructure and urban renewal project. Paul has extensive experience in the development and delivery of Public Private Partnerships, having held the position of General Manager, Motorway Projects with Roads and Maritime Services for the past six years, successfully negotiating PPP upgrade agreements with the private sector partners for both the M2 Upgrade and M5 West widening projects. Prior to this, Paul spent six years as senior project manager for the procurement and delivery phase of the Cross City Tunnel. His early career was spent on road and rail infrastructure projects

Project Delivery Panel

in the United Kingdom, including a significant period working with London Underground Limited. Paul is a chartered civil engineer with nearly 30 years’ experience in the development, procurement and delivery of urban infrastructure projects in Australia and the United Kingdom.

Ken Mathers, Chief Executive Officer, Linking Melbourne Authority A civil engineer, Ken has had a long career in Victorian road infrastructure planning and delivery since commencing with the Country Roads Board in the 1960s. Working with VicRoads involved project management of some of Victoria’s largest road projects, including the Melton Bypass, Hume Freeway duplication, the Western Ring Road, upgrading the Monash Freeway, and pre-construction planning for CityLink. Ken joined Melbourne CityLink Authority in 1995 as Director, Engineering and Operations for its function of facilitating CityLink. He participated in the bid evaluation and the oversight of project development until completion in 2000. After working as a private consultant, Ken returned to government in 2003 as Chief Executive Officer of Southern and Eastern Integrated Transport Authority (SEITA), the state government agency responsible for the facilitation of EastLink – then Australia’s largest PPP road infrastructure project. LMA has since been planning and procuring the 27-kilometre Peninsula Link, the first availability PPP road project in Australia. Delivered by Southern Way and their design and construct contractor, Abigroup, the project was opened to traffic in January 2013.

In 2012, LMA assisted the Department of Transport with the development of the business case for East West Link, and has now commenced the statutory planning process for the eastern section from the Eastern Freeway to CityLink, and the extension to the Port of Melbourne. LMA is now commencing the procurement phase. Ken has had extensive past involvement with Engineers Australia. He has been a Board member of City North Infrastructure and is currently a Vice President of Roads Australia. He is also a member of the Regional Rail Link Authority Advisory Board. In 2012, Ken was awarded Roads Australia’s John Shaw Medal for his contribution to road planning and development in Australia.

Rodd Staples, Project Director, North West Rail Link, Transport for NSW Rodd Staples heads the project team that will deliver the biggest addition to the Sydney public transport network since the Sydney Harbour Bridge was built almost a century ago. As an engineer growing up in Sydney’s south, Rodd has worked in the fields of transport and infrastructure planning for nearly two decades – across Australia and in both the public and private sectors. His qualifications in engineering and finance provide the strong foundations required to deliver a project of the scale of the North West Rail Link – a 23-kilometre extension to Sydney’s rail network and the biggest rail tunnelling project ever undertaken in Australia. Rodd is a former Deputy Director-General at the Department of Transport, overseeing the New South Wales Government’s transport capital works projects.

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HOW CAPITAL RECYCLING CAN EASE RATINGS PRESSURES

Australian states are rated highly. Most Australian states are rated AAA by Standard & Poor’s and three of the seven rated by Moody’s are the equivalent Aaa. The most poorly rated is AA grade (Figure 1). Nevertheless, all ratings changes since 2009 have been downgrades or negative changes to the outlook. This has been due to rising debt burdens and/or a structural weakening in states’ revenue bases that have not been met with sufficient fiscal redress. The average gross debt burden of Australian states has more

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Sowing the seeds for future infrastructre spending Against this backdrop, alternative methods of funding Australia’s perceived infrastructure shortfall must be explored. At present, many state governments appear focused on generating greater participation from the Commonwealth government and the private

Figure 1. State and territory credit ratings S tate or terr itory

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sector to fund infrastructure investment. These alternative funding sources, however, are not necessarily readily available. The Commonwealth Government, facing its own fiscal challenges, set aside just $3.1 billion for infrastructure spending over the next five years in the 2013-14 budget. The private sector, meanwhile, while a potentially rich source of funds, requires a new funding paradigm and regulatory regime to encourage greater participation. Recycling capital – that is, selling assets that could be better managed by the private sector and using the proceeds to fund other infrastructure – seems an increasingly attractive option for state governments. Asset sales will improve state balance sheets if they assist the government to pay down some of its debt and improve budget positions and if the benefits of doing so exceed the dividends foregone and the tax implications of holding the assets.

Figure 2. Average State gross debt and interest payments 120

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than doubled since 2006 and is forecast to increase to nearly 100 per cent of adjusted operating receipts in 2015 (Figure 2). The rise in debt has been driven by a combination of higher capital investment (including earlier large infrastructure initiatives) and recurrent operating deficits, which have been negatively affected by one or more of a combination of global economic troubles, Commonwealth fiscal tightening and weakness in taxable consumption and transactions. Moreover, states’ balance sheets face numerous long-term challenges. These include a weakening revenue base and higher government expenditures from an ageing population but, also, more importantly in the shorter-term, the overreliance on revenues from a structurally weak GST. These factors will put further upward pressure on state debt metrics and potentially constrain capital investment over the medium term. This has potential credit ratings consequences. Against a backdrop of higher relative funding costs (i.e. wider spreads to Commonwealth government bonds) and short and long-term challenges to revenue bases, it is no surprise that state governments are focused on repairing their balance sheets and preserving (or improving) their credit ratings. Indeed, in 2012, New South Wales went so far as to put in place legislation specifically targeted at maintaining its AAA rating.

% of adjusted operating cash revenue

• Recycling capital, that is, selling, leasing or refinancing public sector assets and using the proceeds to fund new infrastructure investment, is an increasingly attractive option for Australian state governments. • With current strong investor appetite, these sales can release considerable value. This can help to alleviate downward pressure on states’ credit ratings, as well as sow the seeds for a self-sustaining state infrastructure funding model. • ANZ has identified a pipeline of around $120 billion of upcoming potential public sector asset sales. We estimate that around $50 billion of these proceeds would be sufficient to trigger an improvement in states’ credit ratings, leaving at least an additional $70 billion on states’ balance sheets to fund new infrastructure projects. Australian state governments face the significant challenge of addressing an infrastructure deficit against a backdrop of weaker finances, rising debt and a desire to protect and/or improve their credit ratings. Reflecting these pressures, public sector infrastructure asset sales look increasingly sensible. Public sector asset sales by state governments have, however, historically been politically tricky. The defeat of the Queensland Labor Government in 2012 is the most recent example of where public asset sales played a role in the government’s election loss. Public opinion of asset sales could potentially be lifted by a new approach, namely a transparent model of capital recycling, whereby a portion of the proceeds is allocated to ‘infrastructure funds’. This is currently being tested, with some apparent success, in New South Wales. Such a self-sustaining model of infrastructure funding could be expected to lift economic growth and deliver significant community benefits.

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After retiring some debt, the proceeds of asset sales could be used to seed infrastructure funds. Infrastructure projects could be approved by state governments but managed by independent infrastructure bodies against preset guidelines. The institutional structure developed in New South Wales, whereby Infrastructure NSW is the state’s infrastructure planning body and Restart NSW (seeded by asset sales) contributes capital towards infrastructure projects indicates this proposition is gaining traction. The 2013-14 New South Wales Budget confirmed that the $4.3 billion net proceeds from the leases of Port Botany and Port Kembla will be allocated to Restart New South Wales, and specifically the WestConnex toll road (A$1.8 billion), Pacific Highway upgrade (A$400 million) and Princes Highway (A$170 million). If new ‘user-pays’ or economic infrastructure assets are initially consolidated/financed on the states’ balance sheets to address risk-transfer issues, these assets could subsequently be considered for disposal once they become operational (post ramp-up) and can ultimately sit off the state’s balance sheet. Indeed, this model has been adopted by the New South Wales Government as it manages the debt implications of the WestConnex project. In practice, recycling capital is not a longterm self-sustaining model of infrastructure funding. State funds raised through asset sales would gradually be eroded over time. With states typically investing in infrastructure to achieve social/welfare objectives (e.g. hospitals, urban transport), the capital realised from recycling assets would be less than new project construction costs. New infrastructure spending would still weigh on states’ balance sheets. The proceeds of sufficient asset sales, however, could provide a significant buffer on balance sheets such that new infrastructure spending does not add to debt before states find ways to better balance their ongoing operational revenue and expenditure. Indeed, while not a mechanism for making states debt-free, recycling capital would still significantly improve states’ balance sheets and could contribute to an improvement in state government credit ratings and/or ratings outlooks. If successful, recycling capital could stimulate economic growth by increasing infrastructure spending and lifting productivity growth. Moreover, investor appetite for such privatised Australian infrastructure assets is strong. This was highlighted when the

New South Wales Government’s 99-year Figure 4. potential pipeline of State government asset sales S tate As set C las s As s et T iming V alue (AUD bn) leases of Port Botany NS W B ulk P orts Port of Newcas tle 2015-17 1.0 Q LD B ulk P orts G lads tone P ort 2015-17 3.1 and Port Kembla raised Q LD B ulk P orts North Queens land B ulk P ort 2018 2.5 $5.1 billion, at a 25x Q LD B ulk P orts Port of T owns ville 2015-17 0.6 V IC C apital C ity P ort Port of Melbourne 2015-17 5.0 EBITDA multiple. Of NS W E lectricity Dis tribution Aus grid 2015-17 15.5 course, not all assets NS W E lectricity Dis tribution E ndeavour 2015-17 6.2 NS W E lectricity Dis tribution E s s ential 2015-17 7.5 would realise such Q LD E lectricity Dis tribution E nergex 2018 12.2 a good outcome, Q LD E lectricity Dis tribution E rgon 2018 10.7 Q LD E lectricity G eneration C S E nergy 2015-17 1.2 but this strong result Q LD E lectricity G eneration S tanwell 2015-17 2.0 has encouraged the NS W E lectricity T rans miss ion T rans grid 2015-17 6.8 Q LD E lectricity T rans miss ion Powerlink 2018 7.7 New South Wales Q LD W ater B ulk S unwater 2015-17 1.1 Government to also Q LD W ater B ulk Linkwater 2018 1.7 Q LD W ater B ulk T ugan Des alination P lant 2018 0.7 plan for the long-term NS W W ater B ulk G osford C ity C ouncil 2018 0.6 lease of the Port NS W W ater B ulk S tate W ater 2018 0.8 V IC W ater B ulk Melbourne W ater 2018 8.0 of Newcastle. WA W ater B ulk W ater C orporation 2015-17 12.0 SA W ater B ulk S A W ater C orporation 2018 12.8 Community NS W W ater R etailer Hunter C orporation 2018 2.5 concerns that asset T otal 122.2 sales will lead to higher Source: ANZ prices and poorer in some markets will remain barriers. Our service levels from the analysis (Figure 3) reveals that sales of around assets being sold are often misplaced. Each $50 billion could be sufficient to lift the potential asset sale needs to be assessed on absolute rating and/or improve the ratings its merits. But, effective regulatory regimes outlook for Australian state governments. that cover both pricing and community benefits (e.g. service quality, environmental A likely pipeline concerns) can usually be developed and In practise, some states are more likely to enforced. This would see consumers benefit prioritise debt retirement over funding new from the efficiency gains and, in many cases, infrastructure. To generate enough funds to an improvement in service provision from both lift credit ratings and successfully recycle transferring the asset to private ownership capital for new investment, sales would need and/or operation. Strong appetite by local to rise well above $50 billion. ANZ considers superannuation funds for these infrastructure this to be achievable, and indeed has assets, meanwhile, provides an opportunity identified a pipeline of around $120 billion to return the direct benefits of ownership to a of infrastructure assets that could potentially broad section of the Australian community. come to market over the next few years (Figure 4). The electricity sector provides the The value of asset sales that could lift highest value of assets, followed by water and State government credit ratings then ports. We note, however, that, partly due Infrastructure Australia has identified $220 to the perceived need of state governments billion of economic infrastructure assets that to seek a political mandate to proceed, these it considers might be suitable for sale from sales are unlikely to commence until at least the public to the private sector to contribute 2015. to funding for the development of new These asset sales would potentially infrastructure. These assets were identified, generate an additional $70 billion on states’ among other factors, as having the potential balance sheets to fund infrastructure projects. to apply a user-pays framework or already This is predicated on the assumption that having a non-government earnings stream reducing the states’ combined debt by with the potential to cover operating costs. approximately $50 billion would deliver Identified assets also have limited or defined a sustainable capital leverage profile of a public policy benefits, which can be obtained triple-A semi-sovereign borrower. Combined by way of regulation, sales conditions or with private equity and debt capital, the community service obligations. In some states could help to fund infrastructure assets cases, however, these assets do require further worth significantly more than the original $70 regulatory changes (e.g. to ensure competitive billion in capital proceeds. markets) before they are suitable for transfer

to the private sector. This full pipeline of potential asset sales identified by Figure 3. Asset sales to achieve lower S&P anchor score Infrastructure S &P S &P G ros s debt / Adj receipts (% ) Ass et s ales to Australia, rating outlook meet S &P anchor however, would 2013 2016 Debt target* $bn be highly unlikely NS W AAA Negative 85.7 95.0 80 15.4 V IC AAA S table 91.1 93.3 na na to proceed Q LD AA+ S table 139.2 138.9 100 22.8 quickly. Political WA AA+ S table 78.8 86.9 70 8.1 and community SA AA S table 69.4 84.3 60 4.4 T otal 50.6 concerns as well *Level that may trigger an improvement in S &P s ratings (bas ed on ANZ analys is ) as the required Sources: State budget papers and ANZ regulatory reform

1. Mike Baird, NSW Treasurer, Australian Financial Review, 12 April 2013 2. Debt burdens play an important role in credit ratings, but are not an absolute measure of creditworthiness. The impact of other factors (eg. economic growth potential, institutional factors) means that the ratings ‘anchor’ score for each state is not uniform.

Contact:

David Byrne Global Head of Utilities & Infrastructure +61 3 8655 755

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Lance Hockridge Optimism around the new national government must be backed by a strong reform agenda if Australia is to solve its productivity and infrastructure challenges, says Aurizon Chief Executive and Managing Director, Lance Hockridge. With a new government in place, I certainly do detect a small spring in the step of the business community. I’m known as being more bullish than a number of my colleagues, particularly in our space, and especially in the resource space. But it seems that, on the back of all of that, many predictions of the end of the world as we know it are already being proven to be somewhat bearish. My challenge, therefore, to business and to government, is not to withdraw from this opportunity that we have in front of us, but to create a new start and create the kind of momentum that is needed for change in the infrastructure space. We’ve all got a role to play on what is a relatively long road around reform and restructure. The Abbott Government is certainly clearly starting to blast away at the policy void – and that’s a good thing. The renewal of federalism is a genuine prospect in which states get on with business, without the dead hand of Canberra impacting on everything that they do and need to do. 68

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The streamlining of environmental approvals, as witnessed between the Queensland and Commonwealth Governments’ Memorandum of Understanding (MOU), makes great sense. Similar moves, of course, have been made in New South Wales. We don’t want to lower the bar around environmental standards, but I believe that we certainly can be faster, we can eliminate duplication, and we can cut the costs of business in this area. The Coalition Government, I believe, also ought to be well supported for its policy of accelerating the completion of free trade agreements with key countries in our region. This will be particularly important for the agricultural sector – and it will help Australia realise the genuine prospect of our agricultural sector becoming the ‘food bowl’ of Asia. The flow-on benefits, as we all know, to regional and rural Australia – indeed to the overall Australian economy – would be substantial. In economic terms, notwithstanding my optimism, I don’t believe that the prevailing headwinds that we’ve all been experiencing are going to dissipate

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any time soon. There’s still going to be a fair degree of pain for our economy, and particular sections of our economy, for some time. However, recent discussions with economists, policy advisers and other well-placed people, certainly have renewed my confidence in Australia generally, and in the Australian resources story. The growth story for coal – including thermal coal – in my view, is intact. Likewise for iron ore. The growth rates in terms of percentages may well be slowing, but the absolute numbers that underlie those numbers continue to grow, they continue to be strong, and they continue to be sustained. Indeed, as is so often the case, the complexity of the story is lost in some of those headline numbers. For example, in the last financial year, the north Asian countries of Japan, South Korea and Taiwan accounted for 40 per cent of metallurgical coal exports and 70 per cent of thermal coal exports. So, as important as China and India are, it is still our north Asian colleagues that are most influential. The growth curve, though, for a place like India is driven inexorably by people moving to urban settings and enjoying a small slice of the kind of lifestyle that today we take for granted. Lifting millions of people out of poverty is about light and power. Coal is – and will remain – the lowest-cost option. By 2030, coal will still be used for up to 40 per cent of the globe’s electricity, while acknowledging the growth nonetheless in that period in gas, in nuclear, and in renewables. If we think about China, the steel intensity continues to grow. Many of you won’t be aware that in August 2013, for the first time, China produced more crude steel than the rest of the world put together. Our company, Aurizon, is 70 per cent leveraged to the Australian resources sector, and that bodes well for our future. There will be no change to our core strategy, no rewriting of mid-term transformation and long-term growth projects. We transport about 60 per cent of the coal that is ultimately exported from Australia. Longer-term prospects remain for us in the Pilbara and in the Galilee, for example. We know that these are not projects for the next five minutes; nonetheless, this kind of national investment in critical infrastructure, underpinning best-in-class networks, for world-class reserves,

remains a sound strategy for our company and for our nation. I’m optimistic about growth prospects, and also reassured that, collectively, we are making a start – or a restart – on reform. We are now seeing unprecedented restructuring at the company and macro levels, given the challenges that we’ve all experienced in the context of a slowing global economy. It has forced a rethink, a recalibration. Frankly, it’s positive and it’s overdue. Australian companies are diversifying with unfolding opportunities in the Asian century and are moving, notwithstanding the importance of resources, beyond the quarry, to education, training and services. We’re rediscovering the capital and cost discipline that faded through those sky-high resource price days. And this, of course, brings us to the critically important piece about productivity. We need to reclaim our place in terms of global competiveness. Companies big and small must keep doing the hard yards of reform, reducing costs, and improving efficiency. We simply cannot duck the responsibility. In that context, overdue government reforms – as discussed within the sector, in regulation, in taxation, and in labour markets – must create a platform for sustained long-term productivity improvements. Investors, as is the case with our company and many others, have a 10- or 20-year horizon, and they have to be certain about the policy settings for a country and a company such as ours. It’s inconceivable that over the last few years, since Initial Public Offering (IPO), so often the phrases ‘sovereign risk’ and ‘Australia’ have been associated in the many discussions that I’ve had with investors. We need a business environment in which duplication and bureaucracy give way to simplicity and pragmatism, where grandiose gold-plated solutions are replaced with cost-effective, fit-forpurpose infrastructure. Policy that creates a level playing field doesn’t pick winners, and rewards the most efficient outcome, so that the pipeline of projects – Australia’s infrastructure deficit – can roll beyond talk phase into execution phase. Projects that stack up strategically, commercially, and with productivity dividends must get to the top of the queue. Volume 4 Number 1

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Aurizon’s recent journey gives a glimpse of the larger opportunity in rail, and elsewhere, in an environment where we have to carve out new approaches to infrastructure investment. The privatisation in 2010 liberated much-needed funds for the Queensland Government, which of course had lost its AAA rating in the global financial crisis (GFC). The current state government has further benefited by selling down the large part of the remaining shareholding in our company at a premium. No longer, then, is government lumbered with capital commitments underwritten by taxpayers for coal railways in Queensland, or iron ore haulage in Western Australia, or the many other things that we do with a substantial capital budget. The investment, though, far from stopping, has been accelerated. We are midway through a $2 billion investment program in the central Queensland coal network – a program that will see an additional 70 million tonnes of capacity added to that network by 2015. This leverages the existing infrastructure assets, building on the inherent scale and efficiency of that asset. Privatisation has also been mighty liberating, of course, for the company. We can now squarely focus on customer value and shareholder value, with employees much better engaged around those kinds of priorities. Transformation has shifted up a gear with a relentless drive on cost efficiency, as well as capital discipline. We’ve shed many legacies from the 150 years of government ownership, big bureaucracy, and, frankly, trainloads of archaic rules that governed us. Nonetheless, we must continue to be leaner, meaner and faster. We’ve made, since privatisation through to June 2013, some 1600 redundancies across our organisation, or 15 per cent of the labour force, while actually carrying more product for our customers. In July, we announced a further $230 million in cost and efficiency savings to be put in place by 2015. Of course, we are not alone; other rail and port entities have been born out of similar privatisation processes, and have embarked on similar journeys. It’s a reminder, then, that the net result will be an increasingly competitive and dynamic market for

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freight and port services, driven by customer demand, funded privately, and with an appetite for growth. We need more of this. And we need to work harder at squeezing more tonnes down existing supply chains, sweating assets, streamlining and integrating – particularly around port and rail interfaces, in our case. So in that context, what could be on the agenda for our new government, and for industry more generally in this rail space? Here are just a few ideas. The Moorebank Intermodal Terminal has the potential to be a gateway for future land transport productivity. Road, rail and shipping would work seamlessly between an efficient, scalable inland hub of one of the nation’s biggest container ports. I know that this is a work in progress, but some are still clinging to a government-led proposal when the private sector is ready, willing and able, and is several years ahead. Without hesitation, government should not have significant equity, commercial involvement or management rights at Moorebank. This is simply not required. The government mandate, in my view, should be one of facilitation, to nurture a long-term strategic solution with the requisite environmental, regulatory and planning approvals. Let the private sector do the heavy lifting in terms of the funding, the development and the delivery. Qube and Aurizon in the SIMTA consortium are standing ready to provide a genuine common-user facility at no taxpayer cost, and should be allowed to get on with the delivery of the project without any further delay. Acacia Ridge in Brisbane has been operating like this for many years. I also see talk of the privatisation or part-privatisation of the Australian Rail Track Corporation. The discussion is a good thing, but let’s also get the structure and the economics right. Let’s ensure that the assessment considers its disparate parts, relationships to markets, and respective commercial values of assets. Certainly the Hunter Valley Coal System is abundantly different to the intermodal network traversing the country. Let’s understand how we effectively recycle the capital into long-term strategic infrastructure in the same broad class.

Lance Hockridge

Some, of course, will say that the sky will fall, investment will evaporate and we’ll all be ruined. The same arguments, after all, were peddled in Queensland three years ago when Aurizon was floated, and yet I stick by the mantra that I set at that time – it was the right decision, at the right time, for the right reasons. There are some things that simply should not be run by government, nor are they deserving of taxpayers’ funds that are better spent in the community. While some sections of the community are yet to be convinced on privatisation, the recent port sales here in New South Wales demonstrate that there is plenty of appetite in the investment world. The deliberate action by the New South Wales Government to recycle those funds into new, higherpriority infrastructure is a worthy precedent. We need to do more to educate and inform on the merits of privatising assets that are not part of government’s social pact with the community. Again, the sale or part-sale of ARTC would be the logical foundation for broader consideration of private sector involvement; for example, in the Inland Freight Rail Project. Here we could recycle capital and look at new funding approaches unwritten by that kind of long-term view of commerciality. We know we have to solve the bottleneck that is the east coast rail route between Melbourne, Brisbane and Sydney – a corridor that struggles from a rail point of view with a mere 15 per cent market share. Notwithstanding work that’s been done in recent years, this route remains beset by legacy issues of alignment, track structure and technology, as well as urban congestion and the competing demand of passenger priorities. We must continue to deal pragmatically with these, while seeking longer-term, sustainable solutions. That’s why at Aurizon we were so interested in the Federal and state governments’ commitment to examine the progress of a freight bypass to the Port of Brisbane as part of that Inland Freight Rail Proposal. It’s a clever play on multiple dimensions, not only on efficient general freight movements. If delivered, the proposal would generate productivity gains through direct, faster and more reliable access for rail freight to and from the port. It would also open up a suite of opportunities for rural goods and agribusiness, both in Queensland and in New South Wales. This is how we can achieve infrastructureenabling shifts in economic activity and value

creation, where we tap into that next wave of investment as Asia’s ‘food bowl’. The role of rail here is to reinvigorate those ageing supply chains, particularly those that service our agriculture industry. We also need to consider how we make them competitive and commercially valuable, and how we work with major customers in these supply chains, including the global grain players that have turned their attention and their interest to this part of the world. Let’s be clear: there is no silver bullet for the ailing regional freight networks across Australia, many of which have been with us since Federation and indeed before. Some are clearly past their use-by date, and are better served, in all honesty, by road servicing into rail hubs. Rail can never be everything to everyone. That’s a mistake that government has too often made with railways in Australia over the generations, and invariably it’s a notion only supported by government subsidies. But there are opportunities if we’re clever, selective and commercially savvy. The long-run business case must stack up. As we’ve heard, the private sector and the investment community will be interested and

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involved when the numbers work, when the customer is there and when the demand is clear. No-one underestimates the size of the transport task over the next 20 or 30 – or indeed 50 – years, and the need for us to get beyond bandaid solutions. We know that rail can do the heavy lifting when we can get our act together. In some areas, such as the Pilbara, the Hunter and Central Queensland, we already have world-class assets with high levels of efficiency. The challenge is to translate these pockets of excellence into the broader freight arena. There are indeed plenty of levers available to get us to the place where we all know we should and must be in lifting productivity, pushing down costs, increasing efficiency, getting rid of the red tape, driving new investment approaches and resurrecting sound policy settings. We need to change up gears on the pace and substance of reform, especially for all of us in the infrastructure space. Now it’s about getting on with the job, understanding with clarity what’s required, and having the execution capability to make it happen. World-class productivity and business performance will deliver untold benefits to our customers, to the economy, and to our future standard of living. That is the opportunity that is before us.

Lance Hockridge, Managing Director and Chief Executive of Aurizon Lance Hockridge became Managing Director and CEO of Aurizon in July 2010 to lead the company through what would be the largest IPO in Australia in a decade. He has guided the transition to private ownership and Aurizon’s listing as a top 50 ASX company after 145 years as a governmentowned and -operated railway. Lance has more than 30 years’ experience in the transportation and heavy industrial sectors in Australia and the United States with BHP and BlueScope Steel. At BHP Billiton Limited, Lance was a member of the leadership team that led BlueScope Steel’s successful de-merger from BHP and subsequent listing on the ASX. In 2005, Lance was appointed President of BlueScope Steel’s North American operations, where he led a major turnaround in safety, production and financial performance. From 2007 until 2010, Lance was Chief Executive Officer of QR Limited, which was split to form Aurizon and the passenger-focused Queensland Rail that has remained in government ownership. Lance is leading a major transformation program at Aurizon, aimed at delivering world-class safety, customer service excellence and superior commercial capability.

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