Future Building Volume 5 Number 1 by Executive Media

The Australian Infrastructure Review Volume 5 Number 1

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Infrastructure. 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 undertaking, but it’s critical in driving improvements in Australia’s national productivity. 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. David Byrne Head of Utilities & Infrastructure, Australia & New Zealand Phone: +61 3 8655 7552 Email: David.Byrne2@anz.com

Infrastructure Bank of The Year In Asia Pacific

anz.com Australia and New Zealand Banking Group Limited (ANZ) ABN 11 005 357 522. ANZ’s colour blue is a trade mark of ANZ. Item No. 85931 09.2014 W412039

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The Australian Infrastructure Review

Managing Editor: Michael Bruce Contributing Editor: Sarah Dagg Editor: Gemma Peckham Design: Alma McHugh Future Building is published by:

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 Cover image courtesy of the Port of Melbourne Corporation

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Contents 2

Chairman’s Foreword | Adrian Kloeden, Chairman, Infrastructure Partnerships Australia

The Hon Warren Truss MP | Deputy Prime Minister and Minister for Infrastructure and Regional Development

The Hon Mark Birrell | Chairman, Infrastructure Australia

Peter Harris AO | Chairman, Productivity Commission

Delivery of major projects in Australia – panel discussion

Dr Peter Boxall AO | Chairman, Independent Pricing and Regulatory Tribunal

Dale Connor | Chief Operating Officer – Construction and Infrastructure, Lend Lease

Jeremy Maycock | Chairman, AGL

The Hon Dr Denis Napthine MP | Premier of Victoria

Aubrey Layne | Secretary of Transportation for the Commonwealth of Virginia, United States

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Prices and people: Community perspectives on infrastructure reform – panel discussion

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Foreword I am delighted to present the latest edition of Future Building – the journal of Australia’s infrastructure sector. This edition presents the proceedings from the annual Partnerships conference – Australia’s most respected infrastructure policy symposium. This year’s programme saw a selection of highly respected Australian and international policy, public sector, community sector and business leaders challenge the status quo – contemplating how Australia might deliver better infrastructure outcomes through change. And change is the key. While Australia’s governments are politically committed to a large economic and social infrastructure task, this commitment will only be met through an honest programme to lead and explain substantial reform to public finances and infrastructure markets. It is a welcome development that national economic policy is increasingly recognising the foundation relationship between infrastructure efficiency and economic productivity. This combination of political will, public expectation and economic necessity is a powerful force that has the potential to drive lasting change across our sector. I hope that this edition of Future Building will be of interest to you – and that it leaves you with a sense of optimism that a period of substantial reform and progress on infrastructure now lies ahead.

Adrian Kloeden Chairman, Infrastructure Partnerships Australia

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The Hon Warren Truss MP Deputy Prime Minister and Minister for Infrastructure and Regional Development the Hon Warren Truss MP discusses the role and function of the reformed Infrastructure Australia, the deepening pipeline of projects currently underway throughout the nation, and the Federal Government’s Asset Recycling Initiative.

Key points: • The Commonwealth Government is firmly committed to infrastructure investment – and policy reform. • The Abbott Government’s first budget lifted federal investment to record highs. • Infrastructure Australia will play a central role in guiding investment and reform. • The Commonwealth’s Asset Recycling Initiative is an important incentive for state infrastructure reform.

Tony Abbott made it clear that he wanted to be recognised and remembered as the ‘Infrastructure Prime Minister’, and, one year after being elected, we have fulfilled our election commitments to get major projects underway. We have a substantial agenda for the future, which will play a key role in transforming the infrastructure of our nation. I would like to acknowledge the Hon Mark Birrell, who was the founding Chairman of Infrastructure Partnerships Australia until 2013. In September 2014, I was pleased to appoint him as the new Chairman of Infrastructure Australia. On 1 September 2014, the Coalition Government’s governance reforms for Infrastructure Australia began. Now, Infrastructure Australia is a truly independent advisory body, with a Chief Executive Officer responsible to the Board. The Government will welcome and value its considered advice on the infrastructure needs of this country into the future. In order to get ahead of political decision-making, Infrastructure Australia has been given a mandate to identify Australia’s long-term infrastructure needs for a rolling 15-year plan to be updated every five years. Volume 5 Number 1

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The Hon Warren Truss MP

Undertaking assessments before the political process – and ensuring that there is better information available to governments when they make commitments to particular projects – is not something that has happened in the past. We want the decisions, which will ultimately be made by governments, to be informed by the best available information, and to give the sector long lead-in times so that they know which projects are favoured as part of our infrastructure network. Mapping Australia’s infrastructure direction has never been more important. Demographic changes, transitioning away from resources-led investment to broader sources of growth, participating in the rise of Asia, and a rapidly increasing freight transportation task are among the critical issues Australia must address. A failure to invest in infrastructure will limit our ability to grow as a nation and to develop our social and economic fabric. It is therefore a huge responsibility, as well as a privilege, to be the Minister for Infrastructure and Regional Development in a government that is focused on delivering the infrastructure that Australia needs, rather than just talking about it. The Coalition Government was elected with a strong agenda to fix our competitiveness and deliver the economic infrastructure needed to create more and better jobs, higher living standards, and greater opportunities for all Australians. The commitments we made included: • fixing the Budget • a strategic investment in building the infrastructure of the 21st century • reforming Infrastructure Australia • tasking the Productivity Commission with examining the delivery of public infrastructure

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to find ways to reduce costs and provide better value for taxpayers’ dollars. These promises are being delivered well within our first 12 months of government.

The Federal Budget The 2014–15 Budget enacted structural reforms that will ensure the sustainability of key government responsibilities, such as welfare, health and education. The Budget also contains the biggest ever contribution by a federal government to building infrastructure. At $50 billion, the Infrastructure Investment Programme includes crucial road, rail, intermodal and port projects – $16.4 billion more than the Opposition promised, and without caveats on many of the proposals, which would have prevented them from happening.

A failure to invest in infrastructure will limit our ability to grow as a nation and to develop our social and economic fabric

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The Hon Warren Truss MP

The $50-billion figure itself is impressive, but Treasury analysts advise us that it will also leverage more than $125 billion in new infrastructure investment. For the first time, state and territory governments will be able to access additional infrastructure dollars when they elect to recycle their mature governmentowned assets and spend the money on new, productive infrastructure. They will then be better able to spend their own money on infrastructure where they have particular expertise and responsibility, such as roads, railways, intermodals, ports and urban public transport systems. We are also reforming the way that infrastructure projects are selected, assessed and procured, and finding ways to encourage greater private sector investment. Infrastructure is expensive. We need new ways to fund and maintain it. Deliberations about the cost of Australian-built submarines to the public purse have received media attention recently, and I am aware of speculation that they could potentially cost taxpayers $80 billion or more. To provide some perspective, the high-speed rail study shows that building a network between

Brisbane and Melbourne would cost in the order of $114 billion. Decisions as significant as these that involve the taxpayers cannot be taken lightly, particularly when we have a current debt legacy with an interest bill of $1 billion per month that continues to rise. Despite this debt legacy, we are getting on with the job. Our first 12 months in government show that the Coalition is serious about linking infrastructure financing, investment and reform with productivity. We are becoming recognised as a world leader in encouraging the innovative expansion of private sector investment and engagement in transport infrastructure. Often when infrastructure is discussed, it is in the context of financial costs, but rarely in terms of benefits and opportunities. Yes, costs are large, often prohibitively so, but when I look at infrastructure across Australia, I also see great opportunities â&#x20AC;&#x201C; opportunities that need better infrastructure to be unlocked. That is why the right decisions must be made â&#x20AC;&#x201C; even if they are costly. Following are several projects that are underway, in terms of their benefit and their progress, which show how we are delivering on our commitments.

Left: IPA Chairman Adrian Kloeden; the Hon Warren Truss MP; and IPA Chief Executive Brendan Lyon

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The Hon Warren Truss MP

Firstly, East West Link Stages One and Two, in Melbourne. The Australian Government is providing $3 billion to the overall East West Link project. This includes $1.5 billion to fast-track delivery of the western section. This will ensure that Melbourne commuters get the benefits of spending less time stuck in traffic and more time being productive, or with loved ones. The East West Link is expected to reduce travel time by 20 minutes for up to 100,000 vehicles each day. The eastern section alone will bypass 23 sets of traffic lights. It is amazing that anyone could be opposed to this project and condemn Melbourne to gridlock. Recently, East West Connect was announced as the preferred bidder to deliver the eastern section of the East West project, which is running to schedule. In Sydney, the WestConnex and NorthConnex projects are progressing. WestConnex is one of Australia’s largest transport infrastructure projects, and recognises Western Sydney as a region with its own purpose and identity, rather than as a dormitory suburb of Sydney’s CBD. The financing of this project is innovative, and our historic concessional loan of up to $2 billion brings the delivery of WestConnex forward by around 18 months, essentially delivering the M4 East and M5 East simultaneously.

WestConnex is one of Australia’s largest transport infrastructure projects, and recognises Western Sydney as a region with its own purpose and identity, rather than as a dormitory suburb of Sydney’s CBD 6

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The M4 Widening is expected to be completed in 2017; the M4 East and M5 East in 2019; and the M4 South in 2023. The design and construction contract for the M4 Widening is expected to be awarded later this year. NorthConnex will ease congestion on Pennant Hills Road – often cited as one of Sydney’s most congested roads – and return local streets to local communities by removing up to 5000 trucks per day from the road and providing a free-flowing, continuous connection between the M1 and M2. The Environmental Impact Statement has been released, and construction is expected to commence early next year, to be completed in late 2019. In April this year, we announced that Badgerys Creek would be the site for Western Sydney’s airport. This decision ended 40 years of uncertainty and debate. It will be good for economic growth and good for jobs, both in Western Sydney and nationally. Our approach to building this new airport is ‘road and access infrastructure first’ – we don’t want to create a situation in which we have an airport but no convenient way to get there. To that end, in partnership with the New South Wales Government, we will spend more than $3.5 billion for significant road infrastructure upgrades in Western Sydney. The tender for Stage One of the Bringelly Road upgrade was advertised in July, and proposals for Round One of the Local Roads Package closed at the end of August. Construction on The Northern Road is expected to begin in 2015. Development of an airport is a complex and longterm infrastructure project. The Notice to Consult has been issued to the Sydney Airport Group – the critical first step to meet our obligations under the right of first refusal process to choose the owner and operator for the new airport. We are working towards an airport being operational by the mid-2020s. In Western Australia, the Perth Gateway project is ahead of schedule. The proposed new Perth Freight Link will provide a new freight connection between the Roe Highway and the Port of Fremantle, and Main Roads Western Australia is finalising the business case for the entire project. Our investment is a major milestone in infrastructure delivery for Western Australia, because it is likely to be the first time that we will see a heavyvehicle user charge implemented for a specific project.

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The Hon Warren Truss MP

Early works and planning are also underway on: the Gateway Motorway widening in Queensland the Midland Highway in Tasmania two sections of the South Road in Adelaide Tiger Brennan Drive in Darwin. In addition, major regional highways are being upgraded. At $6.7 billion, fixing the Bruce Highway in Queensland is the largest financial commitment of our $50-billion investment. The plans include more than 60 separate projects, making it one of the largest construction endeavours that is underway. The duplication of the Pacific Highway within this decade is also on track, with the Government honouring its commitment of $5.64 billion under an 80:20 funding split with the New South Wales Government for the construction of the Woolgoolga to Ballina section. Despite years of work, just 60 per cent of the Pacific Highway upgrade project is complete. At the moment, we have 1700 workers on site, seven per cent of whom are Indigenous. This is obviously a great boost for the regional New South Wales economy. Other regional highways undergoing work include: • the $1.6-billion Toowoomba Second Range Crossing – the largest single road project in regional Australia – and upgrading the Warrego Highway west of Toowoomba • the Western Highway and Princes Highway duplications in Victoria • the Great Northern Highway and North West Highway upgrades in Western Australia • Australia’s longest shortcut – the Outback Way, traversing Queensland, the Northern Territory and Western Australia. • • • •

The importance of the Inland Rail A priority for this Government is to develop the capacity of freight rail to meet the forecast growth in freight, particularly along the eastern seaboard. The Melbourne to Brisbane Inland Rail is the Government’s number-one rail freight project, and one of Australia’s most important and ambitious longterm projects. It is the Government’s plan to see it completed in the next 10 years. The Inland Rail will make rail freight costs more competitive with road freight, and provide real choice for transport operators.

Over the next four years, we have committed $300 million to commence important preconstruction works, but private sector investment in the Inland Rail is also sought. Our aim is to achieve the best balance of public and private sector funds, realising that for the Inland Rail to be attractive to the private sector, the business case must stack up, and the service that it delivers must meet the needs of users. This is a key part of the work being undertaken by the Implementation Group that was established in 2013, chaired by former Deputy Prime Minister and long-serving transport minister John Anderson. Any decisions on further funding will be taken once the Government has considered the Implementation Group’s report at the end of 2014. And while the Inland Rail is the priority freight rail project, the 2014–15 Budget has invested $3.6 billion in other rail projects. The list comprises $1.6 billion in freight rail and intermodal projects, including the Advanced Train Management System trial, as well as intermodal projects in Melbourne, Sydney and Perth, rail revitalisation in Tasmania, and work on improving lines in Adelaide, and port rail connections in Sydney and Perth. Financing is a critical part of building better infrastructure. The Government has put in place a policy agenda to: • target investment in productive infrastructure • complete projects faster • partner with state governments • leverage more private sector investment.

A priority for this Government is to develop the capacity of freight rail to meet the forecast growth in freight, particularly along the eastern seaboard

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The Hon Warren Truss MP

We are developing innovative financing models, which will help to build much-needed infrastructure over the next decade.

A new Infrastructure Australia Reforming Infrastructure Australia is a key part of our productivity agenda. The Infrastructure Australia Amendment Act 2014, which commenced on 1 September, delivers on part of our election commitment to achieve greater independence and improve transparency for this expert advisory body. A second piece of the legislation was introduced into Parliament to deliver the final stage of the Infrastructure Australia reforms. Work on the promised national infrastructure audit has commenced in consultation with state and territory governments, and will feed into the 15-year infrastructure plan, which is expected to be delivered in early 2015. I expect both the audit and the plan to present comprehensive advice on the nationally significant

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infrastructure that we currently have, and the infrastructure that we will need over the next 15 years. The Government will give detailed consideration to Infrastructure Australia’s advice on these needs, to help inform decisions on future infrastructure investment. This includes implementing our commitment to ensure that every project with a Commonwealth contribution of $100 million or more (apart from Defence projects) undergoes Infrastructure Australia’s robust scrutiny and analysis. Infrastructure Australia will publish its reports on its website as transparent advice, and that will be available for governments and the community to consider when allocating and discussing funding for infrastructure projects. The Government is also pursuing strategies to drive longer-term infrastructure financing reforms to inform the Government’s delivery of critical infrastructure, to ensure value for money for taxpayers, and to maximise productivity. The Productivity Commission’s Inquiry Report into Public Infrastructure has examined a range of factors to reduce costs, drive better competition and encourage greater private sector involvement in infrastructure.

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The Hon Warren Truss MP

The Governmentâ&#x20AC;&#x2122;s response to the Productivity Commission will take into account consultations with industry, and, importantly, will acknowledge that many of these reforms require implementation by other jurisdictions. We are working closely with the Productivity Commission to put in place a suite of reforms that will ensure better value for money and reduced time frames for the delivery of infrastructure. Other strategies to drive longer-term reform include the Taxation Review, which is underway, and the Federation White Paper, which will commence shortly. In our first year in government, through negotiations with the states, we have already leveraged new streams of private sector investment to get new projects underway sooner. While the private sector has a large pool of capital available, and is willing to invest in the right infrastructure projects, there has been a limited appetite to invest in greenfield projects with unproven commercial history. That is the reason that the Federal Government has been working with state and territory governments and the private sector to investigate ways of appropriately balancing or sharing risks with the private sector, to see new projects brought to market. The Asset Recycling Initiative will support the transfer of mature public infrastructure assets to the

While the private sector has a large pool of capital available, and is willing to invest in the right infrastructure projects, there has been a limited appetite to invest in greenfield projects with unproven commercial history private sector by offering the states 15 per cent on the sale price, so long as the proceeds are invested in new, productive infrastructure. This initiative will encourage the private sector and superannuation funds to partner with governments in building and delivering vital transport infrastructure, including much-needed public transport investment. Another key priority is reducing the regulatory burden imposed on the Australian economy by $1 billion each year to increase Australiaâ&#x20AC;&#x2122;s productivity and international competitiveness. This recognises that capital is mobile, and that

Figure 1: Asset Recycling Initiative

Source: 2014-15 Federal Budget. Volume 5 Number 1

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The Hon Warren Truss MP

unnecessary red and green tape drives up business costs, as well as the costs to individuals. The first Parliamentary Day dedicated to the abolition of red tape has already occurred, and my portfolio is currently advancing a number of important regulatory reforms in the aviation, maritime and transport security sectors.

The role of local government I have spoken at length about the new paradigm that the Coalition Government is putting in place to deliver infrastructure. Delivering that infrastructure at the community level – where it is often most important – can only be done in partnership with local government. I have a high regard for Australia’s councils and the tough task before them. Councils do not welcome our decision to freeze the annual indexation of Financial Assistance Grants for three years, as their contribution to help get the nation’s budget back on track. Let me put this decision into perspective. Funding to local government has not been reduced – in fact, this year’s funding is $30 million higher than last year’s as a result of population adjustments.

Funding has been maintained; only indexation has been temporarily paused. In August, the Government announced $2.3 billion of Financial Assistance Grants for local government to spend entirely on projects and activities of their choice. The 2014–15 Budget also contained extra funding for existing and new programs, which include: • the expanded $565-million Black Spot and $248-million Heavy Vehicle programmes • the new $300-million Bridges Renewal Programme • the new $1-billion National Stronger Regions Fund, for which we are currently finalising the guidelines. Also in August, the Government ensured that the $2.1-billion Roads to Recovery Programme funding for local communities across Australia will be delivered, despite political opposition. Roads to Recovery money will continue to flow, and there will be an extra $350 million available in 2015–16 to double the funding to every council in Australia. This brings total funding for the programme to $2.1 billion over the 2014–15 to 2018–19 period. We are committed, our strategy is viable, and we have got down to business as we said we would.

The Hon Warren Truss MP, Deputy Prime Minister and Minister for Infrastructure and Regional Development The Hon Warren Truss MP is the longest-serving leader of any political party in the Federal Parliament, having become Leader of The Nationals in 2007. A third-generation farmer from the Kumbia district near Kingaroy in Queensland, Mr Truss 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, Mr Truss 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, Mr Truss was appointed Minister for Trade. Before entering Parliament, Mr Truss was a Kingaroy Shire Councillor from 1976 to 1990, including seven years as Mayor. He was Deputy Chairman of the Queensland Grain Handling Authority and a member of the State Council of the Queensland Graingrowers Association. Mr Truss 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, Mr Truss led The Nationals to the party’s best electoral result in 30 years.

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BUILDING A CREDIBLE INFRASTRUCTURE PIPELINE: A PRIVATE, PUBLIC AND COMMUNITY APPROACH Over the next 15 years, the global demand for infrastructure development is looking at a projected investment shortfall of up to $15 trillion. Not addressing this shortfall means potentially forgoing up to 100 million jobs and $6 trillion in economic activity every year. This was the warning issued by David Thodey, the B20 Infrastructure and Investment Taskforce Coordinating Chair and Telstra Chief Executive, at a recent panel discussion in Sydney, hosted by Westpac Institutional Bank as part of its Deeper Insights series. The taskforce is one of four established by the Business 20 (B20) forum, through which the private sector produces policy recommendations for the annual meeting of the Group of 20 (G20) leaders. The B20 brings together business leaders from across G20 member countries to reflect the key role of the private sector as the main driver of strong, sustainable and balanced growth. ‘If you go out to 2030 and look at all the infrastructure investment requirements, you get to this mind-blowing number of $60–$70 trillion worth of money, or, let’s say, of opportunity that is needed,’ said Thodey, who delivered the keynote address. ‘And, if you go to any government, they’ll always say that they want to build the infrastructure, but somewhere between the opportunity and the reality is this chasm because these projects are not coming online as quickly as you would want. ‘All the data shows that when you look at it in terms of the money that needs to be allocated to these projects, compared to funding available from government and the private sector, there’s a $15-trillion gap.’ Specifically, according to the taskforce’s findings, it is estimated that by 2030, $60–$70 trillion in additional infrastructure capacity will be needed globally; however, under current conditions, only $45 trillion is likely to be realised, leaving a shortfall. Furthermore, the taskforce estimated that closing this gap could create up to 100 million additional jobs and generate $6 trillion in economic activity every year. To maximise the opportunity, it found that while governments have a crucial role

‘It is estimated that by 2030, between $60 and $70 trillion in additional infrastructure capacity will be needed globally. But … only $45 trillion is likely to be realised’ to play in closing the gap, the private sector will be required to play a larger part in the future process.

Overcoming the barriers Despite the business community being ready to play its part, the taskforce concluded that the greatest barrier to more private involvement in public infrastructure remained the absence of a credible pipeline of bankable, investment-ready infrastructure

projects offering acceptable risk-adjusted returns to both public and private investors. ‘Why is this happening? You look around the world and there’s no lack of money, but somehow, it’s not flowing to the right projects,’ Thodey said, in relation to the crucial disconnect. ‘Major infrastructure funds say they see all this opportunity, but there just aren’t that many bankable projects – that is, projects that are ready for the funding round.

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‘You look around the world and there’s no lack of money, but somehow, it’s not flowing to the right projects’ ‘And, if you find them, they say that one of the big challenges is that each project has its own flavour and dynamic, and, therefore, the amount of the money you’ve got to spend first, to look at investing in an infrastructure project, is enormous.’ Added to this, Thodey said that further roadblocks resulted from many countries not having an easily identifiable list of projects, not having a definition of how to prioritise these projects, and there being no-one responsible for them – often due to the nature of the political environment concerned. ‘Big infrastructure projects get caught in the political cycle and it becomes a political outcome, rather than one that’s purely for the good of the nation.’ In addition, the Taskforce noted that barriers to financing remain, including the unintended consequences of prudential financial regulation, underdeveloped local currency capital markets, and limited availability of appropriate, standardised financial instruments to align projects’ risk/return profiles with investor needs. ‘Trying to match money to these longterm projects, which have long gestation periods, long build phases and long-run returns, is difficult,’ Thodey conceded. ‘But the truth is that there are a lot of pension funds and sovereign wealth funds looking for that sort of investment, and the likes of Westpac or Macquarie, who can find ways to structure the deals, so this is a big area that needs to be addressed.’

A six-step solution To deal with the challenges, the Taskforce recommended six core, practical steps that G20 nations should take, individually and collectively, to promote more and more efficient investment in infrastructure. In terms of recommendations, the taskforce advised the G20 leaders to reaffirm the critical importance of infrastructure, as well as private investment in infrastructure, in their national growth plans, and to set specific infrastructure investment targets to 2019 that are aligned to a national infrastructure strategic vision. It encouraged the G20 to establish, publish and deliver credible national infrastructure pipelines that have been rigorously assessed and prioritised by independent national infrastructure authorities, and which take full advantage of private sector finance and expertise, whether by traditional procurement, Public Private Partnerships, or privatisation of existing government assets.

Furthermore, it recommended that the G20 set up a global infrastructure hub with a mandate to collect and disseminate leading practice, collaborate with key stakeholder organisations on project preparation and capacity building. It would also develop and promote appropriate standards, and collate and publish relevant data and reports to increase the pipeline of bankable, investmentready infrastructure projects, improve productivity across the infrastructure life cycle, and accelerate the development of infrastructure as an asset class. Additionally, the taskforce advocated the implementation of infrastructure procurement and approvals processes that are transparent, consistent with global leading practices, and include a commitment to specific time limits for regulatory and environmental approvals for major infrastructure projects, while respecting national policy objectives and not compromising the integrity of approvals processes. It also urged the G20 leaders to work towards greater promotion and protection

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of cross-border capital flows, especially foreign direct investment (FDI), including by developing a non-binding International Model Investment Treaty and promoting broader adoption of existing international standards. Finally, the taskforce recommended that G20 leaders increase the availability of long-term financing for investment, including for infrastructure, by removing unnecessary disincentives for long-term investment, setting out coherent national plans to promote the development of local capital markets, and to promote the provision of appropriate credit enhancement instruments and/or co-investment mechanisms for infrastructure projects where required.

The devil is in the detail Highlighting the taskforce’s three key recommendations, Thodey conceded that while they might sound simple, the recommendations could prove difficult for some countries to agree to. ‘Firstly, we’re saying that every country needs to have a prioritised list of projects, and that targets should be set. This is probably a private sector view, because, for example, every year, I’m held accountable for the

‘Big infrastructure projects get caught in the political cycle and it becomes a political outcome rather than one that’s purely for the good of the nation’ amount of capital I allocate to projects, and I don’t see why governments should not be treated in the same way.

‘The Productivity Commission did put out a report that said setting targets is wrong for infrastructure projects because they could force governments to do stupid things, such as meet the target without generating the right return, but I hope we’re a bit beyond that.’ Discussing the second key recommendation – that the G20 establish a global infrastructure hub – Thodey admitted concern due to its potentially bureaucratic nature. ‘Setting up an Infrastructure Hub to provide a model for best practice has a lot of difficulties, such as whether it would reside in the private or government sector, who would be on the board, and where the funding should come from – all in the context of that age-old belief that the private sector and government don’t work well together. ‘And, while it won’t be the panacea, at least if you can get best practice and a common way to look at these big projects, it would go a long way in helping to release funding for the projects. ‘The third key recommendation is around the private sector’s involvement in infrastructure, as there’s more work to be done to stimulate and develop local markets,’ Thodey said.

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‘I think Australia is not doing too badly, but it’s a matter of degree. One idea is to set up specialised instruments to allow for a separate way of reporting infrastructure projects, giving them greater transparency and visibility so that funds can invest in them. ‘Another idea is to stimulate greater foreign investment, as there’s no question that China is looking for big projects, so it would be a question of how to facilitate that flow of funds.’

Australia’s infrastructure scorecard Assessing Australia’s performance, Deeper Insights panellist and Hastings Funds Management Chief Executive Andrew Day agreed. ‘Australia has been a pioneer in private sector investing in infrastructure, but these are long-term investments that need a highly disciplined approach. With multiple states running concurrent sales processes, it is important that governments and their appointed transaction teams allow time for the extensive due diligence needed to balance price and risk,’ Day said. ‘On a relative basis, Hastings is a leader in dealing with privatised infrastructure. We have also been a pioneer of managing and being a source of funding for Australian infrastructure assets. One of the biggest challenges now is matching up the strong demand from institutional funds from Europe, North America and Asia for Australian assets, while balancing the needs of our Australian clients. ‘At the moment, Australia has a robust pipeline of opportunities, and there is a growing awareness that privatising mature infrastructure assets brings tangible benefits – in the form of readily available sources of capital for continued capital expenditure; and for the broader economy in promoting efficiencies and growth. ‘Infrastructure is a community asset requiring local political and community support, and, as such, successful investments should have bipartisan support and strong local engagement. ‘If the G20 can help promote the benefits of disinclined private sector investment in infrastructure, it could bring tangible benefits to the Australian economy.’ Similarly, fellow panellist and IFM Investors Global Head of Infrastructure Kyle

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‘Merely creating a pipeline of bankable projects is not sufficient; the pipeline must be supported by all sides of politics and the community’ Mangini also believed that the political environment is a major variable that needs to be taken into consideration when embarking on new projects. ‘The challenge is incredibly aspirational, because politically, it’s very difficult to do these things as, while politicians like cutting ribbons, they don’t like telling people that they have to move out of their houses. ‘If a politician tells voters that assets need to be privatised, they’ll say no, but if, instead, they say we will sell the port and build schools, voters will say yes. ‘It’s all about contextualising the message wherever you are, and making it understood that what’s been done will benefit the general population.’ Putting this in the context of local development milestones, panellist and WestConnex M5 Project Director Chris Swann observed that success in this regard has been achieved in recent years in New South Wales. ‘In the last three years, after previously underperforming in infrastructure, New South Wales has taken a number of positive steps, including the establishment of Infrastructure NSW with its priority list of projects that will grow the economy. ‘The number-one recommendation from the list was the WestConnex M5 project, which stands head and shoulders above any other project in terms of growing the New South Wales economy.’ Summing up, B20 Infrastructure and Investment Taskforce Coordinating Chair David Thodey made sure to place the focus firmly on the vast potential upside of closing the projected infrastructure investment gap.

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‘If you were to be able to really unleash this incredible opportunity, it would generate at least one per cent to 1.5 per cent of gross domestic produce (GDP) growth over the next five to 15 years. ‘That’s an enormous stimulant for growth; but, more importantly, if you get it right, it will create 100 million jobs globally, and just look at what’s happening here at Barangaroo – the number of people working creates this energy, which is very important for the city and the nation. ‘This is a tremendous opportunity and, if we can just move it forward a little bit, it will be good for the world economy, good for Australia, and good for institutional investors. ‘We want to stimulate growth and investment, because, personally, I am sick of cutting costs, and I like growing,’ Thodey said. The Deeper Insights Series is a Westpac Institutional Bank thought leadership event. These events provide customers with access to industry thought leaders, and an opportunity to discuss current economic issues and their impacts on business. This year’s event focused on the B20 Infrastructure and Investment Taskforce recommendations to the G20. Speakers included David Thodey, B20 Coordinating Chair, and Chief Executive Officer, Telstra Corporation; Kyle Mangini, Global Head of Infrastructure, IFM Investors; Andrew Day, Chief Executive Officer, Hastings; Chris Swann, M5 Project Director, WestConnex; Pippa Crawford, Head of Westpac Institutional Bank Victoria and Head of Energy and Resources, Corporate and Institutional Banking; and Michael Pascoe, Finance and Economic Commentator (as master of ceremonies).

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The Hon Mark Birrell Infrastructure Australia Chairman the Hon Mark Birrell provides his observations on the outlook for Australia’s infrastructure market, and how the reformed Infrastructure Australia will bring a much stronger focus to the principal constraint facing infrastructure in Australia: funding. Key points: • Infrastructure Australia’s new structure better provides the resources and independence needed. • The national infrastructure audit will be released by year’s end, providing the first robust top-down assessment of national requirement. • The audit will be used to develop a robust 15-year national infrastructure plan. • Beyond the audit and plan, Infrastructure Australia will bring a stronger focus on process, regulatory and structural reform to infrastructure markets.

Our nation needs a period of good policymaking and substantial reform if Australians are to secure the real benefits they seek from the infrastructure of today and tomorrow. Infrastructure is fundamental to the national economy, and it underpins both economic and social wellbeing. It helps to define our national identity, because our infrastructure aspirations are a reflection of our ambition as a country. Australia is already acknowledged as having one of the world’s most sophisticated infrastructure and construction sectors. Correctly so, given our national legacy of past reforms to the procurement and regulation of infrastructure assets, and especially the creation of infrastructure markets. But it is increasingly obvious to users, providers and policymakers that infrastructure reform must go further. There is now something of a national consensus that infrastructure is an economic and social policy opportunity that Australia has to seize during this decade. 16

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Therefore, the challenge to each of us, and the guiding challenge for Infrastructure Australia, is to distil this infrastructure consensus into an actionable programme of well-led and carefully articulated enabling policies, which progressively deliver muchneeded projects across the Federation. While I am optimistic about the outlook for infrastructure, and our collective opportunity to drive change and win real benefits, I am also realistic about the degree of change that will be needed. Since Federation, Australia’s infrastructure has been viewed within a context of state assets and state requirements. This is a legacy of a Constitution that limited the Federal Government’s infrastructure responsibilities to those few sectors that affected commerce between the states, or were transnational in nature (even in 1901). In effect, the Constitution left us a legacy where the national government’s role for infrastructure was limited to telecommunications, interstate freight and aviation. While these neat divisions were often overridden by the practicalities of Commonwealth-State Financial Arrangements, the role of the national tier of government as the dominant source of funds (and increasingly as a source of formal project approvals) has only become clear to all in recent years. But the rise of the central government, and the imperative of national networks and markets, has not always been matched with corresponding corrections to structural accountabilities, funding sources or project management capabilities. This has been compounded by the recent problems of declining state government budget settings. And while Canberra has emerged as a welcome source of alternative budgetary allocations, it has not always had the inherent skills to choose project recipients, let alone actually deliver such projects itself.

This legacy adds rich complexity to the issues before us. That is why Infrastructure Australia is an important structural reform – because if we perform our role well, we will better equip Australia to fully address the costly shortfalls in infrastructure. These shortfalls have for too long depressed productivity, and resulted in business performance and employment creation being compromised. Let us never forget our collective national experiences of: • transport networks failing to keep pace with demand • state-owned water and electricity utilities being unreliable or unreasonably costly • hospital facilities confounded by lengthening waiting lists • freight corridors being neglected. Observations like this are now so common, and immediately familiar, that they necessitate a strategic, national response. But, there is one particularly compelling reason for us to act: if we get our infrastructure right, we will protect Australia’s quality of life at a time of sustained population growth and global economic change. continued on page 20 Volume 5 Number 1

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Against this historic federal context, Infrastructure Australia has been given a special mandate from the Prime Minister to resolve and advise on the range of solutions to better address the country’s infrastructure task. Our role is all the more substantive given the benefit of the agency’s permanence and independence under our new Act of Parliament. Our foundation roles are the completion of a fresh national audit of existing infrastructure, then using this assessment to distil a 15-year vision for Australia’s infrastructure. The audit is being produced with the engagement and support of all state and territory governments. Ideas will be invited from the public, capturing the aspirations of those who are direct consumers of the many services that infrastructure delivers. The 15-year plan, and the audit that informs it, are key outputs for Infrastructure Australia and form the immediate focus for the agency. These documents, done comprehensively and in a real partnership with governments and the broader business sector, will provide a much clearer picture of where the national interest is best served, and what projects need to be fast-tracked. Our infrastructure plan should give national economic policymakers renewed confidence

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and urgency toward enlarged and accelerated infrastructure investment. It should also provide the community with a deeper understanding of the scale of the infrastructure task, and allow the community to directly share in the trade-offs to see why substantial reform is meritorious. Our approach to the audit and the national infrastructure plan will be driven by our positive belief that Australia’s infrastructure gap can be filled. Indeed, smarter regulation and more efficient investment could equip Australia to get substantially more from the infrastructure that we already have – and marshal a measurably larger capital funding envelope to deploy to major projects. In our work, we will be seeking to bring forward infrastructure that: • strengthens our role as a globally focused economy, helping Australians to export valueadded products, services and resources • meets our needs as a highly urbanised nation, enhancing the livability of our cities, and fostering the skilled jobs and innovative businesses that cities create • underpins Australia’s prospects for sustainable growth, utilising the best of new technology, and encouraging strategic planning and integrated land-use decisions.

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Our success as an agency relies, in part, on the degree of rigour and the transparency that we are able to systemise into the selection of major projects. A welcome aspect of the growing community understanding and consensus on infrastructure has been the expectation that governments undertake appropriate due diligence on each major project. A focus on the relative benefits and costs, together with clear articulation of the objectives that a project is expected to achieve, will drive better decisions and maximise the practical and economic effect of projects that are brought forward. With our new legislation now in place, Infrastructure Australia will be required to record evidence of cost/ benefits and reasons for the inclusion of any major projects on our national infrastructure pipeline. Infrastructure Australiaâ&#x20AC;&#x2122;s toolkit assessment will look at economic, social and environmental factors. Evolving out of all of this will be an observable and better-respected prioritisation process, and a highly credible pipeline of nationally significant projects. Across the nation, we should be able to ensure that new infrastructure is constructed for the right reasons, at the right time. While the development of a well-evidenced and ambitious 15-year national infrastructure plan forms our foundation output, it is only the beginning of our programme of reform. We know that the missing piece in infrastructure is as much about our capacity to pay for it as it is about shortfalls in planning, procurement or operational efficiencies. For this reason, Infrastructure Australia, under my leadership, will bring a much stronger focus to canvassing the great constraint on progress: funding. With the guidance of the new Board, the wisdom of the national and state treasuries, and the contribution of the business sector, Infrastructure Australia will seek to provide wise answers on what is needed in infrastructure, and what can be afforded. A primary task must be to expand the total funding base for new infrastructure, and to create effective market mechanisms that signal efficiently for, and sustain, new capital investment. The current debate about funding sources and privatisations should be encouraged. Australia can certainly better utilise private sources of capital, including superannuation funds, particularly through their appetites for privatised assets. Selling or leasing old assets like ports and energy facilities allows the proceeds to be immediately

redeployed to fund new projects, like public transport systems or freight networks. Handled well, the multiplier effect of these initiatives will be considerable and long-lasting. Of critical importance, the consumer price benefits in markets like electricity will also be substantial because of the better disciplines and incentives that have been proven to apply to utilities under private ownership. So, the discussion about asset recycling is vital, because it offers the breakthrough that we need in the immediate term. No one would pretend that the sale of capital assets and reinvestment of the proceeds is the sole solution to infrastructure funding. This initiative must be accompanied by a longer process to realign costs and revenues on public sector balance sheets to increase general fiscal capacity, together with targeted reforms in specific infrastructure markets to create better linkages between access prices and investment. Australia is lucky in this regard, because of the benefit that we will derive from the array of substantial national policy reviews that are underway. Processes like Professor Ian Harperâ&#x20AC;&#x2122;s Review of National Competition Policy, the committed reviews of the tax transfer system, and the White Paper on Reform of the Federation look set to be very important, and many will require a high degree of community education before implementation can become politically or practically feasible. This is where Infrastructure Australia will play a much more substantial role over the medium term, because we are the standing agency for infrastructure reform â&#x20AC;&#x201C; meaning that we will help to interpret these recommendations into a logical and ambitious reform programme.

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We can remain a national champion for complex changes long after the momentary media or political focus has moved from these reports and their complex recommendations, and on to new issues. Infrastructure Australia was designed purposefully to have two roles: the interrogation and articulation of national project priorities, and as a standing commission on the efficiency of key infrastructure sectors. Infrastructure Australia will play an important role in distilling the recommendations across this constellation of white papers (and earlier documents like the Henry Review, with its excellent consideration of road pricing reform, for example) into an actionable programme of debate, resolution, reform and policy implementation – all of this over the long term. We will also continue to advise Canberra – which has historically been viewed as remote from the practicalities of project delivery and network operation – on how the national government can evolve in its role as the true, new leader in infrastructure policy. Indeed, our most transformative impact in Canberra will be by advising on how a smart, wellmotivated national government can use its capital investment priorities and its powers to leave a lasting legacy of major project delivery. This will be sustained through significant enabling reforms to infrastructure markets, through a sensible review of funding approaches and prioritisation methodologies and, in the immediate term, through

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Infrastructure Australia being a reform partner to state and national governments. Australia can now get beyond a talking phase and enter an exciting period of national progress on infrastructure planning and delivery. The broad public consensus that infrastructure solutions must be found provides powerful strength to the arm of reform-minded policymakers. And failure to reform current practices would mean that we miss the real opportunity to increase the efficiency, quality and reach of the nation’s infrastructure. Infrastructure Australia has been asked by the Abbott Government to help it and others deliver better practice and better projects. To this end, we will foster a deeper and more sophisticated public policy debate about how to secure ambitious national social and economic policy outcomes. Our aim can be reduced down to one meaningful goal: to use infrastructure to set Australia up for a higher standard of living. It’s a goal worth getting behind.

The Hon Mark Birrell Mark Birrell was the founding Chairman of Infrastructure Partnerships Australia, and retired from the role in 2013. He has extensive experience as a company director and lawyer, and from 2002–12 was the national leader of the infrastructure group at Minter Ellison Lawyers. In April 2014, Mr Birrell was appointed Chairman of Infrastructure Australia. Currently, he is also the Chairman of the Port of Melbourne Corporation, Regis Health Care Limited and Post Super Pty Ltd, and is President of the Victorian Employers’ Chamber of Commerce & Industry. Mr Birrell’s earlier roles have included being Deputy Chairman of the Australian Postal Corporation and Chairman of Evans & Peck Limited. He is a Fellow of the Australian Institute of Company Directors. Previously, Mr Birrell was Minister for Major Projects and Government Upper House Leader in Victoria, working on successful Public Private Partnerships (PPPs) and capital works initiatives like CityLink and the Docklands.

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MEGATRENDS – WHAT DO THEY MEAN FOR INFRASTRUCTURE PLANNING? Modern, reliable and affordable infrastructure is a key driver of economic growth – and of living standards. Estimates of the world’s infrastructure investment requirement over the coming decades run into the trillions of dollars. While developed countries will want more, and more sophisticated, infrastructure systems, developing countries still need the basics – water, energy, sanitation and basic access to education and health facilities. There are some obvious challenges at a macro level – having the right type and variety of commercial models to deliver the projects, the availability of capability and, most importantly, affordability. Yet, is there a need for a fundamental shift in the way that infrastructure assets are planned, developed, procured and operated? Is it really just about delivering more? We argue that the impact of the global ‘megatrends’ – changes that will transform the world over the coming decades – will change the approach to infrastructure investment decisions. Megatrends, as identified by PwC, are described in the breakout box. What do these megatrends mean for infrastructure? Do they mean that we’ll need more of it? If so, will it be affordable? Will more infrastructure come at the expense of scarce resources and environmental health? Or can we be saved by technological breakthroughs? Here, we discuss four challenges to be addressed.

1. Distributed assets – local solutions for modern people Technological advances and the desire for resource efficiency make the case for moving the infrastructure needed to sustain life (energy, water and food) closer to the demand. Increased urbanisation improves the economics of having such assets ‘embedded’ in our living and working environments. Energy supply is an easy example. In Australia, the major sources of energy are typically far removed from end users. For example, around 90 per cent of Victoria’s electricity is generated by the four large coalfired power stations located in the Latrobe Valley, around 150 kilometres from central Melbourne, with Melbourne being home to 75 per cent of the state’s population. Long transmission distances require large capital investment in networks and result in large energy losses through transmission. Moreover, Victoria’s generation from old brown coal-fuelled power stations is among the most greenhouse gas (GHG)-polluting on the planet.

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What is a megatrend? In 2014, at PwC, we worked with our clients to determine the big changes disrupting their organisations, and the economy as a whole. We’ve distilled what we learned into five megatrends that have a major influence today, and will have a major impact over the coming decades: 1. demographic shifts (ageing populations) 2. shifts in global economic power (from West to East – think China and India) 3. accelerating urbanisation (denser cities) 4. climate change and resource scarcity (at what cost?) 5. technological breakthroughs (what’s next?). Megatrends 1 and 2 have obvious implications for infrastructure in the future. There will be a significant increase in demand for aged care and health facilities, and the shift from West to East will result in a major geographic shift in the concentration of investment. The implications of these shifts will be wide-reaching; however, in this article, we focus on the joined implications of megatrends 3, 4 and 5 – urbanisation, environmental challenges and the opportunities presented by emerging technologies. Following, we provide a brief description of these megatrends.

Urbanisation In the 20th century, the world’s urban population grew from 220 million to 2.8 billion, with growth expected to reach almost five billion by 2030. Urbanisation means an increased concentration of required infrastructure services – including transport, energy, water and waste disposal. Australia is already the most urbanised country in the world.

Climate change and resources The scientific consensus with climate change is clear, yet the political prevarication and social equivocation continue to provide a drag on action; however, it is inevitable that the march of environmentally friendlier practices will continue. No-one disputes the sense in not littering or not pumping untreated sewage into our waterways or not using asbestos to build our homes; however, not so long ago, these were accepted practices in Australia. In addition, to combat the scarcity of resources, such as water, energy, minerals and forests, we should expect an increased focus on recycling, multi-using and reducing waste.

Technological breakthroughs The pace of development, change and proliferation of smart phone devices is visible evidence of the current rate and implications of technological change. We all know the world is changing, but what sort of technological breakthroughs might impact future infrastructure development? Some possibilities, which are under development, include: • artificial intelligence: the rapid growth in the processing power of computers is enabling analysis of data using increasingly complex models to solve problems in ever more ingenious ways – enabling smarter, more informed investment decisions • wireless energy transfer: early technology has been developed that can beam energy from a power source directly into a device without the need for wires. Consider the implications of a world where nothing needs to be plugged in anymore • solar fuel: a technology that creates liquid fuel using only sunlight, carbon dioxide and non-potable water is currently being developed. It mimics the process that plants use to produce energy through photosynthesis, allowing the sun’s energy to be kept in liquid form. The implications for renewable energy storage could be revolutionary.

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Yet, there is an existing and proven low-GHG-emitting technology that can be located in heavily populated areas, and that can deliver base-load electricity (unlike solar and wind), as well as heating and cooling to residential district heating and cooling schemes, or to clusters of commercial buildings. Combined heat and power (CHP or cogeneration/trigeneration) – fired by natural gas, waste or biomass – can reduce GHG emissions by about 60 per cent compared with grid-delivered brown coal electricity, can avoid additional expenditure on transmission and distribution networks, and can improve the security of energy supply by being isolated from grid interruptions. Such distributed energy systems are well utilised in parts of Europe and North America where, admittedly, the economics are improved by the cold climate; however, the main obstacle in Australia is the lack of government sponsorship. In the past, central planning of the energy network was the domain of integrated, state-owned electricity entities, but disaggregation and/or privatisation of the electricity systems across each Australian state has resulted in individual generators, network providers and retailers, each concerned about their own commercial interests, without any incentive to develop options that will erode their existing businesses. Local city councils have attempted to step up to the plate. Sydney City Council had plans for a major distributed energy scheme with an aim to supply 70 per cent of the city’s electricity needs by 2030, but now these plans have been scaled down to a small fraction of the original intent. A number of other city councils across Australia have lacked success in this space. Arguably, local government needs assistance from higher levels of government to deal with the complex commercial, legal, regulatory, policy, market, planning, technical and risk issues inherent in distributed energy generation and reticulation projects. Moreover, individual private enterprises are not able to lead market development in an effective way due to the need for government sponsorship and the need to pull together government bodies, private businesses and private residents to participate in the scheme.

2. Multi-use infrastructure assets – killing many birds with one stone A basic knowledge of 19th- and 20th-century Western history (particularly United States and Australian history) tells us that infrastructure development ran in tandem with the settlement of a country and the evolution of technologies. The model was: wear some rough roads from A to B, then build a railway from A to B, then

build a telegraph line from A to B, and then eventually build some electricity transmission lines, possibly along the same route. Now, we live in an age of multiple proven infrastructure models and sophisticated emerging technologies. A linear adoption is no longer necessary or appropriate. A current project in the United States (supported by the United States Government and General Electric) is a neat case in point. The plan is to build roads from super-strong glass and solar cells to generate electricity. If the technology was applied to all of the country’s roads, it would produce more than three times the country’s energy needs, using renewable energy instead of coal. This example is real, with prototypes currently being installed in parking lots. The solar road idea, in its simplest form, is the building of an infrastructure asset that provides both a transport function and an energy generation purpose. Yet, the development of the project has led to the consideration of other functions, including light-emitting diodes (LEDs) to illuminate the road lines, heating elements to resist ice and snow and the potential to recharge electric vehicles while moving. While the solar road may sound futuristic, we already have an increasing focus on ensuring that infrastructure investment is efficient and can serve multiple purposes where possible. Think schools with community facilities, hospitals with health hotels, public housing with integrated private housing, integrated transport, communications and energy transmission corridors.

3. Closed systems – moving towards resource efficiency and zero waste Where industrial processes consume resources such as water and energy, and produce waste products, there is an opportunity to use new technologies to reduce the impact on the environment. As with multi-use infrastructure assets, increasingly connected thinking is required to deliver innovation and efficient outcomes. Agriculture is a field where we can significantly reduce the ‘leakage’ of resources. Let’s think about it: key agricultural inputs include water, energy and fertiliser; key outputs include food products, plant waste and animal waste. Arable land occupied by farms would otherwise be natural forests or grasslands. In a closed system, crop waste and animal litter could be used to fuel an anaerobic digester to generate energy to power irrigation systems and to heat greenhouses for growing hydroponic vegetables. The anaerobic process would also produce fertiliser as a byproduct. In addition, part of the farm could be devoted to forestry as a carbon-farming initiative to restore environmental balance.

What does all this mean for infrastructure planning? There is a growing body of research and development recognising that natural systems are incredibly efficient (inherently environmentally optimised!) and provide the best basis for designing man-made systems. It is usual for infrastructure projects to need to comply with environmental regulations, and there might be particular environmental objectives; but how is it best to incentivise, recognise and reward the design of infrastructure systems that do not result in any environmental externalities?

4. Rapidly changing and complex technologies – the future is your friend… or is it? Where the required infrastructure output is an information technology (IT) service, the pace of technology change and the risk of inefficient resource use and early obsolescence can loom ominous. Large-scale IT projects pursued by governments (and also by the private sector) have been prone to very long development times, very large cost overruns and often sub-optimal outcomes. The problematic overlay is that the rate of project development can be outpaced by the rate of technology development. This can result in a completed project that is dated and unwieldy at the outset. Moreover, IT projects often fail or deliver sub-optimal outcomes due to a lack of an effective interface between the commercial and technological streams of thinking. For those who are not IT experts, the field can seem like a bewildering array of esoteric concepts – clouds, racks and platforms. This can result in the subject matter experts (the technology specialists) having a much greater say in the project development than what may be the case with a road, school, or hospital. While the opportunities might be exciting, bland commercial questions might rightly override technical considerations – for example, what do budget, cost and risk say about building on top of legacy architectures, rather than starting from scratch with greenfield infrastructure? It is easy to see why an increasing convergence of technology and commercial thinking is needed in the development and delivery of IT projects. Procurement and contractual models that enable and encourage flexibility will become increasingly valuable.

What does it all mean? The sponsorship void – policy and planning Late last year, Sydney City Council made a very detailed submission to the ‘Inquiry by the Public Accounts Committee into Cogeneration/Trigeneration in NSW’.

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It makes clear how industry and technological changes can create voids in the policy, legal and regulatory frameworks needed to enable valuable (and environmentally friendly) investment. The challenge for governments is to move quickly enough to allow and, indeed, encourage investment in new infrastructure systems that would otherwise be technically and commercially viable.

Open development processes Traditionally, governments have determined the need for infrastructure assets. Moreover, projects are normally developed on a departmental or portfolio basis – that is, it might be an energy project, a waste project or a water project. Once a decision has been made, a tender will be issued, seeking bids. The tender process may allow for add-ons to the core infrastructure asset requirement, but the process isn’t designed to and doesn’t easily accommodate the design and delivery of true multi-use assets. What are the alternatives? Governments can become much more joined-up in their thinking, through interdepartmental think tanks or whole-of-government agencies with a mandate to develop infrastructure concepts without constraints by sector. The private sector is also well positioned – perhaps even better positioned – to develop infrastructure ideas that leverage technologies and know-how to merge the delivery of multiple service needs. The private sector may also possess certain assets (such as land or existing infrastructure) that governments would not normally factor into their infrastructure planning. So, should the private sector be encouraged to develop concepts for government? One approach is through a structured tender process, where the private sector’s ideas and asset contributions are sought to solve a broad requirement. For example, if a government wants to improve the quality and quantity of the stock of social housing, they could put out a tender that essentially says, ‘Based on the government’s existing housing stock, we invite privatesector parties to propose ideas and unique contributions that you may be able to make’; however, this leads to the dilemma of ‘comparing apples with oranges’ – that is, comparing two or more proposals that are radically different and achieve different outcomes. While this can be overcome, it is at odds with the typical approach of presetting evaluation criteria that align with very specific service outcome objectives. This leads to the question of unsolicited proposals. Some governments have established processes for considering unsolicited proposals. The Victorian Government released a new Unsolicited Proposal Guideline in February 2014. It emphasises that the proposal ‘must have a

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degree of uniqueness [including] a unique idea or IP, being in a unique position or having ownership of strategic assets integral to delivering the proposal’. Should this sort of approach be used to more proactively seek and harness private-sector ideas to inform the infrastructure planning process? It could encourage private sector innovation and participation in the wider scope of planning and delivering infrastructure assets. This would be attractive to the private sector as an outlet for testing ideas and as a means to avoid some of the costs and risks inherent in usual competitive infrastructure bid processes.

Real options and flexibility So how do we move from a history of ‘lumpy’, one-dimensional investments in infrastructure projects to a more measured and progressive approach, which takes advantage of multisector thinking and innovative technologies to accommodate change? Traditionally, the value and benefits of infrastructure projects have been measured and compared in terms of net present value (NPV). In structuring and valuing projects going forward, governments may be well advised to augment this with a real-options valuation approach, aimed at capturing the increasing value of flexibility and management of risk in a fast-changing world. Real options are the project-based equivalent of financial options (that convey the right, but not the obligation, to buy or sell a security at a future point in time). The value of real options may arise from the inherent operational flexibility of different infrastructure configurations, or from being able to delay investments until more information is obtained, or from the up-front building in of the ability to modify or add to the asset in the future. An interesting and relevant application of real-options thinking is in planning water infrastructure and operating strategies in a world of climate change uncertainty. The Blue Nile project in Ethiopia considers new multi-purpose dam alternatives along the river. The approach incorporates flexibility in design and operating decisions – including the selection, sizing and sequencing of new dams, and reservoir operating rules. The analysis relies on a simulation model that includes linkages between climate change and system hydrology, and tests the sensitivity of the economic outcomes of investments in new dams to climate change and other uncertainties. The real-options framework has been valuable in identifying dam configurations that will deliver robust to poor outcomes and that are sufficiently flexible to capture high upside benefits. Back home in Australia, it is easy to see that real options could be incorporated into the commercial design of road, rail, utility

and health infrastructure assets. Making an unwieldy one-off, long-term investment decision appears increasingly at odds with the rapid evolution of analysis tools, technologies and user demands. Do the traditional business case and decision-making processes need to transform to accommodate the potential of the present and future? Does there need to be an evolution of the public-private partnership (PPP) model? PPPs are beneficial because they take a long-term view of the optimisation of the build, operation and maintenance of an asset within a set of predefined parameters. However, PPPs do not represent a fluid model for long-term asset expansion or evolution, with uncertain add-on dates.

Summary thoughts The future looks like an exciting place. For infrastructure development and delivery, it will be a time of much activity and rapid change. Innovative thinking (both in government and the private sector) will be required to achieve the best outcomes. Governments need to be aware of where there might be obstacles to investment. Collaborations of public and private intelligence will be increasingly fruitful, and the flexibility to respond to changing circumstances should carry a high premium. The megatrends will march on regardless. Infrastructure development needs to be supported by the commercial models that best exploit the opportunities that those trends present. Mario D’Elia (mario.delia@au.pwc.com) is a Partner, and Shawn Wolfe (shawn.wolfe@au.pwc.com) is a Director in PwC’s Infrastructure Advisory practice. pwc.com.au/deals/infrastructure-advisory

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Peter Harris AO Productivity Commission (PC) Chairman Peter Harris AO reflects on the PC’s recently released Inquiry Report into Public Infrastructure, with a particular focus on the negative impacts that can accrue when governments announce projects before proper analysis is undertaken.

Key points: • Political government should resist the temptation to announce infrastructure projects in advance of sound analysis. • Infrastructure funding is ultimately sourced only from taxpayers, or from infrastructure users through user charges. • Transport funding and congestion challenges, together with technological improvements, mean that reformed road user charging is inevitable. • Skills remain a challenge for infrastructure, and must remain a policy focus.

Last year, the newly elected Abbott Government, as well as the state governments, with strong support from industry groups, were talking up the prospects of infrastructure investment replacing mining and liquefied natural gas (LNG) capital investment programmes, as these areas slowed cyclically. Over the last 12 months, governments have generally attempted to live up to this image, which is very positive; however, the lessons that we have learnt in the past decade suggest that we should not 28

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simply rush in to announce the next big project that seems likely to capture the public imagination. Rushing in to announce big, new investments is something that has been heavily criticised, most recently in the case of the National Broadband Network (NBN). We have also neglected to undertake projects with high benefit-cost ratios, which do not have such substantial political salience. It appears that regardless of who is in government, the same rush to announce still seems to be with us. The sequence of announcing the project concept, then doing the planning – after which the concept is almost always revised – with the cost-benefit analysis either not done at all (for lack of time) or not released (generally on the unconvincing grounds of commercial sensitivity) is unfortunate. Without naming individual projects, most states have, since last year, seen exactly this sequence of events. If this process provided some political benefit, it might be understandable – it would not be supportable, but it might be understandable. But it seems not to do that, either. Instead, far from a swift move after the press release into a tender process and the commencement of construction, the next step after the press release is generally silence. Silence while the planning is done, the risks assessed, the interaction between the new investment and the existing system further considered, and the business case prepared for the public or private financiers. There may be occasional hints of net benefit for the community, and there are inevitably speeches to selected groups of targeted beneficiaries, but the disappointment in broader public terms arises because – far from the implied swift decision-making of the announcement – there inevitably follows a long period of apparent inaction. Those who work on infrastructure projects know it is not a period of inaction – far from it. But the Government’s action agenda subsequently feels keenly the public disappointment, all of which is generated by the untimely announcement in the first place. Announcement remorse, you might call it. It would be refreshing to see governments choose, in future, to do the analysis and release it first. My judgment is that it is in the interests of governments to first undertake the detailed analysis and release it. In most cases, this is not beyond the

current capabilities of government agencies and key external advisers. The resources are there, they’re just not deployed effectively. Moreover, this is the only plausible way of establishing a pipeline of opportunities. It is axiomatic that to achieve a pipeline’s purpose of providing analysable ideas of future investment opportunities in Public Private Partnerships (PPPs), and an indication of their timing, you need to publish a sequence of analyses. Not just one every now and then, but a sequence of analyses. It will be of very little use just to publish a snapshot of today’s ideas without comparable analyses of the alternatives to them. Who – investing seriously – can respond effectively to a snapshot? There is some reason to hope that a better system will come about. The renewed interest in infrastructure, and the abandonment of the nonsensical view that all debt is bad, provides a context that could see the infrastructure planning and purchasing system reformed.

The Inquiry Report into Public Infrastructure One contribution to support this is our recently completed Inquiry Report into Public Infrastructure, which was, in effect, two inquiries in one, and done at a rapid pace, just on six months from start to finish. A second cause for optimism is that the Commonwealth Assistant Minister for Infrastructure, the Hon Jamie Briggs MP, recently released a statement on behalf of his colleagues from around the nation that seeks to apply some of the directions suggested in our Inquiry Report. A third cause for optimism can be found in the earlier comments of the Deputy Prime Minister, the Hon Warren Truss MP (see page 3), who said that as a result of reform to Infrastructure Australia, in future he expects to see assessment ahead of announcement. Our Inquiry was as deep as it was broad. It was well supported by industry and public sector submissions, and there was a high level of public commentary provided by the media. I am optimistic that such a detailed piece of work has a fair prospect of actually being turned into public policy. That process will take time, and it may be a five- to seven-year process, but it is my belief that there is a fair prospect of it happening. There is no doubt that infrastructure investment is one of the wisest things that a government can Volume 5 Number 1

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do for the public. The efficient and equitable provision of safe and reliable means of travelling and communicating; of delivering, of powering and of sewering a society are core public interest reasons that we have governments. We want these services provided cost-effectively, but above all, we expect that they will be there, regardless of where we live in Australia. There is a fundamental equity aspect to the public provision of infrastructure that makes it a natural place for good government to meet its commitment to its citizens. It is not essential that government does all of this in-house. This is obvious nowadays in relation to design and construction, where the public works departments have been outsourced. Our society has evolved to a level that allows not just private building of infrastructure on behalf of government, but also full private provision of services, where government simply retains the role of ensuring that access is fairly made available between consumers. Where evolution is yet to be seen is in the processes for selecting and financing these projects. The Inquiry Report does not act as a cheer squad for shifting all responsibility in future to the private sector, and there is explicit recognition that the private provision of infrastructure should occur only where there is a profit motive to do so. More importantly, the report recognises that, regardless of who plans and builds the infrastructure, the cost will have to be paid either directly by users and other beneficiaries, or in the alternative, indirectly by taxes.

The phrase ‘no magic pudding’ is used quite deliberately. Getting debt off government books and onto the books of other entities or special purpose vehicles only reduces the actual liabilities of governments if it’s accompanied by effective pricing for using that infrastructure, and sustainably transferring risk as a consequence. Pricing reform is not just essential to managing liabilities; it is also essential if we are to meet our expectations for the ever-increasing quality and quantity of infrastructure services. The Inquiry looked very closely at the situation with regard to roads – both funding and governance. By governance, I mean the structures that we use to allocate resources, because in the wider economy, we generally use prices to allocate resources. This means that projects are often self-selecting – they’re the ones that consumers will pay for. Prices follow – or try to influence – consumer preferences. This happens less in infrastructure. Of course, we do charge people for their use of some infrastructure, including electricity networks and water systems, but these charges are limited to cost recovery. Therefore, it isn’t consumers who are making the decisions, it is engineers and regulators who are determining who will receive what service. We can see what happens when we want to introduce some better form of allocating access – say, one reflecting the preferences of users – when there is a drought or a power shortage. We don’t use price. Price in those areas of infrastructure is limited to cost recovery, and is not about efficient allocation, or even fair allocation. We don’t use price to allocate effectively.

Figure 1: Road use and real net revenue from fuel excise tax

Source: Productivity commission

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A role for road pricing In roads, there isn’t even cost recovery. Figure 1 contains a close proxy for future expectations of road provision (the vehicle kilometres travelled on average in Australia each year). Contrasted against this is the trend in revenue from the primary federal source of ‘payment’ for roads, the fuel excise. It generously includes the Budget proposal for restoration of fuel excise indexation, although that is now in some doubt. Despite this generosity, the gap and the direction of change is very clear. Our expectations as measured by vehicle kilometres travelled are well in excess of these payments. We do acknowledge in the Inquiry that there are arguments that can be made about other funding sources such as registration charges, which reduce the size of the gap. Unfortunately, they do nothing to suggest that the gap will close. We need a new pricing system, and it is possible to envisage one. Technology is inevitably transforming our vehicle fleet so that each vehicle will be independently identifiable, conceptually in the same way as mobile phones. Each vehicle will communicate with roadside monitors, and with other vehicles. The United States Government has recently announced that it intends to mandate such technology for vehicles. The driving force behind this is safety, since the technology that the United States plans to use will be designed to reduce collisions, in the same way that aircraft have technology to avoid collisions. The National Highway Safety Administration suggests that 600,000 collisions could be avoided in the United States each year, and many lives saved. And it won’t hurt that there are United States firms that are very interested in these applications. You’ve heard about the Google cars that have, for some time now, been logging up thousands of miles in driverless form on United States roads – they are not alone. This technology may sooner rather than later deliver the capability for a new pricing system. Capability does not, of course, guarantee application. No-one expects to reform road pricing overnight. The incentive beyond safety that will encourage take-up of technology like this, however, lies in Figure 1: a new pricing system will be needed. It won’t be a tax, and it won’t apply everywhere. Yet, without it, taxpayers will foot more and more of an increasing roads bill.

This technology may sooner rather than later deliver the capability for a new pricing system. Capability does not, of course, guarantee application Even the wider use of toll roads will be insufficient to offset this gap. As a number of failed toll roads have proven, there is a limit, in terms of consumer behaviour, to the use of the toll; whereas, electronic pricing need only be small, measured in the cents, every time a vehicle takes advantage of a bridge or grade-separated rail crossing. In the short term, the immediate need is for a new governance structure to allow confidence between consumers and suppliers of roads, believing that this new system could be effectively implemented.

Road user groups The new governance structure in our report is designed to take up a variation on the New Zealand road fund model that would, initially, bring road user groups into the decision-making process for major infrastructure.

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Such a step would have two major benefits: • The knowledge of the limited scope of current funding to meet all expectations would be shared more widely via these groups and out into the community. • The preferences of users could be incorporated into future planning in a way that simply consulting does not achieve. Moreover, roads and motorist associations, and heavy vehicle groups, will only be able to contribute if analyses are made available to them. They won’t just expect to see a list; they’ll want to look at the costs and benefits of each of the projects, and they’ll probably want to propose some of their own. Such a system encourages better planning, which is the largest failure in major infrastructure projects. Effective infrastructure planning desperately needs more incentives like those that this model provides. A road fund model is a win-win for infrastructure investment. Since the consumer groups – roads associations and heavy vehicle groups – that we advocate forming the road funding model (alongside the traditional roads agencies) would have to be trusted with the analyses, the doubtful claims of commercial confidentiality when governments do not publish

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cost-benefit analyses could be tested, as these groups will be expected to consult with their members. Publication of these analyses would – once done consistently and persistently – create the pipeline of projects that private investors have said that they need for superannuation to play an even larger role in investing in long-term infrastructure. The recent innovation of state governments to allow unsolicited bids for private investment means that investors could also contribute to planning for these projects. Investors will see the analyses in advance of any announcements, and provide advice that links back to the revenue system, which links back to the pricing system that is the best means of getting efficient allocation of resourcing. It all fits together, and could be done in advance of any commitment by ministers, assisting governments’ decisions on which projects might become PPPs and which would remain traditional publicly funded design and construct (D&C) projects. Finally, the clash between probity and innovation can be dealt with by getting innovation input up front. That is, the clash was put to us that innovative ideas cannot be put to government once the tender process is underway due to restrictions in the probity process.

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If analyses are published up-front, innovative ideas come through and can be revised before being put to a minister who can then decide if the ideas progress, and then that forms part of the final tender option. Some of this process is done occasionally and informally around jurisdictions today, but that is not an excuse to avoid formalising it. There will be no pipeline without a formal structure, just as there will be no incentive to design and analyse in advance of the press release. In time, after a few years’ experience of governance structures like these, states and territories should be able to call upon Federal funders to align Commonwealth funds with their consumer-driven preferences. Around that time, too, technology and electronic pricing may be able to play their part in shifting roads into a more market-oriented pricing structure, which is why I suggest that the process may take five to seven years. There is much more explored in the Inquiry Report, including privatisation, a better role for Infrastructure Australia, the significance of costs such as land in the high cost of urban projects, the scope for productivity improvements, and reducing cost pressures. The overall narrative, however, is one in which we are trying to align in-depth design in advance of announcement, with innovation and choice of financier and greater opportunity for price reform. All of this would lead to a better informed public and investment decisions closer to consumer preferences, and, ultimately, to the creation of the public pipeline of investment opportunities, in cost-effective and well-selected infrastructure. While roads may seem to be the dominant focus in this narrative, it is simply because it starts out with the least developed resource allocation system of all. I don’t doubt that the benefit of the level of transparency that’s implied by this process will be of benefit in other parts of infrastructure. In the last four years, the electricity transmission industry has spent a similar amount on upgrading electricity transmission and distribution assets, as the NBN was originally forecast to cost some $40 billion. These numbers are large, with large implications, yet awareness of one number is much greater than the other. This is hardly in consumer interests. Lest it be thought that the emphasis on roads means that rail – in particular, urban rail – and other public transport is once again given the short

straw, I observe that nothing will make clearer to the public the value of alternative investments in weekday commuting solutions than the system we are advocating. Urban rail will not necessarily be able to adopt the pricing reforms that we suggest, but as the primary alternative to some major road projects when viewed in terms of outcomes, it can only benefit by better analysis of roads and better linkage to consumer willingness to pay.

Australia’s apprenticeship system It is quite normal in inquiries as deep as a Productivity Commission review to come across issues that time does not allow us to pursue. An example of this is the apprenticeship system. We have put a specific recommendation to the Government to review it in its entirety. Both unions and employers told us during the Inquiry that the apprenticeship system was struggling. Submissions pointed to a number of persistent deficiencies in attracting and sustaining apprenticeship levels, such that major shortages occur with regularity both in downturns – when apprentices are not taken on, by short-sighted management – and in upturns, such as the mining boom, where the deferred return from Volume 5 Number 1

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being an apprentice is quite rationally an unattractive option for young people who can obtain high-paying positions with much less prescribed qualifications. It is a complex field that requires comprehensive analysis. Data shows that apprentice numbers increased strongly in some fields during the boom, but completion rates fell. The temporary attraction of higher pay for lower (or no) qualifications was undoubtedly alluring. For example, a first-year welder will make about $10.68 per hour. His mate driving a truck on the same site might make two to four times that, depending on the industry and the location. It is also likely that the incentives to make a rational choice in favour of deferred income, which a young apprentice must make, may be weakening, as our society increasingly values immediate satisfaction of needs. And for adults, the incentives to retrain as an apprentice seem even less attractive, for both employer and employee. If an employer is prepared to agree to an adult employee switching to become an apprentice and remain with the firm, that employer generally has to pay the pre-existing wage. For an unemployed adult with any debt, and certainly with a mortgage, the option to retrain, as, say, an apprentice welder, also seems rather unsustainable. Completions appear to be a significant weakness, with completions around the 90 per cent level for some higher-level traineeships not unusual, but traineeships are shorter-term courses. Completions

in apprenticeships, by comparison, are around 50 per cent. These factors suggest that a comprehensive review of apprenticeships, and how incentives inherent in the current structure do or do not work to support entry, completion and retraining, is necessary. The Federal Government recently announced some fiscal changes to the way that apprenticeships are funded, but our suggestion of an Inquiry was aimed at a much wider target than government funding. It is about whether the system continues to serve its original, and still valuable, purpose. Full text of Peter Harris’s presentation is available on the Productivity Commission’s website: www.pc.gov.au.

Peter Harris AO, Chairman, Productivity Commission Peter Harris is Chairman of the Productivity Commission. Mr Harris 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 Environment; Primary Industries; and Public Transport. He 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 and 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, he 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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COMPANY FOCUS

SYDNEY AIRPORT EMBARKS ON FIVE-YEAR GROUND TRANSPORT SOLUTIONS PROJECT In one of its biggest infrastructure projects in more than a decade, Sydney Airport has embarked on a broad suite of ground transport initiatives designed to ease congestion in and around the airport and support future growth. Over the next five years, projects will include transformative road works at the T1 and T2/T3 terminal precincts, a new ground transport interchange and multimodal storage and car park facility, and a hotel at T2/T3 to service passenger demand for accommodation near the airport. Sydney Airport Chief Executive Officer Kerrie Mather says that with more than 150,000 visitors travelling to and from the airport every day, including more than 28,000 airport workers, the key priority is to improve the passenger and airport user experience. ‘We’ve listened to our passengers and are working to make it easier to travel to the airport, whether by car or public transport,’ Ms Mather says. ‘With 74 million passengers per year forecast by 2033, we’re building the road and public transport capacity now to support continued tourism and travel growth.’ Construction work on the first of Sydney Airport’s ground transport solutions initiatives began in July with the start of improvements to

the road network in the T1 terminal precinct. The first stage of the T1 project, targeted for completion by the end of 2014, includes construction of a new centre road and a dedicated, more efficient public pick-up area. When complete, these changes will result in greatly improved traffic flow in and around T1.

The new one-way road system for the T2/T3 precinct, expected to be completed by 2017, will increase the capacity of major intersections and reduce traffic congestion. The new ground transport interchange at T2/T3 will include a bus/coach station to encourage greater use of public transport.

UPGRADING YOUR JOURNEY

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COMPANY FOCUS

MANAGING RISK KEY TO SUCCESSFUL RAIL PROJECTS In Australia, the current focus is on developing innovative solutions that meet the increasing demand for faster, safer and more reliable rail transport systems. Rail transit projects are by nature more complex and technically challenging, and have a higher risk profile than any other transportation projects. The funding issues, the need to liaise with different stakeholders, and the potential integration issues with existing systems result in additional project complexity. Rider Levett Bucknall believes that successfully managing risk is the key to successful rail projects, and is critical to the future of rail in Australia. This has been a key focus across the firm’s multibillion-dollar portfolio of rail infrastructure project experience, which includes the Sydney Light Rail, the Canberra light rail, the Northern Sydney Freight Corridor, the Southern Sydney Freight Line, the South West Rail Link and the Gold Coast light rail. The firm has also recently been appointed as head cost consultant on the $11 billion WestConnex project. In developing a proposed risk allocation for a project, it is important to recognise that non-standard risk transfer, as allocated in Australia, may cause confusion to international players. Although the majority of players are largely comfortable with standard-type risks, the risk areas that may need to be given additional consideration in rail projects include: • revenue risk – in general, the private sector is unlikely to take a significant level of revenue risk in a manner that provides value for money, and, therefore, the demand/patronage risk will remain with government, as the majority of levers that affect this will remain as a matter of policy • inflation risk – the private sector is very wary of the fluctuating cost of commodities; in particular, the uncertain price of energy in the current market. It is becoming increasingly difficult to transfer construction price risk over long periods, and also to transfer longterm maintenance risk • interface risk – the nature and extent of this risk will vary, based on the outcome of the procurement strategy. In general, where government does not opt to take interface risks, it can be managed, but this needs early interaction with the parties

36X

• reliability/availability – Rider Levett Bucknall’s experience in this sector has found that the private sector is comfortable with the bespoke regimes that have developed • train acceptance – it is vital that the acceptance program is based on clear, objective measures. This was an area of significant negotiation on the RailCorp Rolling Stock PPP transaction, in order to meet the requirements of funders. While cost overruns on major projects are often associated with the way risks are identified and managed, increasingly, major infrastructure projects use risk modelling techniques with the aid of risk modelling programs. As part of its estimates, Rider Levett Bucknall uses one of the most recognised risk programs, @RISK, which assesses the risk outputs and provides probability levels for both the inherent and contingent risks. These levels are typically expressed at P50 and P90 probability levels. The process is valuable in identifying those risks with the biggest potential cost impacts, and also prompts mitigation measures to be employed rather than reacting when this risk materialises. No software program, no matter how brilliant, is a substitute for real knowledge and experience gained from working on similar projects. Rider Levett Bucknall specialises in every cost facet of the lifecycle of rail transport systems – from planning, forecasting, modelling and feasibility studies, to asset management. Globally, Rider Levett Bucknall has over 3500 people in 120 offices, with its services informing a diversity of project types, locations and clients, and responds to environments as diverse as Asia, Oceania, Europe, the Middle East, Africa and the Americas.

Matthew Harris

For further comments, please contact: Mr Matthew Harris, Director Rider Levett Bucknall Phone: 02 9922 2277 Email: matthew.harris@au.rlb.com Web: www.rlb.com

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Delivery of major projects in Australia – panel discussion

Delivery of major projects in Australia – panel discussion The need for a coordinated approach to project sequencing and an up-front analysis of project objectives were key themes of the Project Delivery Panel at Partnerships 2014. Chair: Michael Zorbas, Head of External Affairs, Lend Lease Panellists: • Jim Betts, Chief Executive Officer, Infrastructure NSW • Ken Mathers, Chief Executive Officer, Linking Melbourne Authority • Peter Regan, Chief Financial Officer, WestConnex Delivery Authority • John McEvoy, Bus & Train (BaT) Project Director, Projects Queensland

Key points: • The increasing trend toward longterm state infrastructure plans has provided a better opportunity to sequence projects across the national infrastructure market. • A shortage of experienced, high-quality project directors remains a challenge for all parties, but particularly the public sector. • A reinvigorated Infrastructure Australia offers the opportunity to better coordinate procurement policies and timing across jurisdictions. • Unsolicited bid processes have a role to play, but they should only be applied in selected circumstances.

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Michael Zorbas (MZ): Can each panellist give a brief overview of the projects or initatives they are involved in? Jim Betts (JB): Infrastructure NSW (INSW) is an advisory body to the New South Wales Government that was established around three years ago, when the O’Farrell Government came to office. Our primary focus is to provide advice to the Premier and to the rest of the Government on the priority investments in infrastructure and that front-end selection and assurance function. At the moment, we are preparing advice for the Government in the context of the announcement that if re-elected in March 2014, it will enter into a long-term lease of 49 per cent of electricity transmission and distribution assets, which is expected to yield proceeds of around $20 billion. The Government has given some pointers around priorities that it wants us to have regard to in preparing that advice – things like the extension of rapid transit; single-deck, driverless trains through the

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Delivery of major projects in Australia Project – panel Delivery discussion Panel

heart of Sydney, the CBD and out to Bankstown and the west; the WestConnex project, and a whole series of other allocations around regional water security, schools, hospitals, and sport growth. That’s our main focus at the moment. MZ: Where is the INSW State Infrastructure Strategy at currently? JB: Our intention is to provide the advice to Government before the end of the year, and the Government will respond to that. Our advice will be published in accordance with our legislation, and that will enable the Government to formulate its position going into the Christmas break and up to the state election on 28 March 2015. MZ: Peter, can you tell us about your organisation? Peter Regan (PR): The WestConnex Delivery Authority (WDA) is tasked with doing exactly what it says: ensuring the delivery of the WestConnex scheme. As we currently sit, that is around $15 billion of capital expenditure over the next eight to 10 years, and we’re progressing that in three stages. The first along the M4 corridor, the second on the M5 corridor, and then the third joining those two together (see Figure 1). As Jim mentioned, we are also doing work and coming back to Government in the next month or so with a further business case on potential extension of that scope to the north and south. That work is progressing at the moment. In terms of where the project is up to, we’re in the procurement phase for both Stage One (the M4) and Stage Two (the M5). We are on target to have our first construction contract awarded by the end of this year, with construction to start next year. We are looking to award the M4 East and the M5 East, which are the two main tunnel projects, next year, and both are on schedule to be delivered by 2019. MZ: Ken, could you please give a bit of an overview? Ken Mathers (KM): The Linking Melbourne Authority and its predecessors have been responsible for all of Melbourne’s large Public Private Partnership (PPP) road projects, stretching back around 20-odd

years. Some of the team members that work with me now have been there all the way through CityLink, EastLink, Peninsula Link and now the East West Link. There’s a lot of experience in the team. Recently, the East West Connect consortium was appointed as the preferred bidder for the first stage of the East West Link, which is an incredible project with 4.5-kilometre-long, twin three-lane tunnels, and very significant viaducts. It’s a high-risk project, technically. We had three outstanding bids from the private sector, and we were absolutely delighted with that. At the end of the day, there was a pretty tough call with our recommendation to the Government about who should succeed; such was the quality of the bids. We’re hoping to achieve contractual close by the end of this month and then allow East West Connect to move to financial close [Editor’s note: Contractual close was achieved in late September]. We’ve got final planning approval pending from the Minister for Planning, and we’re very hopeful of achieving that soon. It’s been a very challenging Figure 1: Map of the WestConnex programme

Source: WestConnex Delivery Authority Volume 5 Number 1

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Above, L to R: Michael Zorbas, Lend Lease; John McEvoy, BaT project; Ken Mathers, Linking Melbourne Authority; Peter Regan, WestConnex Delivery Authority; Jim Betts, INSW.

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Delivery of major projects in Australia – panel discussion

Figure 2: Artist’s impression of the BaT Project Department of Transport and Main Roads

Source: Queensland Department of Transport and Main Roads

environment that we’ve been working in, but we’ve gone extremely well. I think that the private sector Reference Design Overview Report – September 2014 participants have been magnificent in all of our dealings. We ran a highly interactive process, with over 100 meetings in total with the three bidders. We’ve also been finishing off work on Peninsula Link, which was built by Southern Way and Abigroup, and opened about 20 months or so ago. It’s a very successful road, and it’s going very well as a PPP availability model. There are just a couple of minor issues to resolve before we hand it over to VicRoads for their ongoing management. MZ: John, can you tell us about Projects Queensland? John McEvoy (JM): Projects Queensland was set up by the Queensland Government when it came to power at the last election. Basically, the view was that Projects Queensland would head up the development of all business cases that may involve private sector funding; prosecute those projects through government; address the funding needs, funding opportunities and financing solutions; and then work with line agencies in order to take projects into the market and get them delivered. I’m one of the project directors in Projects Queensland, and I’m heading up the Brisbane Bus and Train (BaT) project. The project itself is actually quite innovative. The genesis of it commenced a number of years ago with the Cross River Rail proposal, which was a rail project running north-south under the Brisbane River in order to duplicate cross-river capacity for the rail network. Coincidentally, at the same time, Brisbane City Council, which runs the majority of the bus network, was weighted down with the success of Brisbane’s bus network expansion. The Northern Busway, the Inner Northern Busway, the Eastern Busway and the South East Busway – a lot of

BaT project

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busways built in Brisbane – all lead into Queen Street. Brisbane City Council recognised that it was running out of footpaths, platforms and offloading facilities in the centre of the city, so it came up with a project called Suburbs2City, which was about duplicating cross-river access into the city, and also then dealing with the supply of further bus platforms in the CBD. Quite cleverly, what’s come about is almost a combination of both of those projects. If we are trying to get both buses and trains into the CBD, the concept of doing it together and providing integrated bus and train solutions is quite innovative. When we look at the public transport modelling, some of the benefits flowing from that assessment are quite incredible – including the major benefit of a new railway station in the southern end of the city, which has always been very hard to service from a public transport perspective. With Central and Roma Street stations sitting at the northern end of the city, modelling is showing us that with the new project in place, we are actually going to get a significant number of people wanting to jump off rail at Roma Street, get onto a bus and then get off at George Street. So, opportunities for enlivening and basically redistributing the footpath use and the accessibility in the city itself is going to be quite a major accomplishment of the project. In terms of status, the business case is in its final stages – we’re looking to get that to Cabinet for consideration in a short period of time. MZ: I’d like to look at the issue of project sequencing and the capacity of the sector to concurrently deliver major projects down the east coast. Do the panellists have a view? JB: I think that it’s fair to acknowledge that states in general don’t do as much information sharing as they ought to – we could do a hell of a lot more and we always say that. We go to meetings with each other, generally under the auspices of the Commonwealth, and state government representatives look at each and say, ‘We really should be comparing notes,’ and it really doesn’t happen as much as it should. That having been said, I’m not sure that there is a huge problem at the moment in terms of a lack of coordination leading to adverse outcomes. There’s a heap of activity planned in Sydney over the next four years with projects like the North West Rail Link and CBD South East Light Rail. The main challenge as far as the Commonwealth is concerned is to deal with the consequences from the fall-off in the mining investment boom. The more infrastructure that can

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be brought to market during that time, the better. If the purpose of coordination and sequencing is to ensure that the market doesn’t get overheated, that’s not looming large as one of our top 10 problems right now. Rather, a whole bunch of projects that were committed to in New South Wales when the O’Farrell Government was elected in 2011 are all, with the possible exception of WestConnex – although, we are looking to accelerate that – looking at coming to a conclusion around the same time in 2018–19. So, one of the focuses of the State Infrastructure Strategy that we’re working on is to articulate the pipeline that will follow on from that. One good thing is that governments are much better now in terms of articulating long-term plans. I think the Queenslanders started it with the South East Queensland Plan, Victoria followed in late 2008 and New South Wales has done the same thing with the State Infrastructure Strategy. I think the presence of Infrastructure Australia on the national scene gave almost a pretext, or permission, for jurisdictions to plan outside of the normal forward estimates cycle, so that’s been a positive thing. MZ: Peter, your perspective? PR: We all have to recognise that state governments are separate jurisdictions and they’ve always got their own political objectives. They’re not going to defer or line projects up so that they’re in conjunction with other states if that’s cutting across those objectives. But there is a reasonable amount of communication, certainly Ken [Mathers] and I, and the various state treasuries, do discuss projects and where we are up to. We welcome the recent announcement on East West Link because we can now start the M5 East procurement with the market having more knowledge of who is committed where. There is a certain degree of knowledge sharing and consciousness of where each other is on projects. And certainly, with the amount of things going on at the moment in the bidding phase, it’s very important for each government to be well aware that there are capacity constraints in the market. It’s not necessarily just constraints around building projects, it’s bidding projects and ensuring that we’re not getting too many things with deadlines right on top of each other, so that contractors and financiers can actually try to put their best bidding teams forward each time. We’re probably getting better at it, and it’s a good space

for the industry to be in, generally, if there are a lot of things happening and they’re not just happening in one city, because there are different ideas and different approaches being trialled. MZ: Ashurst’s most recent Scope for Improvement report provided some interesting perspective on the skills shortage, particularly at the project director level. What’s your view? PR: It’s a very fair observation. There are not a lot of really skilled project directors on the government side, and as government procurement progresses, we’re in a phase where there is a lot more interaction with industry through those processes. There is potential for more innovation, so you have to have people on the government side with greater skills to be able to manage that process to ensure that we don’t get completely bogged down in probity-driven processes. That is an area where there is probably scope for improvement in terms of the general skill level on the side of the government and, again, in the bid phase as well as during the delivery phase. Having people who have the experience and the capability to make pragmatic decisions in the interests of the project, but with consciousness of the broader picture, is actually important. Governments at the moment are probably taking a bit more risk on some of these procurements – certainly in the WestConnex context. Building as the WDA inherently that means that we are internalising more of the front-end development risk than using some of the previous models for toll roads – so we do need the right people with the right skills on the government side. KM: I agree with Peter and Jim. The state and federal governments and oppositions all have their own agendas, and major infrastructure projects sometimes play a key role in those policies and what they’re trying to promote to the public at large. It’s virtually impossible for bureaucrats to really control that process. As Jim indicated, the Victorian Government has previously developed a transport infrastructure plan, and quite a number of those projects have been delivered, so a pipeline was created and certain projects have proceeded. It’s very difficult to look over the border into New South Wales or Queensland to try and judge when we should bring a project to the market. When federal funding is involved, Infrastructure Australia naturally has a key role, and it’s got to probably lead the reform agenda at the present time. To that end, Infrastructure Australia has really got to develop the relationships Volume 5 Number 1

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Figure 3: Map of the East West Link

Source: Linking Melbourne Authority

with each state further. Previously, John Fitzgerald [Interim Infrastructure Coordinator, Infrastructure Australia] served in Victorian Treasury and he knew all the projects that were on the drawing board, and ensured that Treasury had a great relationship with those of us who were trying to deliver the projects. There was always a lot of dialogue going on, and that continues today, which is really good. The other thing is that there’s an incredible effort to get these big infrastructure projects to the marketplace, but it’s not always plain sailing. The East West Link came out of the study led by Sir Rod Eddington in 2008, and some of the rail projects in that plan have been delivered or are very close to being finished. But there’s a heck of a lot of planning that has to go on, and there’s a lot of business case work. We worked on a business case for Jim [Betts] when he was heading up the Department of Transport here in Victoria – it took us about 15 months and it was a very intensive exercise. As a result of that business case, the Victorian Government decided to proceed with Stage One of the East West Link, so I’m very pleased with that outcome. But the planning processes for these large projects are very detailed, indeed. Planning for the first stage of the East West Link has taken about 20 months by a dedicated team within the Linking Melbourne 42

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Authority, supported by a lot of consultants and specialists presenting all of that planning work and reports, as our current legislation requires us to do, and we’ve done all of that. For some of our projects, we also have to satisfy the requirements of the Federal Government’s Environmental Protection Biodiversity Conservation Act, so that adds another level of complexity. Bringing these big projects to the market requires a lot of background work, so while you are doing that, you can’t be particularly worried about what’s going on in the other states – you’ve just got to get on with it and present the opportunity to the government for them to make a decision. MZ: John, what are your thoughts on the industry’s capacity to handle these concurrent projects? JM: I’m not too concerned about the capacity of industry to deal with the infrastructure challenge. A decade ago, we didn’t have Spanish, Italian or French participants in the market, and they’re here now. Internationally, we are seen as a viable infrastructure market. Secondly, if you’re able to sequence your procurement, you won’t fatigue bidding teams and you do get the ‘A’ bidding teams onto the key projects. That’s probably the most critical issue for governments. You can move around a project’s bid

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phase by two or three months, as we have a very good idea of what we think is happening in New South Wales and Victoria, and we’re trying to plot our way now as to where to position projects in order to get access to the good bid teams. Our perspective is that if you do get bid teams that have been together and have done their job, and then can immediately move straight on to the next project, then it’s normally the next government that benefits from that because their capacity to innovate, and their capacity to put together good deals and good offers is enhanced. So, I’d always try to get a bid process in the sweet spot if we possibly can. In terms of a shortage of project directors on the government side, unfortunately, governments have been very good at promoting people who are good at what they do, and that’s tended to mean that good project directors get promoted out of the infrastructure sector and into something else. Les Wielinga (former Director General of Transport for NSW) was a very good project director before becoming a Director General. Dave Stewart was a very good project director in Queensland, and is now working in New South Wales as a Departmental Secretary. Governments, in a sense, struggle a little bit with the concept of project directors in terms of how you define their permanent roles in government. I think that is part of why that issue exists. It is a challenge. JB: Having a pipeline of projects enables you to start doing the succession planning. So, I think of Ken [Mathers] working on CityLink in the 1990s; you look at Rodd Staples (Project Director) on North West Rail Link, Corey Hannett on Regional Rail Link in Victoria – you can see that generation of really high-calibre project managers coming through. It all helps to have a pipeline. MZ: I want to explore the Federal Government’s role in infrastructure, and particularly Infrastructure Australia. What’s the ideal role for Canberra to play? JB: The main thing that we’d like from Canberra at the moment is role clarity between the Department of Infrastructure and Regional Development, and Infrastructure Australia, and I think that both organisations would want that themselves. Infrastructure Australia has been an unambiguously positive thing in terms of lifting the debate about infrastructure beyond the narrow confines of the forward estimates period, and encouraging really good planning. I think that’s been the best of Infrastructure Australia. The worst

of Infrastructure Australia has been the paralysis by analysis, so that after six or seven years of Infrastructure Australia’s existence, if you looked at the ‘Ready to Proceed’ list, nationally there were only half a dozen projects in there – a couple of managed motorway projects, and a few others. And certainly I felt some frustration in Victoria working on the Melbourne Metro project. There seemed to be constant requests for analysis, which would clarify whether the benefit cost ratio was 1.19 or 1.18. I thought that there were opportunities to cut to the chase there. I think that the re-establishment and refresh of the Board is a really positive thing. There are really quality people on there like Peter Watson, Michael Carapiet and Dr Kerry Schott, and that will continue to stand Infrastructure Australia in really good stead. But I think that maybe when it drifts over into unsolicited policy generation, that’s where a bit of frustration comes in, in terms of who our interlocutor is at the Commonwealth level. Should we be talking to Infrastructure Australia, or should we be talking to the Department? Recognising that Infrastructure Australia is an advisory body, and that the Department is the one that is associated with the ultimate funding decisions, is important. What Infrastructure Australia shouldn’t do is generate a huge standing army of analysts in its own right. By far, the best way of proceeding is to try to inculcate good practice into the jurisdictions and enable them to produce the business cases, and do the assurance around those business cases. These guys know how to do business cases, they know how to assure them, and they have their investor roles properly thought through, and their high-value, high-risk type process – as opposed to Infrastructure Australia replicating what should be the responsibility of jurisdictions both at the development stage and the delivery stage. Where we interact with the Commonwealth once projects have been funded, it’s a pretty good interaction. The Commonwealth has been pretty good at striking the right balance between making sure it has its eye on the ball in terms of following the money, ensuring that good governance is in place, but not getting intrusively over-involved in projects. The Department is getting that balance right. continued on page 46 Volume 5 Number 1

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COMPANY FOCUS

EIG: BUILDING A REPUTATION FOR TRANSACTION EXCELLENCE In 2006, four industry leaders established Everything Infrastructure Group (EIG) in response to the increasing scale and complexity of projects and client demand for better business outcomes. In eight years, EIG has grown from four to 70 full-time employees, with offices across the eastern seaboard and current significant transaction roles in client projects valued in excess of $20 billion. Recruitment of experienced professionals enables EIG to consistently deliver on its founding promise — to measure success by its clients’ success.

EIG was born out of a collective passion to be ‘best in class’ for client service, and to leverage industry expertise and individual reputations in the pursuit of transaction excellence. Founders Peter Gemell, Doug Cowan, David Longmuir and John McLuckie fill active project leadership roles. Their consistent track record across EIG’s service offerings of strategic advisory, infrastructure development, delivery and asset management has attracted other respected industry leaders to the team, including the former New South Wales Transport Director-General Les Wielinga, and the former Chief Executive of the Brisbane Airport Link, David Lynch. Peter Gemell casts his mind back to 2006 and the inspiration for EIG’s foundation. ‘We had strong relationships with key decision-makers and proven performance with major delivery entities. We had a wide network of clients and associates, and a broad range of industry skills across infrastructure, including roads, buildings, trains, airports, ports, dams, mines, processing and asset management.’

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Changing client needs had created a gap in the marketplace for a new entrant, according to David Longmuir. ‘Clients were looking for better business outcomes from existing investments. They valued long-term relationships and alignment of values with known professional service providers. We also identified an increased demand for high-quality services and strong commercial skills.’ EIG’s newest senior appointment, Les Wielinga, says alignment with client needs is an enduring focus. ‘EIG continues to adjust itself, as an organisation, to meet client needs and to enable the administration of a growing company.’ Signature projects at the time of EIG’s launch as a new business indicated the strength of demand for its service offering, and included: transaction management of Airport Link and Northern Busway (Brisbane); transaction management and project management delivery for the Sydney Water head office at Parramatta; transaction and delivery advisory for the Port Botany

expansion; procurement of the Sydney Desalination Plant and negotiation of the distribution network; Cable Crossing Botany Bay; transaction management for numerous Pacific Highway upgrade sections for Roads and Maritime Services; and transaction management for Sydney Metro, North West Rail Link and Sydney Light Rail. Significant growth milestones for the firm occurred in 2012 and 2013 when it merged with Addison Consulting and Metis Advisory, allowing EIG to provide service excellence in Brisbane and Melbourne. Leaders in the Melbourne and Brisbane offices, Mike Kee and Mike Gould, said the mergers have been successful because of the alignment of business and service ethics, competencies and employees’ desire to be integral members of the EIG team. The diversity of project work and the challenges it presents is one of the main reasons that employee Tony Eames joined EIG. ‘I wanted to work in a supportive and collaborative team environment with the opportunity to continually learn.’ The experience of employee Kathryn Coutts reflects this value proposition: ‘Working with EIG’s experienced practitioners provides valuable learning experiences. The small-medium size of the company allows all employees to have a voice and provide input into their roles and career direction.’ A workplace with a focus on excellence and personal growth was a key factor in employee Steven Bartlett’s decision to join EIG. ‘The employees were all experts in their fields, and the organisation recognised the value of good people and created a positive working environment that retained them in the organisation. The culture and values of the people in the organisation have grown stronger and adapted as the company has grown.’ The opportunity to work on nationally significant infrastructure projects and deliver transaction excellence has been a drawcard for new recruits. ‘Transaction excellence’

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COMPANY FOCUS

Pictured Left to right: Peter Gemell, Doug Cowan, John McLuckie and David Longmuir

is not a term used lightly by EIG’s people. It means everything. Doug Cowan explains: ‘Transactions are the mechanisms our clients use to implement change, and each transaction presents risks and opportunities. The quality of each transaction is fundamental to our clients’ success, because effective outcomes deliver their business case. We are the partners entrusted by our clients to deliver excellent transaction outcomes.’ Clients agree. General Manager of Major Projects for Queensland Motorways

David Wright says: ‘As General Manager of the $2 billion Gateway Upgrade Project, I experienced, firsthand, EIG staff involvement in providing transaction advice over an eight-year period, including procurement and delivery phases. The project was delivered seven months ahead of schedule and under budget. The project also included the negotiation and agreement of a $200 million scope enhancement requested by the owner. The project was delivered within a strong relationship framework.’

Peter Gemell says relationships and values are critical to the way EIG delivers its services. ‘Our key values are integrity and respect. We build long-term relationships based on performance and trust. We measure our success by our clients’ success. We have a shared destiny with our clients, our people and the people we affect. ‘We aim to continue to attract exceptional people and clients who share the same values and commitment to delivering transaction excellence.’

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continued from page 43

The demonstrable value for money that comes from marketbased competition is clear PR: I agree with Jim. The changes in Infrastructure Australia and the relationship with the Department have been really positive. We’ve been able to work really well at developing financing structures with them by being fairly open and direct as to what they are trying to achieve and what we are trying to achieve. In the long term, there is potential for more objective criteria surrounding when states can expect that there might be Commonwealth funding available in some form. Historically, the allocations inherently have a degree of political overlay to them, and that’s to be expected, but clarity on a more objective basis is helpful. Certainly, some of the more alternative approaches – such as the concessional loan structure that we are looking at on WestConnex M5 – are really positive steps and something that is well placed with the Department rather than with Infrastructure Australia. At the same time, it’s important that Infrastructure Australia supports the underlying project from the start so that you don’t have the risk of going down a path and then finding that a particular project was not a priority. It’s about clarity and objectivity, and also maintaining dialogue that at the moment works very well. MZ: How can industry become a better advocate for these projects? JM: Governments seem to have to take the frontrunning on these projects. It’s been interesting watching the engagement of industry through organisations like Infrastructure Partnerships Australia (IPA) on the concept of asset recycling and contributing to the debate. It’s been quite useful to see IPA actively contribute to that debate and provide supportive comments to government. With road projects, you often have some vested or community group that can push a project in a certain direction. In those instances, industry has to stand back and let that debate occur. The focus for industry is to work with government and keep the fundamental message moving forward, that we do 46

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need to recycle our asset base, and that government does play a role in increasing investment to boost the economy. MZ: Looking at the unsolicited bid frameworks, what’s worked well and what hasn’t? Is there a danger that unsolicited bids might be seen as a replacement for a broader, deeper public sector planning process? PR: That is an issue, and industry needs to understand that unsolicited proposals certainly do have a role, and potentially a very positive role, but that role is not in circumventing or replacing the standard of procurement from government, which is always going to be a competitive process. The demonstrable value for money that comes from market-based competition is clear. That said, we’ve had an excellent illustration of the benefits of unsolicited proposals in Sydney with the NorthConnex project, which we have been working on with Transurban and their partners. That is a very unique opportunity where a piece of longneeded and well-understood infrastructure is being delivered a lot earlier than it would otherwise have been delivered, and probably with more innovation than would have come out of a conventional process. That has worked because of the approaches taken by the Government and Transurban in working collaboratively after an initial assessment found that something could be done, that otherwise could not have been done without that direct negotiation. It is to do with joining existing toll roads and with the ability to apply network financing across a group of roads that Transurban already has concessions over, so you do have a genuine uniqueness. That process is using the unsolicited proposal framework to effectively trial an alternative approach to procurement, separating design and construction from financing, still with a very competitive design and construction process, and a financing structure that also works and shares upside with the state. This is a really good outcome that has given a lot of confidence when it comes to projects like WestConnex to go down a similar path, and to run a design and construction process that isn’t linked to the provision of finance. There are real positives. Clearly, it is a ‘horses for courses’ approach. There are examples in Melbourne where the unsolicited proposal framework is being used, particularly where you have incumbent owners of infrastructure, and it makes a lot of sense. But it has to occur where there is a unique opportunity, and industry

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needs to clearly understand that they have to inject as much competition as possible and demonstrate as much of a competitive process as possible. Simply trying to lock in equity returns at the start of the process and then work out the risks and how they are allocated doesn’t really work. It has to be a genuine two-way negotiation. MZ: Is there a culture of fear in the public sector that good ideas can’t be properly vented because they might make their way into the press or create tension in the minister’s office? How can we incentivise public servants to be more entrepreneurial? JB: I don’t sense a huge fear that is crushing the capacity to have good ideas. In fact, one of the really refreshing things about working in New South Wales at the moment is that you have a government that has a real interest in reform and a Premier who is very personally committed. Generally, there is a culture in the public sector where you get absolutely penalised and lambasted for your mistakes, and sometimes much less rewarded for innovative thinking, so there is a whole apparatus of machinery around auditors general, ombudsmen and other scrutiny bodies – and I make no complaint about that because it’s entirely appropriate – which militates in favour of people being potentially more cautious about having open discussion internally regarding innovative and potentially controversial things. Equally, it’s incumbent upon bureaucracies to come up with good long-term strategic advice. In the absence of properly structured, evidencebased, sound advice, you have the preconditions for opportunistic, politically driven programmes based on primary school whiteboards, with space programs and bridges to Tasmania. PR: The key for government is to ensure that the thinking is refreshed as well. When I came into New South Wales Treasury three and a half years ago, I hadn’t been around that scene before. I’d been working in Sydney and overseas, for both the public and private sectors, so I probably did have a different viewpoint on how things are done. That did allow me to take things forward in a way that wouldn’t have been possible had the bureaucracy been set up the way it was before that point. But the Government at the moment in New South Wales is pretty forward thinking and open to new ideas. It is always going to be a balance between getting public sector people who are risk-averse and

conservative, and those who are more entrepreneurial, but as long as there are fresh thoughts coming in and new approaches that aren’t immediately starved of oxygen, then it can work very well. But it’s all about a sensible balance. KM: The last two big road PPP projects in Victoria have been driven from within government, so I don’t believe that there is a lack of that entrepreneurial spirit. It depends on how determined you are; you’ve got to keep plugging away. When you are working on the basis of a report that was very well considered by Sir Rod Eddington, and trying to bring forward some of the projects in that report, you know it is well based and you know that you are going to get there at the end of the day. I don’t think that there is any negativity, either, towards ideas that come from the private sector. Governments are generally pretty open to those sorts of things. I encourage the private sector to keep pushing their agenda as well, and bodies like IPA and other industry groups all have a role to play in pushing governments along with the delivery of infrastructure. JM: If there is a fear in public service and politicians in Queensland, it is a fear of mediocrity. I don’t think that there is a fear of entrepreneurship and getting on with the job. I think that all states are in fairly similar situations, faced with high debts and stretched balance sheets, and we are all dealing with the fact that there’s an ongoing public expectation that we get on and do this to improve the economy. That’s not going to happen if people are fearful of putting forward good ideas and testing them. Volume 5 Number 1

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Above: Lend Lease’s Michael Zorbas

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Peter Regan, Chief Financial Officer, WestConnex Delivery Authority Peter Regan has more than 18 years of public and private sector experience in project and infrastructure financing in Australia and the United Kingdom. He is currently the Chief Financial Officer of the WestConnex Delivery Authority, and is responsible for implementing the Government’s financing strategy for the WestConnex project. Mr Regan joined WestConnex in April 2014 on secondment from the New South Wales Treasury, where he had been the Head of Infrastructure Finance with responsibility for the development and financing of major new infrastructure projects including the North West Rail Link, NorthConnex, Darling Harbour Live, Sydney Light Rail and the Northern Beaches Hospital. Mr Regan also led the successful restructuring of the $2.4 billion Waratah Train PPP and was previously a member of the WestConnex Delivery Authority Board. Prior to joining the New South Wales Treasury in April 2011, Mr Regan spent 10 years in the United Kingdom. As Director of Corporate Finance at Transport for London, he led the unwinding of the £5-billion London Underground PPP, financed the development and expansion of the London Overground and Docklands Light Railway, and played a key role in delivering the financing and governance structures for the £15-billion Crossrail scheme. Prior to joining Transport for London, Mr Regan worked in project finance lending and advisory roles at Deutsche Bank and in corporate advisory at PricewaterhouseCoopers.

Jim Betts, Chief Executive Officer, Infrastructure NSW Jim Betts was appointed Chief Executive Officer of Infrastructure NSW following five years as the Secretary of the Victorian Department of Transport and four years as the Director of Public Transport at the Victorian Department of Infrastructure. Key personal achievements during this time include the delivery of the $38-billion Victorian Transport Plan, the overhaul of Victoria’s legislative framework to integrate the planning of transport and land use, and overseeing construction of the $4.3-billion Regional Rail Link project.

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Mr Betts’s 25 years of experience span strategic transport planning, infrastructure delivery, and transformational structural reform, including privatisation, private finance and regulatory reform, and also include senior roles in the British Government.

Ken Mathers, Chief Executive Officer, Linking Melbourne Authority Ken Mathers is the Chief Executive Officer of Linking Melbourne Authority (LMA), and has held this role since incorporating in 2003. A civil engineer, Mr Mathers has had a long career in Victorian road infrastructure, commencing with the Country Roads Board in the 1960s. Project management roles included Melton Bypass, Hume Freeway duplication, the Western Ring Road, Monash Freeway upgrades and planning for CityLink. He joined the Melbourne CityLink Authority in 1995 as Director, Engineering and Operations. CityLink was then the largest road infrastructure development in Australia undertaken as a Public Private Partnership (PPP) that introduced electronic tolling. After three years as a private consultant, Mr Mathers returned to State Government in 2003 to lead the Southern and Eastern Integrated Transport Authority (SEITA), which was responsible for EastLink – another PPP roll road. Renamed as Linking Melbourne Authority, it was responsible for the 27-kilometre Peninsula Link, the first PPP Availability project in Australia, which was opened to traffic in January 2013. In 2012, LMA developed the business case for East West Link. It completed 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 undertaking the bidding process leading to contract award in 2014. Mr Mathers is well known in industry for his support of infrastructure procurement through PPP delivery, and the promotion of quality urban design and public amenity in road development. He has been a Board member of City North Infrastructure Pty Ltd – the Queensland Government entity responsible for facilitation of Brisbane’s $4.3-billion Airport Link project – and is

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currently Vice-President of Roads Australia and has had an extensive past involvement with Engineers Australia. Mr Mathers has also been a member of the Regional Rail Link Authority Advisory Board. In 2012, Mr Mathers was awarded Roads Australia’s John Shaw Medal for his contribution to road planning and development in Australia.

John McEvoy, Project Director, Bus and Train (BaT) Project, Projects Queensland John McEvoy has 35 years’ experience in the mobilisation and delivery of mega projects within Australia and internationally. During the past 15 years, he has focused on the transactional and implementation phases of a range of major economic, social and environmental infrastructure projects, ranging from $300 million up to $5 billion. Mr McEvoy has established an industry reputation as an innovative problem-solver with significant experience in capital investment optimisation, and in utilising PPP, EPC and Alliance contract models to deliver successful project outcomes within challenging and complex social and political environments. Mr McEvoy has recently been appointed by Projects Queensland as its Project Director for the $5-billion Brisbane Bus and Train (BaT) Project.

Michael Zorbas, Head of External Affairs, Lend Lease Michael Zorbas is Head of External Affairs at Lend Lease. In this role, he is responsible for engagement with governments and the media on behalf of one of Australia’s most iconic companies. Lend Lease employs 14,000 Australians who have created international icons, from our own Sydney Opera House, through to the S11 National Memorial and Museum in New York, Petronas Towers in Kuala Lumpur, the Tate Modern in London and back to Sydney’s Barangaroo and Headland Park; a financial centre and waterfront asset for the people of Sydney to rival Canary Wharf in London and Marina Bay in Singapore. Mr Zorbas’s previous roles have included Head of Strategy and Communications for Grocon, General Manager of Government Relations for Stockland, Deputy Head of Media for the Liberal Democrats in the United Kingdom, and Chief Advocate for the Property Council of Australia. He is currently a Board member of the Sydney Institute and the Committee for Sydney. He is a past director of the Canadian Government’s Forum of Federations, and also served two terms on the Special Broadcasting Service (SBS) Community Advisory Committee.

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INFRASTRUCTURE FOR VICTORIA – GETTING AHEAD OF THE GROWTH CURVE Will a record investment in infrastructure keep Victoria ahead of the game? Yes, says Victoria’s minister for public transport and roads, Terry Mulder MP.

A strong pipeline of key infrastructure projects will drive Victoria’s prosperity and shape Melbourne for decades to come. Billions of dollars of investment in a new port, new roads and new rail lines will generate thousands of jobs, create new suburbs, build new transport links and expand the central business district. A new rail tunnel and airport link, a new road spanning the breadth of the city, expanded freeways and upgraded suburban rail links herald a new era in the city’s transport infrastructure. The Melbourne Rail Link will see a new tunnel from Southern Cross to South Yarra via the Fishermans Bend Urban Renewal Area, driving investment in Melbourne’s newest precinct and adding fast new travel alternatives to the central city. New trains, modern and reliable signalling, and level crossing removals will boost services on Melbourne’s suburban lines, and a rail link to Melbourne Airport will bring easier access for locals and visitors. An expanded CityLink will complement the airport rail link with new lanes, and the East West Link will extend from the end of the Eastern Freeway to the Western Ring Road, providing a vital alternative to the M1 and relieving the inner north of chronic traffic congestion. This massive investment will comprise a mix of public and private funding. Innovative new PPPs will supplement state and Commonwealth contributions. As well as the creation of thousands of jobs during construction, the $24-billion investment will deliver long-term dividends to the city’s liveability and prosperity. Melbourne’s CBD and the inner city have generated jobs and growth for two decades, fuelled by new residential and business addresses in Docklands and Southbank. Employment growth has been particularly strong in education, and financial and property services.

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Melbourne Rail Link will service the new residential and business location of Fishermans Bend

New lanes will be added to CityLink between the West Gate Freeway and Essendon Airport

For this prosperity to continue, more residential and commercial land is needed. Melbourne Rail Link will ensure not only better commuter access to the CBD, but also the development of Fishermans Bend as a new residential and business location. Fishermans Bend adds 250 hectares to the edge of the CBD and is projected to house up to 80,000 residents and 40,000 workers by the middle of the century. Its development will ensure a ready supply of homes and office space for coming generations of workers. Melbourne’s prosperity is becoming less dependent on traditional industries and more dependent on knowledge industries like education, research and finance. These industries already employ a majority of Melburnians – a trend that will increase in coming decades. Growth in prosperity, in population and in commodity exports will drive a doubling in the state’s freight volumes between now and 2035. To cater for this, Hastings will become the state’s second container port, heightening the need for new freight transport infrastructure. New road links like the East West Link and new and upgraded road and rail links between Dandenong and Hastings will be built. As Asia demands more of what Victoria grows, containerised grain, meat, vegetables and dairy products will need to move quickly and efficiently from the state’s agricultural regions to our ports. This will increase the movement of containerised export freight to our ports, and one of the added benefits of Melbourne Rail Link is the potential it offers to free up existing tracks for this freight.

In addition, the completion of the 18-kilometre East West Link will ensure that workers in industries that rely on vehicle travel – from tradespeople to sales representatives to couriers – can move about the city. Melbourne’s sole reliance on the M1 and West Gate Bridge means that breakdowns or incidents can bring the city to a standstill. The cost of congestion to industry is estimated at nearly $1 billion per year – much of this as a result of delays to freight movement. The government’s multi-billion-dollar investment is a response to rapid growth in population, much of it in metropolitan Melbourne.

Between 2007 and 2012, Melbourne had the largest population growth of any capital city in Australia, with an increase of 406,600 people – equivalent to more than 1500 people per week or two per cent per annum. This is expected to continue. ABS projections forecast a population of 8 million by 2051, making the city more populous than Sydney by 2053. The strongest growth in employment is in knowledge-based services in inner Melbourne. Annual employment growth in the City of Melbourne over the decade to 2011 was 5.3 per cent compared with 2.2 per cent for the rest of Melbourne. Over the past decade, central Melbourne has been responsible for 43 per cent of the growth

A planned underground station at Domain will ease pressure on St Kilda Road tram services

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Expanded Central City East-West Link This section of Airport Rail Link (as part of Melbourne Rail Link) on existing tracks To Airport

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South Yarra Twin tunnels as part of the Melbourne Rail Link

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Rail network Existing rail station Melbourne Rail Link–Tunnel Melbourne Rail Link–Airport Rail Link Cranbourne-Pakenham Rail Corridor upgrade

New station Potential future station Freeway network East-West Link CityLink-Tulla Widening DART bus upgrades

in gross state product (GSP). This reflects a strong trend among service industries to locate in areas that offer proximity to clients and like-minded professionals, links to interstate and international markets, and access to a deep, skilled labour market. Strong employment growth in the CBD has increased the number of trips to the City of Melbourne from 240,000 per day in 2006 to 340,000 per day in 2011. Most of the new trips have originated from the outskirts of the city – as well as the City of Melbourne itself. As the majority of trips into the Melbourne CBD are made using public transport, greater demands are being placed on rail in particular. Melbourne has accommodated its employment growth over the past decade by increasing total office space in the CBD. Docklands has accommodated almost 60 per cent of the growth in office space in the Melbourne CBD since 2003. Once Docklands is complete, there will be little scope to cater for the large floor-plate office space being increasingly sought. Based on potential supply and a net absorption rate of 100,000 square metres per annum, capacity will be exhausted in the next seven to 10 years. Without a supply of new, fit-for-purpose office space, Melbourne city centre’s position within the Australian market as a relatively low-cost and accessible office precinct will be under threat. A stronger service economy is increasing the demand for air travel. Knowledgebased industries are highly dependent on accessibility and interaction. As the gateway for interstate and international travel, Melbourne Airport provides these industries with face-to-face interaction with clients based outside Victoria. The importance of

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Expanded central city urban renewal area Industry and employment area Port of Melbourne Key bus route Potential Rail Projects (alignment not yet determined)

the airport to the growing knowledge-based economy is reflected in the fact that the single-biggest industry user of air transport services in Victoria is the professional, scientific and technical services sector. This accounted for 17.6 per cent of expenditure on air transport by industry users in 2012/13. International education is Victoria’s largest single export industry. In 2012, there were almost 150,000 international student enrolments in Victoria from more than 160 nations. The export value of Victoria’s international education sector from students studying onshore (on a student visa) was $4.365 billion in 2012, generating an estimated 30,000 full-time equivalent jobs in

Victoria. Almost every international student studying in Victoria is likely to have entered via Melbourne Airport. The number of international visitors to Victoria has grown by more than 800,000 per annum since 2005, with most visitors destined for Melbourne. This is more than twice the growth generated in New South Wales in the same period, and brings Victoria close to the level of international tourism generated in Queensland. Almost all of these visitors arrive through Melbourne Airport. In addition, 368,000 tonnes of international and domestic freight moved through Melbourne Airport during 2010, and food exports – fisheries products, livestockbased food, fruit and vegetables – were one of the largest components. The Victorian Government’s Food-to-Asia Action Plan aims to boost exports of premium food and beverage to Asian markets. One of the key priorities under this plan is to improve travel times from farm to port. Freight has been formally identified by the government as a key driver of the state economy, a point reinforced in last year’s release of Victoria – the Freight State, the Victorian Freight and Logistics Plan. It found that the freight and logistics sector contributes $19–23 billion to Victoria’s GSP, or between six and eight per cent, making it a major contributor to the economic wellbeing of the state. Melbourne is Australia’s biggest container port, with a 37 per cent share of the nation’s container trade – higher than any other city – and more than the total of the other ports combined if you exclude Sydney. While work to expand the Port of Melbourne is well underway, capacity at

The Western Section of the East West Link will deliver Melbourne’s second river crossing

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Melbourne Rail Link will give each train line its own dedicated path within the network

Swanson Dock and Webb Dock will be reached in the next 10 to 15 years, by which time the state will need a second port. Hastings offers a number of advantages as the state’s second container port. As well as being a natural deepwater port with a large landside area zoned for port use, Hastings has been servicing the steel, gas and bulk liquid trades for five decades. Developing Hastings also negates the need for another round of dredging in Port Phillip Bay, a prospect that attaches a high economic and environmental cost. The expansion of Hastings also offers the opportunity to develop a more extensive warehousing and logistics industry in Melbourne’s south-east, closer to the city’s demographic centre. Since the construction of the Western Ring Road in the 1990s

concentrated warehousing in the west, the West Gate Bridge has borne the brunt of containers transported westward for unpacking, and eastward as loose product. Warehousing is a very mobile industry that will relocate to where it can operate most efficiently. By attracting warehousing to the east, an expanded Hastings will rebalance the metropolitan freight flows of import and export goods. At its peak, the Port of Hastings is estimated to cater for nine million 20-foot equivalent containers by 2050 – more than three times the Port of Melbourne’s current throughput. Our state is growing fast – in population, in the scale of the economy and in the freight task.

The challenge facing Victoria is to sustainably accommodate this dramatic growth. Through some tough decisions on the expenditure side of the balance sheet, we’ve been able to maintain spending on infrastructure, despite the considerable challenges on the revenue side. We are delivering a record spend on infrastructure, while at the same time delivering an operating surplus and keeping borrowings at reasonable levels – and we’ve only been able to do this through a combination of tough decisions and responsible economic management. Our multi-billion-dollar investment is recognition that we have to keep ahead of the growth curve if we’re to maintain the state’s business and liveability edge.

A key component of the Melbourne Rail Link is a rail line to Melbourne Airport

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Dr Peter Boxall AO

Dr Peter Boxall AO, Chairman of the Independent Pricing and Regulatory Tribunal (IPART), outlines the current impediments to a competitive and private urban water market.

Key points: • Australia’s urban water sector remains largely unreformed. • While water is different to electricity, much can be learned from the principles that guided the restructure of state electricity sectors. • Effective regulation is the key to competition in water. • Existing competitive frameworks have achieved only limited success, because of inconsistent obligations and opportunities between incumbent government monopoly providers, and potential new entrants.

My discussion today will focus on urban water, primarily with New South Wales in focus, but I trust that the principles are applicable elsewhere. I’d like to talk about getting the regulatory structure right so that the private sector wants to invest in infrastructure and wants to enter the market. Competition is important because it basically gives rise to much better outcomes for markets striving to deliver the best deal for customers, in terms of 54

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higher productivity, greater innovation, wider choice of products and services, and lower prices. Indeed, in the case of IPART, we regulate water prices in New South Wales and we try as best we can to achieve an outcome, which would be the case if it were a private market. But that, in a sense, is not a good substitute for getting more competition into the industry.

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Now, if you compare this market with electricity, you’ll know that there have been significant reforms in the electricity market over the last couple of decades, and while water is not the same industry, it is nevertheless a good starting point. In electricity, there was a disaggregation in the vertically integrated monopolies, so that competitive services in generation and retail could be separated from the natural monopoly of the grid system. There’s also the issue of providing access, and we’ve had the development of a single wholesale electricity market in eastern Australia, and a national regulatory framework. These reforms have been a success; there have been new entrants and there’s been greater customer choice, and this provides a very strong basis from which to go forward. Urban water is not the same. Like electricity, there is a capacity for upstream and downstream competition, with the monopoly transportation network in the middle. We need to be mindful of a couple of key differences. Water is very costly to transport; although, in some cases there is natural interconnectivity, such as in the Murray-Darling Basin. In terms of urban water, however, it’s not really possible to transport water from Melbourne to Sydney in the event of a shortage in Sydney. Also, unlike electricity, water can be stored. Of course, in the future, with the development of battery technology, it will probably be possible to store electricity, but the key difference is that water can be stored, and the urban water market includes several products – not just the supply of potable water and recycled water, but also wastewater services and sewage – whereas with electricity, there’s basically one product. The other thing is that water is regulated more for health and environmental impacts than electricity, and this is a key issue that needs to be taken into account. Currently in New South Wales urban water, we have incumbent monopolies: Sydney Water, Hunter Water and also the Central Coast councils, Wyong and Gosford, all of which we regulate. Most of these are vertically integrated, apart from Sydney Water, where the Sydney Catchment Authority (SCA) runs the bulk water and Sydney Water purchases it. Nevertheless, it’s a highly integrated system of incumbent monopolies that are government-owned.

The importance of competition There has been quite a lot of work on competitive procurement, such as in operating and management contracts, and Build Own Operate Transfer (BOOT) contracts. But competitive procurement is one thing, and competition in the market – where you have outsiders coming in and running the business – is another thing. That’s what I’d like to examine: the possibility of getting the regulatory system to the point where it opens up to competition. We have had a little bit of competitive procurement in New South Wales in terms of the desalination plant; recycled water, where we’ve had some alternative supplies of water; and there have also been a number of decentralised schemes relatively at the margin, which I’ll talk about later. We also have independent price regulation, which is one of our roles. There has been progress made in New South Wales with the Water Industry Competition Act (WICA), which came into effect in 2006. The Act is a licensing regime to allow new utilities to enter the market, and it also provides for new regimes to negotiate access to infrastructure. The impact has been positive, but it’s been pretty modest. As yet, we’ve had no third-party access seekers. We’ve mainly had small private utilities in new development areas, such as the fringe areas of Sydney and Newcastle, in the Hunter, and also in some infill projects where you have a new apartment complex – for example, in the inner city – and they want to have their own recycled water system. There has been very little action, so if you have this legislation, which is meant to promote competition and entrants into the industry, and eight years later not a lot has happened, then there clearly is a case for review to discuss what else might be done. In terms of third-party access, it has, in a sense, been declared – but it’s rather limited, with water treatment plants, for instance, not included. But Sydney Water has come to the party and has put out a draft access agreement, which they have put to us for approval, and we’ve gone back to them with a number of comments. It’s been put on hold, not because there’s a real problem with it, but because the government is reviewing WICA, which I’ll get to. Nevertheless, Sydney Water has taken the initiative on that.

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We do have some reticulation networks in Sydney where we do have access covered – namely Bondi, Malabar and North Head – but, again, apart from some interest in the mid-2000s, there’s been little action there. So why hasn’t this happened? Mainly, there are impediments because there are inconsistent obligations and opportunities between the incumbent – usually the government monopoly provider – and the new entrant. Some of these issues are being addressed, but it’s important to keep this in mind in terms of regulatory regimes. You have a situation where, under WICA, the new entrant must obtain water from other sources. Clearly, this was drafted in the middle of the drought where they said: ‘Well, anybody who’s coming can’t buy water from the Sydney Catchment Authority; they have to come with their own dam’. Not surprisingly, that has turned out to be a barrier to entry. The next issue is the incumbent’s area licence. Sydney Water has a licence to cover a whole area, as does Hunter Water, but all of the WICA applicants have to come to IPART and get approvals scheme by scheme, so it’s not really a level playing field. The third issue, which is important in Sydney and possibly in other state capitals, is that there is an overhang from the past, when Sydney Water was basically a government department. Sydney Water has quite a lot of influence on land use planning; they’re consulted and are providing a lot of advice, so, not surprisingly, they have an inside running. They nominate areas that they’re prepared to move into, which is consistent with their own business. So, that’s another area that needs to be addressed, and opened up so that other players can come in and make proposals with respect to planning, rather than having the incumbent have the inside running.

Moving to contestable CSOs The fourth point that is really important and can put the incumbent at a disadvantage is the issue of delivering community service obligations (CSOs). What tends to happen – and priority sewerage projects are a good example – is that the government will direct Sydney Water to, for example, put in a sewerage project somewhere. That project is usually costly and it has to be funded by Sydney Water, not by the government

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budget. Sydney Water then cross-subsidises it from all the other water users in Sydney. You have a situation where they’re able to crosssubsidise from other water users to fund a CSO, but, obviously, it’s not possible for an outside party to get access to that because an outside party can’t bill other water users in Sydney to fund the cost of an expensive project. There needs to be a process put in place where these CSOs – which basically enable the delivery of services that cannot be supported economically, but which the government decides for political, social and other reasons are perfectly legitimate – are to be made contestable. The key questions are: How should it be delivered? How should it be structured? We would argue that it should be structured such that the delivery of CSOs is contestable and other potential entrants can bid for it, as can the incumbent provider.

Postage stamp pricing and developer charges We then get to some more impediments, and a key impediment is postage stamp pricing, and also the fact that there are no developer charges. Dealing with postage stamp pricing – where everybody is charged the same price for water whether they live in an area that is relatively cheap to supply, or in an area where it’s very expensive – involves a large cross-subsidy from people living in areas that are cheap to supply. It’s an area that obviously impedes entrance in one sense, and it also sets up the potential for cherrypicking, where somebody might want to provide an area that is relatively cheap to supply, charge the price that is set by IPART for the whole of Sydney, and, of course, make a killing. This would, in a sense, reduce the capacity of Sydney Water to cross-subsidise the higher-cost areas. It’s not sustainable, and it’s something that needs to be addressed. If we are going to open up the water sector to new entrants, and if we are going to have competition in the water industry, as opposed to competitive tendering for the supply of specific services, this issue needs to be wrestled with. And if postage stamp pricing is going to stay, then there needs to be some way of taking the implicit crosssubsidy, which is now dealt with by Sydney Water,

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Hunter Water and others, and making it explicit and opening it up for outside players. The other issue is developer charges. In Sydney in 2008, the then government set developer charges for Sydney Water and Hunter Water in the Newcastle area to zero – this remains government policy today. Prior to 2008, when a developer opened up a new suburban lot, they would pay a charge to, say, Sydney Water to supply the infrastructure. That charge was then added into the price for the sale of the lot and was paid for by the land purchaser in the end. Even though you had postage stamp pricing, you could have some competition because somebody from the private sector could come along and say, ‘Well, you know, I’m going to pay a developer charge to Sydney Water to put in the infrastructure and then I will supply water to the new suburb’. Now, they can’t do that because the developer charge has been set to zero, so Sydney Water and Hunter Water will fund that by cross-subsidising all the other water users. So, we have quite an awkward situation where we have postage stamp pricing and no developer charges. When we had postage stamp pricing and developer charges, there was some form of release from this bind, but that is an area that needs to be wrestled with if you’re going to have new entrants coming to the industry and competing with the incumbents. There’s also no real incentive for incumbents to negotiate access agreements, particularly with postage stamp pricing, because you could have potential entrants trying to cherry-pick the areas with the lowest cost to deliver, and then hope that they can make a killing on the back of the regulated price that obviously has to cover the whole of Sydney. These are important issues, and they are big policy issues for governments – not just in New South Wales – to wrestle with if we are going to see any major development in the supply of urban water. In terms of facilitating a more competitive urban water market, these issues include the market to inform land use planning; again, this is something not readily apparent to those outside, but if you have the incumbent water utility basically operating like an extension of the Department of Planning, then clearly they have an inside running and it’s quite difficult for other entrants to come in. In terms of cost-reflective pricing and developer charges, at IPART, when we regulate the price of

water, we try to make sure that the prices for water and sewage are set according to the long-run marginal cost, and in most cases are as cost-reflective as possible. The problem with this is that it’s an average across the whole area, so you don’t have cost-reflective pricing for the supply of services in particular areas. The next issue is that there is no requirement for a new entrant to obtain water from other sources. I’m pleased to say that there is new amended WICA legislation in the New South Wales Parliament, and this has been addressed in part. It has not been fully addressed, but now you could have an entrant under WICA to the water market to supply water – they are able to get it from a public water utility, but they do need to show some investment in water infrastructure. That is clearly better than the current arrangement, but it is not full deregulation. The other thing an efficient regulatory regime has to do is to protect consumers’ public health and safety, and the environment. As I mentioned earlier, water by its very nature does have more health and environmental regulations than electricity. For example, the government might determine that additional wastewater should or should not be put in a certain river. You can set those environmental parameters rather than just directing Sydney Water or some other incumbent to do it and, in a sense, wear it. You could actually call for bids for somebody to dispose of wastewater in a certain way and according to certain parameters, and you would probably get a better solution – you would certainly get a solution that is transparent and costed reflectively. On an enhanced access regime, the issue is to have more things under WICA where entrants can look to get access. Entrants can always ask for a declaration of access, but that’s a process that they would have to go through rather than being automatically entitled to access.

A role for scarcity pricing Another issue that is quite important is scarcity pricing. At the moment, we set the price of water; for instance, from the Sydney Catchment Authority to Sydney Water. That’s a price that is set whether the dam is full or not full. There’s no concept of attaching a value to water, and this is an area that I think could be explored further, to see whether you could, in a

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sense, get a market for bulk water, and to see if a market could put a value on water. Obviously, water would be cheaper when it’s in abundant supply as opposed to when it’s not. This is very new thinking, but it is an area of potential that I believe in, and an area that would allow for other players to come in and participate in the water market to supply consumers, households and businesses; but it would also open up the possibility for trading to try to get arbitrage and get the best possible price attached to the water. As you know, normally what happens when you have a drought or shortage of water is that you have restrictions. They are pretty effective, but they are very blunt instruments. Often what happens is that if you have a drought, then the price of water will go up and low-income earners will then be unable to get access to an essential service. That, of course, is relatively easy to address by having a situation in which low-income earners are subsidised for water or a certain amount of water. These issues are important issues, but they are not insurmountable, and that is an issue that would probably benefit from further attention. The other thing that I did mention was marketbased mechanisms to achieve environmental objectives, such as pollution mitigation and, in particular, the disposal and treatment of wastewater and sewage. In this field, WICA has actually led the way. It’s a good start, but it’s a pretty modest start. The review of WICA has been encouraging, because not only is Parliament addressing, at least in part, the issue about new entrants having to have a supply of water outside the public water supply, but they’ve also addressed the issue that I mentioned earlier about new entrants having to get scheme-by-scheme approval. We’re now looking at the possibility that new entrants will be able to get area-wide approval, which 58

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would put them on the same basis as the incumbents, and would obviously reduce red tape and a lot of hassle that goes with applying for approval every time they have a new project. There is also the capacity for enhanced access and the obvious catch-all of having consistent rights and requirements for incumbents and new entrants. Finally, cost-reflective pricing and the issue of postage stamp pricing needs to be addressed if any progress is going to be made on this. It doesn’t have to be abolished, but if it’s not changed, then the implicit cross-subsidies need to be made transparent and made open to all players. The developer charges issue is a serious one, because where you have a new project being opened up, it’s not unreasonable to expect people who move into that project to make a contribution through the price of their property for the infrastructure to serve their property.

Dr Peter Boxall AO, Chairman, New South Wales Independent Pricing and Regulatory Tribunal (IPART) Dr Peter Boxall AO is the Chairman of New South Wales’s Independent Pricing and Regulatory Tribunal (IPART). He was also a Commissioner of the Australian Government’s National Commission of Audit. Previously, Dr Boxall was a Commissioner at the Australian Securities and Investment Commission (ASIC) from 2009 to 2011, and, prior to that, was Secretary of the Department of Resources, Energy and Tourism. Dr Boxall’s career has also included roles with the Department of Employment and Workplace Relations (2002–07) and Department of Finance (1997–2002). In 2007, Dr Boxall was made an Officer of the Order of Australia (AO) for services to economic and financial policy development and reform in the areas of accrual budgeting, taxation, and workplace relations. Dr Boxall is Chair of the St Catherine’s Foundation Limited, and was a member of Canberra Girls’ Grammar School Board from 2001–2009. He holds a PhD in Economics from the University of Chicago.

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Lara Poloni, Chief Executive AECOM, Australia New Zealand AECOM is evolving into the world’s premier, fully-integrated infrastructure services firm. As well as continuing to provide a range of technical services that our clients require, we are supporting clients to get their projects built, facilitating the funding and financing, and providing a range of services across the operations and maintenance of their assets. For us, it’s about taking our thinking and technical capabilities and applying it to our clients’ projects. By fully leveraging the amazing technical skills, experience and data that helps our clients’ projects succeed, we’re contributing to great community outcomes. Ultimately we want to be known as thought leaders in connecting cities, be it through built form, making cities more adaptive and resilient to climate change, or through improving infrastructure capacity or service reliability. Every city will have to make choices in terms of how it develops. AECOM wants to be a part of the conversation with industry, businesses and community to help spark new ideas. The depth and breadth of AECOM’s capabilities means we’re able to think differently about how our clients’ projects are procured, delivered, financed and maintained. With such possibility comes enormous opportunity for growth. It’s an exciting time. AECOM — in helping our clients solve their infrastructure challenges — is well placed to offer big-picture insight on how our cities can evolve over time and leave lasting legacies from which further development can follow.

Leading-edge design

Creating communities

Enhancing connections

Converting leading-edge design into constructed reality often requires overcoming technological constraints, which can lead to industry innovations.

How will Brisbane transform one of its largest inner-city precincts to create a thriving and connected community?

Delivering on a promise to create jobs and improve amenities for existing and future residents is a key direction for the NSW Government and local Councils along the Parramatta Road Corridor.

Designed by internationally-renowned architect Frank Gehry, the University of Technology, Sydney’s new Business School — with its rippling façade and angled columns — is one of the most iconic buildings currently under construction in Australia. AECOM is playing a lead and innovative role in overcoming the technological constraints of making the bricks and mortar appear fluid and true to the pioneering design.

AECOM’s masterplan for Kurilpa will create a new riverfront destination, a sophisticated inner-city community with a mix of contemporary apartments, state-of-the-art offices and world-class cultural venues. It will be a place to shop, dine, visit and celebrate and will be an incubator of ideas and a powerhouse of creativity. Showcasing the best in contemporary design, Kurilpa will retain strong links to its rich heritage, with chimney stacks and industrial relics standing as landmarks to the past.

We’re helping redefine what’s possible in the built environment.

We’re helping Brisbane create an identity for its people.

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AECOM is working with UrbanGrowth NSW, state agencies and councils to determine the location of precincts along the corridor that should be the focus of future urban renewal, including a review of existing land uses, zoning, environmental constraints, location of schools and special uses, heritage considerations and development opportunities around transport nodes. We’re helping shape precincts critical to Sydney’s growth.

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Dale Connor

Dale Connor Dale Connor, Chief Operating Officer – Construction and Infrastructure at Lend Lease, outlines the considerable shared opportunities that exist for governments, the community, and the private sector through large-scale urban regeneration. I want to talk about urban regeneration and its associated infrastructure requirements. Urban regeneration is different to other projects that Lend Lease is undertaking in the infrastructure space, such as roads, tunnels and bridges. The art of making places is equally as important as inner-city urban regeneration, and it is as important as the role of infrastructure. To Lend Lease, urban regeneration is an opportunity to revitalise and re-use inner-city areas, some of which are contaminated and have a remediation focus, and to create a more positive legacy for people and places. This process involves the private sector working with governments to upgrade infrastructure by leveraging the new value that is created to pay for it. This is an ongoing, efficient way to fund innercity infrastructure.

The opportunity for Lend Lease By way of background, Lend Lease operates in Australia, Asia, Europe and the Americas. The majority of Lend Lease’s $40 billion of pipeline development is in inner urban regeneration, and our $16 billion construction backlog doesn’t reflect some of the recently announced preferred positions in the infrastructure space.

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Key points: • Lend Lease has a global pipeline of large urban regeneration projects across Australia, Singapore and the United Kingdom. • Major urban regeneration projects in Australia include Barangaroo South in Sydney, Docklands in Victoria and RNA Showgrounds in Brisbane. • Urban regeneration provides unique opportunities for the private sector to work with governments to upgrade infrastructure and create better economic, social and environmental outcomes. Lend Lease’s global pipeline of large regeneration projects extends from Australia to Singapore and the United Kingdom. Large-scale urban regeneration is large-scale, mixed-use redevelopment of inner urban locations, with a minimum development value set for each geography, profit opportunities for Lend Lease, and a lasting positive legacy for people and places. These opportunities are found in creating mediumto high-density developments, which importantly

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Dale Connor

include upgrades to the public realm and infrastructure, which are managed and aligned with policymakers. The solution here is one where our integrated solution approach and our core values around safety and sustainability align to the creation of projects, the product of which is creating great places and improving economic, social and environmental outcomes for people and their communities.

Urban regeneration projects In Sydney, the Darling Harbour Live consortium is delivering a world-class convention centre, entertainment and theatre precinct. Following a successful Public Private Partnership (PPP), Lend Lease has been able to upgrade a mixed-use neighbourhood in the vicinity of the University of Technology, Sydney (UTS) for Infrastructure NSW and the Sydney Foreshore Authority, and construction is well underway. On the other side of Darling Harbour, the $6 billion Barangaroo South project is continuing. The project includes construction of three commercial towers, residential works and foreshore upgrades, and will create a new financial centre not only for Sydney, but for the region. Outside of Sydney, a lesser-known project is the Waterbank development, a precinct near Perth’s WACA Ground. The $1 billion urban regeneration project is proceeding in partnership with the Western Australian Metropolitan Redevelopment Authority. In Brisbane, in an agreement with RNA Showgrounds, Lend Lease is redeveloping the showgrounds and the inner city area of Bowen Hills. The first stage of infrastructure has been completed, and work is now underway on residential and commercial opportunities as we revitalise what has previously been a dour area of Brisbane. Internationally, we have similar opportunities and positions with the City of London in Stratford, and the Elephant and Castle precinct – both of which are large-scale £1–£2 billion (A$1.83–$3.67 billion) regeneration projects.

Following that overview, I will focus on the drivers of urban regeneration and why Lend Lease feels that they align strongly to the major cities of Australia. Infrastructure continues to grow and develop with roads, tunnels and bridges, among other things; however, it is also clear that inner-city urban regeneration represents an important opportunity for the sector over the next few years. Australian cities are a favourable backdrop for these categories, with constrained areas with firm population growth and economic strength. There are opportunities readily available to improve land use. Government renewal plans are in place, and they align to what the improvement of that land use can be. Everybody knows that investment in infrastructure is required and is a challenge, and the sector should be optimistic that there is great access to capital. Looking at two case studies locally, I’d like to draw attention to Victoria Harbour, at Docklands in Melbourne, because it highlights some of the key drivers that I’ve been talking about. Victoria Harbour was once a swampy wetland and an Aboriginal hunting and fishing ground, until it became an industrial area, filled in many times with the river relocated around it. In the 1980s and 1990s, it was a port, warehouse and industrial area with containerisation requirements, meaning that new facilities needed to be developed. Docklands was abandoned, left as a derelict port area, cut off and contaminated. Today, we consider the area the jewel in the crown of Docklands. Lend Lease was selected to revitalise the area in 2001. Our area of the project is around 30 hectares: one-third of the size of the Melbourne CBD. Our 20-year agreement with the Victorian Government sets out maximum build-outs for residential, commercial, retail and office space. Places Victoria (the Government’s property development agency) retains the ownership of the site until such time as we wish to purchase individual parcels of land. All of the infrastructure within Victoria Harbour Volume 5 Number 1

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Above: An artist’s impression of Victoria Harbour in 2021 Source: Lend Lease

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Dale Connor

Dale Connor, Chief Operating Officer Construction & Infrastructure, Lend Lease, Australia

Above: Artist’s impression of Barangaroo South Source: Lend Lease Below: Victoria Harbour project overview Source: Lend Lease

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is provided by Lend Lease development, and has been rolled out well in advance of the built form coming into place. We then make land payments to Places Victoria based on a percentage of gross revenue – land is acquired on a stage-by-stage basis once stage release requirements have been satisfied. Importantly, Lend Lease has to hand back to Places Victoria an area for community and human services use.

Dale Connor was appointed Chief Operating Officer of Construction & Infrastructure, Australia, in February 2013 and is based in Sydney. Mr Connor joined Lend Lease in 1988 and has held a number of senior roles across Lend Lease. Most recently, Mr Connor was Group Head of Environment, Health & Safety. Previous roles also include Managing Director for the project management and construction business in the Americas region; Managing Director of Lend Lease’s military housing business in the Americas; and Executive Vice-President of Lend Lease’s investment management business in the Americas. Mr Connor has widespread experience in project management and construction, as well as design, development and privatisation. He has worked extensively in the construction industry across Australia, the United Kingdom, China and the United States, and believes that working incident- and injury-free is a key principle to Lend Lease’s success. Mr Connor holds a civil engineering degree from the University of Queensland, and is a member of the Association of Defence Communities and the Urban Land Institute. We are working with the City of Melbourne, Places Victoria and the State Government to come up with a design that creates best value in the best place, aligned with government requirements. Today, the Victoria Harbour master plan includes development of two distinct precincts: a City Quarter and a Wharf Quarter. We are trying to leverage the heritage of the wharf area and improve access to Melbourne by extending Collins Street to the full length of the site. The project also provides a civic space between the intersection of Collins and Bourke Streets, which has more frequent public spaces, more points of public interest, and a better proximity and relationship to the water. This can only come about by striking the right deal with government, and funding the infrastructure through that.

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Commercial and Municipal Lighting

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COMPANY FOCUS

AUSTRALIA’S NUMBER ONE ENGINEERING AND SURVEYING DISTANCE EDUCATION PROVIDER The University of Southern Queensland (USQ) has been named Australia’s number one engineering and surveying distance education provider1. Combined with the fact that engineering and construction are named among the nation’s top five highest paying industries2, there is no better time to get your foot into the industry. Studying with USQ means that you have the option to study on campus or online, full-time or part-time, or a combination of these modes. This flexibility ensures that you are able to maintain your work or life commitments while you study. USQ engineering degrees are fully accredited by Engineers Australia and are recognised worldwide, so they’re perfect whether you’re looking to gain qualifications, upskill or accelerate your career. Combine this with the fact that USQ is number one in Queensland for graduates in full-time work3 and you will be sure to achieve success in your career. One specialisation offered at USQ is construction, perfect for whether you’d like to start off your career in building and construction, or if you’re interested in moving into construction management roles, such as a site manager or property developer. With construction job prospects expected to grow very strongly4, our degree will equip you with the knowledge and skills to enter this fast-paced industry. This degree will give you a strong foundation in engineering principles to tackle problems in the workforce. USQ also offers other programs in specialist engineering and spatial science areas, such as agricultural, environmental, civil, infrastructure management, computer systems, urban and regional planning, electrical and electronic, mechanical and mechatronics, power and process engineering, as well as in geographic information systems and surveying. There is a range of degrees available, from associate degree to masters, all designed to meet the changing needs of industry and the busy lives of our students. Matthew Brennan, a current USQ engineering student, says, ‘I chose to study at USQ because of the wide range of degrees on offer, particularly in engineering. ‘The level of dedication to its students and the facilities were other reasons why I came to USQ.’ USQ also recognises prior learning or work experience in the field, so you could fast-track your studies by receiving credit towards your degree. This could be in the form of a diploma through to TAFE.

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So, whether you want to gain an engineering or construction qualification, upskill your award from TAFE, undertake study to gain graduate professional status or just talk to one of the industry’s leading education providers – talk to us!

For more information about studying engineering or construction at USQ, visit usq.edu.au/study/degrees/engineering, call 1800 269 500 or email study@usq.edu.au. 1 Department of Education, 2014 2 Seek Salary Survey, 2014 3 MyUniversity, 2013 4 Job Outlook, 2014

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Study with Australia’s No. 1 distance Study Studywith withAustralia’s Australia’sNo. No.11distance distance education provider of Engineering education educationprovider providerof ofEngineering Engineering * and Surveying degrees and andSurveying Surveyingdegrees degrees* * Choose from 9 engineering specialisations, Choose Choose from from 99 engineering engineering specialisations, specialisations, including the only Agricultural Engineering including including the the only only Agricultural Agricultural Engineering Engineering degree in Australia and New Zealand. degree degree inin Australia Australia and and New New Zealand. Zealand. Flexible study options. Study full-time, part-time, Flexible Flexible study study options. options. full-time, full-time, part-time, part-time, on-campus, online or Study a Study combination of these on-campus, on-campus, online online or or a combination a combination of of these these modes to fit study into your life. modes modes toto fitfit study study into into your your life. life. Our programs are fully accredited by Our Our programs programs are are fully fully accredited accredited byby worldwide. Engineers Australia and are recognised Engineers Engineers Australia Australia and and are are recognised recognised worldwide. worldwide. Choose a degree to help you accelerate your Choose Choose aestablished degree a degree toto help help you you accelerate your already career; oraccelerate give you your the already already established established career; career; oror give give you you the the knowledge, skills and expertise you need to knowledge, knowledge, skills and and expertise expertise you you need need toto get your footskills into the industry. get get your your foot foot into into the the industry. industry. We are Queensland’s No. 1 university for We We are are Queensland’s Queensland’s No. 1 university 1^.university for for graduates in full-timeNo. work ^ ^ graduates graduates inin full-time full-time work work . .

Find your future in Engineering today. Find Findyour yourfuture futureininEngineering Engineeringtoday. today. W usq.edu.au/yourfuture usq.edu.au/yourfuture usq.edu.au/yourfuture 1800 269 500 1800 1800 269 269 500 500 @ study@usq.edu.au study@usq.edu.au @ @study@usq.edu.au

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THE BURNING RENEWABLE ENERGY TARGET With energy demand declining, changing the Renewable Energy Target (RET) has the potential to impact the financing of the Australian renewable market even further. The renewable energy environment might be changing, but it seems that the Australian Capital Territory Government’s legislated renewable energy target of achieving 90 per cent of energy generation using renewable sources by 2020 is looking to rise above federal policy uncertainty and lead the charge in establishing independent renewable targets. Wind-farm developers have shown strong interest in the Australian Capital Territory’s recent 200-megawatt (MW) wind power capacity auction, with 18 proposals totalling more than 1000 MW of capacity reported to have been received by the Australian Capital Territory Government to date. The huge response to the Australian Capital Territory auction is largely driven by the limited new offtake opportunities that are currently available for wind farm developers. The Australian Capital Territory auction process offers a 20-year feed-in tariff (FIT) and a high-quality offtaker backed by the Australian Capital Territory Government, which has also enabled much-needed certainty for investors and financiers. On 23 September 2014, the South Australian Government announced its own state target to achieve 50 per cent renewable energy in its electricity mix by 2025, although this is only if the Federal Government maintains the current Renewable Energy Target Scheme arrangements.

As we reach the end of 2014, Australia’s power sector continues to face policy uncertainty, as the current government removed the carbon tax on 1 July 2014 and is preparing to amend the national RET again. At the same time, demand in the National Electricity Market (NEM) has declined significantly, with further falls expected before stabilising at lower-thanhistoric levels (see graph 1). Decreasing demand has been largely driven by falling electricity usage in energy-intensive industries (such as recent aluminium

smelter shutdowns at Kurri Kurri and Point Henry), the impact of energy-efficient programs, and the growth in rooftop solar photovoltaics (PV). Significant investment in new renewable generation capacity has also added to the competitive pressures faced by the incumbent fossil-fuel generators, some of which have been mothballed or curtailed. The Australian Government’s independent expert panel review of the RET scheme was released in August 2014, and presented a range of possible amendments to both the Large-scale Renewable Energy

‘Significant investment in new renewable generation capacity has also added to the competitive pressures faced by the incumbent fossil-fuel generators, some of which have been mothballed or curtailed’ Declining National Electricity Market (NEM) demand (graph 1)

Changing renewable environment The development of renewable energy generation in Australia was supported by government policies in response to concerns about climate change, energy independence and economic stimulus. The Renewable Energy Target (RET) was increased in 2010 to 41,000 gigawatt-hours (GWh) per annum, encouraging a wave of projects that were being developed across the country. Banks geared up for significant growth in renewables financing, based on longer-term offtake contracts, increasing bundled power prices and a stable market for the large-scale generation certificates (LGCs) that would be regularly traded by finance and energy houses. By the end of 2013, 11 per cent of total electricity production in Australia – 19,088 GWh – was generated by renewables. As a market leader in renewable debt financing, ANZ financed more than $1.9 billion in total loans for eight wind farms during 2013. Sources: Bureau of Resources 2013 AEMO 2014, and ANZ

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Target (LRET) and the Small-scale Renewable Energy Scheme (SRES). These included capping the RET at current generation levels, or linking the RET to electricity demand growth, with only 50 per cent of any increase available to renewables. This would put the RET at a ‘true 20 per cent’ of electricity production by 2020, which was the scheme’s original intention. The SRES would be either abolished, or reduced so that the size of eligible solar energy systems moves from 100 kilowatts (KW) to 10 KW.

Bank financing considerations The potential outcome of the RET review may increase concerns around sovereign risk in Australia, particularly given the ongoing uncertainty associated with the various renewable schemes, declining demand and low energy/LGC prices. New and current development projects dependent on the RET are likely to face further delays, as they wait for the government’s decision and the time when the proposed changes (if any) are incorporated and successfully passed into legislation. In the meantime, many existing projects continue to benefit from longterm power purchase agreements (PPAs) sought by owners, which were critical in securing financing commitment from banks. Historically, wind farms in Australia have had long-term PPAs – typically up to 15 years. Over the past few years, however, tenor has reduced to 10–12 years due to energy prices and RET uncertainty, with financing arrangements being much shorter – usually around five years. There are a large number of wind farm projects due to refinance in the next few years. While there is a dearth of supply of new opportunities, any competitive tension that this situation would normally be expected to generate will need to be considered against

‘Australia’s power sector continues to face policy uncertainty’

‘While there is a dearth of supply of new opportunities, any competitive tension that this situation would normally be expected to generate will need to be considered against the increased uncertainty on the price path for uncontracted merchant risk beyond the offtake period’ the increased uncertainty on the price path for uncontracted merchant risk beyond the offtake period. Capital structures may need to be altered to counteract the risk of lower merchant prices being received once existing PPAs expire. One area of opportunity for electricity retailers and financiers (if the SRES is only reduced to 10 KW) is in the rooftop solar PV market, where technology is improving panel production rates and reliability, and lowering up-front costs to the point where subsidies are no longer required for consumers to gain a positive financial pay-off. This, in turn, is enabling new market entrants to gain the first-mover advantage, led by international solar players and domestic retailers. The International Energy Agency forecasts that rooftop solar in Australia will more than double over the next four years, with Australia to have 5 GW of installed rooftop solar capacity by 2018. Over several years, banks have developed a favourable understanding of renewable technologies and appropriate funding structures, and have had substantial appetite to fund the sector, with significant competitive tension seen for each renewable opportunity. Developers and sponsors have shown a willingness to invest equity in these long-term assets, with significant development opportunities presently sitting in abeyance, and equity sponsors showing strong competition to secure the right

asset at competitive investment returns within the right regulatory environment. The Australian Capital Territory has taken leadership and shown willingness, desire and capacity to increase its generation mix towards renewables. In the absence of similar action, other states’ ambitions require a consistent federal direction to provide lenders, developers and sponsors with sufficient regulatory certainty to pursue further investments in this important global sector. We note, however, that federal considerations need to balance the desire for new generation from any source in an oversupplied market with other factors, such as impact on cost of living, sustainability and environmental targets, and community concerns around long-term composition of fuels used to provide our nation’s electricity. Author: Marcus Ritchie, Director Utilities & Infrastructure, ANZ The views and recommendations expressed in this document are those of the author, and may not reflect the views of Australia and New Zealand Banking Group Limited.

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Jeremy Maycock

Jeremy Maycock AGL Chairman Jeremy Maycock outlines the key challenges that the domestic energy sector in Australia is currently facing, with a focus on the efficiency of publicly owned networks, deregulated metering, reform of tariff design and scrapping the Small-scale Renewable Energy Scheme. Key points: • Australia had the second-lowest power prices among peer OECD countries in the early 2000s, but this advantage has been lost. • Flawed policy and regulatory interventions saw power prices grow faster than in any other country between 2007 and 2013. • Inefficient public ownership of networks in New South Wales and Queensland has been a significant contributor to costs. • The benefit of small-scale solar schemes should be reassessed, in light of high prices. • Smart metering and other reforms that engage customers offer real opportunities for better value.

So much discussion about energy markets and energy policy is very narrowly focused, without a broader consideration of the interrelated issues. For example, decisions relating to electricity network expenditure will influence consumer pricing. In turn, this will influence electricity demand, which will determine, at least partially, generator and retailer profitability. 70

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Another example would be where renewable energy policy not only influences consumer pricing, but can also create material social inequity, as well as prematurely stranding generation assets with remaining economic lives – another cost of scarce resources that must be borne by society.

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With all this in mind, it is important to ask the most basic of questions in relation to how we are tracking with energy markets. That is, what objective does energy policy try to achieve? In our view, in any modern economy, energy policy has three objective functions: • to deliver a reliable supply of electricity • to deliver at a cost-reflective price • to deliver in a way that minimises impacts on the environment over time. You don’t need to be an energy policy expert to know that these objectives can collide, and so trade-offs must be continually made. For example, changing reliability standards means altering the flow of investments into generation and network assets, which changes end-user prices. Appropriately setting energy policy therefore requires trade-offs among these conflicting objectives, as well as catering for the inevitable introduction of new-generation technologies. It also requires an understanding of how micro-economic reform is best implemented – with ‘product market’ reform being prioritised, and an appropriate level of competitive tension enabled. We would argue that the industry and policymakers have too often neglected ‘product market’ reform, and therefore the consumer, in policy decisions. When you consider an analysis of past (and possibly future) electricity prices in New South Wales (see Figure 1), you can see the very rapid rise in electricity prices in recent years following a long period of price decline. In the early 2000s, Australia had the secondlowest electricity price among our main OECD counterparts. Between 2007 and 2013, Australia’s electricity prices increased in absolute terms more than any other country. We’ve gone from first place to last. And the consumer is paying for this.

There are ways in which we can reverse this trend. Research that our organisation published in The Electricity Journal last year showed that a real price reduction of 10 per cent is entirely possible by 2020 – shown as the forecast, perhaps optimistically, on Figure 1. It is this prospective future that I would like to talk about. My proposition is that there are four reforms that should be considered simultaneously to turn around the overall performance of the National Electricity Market (NEM) and place downward pressure on retail electricity prices: • firstly, we should revisit the ‘energy-only’ basis of the wholesale market and amend the Large-scale Renewable Energy Target • secondly, we need to sort out small-scale renewables policy • thirdly, we need to reform tariff design • lastly, we must deregulate metering.

Figure 1: Historical and 2020 forecast – New South Wales prices

Source: AGL Volume 5 Number 1

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NEM energy-only market design The NEM is often cited as one of Australia’s most successful micro-economic reforms. Generators are paid for their energy in five-minute increments, but, importantly, they are not paid for their capacity. Unless your generation is dispatched to meet demand, you don’t get paid. Power engineers and energy economists call this model the ‘energyonly’ market. All around the world, people are grappling with market design issues. Simply put, revenues in the NEM have never recovered long-run marginal costs. Average wholesale electricity prices have been below newentrant costs in all years except the drought year of 2007. The obvious question is: how has new investment been possible with such sub-economic pricing? The answer is that since 2004, generation has not been financed by investors without the backing of a Power Purchase Agreement (PPA) with an investment-grade, credit-rated retailer, and most of that generation has been accompanied with some form of levy or subsidy, which has in turn been funded by consumers. In other words, investors are asking retailers, and eventually consumers, through government subsidy policies to wear the risk that the NEM doesn’t provide adequate revenues. Many of the issues we face today were certainly not considered by policymakers when the NEM was being designed: declining electricity demand, new renewable energy capacity driven by government policy, and barriers to exit in the context of the necessary replacement of the capital stock. In 2009, the policymakers who established the 20 per cent Renewable Energy Target (RET) expected electricity generation to increase by approximately 2.5 per cent per annum, from 230 terawatt hours to about 300 terawatt hours in 2020. What has happened has been the reverse. Electricity demand has fallen. In fact, electricity generation in 2012 was just 221 terawatt hours – four per cent lower than in 2009. The combined effect of falling demand and adding more supply through government policies, in particular the RET, is the development of significant oversupply. In fact, recent analysis by AGL and the Australian Energy Market Operator shows that the market has 7000 megawatts of oversupply. This is the equivalent of three or four Loy Yang A power stations in the Latrobe Valley, and at market rates, about $13 billion of over-investment.

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Let’s put that oversupply into perspective. Figure 2 shows the capacity utilisation or ‘capacity productivity’ of the Australian electricity system. Two trends are worth noting. Firstly, the significant upward swing in capacity utilisation during the 1990s and 2000s as the Hilmer reforms resulted in the creation of the NEM, and allocative efficiency was promoted through a dynamic wholesale market. Secondly, and disturbingly, is the significant decline in capacity productivity over the past few years as more supply has been added but demand has declined. With such significant oversupply, there has been a sustained reduction in wholesale electricity prices. In fact, forward contract prices in Victoria are now $30 per megawatt hour – around half the cost of a new entrant power station. I don’t think that this situation will correct itself anytime soon. As of today, around three-quarters of east-coast steam plant is beyond the age of its original design life. Many of these ageing power stations are operating not as base-load power stations, but as peaking or intermediate power stations. As prices decline, some will be mothballed and some will remain in the market, theoretically available for immediate dispatch. But maintenance budgets will be slashed, and this will mean increased instances of forced outages. In such a scenario, it is feasible that even with so much oversupply, much of it mothballed and unavailable at very short notice, system security could ultimately be compromised. It may take a decade to see this, but unless we deal with the issues related to wholesale market fundamentals, it is inevitable that maintenance and investment in aged asset replacement plants will not

Figure 2: Electricity capacity utilisation

Source: AGL

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Figure 3: Household demand and solar PV output

Figure 4: Net household demand and solar PV output

Source: AGL

occur. Without this investment, it is only a matter of time before reliability comes into sharp focus. Furthermore, if wholesale prices remain low, new renewable investment will be increasingly reliant upon government subsidies under the RET. It is clear to me that the status quo is unsustainable. Energy throughput is paid for, but reliability is not. Reliable capacity is now more important as we move towards a market with more intermittent renewables. It is important that this reliable capacity has a price signal to ensure that it continues to be available when required. Policymakers must consider how the RET becomes a ‘transitional’ rather than ‘additional’ policy. For each unit of renewable capacity added through the RET, the policy should incentivise a highemitting unit of capacity to be withdrawn – perhaps using a similar but reverse RET-style obligation on liable entities to contract with generators to facilitate permanent closure.

Public policy rationale for SRES Moving to the second issue I outlined, it is important that policymakers question the public policy rationale for continuing to subsidise small-scale solar PV. There is little doubt that solar PV has been generously subsidised – with around $6 billion in capital subsidies provided by the Federal Government, and a further $6 billion to run via historic and future Premium Feed-in Tariff payments. All Premium Feed-in Tariffs have since been closed to new households, but the schemes remain on foot until their termination date – some spanning until the year 2028. Explicit subsidies, funded by electricity consumers through feed-in tariffs, have

resulted in some customers with PV significantly profiting at the expense of those customers without it. AGL’s economists highlighted the social inequity with these policies, finding that the ‘implied tax rate’ of the lowest-income households was around three times higher than the ‘implied tax rate’ of the highest income households. But there are still two ways in which solar PV is being provided with an unnecessary cross-subsidy – firstly, poor tariff design, and secondly, the continued operation of the Small-scale Renewable Energy Scheme (SRES) policy. The way tariffs are currently set allows those with solar PV to ‘free-ride’. We know, looking at Figure 3, that household peak demand occurs between 4 pm and 8 pm. Network costs directly relate to meeting this peak demand, and that is why distribution networks define the ‘peak period’ as 4 pm to 8 pm. Now, let us consider what happens when a customer installs a solar panel (Figure 4). The profile of solar production is highlighted by the black line. At the time of peak electricity consumption, the solar PV unit is producing little energy. In other words, the cost of the network is broadly the same, irrespective of whether a household has solar, because networks are built to meet peak demand. Now, if we throw into the mix the fact that network tariffs are currently based upon ‘average cost’ energy throughput pricing, we can begin to see the significant cross-subsidy that occurs. If you look at the ‘net consumption’ of the household and how they are charged under existing tariffs, it’s clear that network operators see significantly reduced energy throughput due to the solar PV unit ‘hollowing out’ electricity demand in the middle of the day. But peak demand is almost unaffected. It is reduced by five per cent, yet the average PV household is avoiding, to our calculations, 32 per Volume 5 Number 1

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Figure 5: Global electricity price changes

the RET review panel was clear – SRES should be abolished on both efficiency and equity grounds.

Networks and tariff design

Source: UBS, AGL

cent of network charges. With ‘average cost’ pricing in place, solar PV customers are effectively avoiding several hundred dollars in electricity costs, which are then smeared across the remaining customer base. Looking at the extent of the cross subsidy, ACIL Allen, in modelling for the Energy Supply Association of Australia, found that avoided costs total around $241 per year for an average customer. AGL’s economists found the number to be about $264 per year. Importantly, these avoided costs must be paid for. Because the networks have regulated revenue targets, they are recovered through higher tariffs from the rest of the network’s customers. Apart from sub-optimal investment in PV units, policymakers must consider these issues on social equity grounds. It is grossly unfair that solar customers are cross-subsidised by other consumers. These payments are ‘wealth transfers’ between customers. The SRES policy, which provides an upfront subsidy, was never well thought through. The five-times multiplier adopted when the policy was conceived has resulted in subsidies being paid for 75 years’ worth of energy generation up-front. Even with the multiplier now unwound, it has become clear that the policy is unnecessary. AGL estimates that the payback period for installing a three-kilowatt system for an average customer is currently a little under six years. Without the SRES subsidy in place, the payback period for installing the same system would be a little over eight years. The question that policymakers must ask is whether the payment of thousands of dollars in SRES subsidies for solar PV installations is a sensible use of scarce societal resources. Consequently, our advice to 74

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Let me now turn my attention to the third issue: energy networks. Much discussion has occurred in recent years about the loss of economic competitiveness in Australia due to significant electricity price increases. UBS has looked at the increase in prices in various countries around the world and their drivers, broken down by networks, taxes and levies; and energy and supply – supply being the ‘retail’ component. What UBS found is that Australia’s electricity prices have increased by far more than other countries, driven primarily by network costs, as you can see in Figure 5. In some states in Australia, network prices have more than doubled. In my view, there are two reasons: the reliability standards set for, and the performance of, government-owned businesses in Queensland and New South Wales; and lack of tariff reform, which has contributed to such poor outcomes. In Queensland and New South Wales, network assets have more than doubled over the past 10 years, from $28 billion to $60 billion. To truly understand, though, just how significant the increase in network capital expenditure in New South Wales and Queensland has become, one needs to look to capital and labour productivity. Let’s consider capital productivity first. Network capital productivity in Queensland has fallen from around three gigawatt hours per million dollars of regulated assets in 2005, to just 1.5 gigawatt hours today. In New South Wales, network capital productivity has fallen from approximately five gigawatt hours per million dollars of regulated assets to around just two gigawatt hours today. In other words, capital productivity in the northern states has fallen by 55 per cent. At the same time, overall capital productivity in the Australian economy has fallen by 13 per cent – and that’s in the context of a mining and resources boom where capacity is gradually coming onstream. Labour productivity has fallen by around 20 per cent in the northern states; yet, over the same period, labour productivity in the broader Australian economy has improved by around 11 per cent. With declining capital and labour productivity, by definition average costs must be higher. In New South Wales and Queensland, tariffs have risen from around five cents per kilowatt hour

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to more than 12 cents per kilowatt hour today. While we may argue whether the capacity built was necessary or not, it cannot change the fact that such investment has occurred. What we can do is improve the incentives faced by consumers to ensure that capital productivity and utilisation improves in the future. This brings me to the most important topic in my presentation: tariff reform.

Tariff reform As mentioned, when discussing the merits of continued subsidies for small-scale solar PV, networks currently price their electricity using ‘average cost’ tariffs. Increases in ‘average cost’ tariffs prompt a demand-side response. Customers use less energy, but at a time most convenient to them. As underlying demand falls, ‘average cost’ tariffs increase, and so it continues. It is what AGL’s economists call the ‘energy market death spiral’. Preventing such a death spiral occurring relies upon pricing structures that are more cost-reflective. There are two main alternatives to ‘average cost’ pricing. Firstly, demand tariffs could be used. Demand tariffs are based upon the ‘capacity’ required to service a household rather than how much ‘energy’ it consumes. This was how electricity tariffs were originally designed back in the 1890s. It would result in a higher proportion of fixed charges in the electricity bill, much like water and sewerage tariffs, and avoid inefficiently granting rooftop generators a ‘free option’ on the grid for when the sun doesn’t shine. The other type of tariff that could be used is a ‘time-of-use tariff’. These tariff structures price energy usage differently at different times of the day. Either of these pricing structures would be more effective at preventing a ‘death spiral’ occurring; although, we are starting to form the view that under current conditions and given current regulatory frameworks, demand tariffs will be more efficient and more equitable. This is not about ‘punishing’ customers. It is about a fairer system of pricing that is more costreflective, and incentivises consumers to use electricity more efficiently. As I mentioned earlier, peak capacity infrastructure has now been built – whether we like it or not, it exists and can’t be undone. Our challenge is pricing structures that improve its utilisation.

Metering The fourth issue I wish to raise is around metering technology and the regulatory framework. A critical part of the adoption of more efficient pricing structures is the rollout of smart metering technologies. Studies have shown that a consumerled rollout of metering technologies will result in a net benefit to society. That a ‘market’ might outperform a ‘regulated’ outcome is perhaps not entirely surprising. Research by AGL economists has shown that very poor metering services are materially impacting on customer experience. One in 13 meter reads is currently erroneous or estimated. Imagine doing your shopping at a supermarket and the assistant telling you that one in 13 items scanned through the checkout is incorrectly priced. I am glad that regulators understand my concern with the monopolistic status quo in metering. It is pleasing to note that the Australian Energy Market Commission is currently considering how best to change the regulatory state of play to facilitate competition in metering services. This will be the catalyst for more dynamic pricing structures, in my view. A more enlightened set of metering policies and rules, together with the retailer-led rollout of smart meters, has the potential to unlock significant value for consumers, and remove probably the largest source of frustration for retailers and consumers. In a world where distributed generation and storage will become increasingly important, smart meters are a critical enabler.

Energy policy settings This brings me to the final point of discussion – the lack of integrated supply chain consideration of energy policy. Many of the issues addressed have been the result of poorly coordinated energy policy. Decisions relating to network infrastructure have failed to consider the value that consumers place on reliability. Continued use of ‘average cost’ pricing structures impacts underlying electricity demand and the fairness of tariffs. Climate change policies were too rigid and failed to account for falling electricity demand in the operation of key schemes such as the RET. We need to learn lessons from these mistakes. Policymakers therefore need to better consider how all these policy pieces fit within the broader energy policy jigsaw puzzle. We need to stop making uncoordinated short-term policy decisions that increase investment risk and undermine long-term Volume 5 Number 1

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Electricity pricing structures must be changed. Pricing must become more cost-reflective through ‘product market’ reform policy objectives. The Energy White Paper process currently underway provides a unique opportunity for policymakers to present a more integrated ‘policy’ narrative for electricity and gas markets, and a smoother runway to a sensible future. Microeconomic reform of Australia’s east-coast energy markets was appropriate for the time in which it was implemented; however, times have changed. Electricity pricing structures must be changed. Pricing must become more cost-reflective through ‘product market’ reform. If we don’t adopt such product market reform, the decline in electricity capacity utilisation and productivity will continue, and our energy competitiveness will get worse. At the same time, we need to accept that changing energy generation technologies require us to rethink both the design of our wholesale energy market, and how best to integrate large- and smallscale renewables so that the system is robust. We need to take advantage of the opportunities for distributed generation and storage, but we will also need an efficient and robust grid-based supply chain for many decades to come. If we get this reform right, consumers will benefit over the long term. Not just households, but businesses, too. The research I talked about earlier could become our future if we make the right decisions – a 10 per cent real reduction in electricity prices is something that would materially improve our energy productivity and standard of living. Fixing these issues will not be easy, but major reform never is. To paraphrase a well-known United States President’s take on space exploration, we should choose to tackle these problems, not because they are easy, but because they are hard.

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Jeremy Maycock, Chairman, AGL Jeremy Maycock has been a Non-executive Director of AGL Limited since 2006, and Chairman since 2010. Mr Maycock is also Chairman of Port of Brisbane Pty Ltd and a Director of Nuplex Limited and The Smith Family. Previously, Mr Maycock has been Managing Director and Chief Executive Officer of CSR Limited and held senior management positions in Australasia and South-East Asia over 20 years with Swiss multinational construction material group Holcim Ltd. His commercial experience spans 39 years, with his early career being with Shell Oil in the United Kingdom and in New Zealand.

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VICTORIA’S REGIONAL RAIL LINK The true landmarks in a nation’s infrastructure do more than bring change and long-term benefit to their communities. They bring change and long-term benefit to the industry of infrastructure itself. Victoria’s Regional Rail Link (RRL) was the largest public transport infrastructure project undertaken in Australia. Announced in December 2008, with the first ground broken in August 2009, the $4.1-billion project is now scheduled for completion in early 2015. RRL liberates ‘bandwidth’ for both regional and metro services by untangling the train lines on Melbourne’s doorstep, and introducing a dedicated bypass through the booming western region to Geelong. It creates a vital channel for future projects, such as the Melbourne Airport Rail Link. Even more impressive, however, is the approach to governance, contracting and culture that has the RRL now on track for completion six months ahead of schedule, and $900 million under budget. In every key performance indicator – safety, innovation, environmental sustainability, and community relations – RRL is the new benchmark for major infrastructure projects. From the mid-19th century, Melbourne’s metro and regional rail network grew in a piecemeal way. A by-product of this early growth is that Southern Cross Station – one of the city’s two main stations, along with Flinders Street – accommodates metro (electrified), regional (diesel) and dualgauge interstate services from all across Melbourne’s west. All have had to converge in a bottleneck north of Southern Cross Station. Regional services for major centres like Bendigo and Ballarat endured some 12 kilometres of choked metro tracks between Sunshine and Southern Cross. The Geelong regional service, peeling off to the south-west, similarly had to share a metro line out to Werribee for almost half of its 70-kilometre journey. Scheduled trips would often be extended by 10 or 15 minutes for the simple want of finding track space among the metro trains. The solution: separate the regional and metro services by giving the west a dedicated regional channel all the way into Southern Cross. The RRL entailed the weaving of new, paired tracks through the thicket of existing lines, passing through (or briefly bypassing) impossibly pinched parts of the corridor, and the replacement or modification of virtually every bridge – and four of the six stations – between Southern Cross and Sunshine. But the RRL would do much better yet for Melbourne’s west. The Geelong services

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that formerly shared the metro line between Southern Cross Station and Werribee would also use this new, westbound portal. Beyond outer-suburban Sunshine, Geelong services turn south onto 26 kilometres of all-new RRL route that delivers rail services into the heart of the rapidly urbanising region of Wyndham, and pass through two all-new stations, Tarneit and Wyndham Vale. The RRL creates the capacity for an extra 10 regional services and 23 metro services in each morning and evening two-hour peak period – that’s a potential 54,000 more passenger trips per day. Associate Professor Colin Duffield of the University of Melbourne’s Department of Infrastructure Engineering led an August 2014 survey of community and business leaders on the RRL route. Professor Duffield sought to quantitatively interpret the project’s impact on issues like economic growth, housing, travel times, mobility and health. Beyond the mathematics, wherein the gains anticipated from RRL across all categories averaged at almost double their current levels, Professor Duffield distils the RRL project to one word: ‘magnificent’. ‘The view is that this project has been spectacular in terms of its input to the socio-economics, the health benefits and the economic growth potential of their communities. And it has added positively, if not to the same massive extent, to accessibility, mobility and housing.’

In practice, RRL has been hugely ambitious, requiring the laying of 90 kilometres of new track – about 10 kilometres of that through dense urban areas – and the construction of no fewer than 40 bridges and grade separations in both urban and greenfield sites. The journey has gone from the pioneering design of environmentally sustainable railway stations, and large-scale geotechnical challenges, to the study of a unique orchid that grows wild in a small reserve among the train tracks at Sunshine – and literally nowhere else on earth. Every task in the RRL project has been undertaken with a commitment to best practice. And yet, it is well ahead of time, and well under budget. The exploration of new and better ways began with the very structure of governance. The Regional Rail Link Authority (RRLA) is a public-sector authority reporting to an eightmember advisory board, whose members read like a who’s who of engineering, infrastructure, finance and government relations. Its Chairman is Peter Watson, a former Chief Executive Officer of Transfield Services. Corey Hannett, with a wealth of experience in major road and rail infrastructure projects, was appointed CEO in 2009. After leading the RRL project for five years, in July 2014 Hannett was appointed Coordinator-General, Major

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Transport Infrastructure Program. In the new role, he will oversee a number of largescale projects and ensure a coordinated and collaborative program approach. ‘Collaboration was a key driver in the success of the Regional Rail Link,’ says Hannett. ‘I knew right from the start we needed people with different skills and experience, from both the public and private sectors, working together and interacting with the community, the constructors and the government. I made sure we had the right people who shared our vision and knew what we had to do to deliver it. ‘RRL has been undertaken in a different manner than normal,’ Hannett explains. ‘This project has actually been delivered by the RRLA. We haven’t just packaged it up and funded it and outsourced it – we’ve delivered it. We’ve broken it up to deal with the terrain and the difficulties, and we’ve had to manage the risk of all those packages to deliver one railway corridor.’ Extensive market research and discussion with Victorian and interstate agencies prompted the division of RRL into six work packages to contain the cost and complexity of each. It was a key decision. Hannett explains: ‘The Southern Cross Station Work Package was delivered by the rail operator Metro Trains Melbourne (Metro), as it was so complex and had so much interface with their business. The next two work packages covering the area between Southern Cross Station and Sunshine were delivered as alliances because they needed the horsepower of big, private construction and design companies, combined with the rail operator expertise and RRLA knowledge and influence. Out into the greenfields, we were able to open it up to broader competition and delivered the works under design and construct contracts. The final work package, another alliance, covers the train control systems, or “traffic lights” for trains’. Challenging baselines were established for safety, environmental sustainability and community relations. Contractors were incentivised to surpass them, yielding better value should they succeed. The environmental targets alone comprised 22 separate goals, taking best-case examples from earlier projects and raising the bar in areas like embedded carbon, energy use, the re-use of material, and zero use of potable water for construction. Allen Garner, formerly RRLA’s Chief Operating Officer, has followed on from Corey as CEO. Garner has extensive infrastructure delivery experience in both private and public sectors. ‘The use of potable water was a big issue during the drought period,’ says Garner. ‘When that went away, people took the view that we can use drinking water for construction again. We decided: let’s not. We’d found a way to do it before…

‘In the end, everyone solved it in a number of ways – using saline water from the Maribyrnong River, and catching rainwater run-off and holding it… And it doesn’t cost much if you mandate it up front. It just needed our team pitching in and holding a line on sustainability.’ The way Garner tells it, the stunning success of the RRL is owed not so much to any specific new technological breakthrough, but to major efficiencies that arose from collaboration and understanding among the government and private sectors, and a well-informed community. ‘As it happened, at the time we went to market, there was a lull in the construction market in Victoria – so we hit a bit of a sweet spot, resulting in strong competition and great outcomes. ‘You can draw a line in the sand and say, “Let’s go for that,” and because you’re big enough and have the resources, you can make it happen,’ says Garner. If there is one overarching reason for the RRL’s streamlined success, it’s the use of long-term occupations of the rail corridors to undertake extensive works. The strategy was enabled by collaboration between key parties associated with the RRL project, strong community relations, and an up-front requirement for contractors to submit binding schedules of public interruption periods. The longer-occupation strategy, typically in blocks of two to three weeks, reaped immense benefits in terms of work efficiency and employee safety. ‘We took the view that just working at night and on weekends was not practical,’ explains Garner. ‘We couldn’t complete the project in that time frame, and the risk profile of shutting down the rail, setting up, doing a little bit of work, turning it on, shutting it down, packing up – annoying everyone, constantly – wasn’t the right way.’ During the July 2011 school holidays, there was a two-week trial of buses replacing trains between Sunshine and Footscray. The rail closure affected passengers from as far afield as Bendigo, Ballarat and Sunshine; but the smiling faces of RRL staff and volunteers – who staged sausage sizzles at the stations, provided free coffee to commuters on cold mornings and explained the works one-onone – smoothed the way. They proved to the community, and to the industry, that it could be done. ‘Two weeks is a bit of a pain,’ Garner says, ‘but when people came back and saw how much had been done – to see the skeleton of a station rising out of the ground – suddenly, wow!’ As part of the RRL, two new platforms – 15 and 16 – were constructed on the western side of Southern Cross Station, anchoring the new RRL lines. From the comfortable cabin of a V/Line (regional) train departing Southern Cross, it seems just a matter of seconds before

one is whizzing along at 80 kilometres per hour, and then at 130 kilometres per hour. But such speed and efficiency belies the needle-threading art of rail line placement undertaken by the RRL’s designers, engineers and workers. For those V/Line trains that continue to use the station’s platforms 1 through 8, a rebuilt flyover and ‘country bypass’ track section links them to the new RRL line just beyond Dynon Road, two kilometres upstream, near a junction known as Spion Kop. The Southern Cross Work Package, managed by Metro, with the major track and civil works contracted to a joint venture between John Holland and Coleman Rail, platform works contracted to Brookfield, and a new signalling system to Alstom, was the first RRL package to be completed. The new platforms and track they built became operational in December 2013. Delicate handling, if on a much larger scale, was also required where the RRL corridor squeezed past Scalzo Food Industries, on Kensington Road, immediately adjacent to the Maribyrnong River. This task fell to the City-to-Maribyrnong River Work Package Alliance (comprising John Holland, Abigroup, Coleman Rail, AECOM, GHD, Metro, V/Line and RRLA). This package also included 4.5 kilometres of new track, major modifications to three existing bridges and the construction of a one-kilometre-long rail bridge over the Maribyrnong River. The package’s Director, Evan Tattersall, explains the need for a careful touch. ‘The Scalzo family’s food manufacturing business relies on sensitive measuring and hygienic equipment. The excavation of rocks, heavy bridge building and the laying of rails all took place within a smidge of their facility’s walls.’ An innovation employed for the Maribyrnong River Bridge was the use of a launching truss, a heavy frame laid across the span to be covered. Machinery travelled along the truss to construct the bridge beneath it, obviating the need for heavy cranes and scaffolding. ‘It was one of the largest pieces of machinery used on the project,’ says Tattersall, ‘and ideal for use for construction in such a tightly constrained area.’ RRL’s community interactions have perhaps been most visible in the stretch of suburbia of the Footscray to Deer Park Work Package. This work package was delivered by an alliance comprising Thiess, Balfour Beatty, Parsons Brinckerhoff, Sinclair Knight Merz, Metro, V/Line and RRLA. It embraced the colourful and characterful communities of Footscray and Sunshine. In both locations, the rail corridor dissects the urban centre, and the stations serve as both a civic focus and quite literally a 24-hour bridge between neighbourhoods. Brett Summers was the Director of this package, having previously directed the Volume5 5Number Number Volume 1 1

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outlying section from Deer Park to West Werribee Junction Work Package, as well as the small work package at Werribee Junction, a Leighton-Downer joint venture, which built the rail-over-road flyover to join the existing Melbourne–Geelong regional passenger line. From surveying the vast, open landscape, including the junction, Tarneit and Wyndham Vale, Summers was now working within an existing rail corridor in an urban area. ‘It was quite a challenge to build a new station, while preserving a heritage station, and also keeping the trains running,’ Summers reflects on Footscray’s latest landmark. ‘You’re trying to keep a heritage building intact, build new weather canopies, match an existing station structure, do all new ramps, stairs, lifts – and keep people moving through a construction site to get to their trains.’ That lovely heritage-listed building, and its sister originals, are reliving their glory days. ‘All of the roof tiles are original slate tiles from Wales,’ Summers says. ‘So, to replace them, we had to get genuine Welsh slate out of the mines in Wales.’ Footscray’s major works extended beyond its impressive new station. Road bridges on Nicholson, Albert, Hopkins and Victoria Streets had to be replaced. Nicholson Street’s original bridge had, unusually, carried a row of narrow shops along one side. The bridge links the communities of Little Ethiopia and African Town and is well-travelled by students from the nearby Victoria University Footscray Nicholson Campus. Engineering Director Brendan Driscoll recognised that this, and the nearby Albert Street Bridge, deserved a new landmark. And so, the new Nicholson Street bridge, a handsome white tubular arch, has conjured an inviting combination of width and weather protection. Albert Street’s new crossing is almost as striking, with its blue truss design. ‘Both bridges were constructed largely off site, and their main beams craned into position – a time-efficient technique that benefited both the project and the community,’ says Driscoll. Footscray’s transformation is already visible in the new 1 McNab Avenue office tower that brings hundreds of people daily to work in the community. The new Café Cui, on Leeds Street, could be anywhere in trendy inner Melbourne; yet, it’s only metres from the Footscray Markets, whose colour and noise still recalls the 1960s. But here’s Footscray in one, delicious bite: sometime in 1979, Nick Tsiligiris parked a caravan at the train station and began serving his Olympic Doughnuts. The sugar-dusted treats were jam-filled from a ceramic dolphin dispenser, destined to become a Footscray icon itself. In the station’s transformation, the RRLA replaced the dilapidated caravan with a purpose-built kiosk. Tsiligiris, now edging

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into his 80s, is delighted with his new kiosk, and with the changes he’s seeing daily in Footscray. ‘It’s nicer now; different people coming, younger people,’ he smiles. ‘I’m very happy.’ A little way up the track, the elegance of the new West Footscray station belies the fact that it has been relocated 160 metres to the west. It, too, tells a local story, with ‘picture-perforated’ steel panels on the overbridge – a 24-hour crossing, enhanced with CCTV and night security staff – featuring historic photographs overlaid with the faces of local children. Parkiteer bicycle parking is likewise a feature of the new stations. Footscray’s rebirth is being mirrored in Sunshine, now truly poised to take advantage of its position as the western gateway to Melbourne. Here, preservation has taken on an eternal dimension. The Sunshine diuris orchid is a critically endangered plant. Examples are being cultivated in a nursery at Laverton, hopefully to ensure the species’ survival, but it grows wild only in a grassy little area among the tracks in Sunshine. Consolidating all the tracks to accommodate the new RRL lines, maintaining the trains’ original distance from the reserve, was not the matter of a moment. But then, neither is the extinction of a species. Nearby, the brand-new H V McKay footbridge commemorates the industrialist Hugh McKay, whose vast combine-harvester enterprise was established on the adjacent land in 1906. The 66-metre bridge, hoisted into position with one extraordinary lift in January 2014, has its supports decorated with murals, which are helping to reveal Sunshine’s rich history to its modern residents. Pre-dating even H V McKay’s tractor works were the level crossings on Anderson Road. The branching of train lines beyond Sunshine – continuing west for Ballarat,

turning north for Bendigo – had blighted this major north-south thoroughfare with a pair of level crossings just 450 metres apart. The southernmost line now runs beneath a new, longer road bridge. Like many in the RRL project, it’s been built wide enough to accommodate future, additional lines beneath it. (The line to Melton is said to be a strong candidate for electrified metro services in the future.) Just to the north, the Bendigo line crossing lent itself to a rail-over-road separation. Innovation again attended the construction of this new rail bridge, built ‘offline’ in an adjoining worksite. Train services were interrupted for just one weekend, while the completed bridge was literally slid across into place. The road underpass was then dug beneath it. The RRL has been characterised by an atmosphere of innovation, best practice and one of competing for excellence – and all have contributed to the project’s extraordinary safety record. Safety is built into the RRL’s foundations. Garner says: ‘Alliancing has driven a big shift; safety performance isn’t incentivised, it’s penalised – so that drove a whole mind shift for teams to go the extra yard. Before we went to market, we drove a campaign to get our team into a different safety paradigm. It empowers everyone to enforce that responsibility. ‘The rail sector traditionally hasn’t had a good safety record, compared with other sectors. There were many work practices that have “always been done that way”… When you challenge it, it turns out you don’t necessarily have to do it that way.’ Safety awareness across the project was maintained in the reporting of every incident, no matter how minor, and workshops to challenge and refine procedures. The workforce was trained, respected and nurtured, and began joining the push to make things better.

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One nifty innovation encapsulates the mood perfectly. Typically, track workers are warned of approaching rolling stock or equipment by flagmen. That is, until some of the workers on the City-to-Maribyrnong River Work Package, with inspiration almost certainly received during a coffee break, suggested that they carry wi-fi buzzers like those used in cafes and restaurants to alert customers that their order is ready. ‘In 14 million man-hours, we’ve had nine LTIs (lost-time injuries),’ reports Kelvin Doyle, the project’s Director of Safety. ‘The most serious was when a person in the head office broke her ankle walking down the stairs. Three of our nine LTIs are office-based. From what this industry was before – 30 or 40 TRIFR (total recordable injury frequency rate) – we’re down to around 10 and trending further south.’ The RRL’s safety record is even more commendable when one considers the scale and difficulty of so many of its components. One such component was the excavation of some 450,000 cubic metres of rock and soil to create a cutting at 2.5 kilometres long, and up to nine metres deep, for the Wyndham Vale Station. The cutting project alone took close to 18 months. For six of those months, residents became accustomed to the weekly ritual of ‘blast half-hour’. Brett Summers paints the picture: ‘Every Friday at 2.30 pm, when the kids were in school, the sirens would go off and the traffic would stop. There’s a pop underground and a bit of a rumble, and 15 minutes later, everyone’s just going about their business again.’ The Deer Park to West Werribee Junction Work Package is the longest, geographically, of the RRL phases, spanning some 26 kilometres. Almost the entire length comprises all-new rail, and 13 new road and rail grade separations. The package was a design and construct undertaking by Baulderstone and Leighton. In these greenfield sites, new histories are ready to be written. In the 2013–14 financial year, around 7000 people, or 2400 families, moved into Wyndham: the state’s fastest-growing municipality. The railway line is a beauty to behold, a silvery slice across the region’s agricultural expanses, stitched with crisply new bridges and crossings, dashing past new urban developments. It could be a snapshot of France or Germany. The European imagery certainly carries through to the 250-metre-long stations installed at Tarneit and Wyndham Vale. ‘Futureproofing’ is the mindset that pervaded the entire RRL project. And with futureproofing in mind, both stations were built with provision for corridor widening. In the more immediate future, Wyndham Vale’s class of 2014 Year 12 students now have the choice to pursue university study in either

Melbourne or Geelong, living at home and commuting to either with equal ease. ‘All of the RRL’s new train stations are at the very forefront of public infrastructure design. No “green building” environmental sustainability guidelines existed for railway stations, so the RRLA, in consultation with the Green Building Council of Australia, set about developing some,’ says Hannett. ‘Green Star rating guidelines were adapted to take in elements like collecting rainwater in underground tanks for station cleaning and toilets, solar panels to supplement energy, and low-energy consumption lighting. ‘The RRL’s car parks are lit by lowenergy consumption LED lamps, made possible by new security-camera technology. Both Tarneit and Wyndham Vale each have provision for parking 1000 cars, along with the Parkiteer bicycle kiosks. ‘All five of our stations have now been awarded the four-star “green” rating,’ says Hannett. Associate Professor Duffield acknowledges that the project’s success began with this kind of preparation. ‘It’s been planned not just as a train set, but with people sitting down, looking at the urban growth corridor, and asking themselves what the community really needs and how to make sure it’s robust for the future. ‘It’s people building rail for the community, which is what our survey demonstrated. And I understand it’s being delivered and actually giving some money back. It’s got to be ticking all the boxes, hasn’t it?’ The train control systems have also had to embrace and upgrade five decades of disparate signalling and communications technology. This work was undertaken across the project by Work Package G, delivered in alliance of RRLA, Metro, V/Line, UGL and RPS.

‘We’ve delivered some of the most complex signalling works undertaken in Victoria for many years,’ explains Deb Spencer, Project Director of the Rail Systems Work Package. ‘Regional Rail Link has installed a new state-of-the-art train control and signalling system, and delivered the project’s communications and passenger information technology.’ The scale and nature of the RRL project has spawned an unprecedented transfer of project and construction knowledge among all stakeholders: the government, the contractors and the community. A new benchmark has been set for all future infrastructure projects, and that potentially means exponential benefit to Victorians’ quality of life and the state’s productivity. ‘Because of the way this project has been split up, we virtually had every major construction and design company in Victoria working on it,’ explains Hannett. ‘Up to 10 construction companies and a dozen design houses, in different packages, all having to work together – that is unique. ‘And so we worked very hard to make them open up and share their knowledge. We introduced the industry to itself – not as competitors, but as co-workers.’ For both Hannett and Garner, personally, there’s been a huge satisfaction in pulling the puzzle together ahead of time and under budget. But it’s really about what they see in the faces of colleagues, and on the streets of communities being reborn. ‘Big projects create opportunities for local communities and councils to participate, and get a bigger benefit than just putting in new sets of tracks and a new railway station,’ says Hannett. ‘It’s what true engineering is and what it used to be – building infrastructure for the community: something it can be proud of. That’s the goal, which we believe has been achieved,’ concludes Garner.

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The Hon Dr Denis Napthine MP

The Hon Dr Denis Napthine MP Victorian Premier, the Hon Dr Denis Napthine MP outlines key planned or underway infrastructure projects in Victoria in a wideranging address to the infrastructure sector. Key points: • Victoria’s budget reforms see the state able to deploy a record infrastructure programme of $27 billion over the forward estimates. • The focus on urban rail and road projects reflects the substantial congestion and growth challenge. • The privatisation of the Port of Melbourne is a key focus, with the proceeds to fund new infrastructure. • Privatising the Port of Melbourne means that Victoria must resolve the timing and impact of additional container port capacity. • Major investments in motorways and urban rail will equip Melbourne for growth and prosperity.

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We have a very diverse and exciting infrastructure agenda. It’s an infrastructure agenda that’s being driven by the needs of people and families in Victoria. It’s an agenda that is to meet the needs of a growing population, and it’s an infrastructure agenda on which we are keen to work in partnership with the private sector to develop and deliver. This infrastructure agenda is built on the back of hard work, in terms of economic management, and we’re fortunate, in terms of the 2014–15 Budget, to reaffirm our Triple-A credit rating and also to have budget surpluses in this year, and each and every year of the forward estimates. We’re the only state or territory across Australia that has that strong budgetary position. And in early September, our Triple-A credit rating was reaffirmed by ratings agency Standard & Poor’s, who cited ‘the state’s very strong financial management, economy and exceptional liquidity’ and our ‘strong budgetary performance’ in a recent report. But we don’t manage the economy well to get plaudits for economic management. We manage

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the economy well so that we can deliver the services Victorians need, and the infrastructure we need to grow the great state of Victoria.

The State Budget In our May Budget, we were able to provide $15 billion – a record level of funding – for health and education services, and vocational education and training services, as well as a record level of funding for law and order to make sure that we have a safe and secure state. We’re also managing a $4.5 billion rebuild of our hospital system, which includes the $1 billion Comprehensive Cancer Centre in Parkville; the $630 million Bendigo Hospital, which is also delivering a hotel, conference centre and childcare centre, and is revitalising the heart of that great regional city; the $448 million Box Hill Hospital; $250 million Monash Children’s Hospital; $200 million investment in Barwon Health in Geelong;

and redeveloping the Eye and Ear Hospital, just to name a few projects. And, of course, in our Budget, we announced a number of key infrastructure projects totalling more than $27 billion. In real terms, that is the largest infrastructure spend by any Victorian government since World War II. In my lifetime, I look back and think of five game-changing projects or pieces of infrastructure in Melbourne and Victoria. They include: the City Loop, when we first had our underground rail; the Tullamarine Airport, when we moved from Essendon to Tullamarine and built the Tullamarine Freeway; the West Gate Bridge; the building of the Thompson Dam, which drought-proofed Melbourne and Victoria; and, more recently, CityLink. Each one of those projects was conceived and delivered by Liberal governments and I, as a proud Liberal Premier, am pleased that we are continuing

Left: IPA Chairman, Adrian Kloeden; Victorian Premier, The Hon Dr Denis Napthine; and IPA Chief Executive, Brendan Lyon

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The Hon Dr Denis Napthine MP

Addressing the demand pressures

Above: The Regional Rail Link Source: Regional Rail Link Authority

that same level of infrastructure investment to grow and develop this state. The Leader of the Opposition in Victoria, not long after he was elected to the role, said that one of the reasons that the Labor Party lost the 2010 State Election was because the Labor Party, in 11 years in government, failed to invest in the infrastructure that Victoria needed to meet the needs of a growing population. And we are a growing population. Recent Australian Bureau of Statistics (ABS) data shows that our population in Victoria is growing at two per cent per year, which is well above the national average of 1.8 per cent, and significantly above New South Wales at 1.5 per cent.

It’s vital that we, as a government, meet the needs of that growing population; and one of those clear needs is public transport. I’m pleased to advise that since we’ve been in government, we now have a public transport system that delivers 10,000 additional tram, train and bus services each week in Victoria, compared to when we came to government three years ago. We’re building 50 new trams, 40 new trains and 43 new V/Line carriages. We’ve also improved punctuality and reliability – for example, on one of our busiest lines, the Frankston (or Bayside) line, reliability and punctuality was at 62 per cent when we came to government. Punctuality on the Frankston line is now over 90 per cent, and across our whole system, we’ve had 28 months in a row of punctuality and reliability well over 90 per cent. We know that there’s still more to be done, but that improvement was based on fixing the basics – fixing the sleepers, fixing the maintenance and fixing the infrastructure. We also know that as the population grows, you have to do more. You have to build the new infrastructure to meet the needs of a growing community. And I want to talk about some of our major projects across public transport and across roads, across regional and rural Victoria, and ports. One of the great projects that we’re undertaking at the moment is the Regional Rail Link. This is a project that is separating our country rail services, V/Line, from our metropolitan services to improve the reliability and punctuality of both so that they don’t clash in competition for slots on the rail system. This project, since we’ve taken over, has increased in scope, it’s ahead of schedule, and it’s $900 million under budget.

Punctuality on the Frankston line is now over 90 per cent, and across our whole system, we’ve had 28 months in a row of punctuality and reliability well over 90 per cent 84

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Its budget was $5 billion – it’s now $4.1 billion, and it will deliver increased services. For example, when you separate the V/Line services, and our metropolitan services in the western suburbs and in the north-western suburbs – the Werribee line, Williamstown line, Altona line and even in the northwestern lines like Sydenham – more services can be put on. At the same time, we’ll be able to deliver better, more reliable services, and more services to regional centres like Bendigo, Ballarat and Geelong. And, indeed, in April 2015, when this project is in full operation, there’ll be an additional 140 services per week to Geelong, including an additional 30 peak-hour services. And with those budget savings, we’ve actually dedicated more than $200 million to remove the St Albans level crossing – one of the most dangerous level crossings in Melbourne. I’m also pleased to advise that the Regional Rail Link project won Infrastructure Partnerships Australia’s Infrastructure Project of the Year Award in 2014. That’s the sort of project management that we want, and we’re proud to have, in this state. We announced in the Budget that we would be undertaking the Melbourne Rail Link, including the Airport Rail Link. This is a project of $8.5 billion to $11 billion. It’s about increasing the capacity of our metro system through the City of Melbourne. The City Loop has served us well, and it’s absolutely running at capacity. The Melbourne Rail Link will increase capacity through the city by 30 per cent. It also facilitates services so that we can have virtually a turn-up-and-go system across Melbourne. We’re already delivering that on the Frankston line and on the Pakenham-Cranbourne line. So, on those lines, under our new timetabling, there are offpeak services every 10 minutes, and during peak times, there are services every two to three minutes. Passengers won’t even have to bother to look up the timetable; the service will be there. But to do that across all our lines, we need to increase capacity through the centre of Melbourne, and the Melbourne Rail Link will certainly deliver that. It will also deliver a new tunnel from South Yarra through to Southern Cross. It will deliver new stations at Montague, which will service the growing Fishermans Bend area, and at Domain. It will be a massive project. That project will also include the long-awaited Airport Rail Link. For those who know Melbourne,

we’ve been arguing about the Airport Rail Link for over 40 years, but this project, as outlined in the Budget, is fully funded and will commence work in 2016. The Pakenham–Cranbourne Rail Corridor is a project that we’re delivering through an unsolicited bid process. This will give us a significant improvement in capacity on that line of 30 per cent. It is our busiest rail line, and as part of a total package to upgrade that line, this project will deliver 25 new trains; high-capacity signalling, so we can run the trains much closer together; three new stations; four level crossing removals, or grade separations; and 3000 jobs. Level crossing removals are a major issue in Melbourne. We have too many level crossings, which cause congestion and are dangerous, and we have a programme to get rid of them. From the last three and a half years, there are 40 level crossings that we’ve removed, that are currently out to tender, or that are in advanced planning of removal. Indeed, we have removed major level crossings in Mitcham, at Rooks Road, Springvale Road and two at Anderson’s Road, and we recently released a package of $660 million worth of tenders for St Albans, Burke Road in Glen Iris, North Road in Ormond, and Blackburn Road in Blackburn.

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So, across our public transport system, we’re improving the existing system, and we’re investing in key infrastructure to increase capacity to grow the system as the population grows. But we know that you need the balance between public transport and road infrastructure. We do need to move our goods and services by road, we need people travelling to and from work, and we need people taking their children to the local sports ground, coming into the city, so you need a mixture of road and rail. That’s why we are committed to the East West Link.

East West Link This proposal was originally put forth by Sir Rod Eddington in 2008, and it was embraced at the time by all sides of politics. It is an absolutely vital project for Melbourne and Victoria. It will massively reduce congestion, particularly in some of our most congested areas. For example, where the Eastern Freeway joins Hoddle Street, and where CityLink joins the Tullamarine Freeway and Flemington Road. It will deliver, in the western section, a vital second crossing of the river for Melbourne and Victoria. Currently, we only have one significant river crossing, the West Gate Bridge, which currently carries about 200,000 vehicles a day. All you need is for a taxi to break down – a minor incident – and the whole of the West Gate system, our M1 system, is absolutely crippled, causing congestion and chaos. Each and every morning, if you’re coming in from the 86

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west, you wait back to Laverton or Werribee to get on, and on the Western Ring Road, back to the Deer Park Bypass. We are determined to build the East West Link, both Stage One and Stage Two, which will improve transport productivity and efficiency, with better access in and out of the Port of Melbourne and taking trucks out of suburban streets, taking trucks off the West Gate Bridge, and improving the economics of our transport system. It will create 6200 jobs, and it will certainly make a game-changing difference to Melbourne and Victoria. We’ve announced that the East West Connect consortium is the preferred tenderer for Stage One, and we expect to sign the contracts in the next few weeks [Editor’s note: Contractual close reached in September]. We will build East West Link – it is absolutely vital for Melbourne and Victoria, and it is absolutely irresponsible for anybody to suggest that these contracts shouldn’t be honoured. I also want to talk about Tullamarine Airport. One of the reasons that we need the Airport Rail Link is because over the next 10 to 15 years, Tullamarine Airport will go from 30 million passengers in a year to 60 million, and perhaps even higher. So, you desperately need that Airport Rail Link. But you also need to improve the road to the airport. We’ve done a deal with Transurban, so that there is an $850 million expansion of Tullamarine Freeway from the end of Flemington Road right through to Essendon Airport, and that will guarantee to reduce travel times to Tullamarine by 16 minutes, even in peak hour. Those projects are vital for Melbourne and Victoria. Of course, it is also important to invest in infrastructure in regional and rural Victoria, where I come from. One of the major projects that we’re undertaking is the $220 million upgrade of the Murray Basin Rail Project. This will standardise the rail gauge from Mildura, down to the ports of Portland, Geelong and Melbourne, and link Mildura, finally, into the national rail grade. This will make a real difference in transporting cereal grain and mineral sands, and will create opportunities for the future of linking north, from Mildura, to the key Sydney–Perth rail line. At the same time, we’re increasing capacity by 15 per cent, from 19 to 21 tonnes per axle.

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On roads, we’re doing a $500-million expansion of Princes Highway west, duplicating Winchelsea and on to Colac. On Princes Highway east, we’re moving a duplication from Traralgon through to Sale. The Western Highway, another $500 million project, we’re duplicating from Ballarat through to Ararat and on to Stawell. In Bendigo, we’re spending $86 million fixing the Calder Interchange, the most dangerous intersection in Melbourne, which is also vital for transport productivity and efficiency. We’re also upgrading the Great Ocean Road and putting in place the Koo Wee Rup Bypass.

Growing the state’s port capacity We know that with the growth of trade, and imports and exports within a decade, the Port of Melbourne will be absolutely full. The Port of Melbourne is the largest container port in Australia, with 37 per cent of all containers going through there. There’ll be no capacity for growth, so we’re undertaking a project at the Port of Melbourne, at a value of $1.6 billion, to open up a third container terminal in Webb Dock East and, of course, to relocate our automotive trade to Webb Dock West. So, when you drive over the West Gate Bridge and you look towards Tasmania, just lower your eyes

This will make a real difference in transporting cereal grain and mineral sands, and will create opportunities for the future of linking north, from Mildura, to the key Sydney–Perth rail line

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Below: Port of Melbourne. Source: Port of Melbourne Corporation

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We have strong figures on building approvals, retail sales, consumer confidence and business investment a bit and you’ll see that magnificent work going on at the moment, employing up to 3000 people, both on and off the site. Despite that work, by 2030 to 2035, the Port of Melbourne will be full and there will be no room for further expansion. If we’re going to be the freight and logistics capital of Australia, and if we’re going to be a number-one port in Australia, then we need the next generation of port. That’s why this Government has provided $110 million to start work to build the Port of Hastings – a natural deepwater port – close to Melbourne, and close to the fast-growing areas of Melbourne. We desperately need to build Port of Hastings by 2030 to 2035 to cater for growth and opportunities. I’d also like to mention some of the urban renewal opportunities in Melbourne and Victoria. They are right across the state: E-Gate, near Docklands; Fishermans Bend in Melbourne; or the East Werribee Employment Zone, these are great opportunities for urban renewal. And in country Victoria, in Junction Place where the rail line has been removed, we are opening up

that part of Wodonga. In Ballarat, the Ballarat West Employment Zone, near the airport and near the major highways in one of our large regional cities, is another urban renewal opportunity. The reason that we can do all of these things is because we have a Triple-A rated economy. We do have a strong budgetary position and, indeed, the recent ABS statistics show that State Final Demand in Victoria in the June quarter grew 1.2 per cent, compared to the national average of 0.4 per cent. Over the year, growth in Victoria was 2.5 per cent, compared to the national average of 1.4 per cent. The unemployment figures that came out in early September 2014 showed that in the past month, there were 26,000 new jobs created in Victoria and, in the three and a half years that we’ve been in government, there have been 108,000 more Victorians in employment. We have strong figures on building approvals, retail sales, consumer confidence and business investment. Victoria is also superbly placed in the growing Asian Century, where there are great opportunities in food and fibre, education, tourism and hospitality, financial and other services, advanced manufacturing, and biotechnology and scientific research. This Government is about getting on with the job of building the infrastructure that we need for a growing population. Infrastructure that we need for a growing economy. Infrastructure that we need to create jobs, and grow new jobs in our community. We’re about building a better Victoria.

The Hon Dr Denis Napthine MP, Premier of Victoria Dr Denis Napthine was sworn in as the 47th Premier of Victoria on 6 March 2013. He is also Victoria’s Minister for Regional Cities and Racing. Dr Napthine was born on 6 March 1952, and grew up on the family farm in Winchelsea. Before entering Parliament, Dr Napthine attended Winchelsea State School and Chanel College in Geelong. He is a graduate of the University of Melbourne, with a Bachelor of Veterinary Science (BVSc) and a Master of Veterinary Studies (MVS). He also holds a Masters in Business Administration (MBA) from Deakin University. A qualified vet, Dr Napthine held the positions of District Veterinary Officer, and Regional Veterinary Officer, and ultimately became Manager of the Hamilton complex of the Victorian Department of Agriculture and Rural Affairs. Dr Napthine was elected to the Parliament of Victoria in the October 1988 State Election, representing the seat of Portland in the Legislative Assembly.

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COMPANY FOCUS

NEW FUNDING FOR PRODUCTIVE INFRASTRUCTURE We know that infrastructure is the key to Australia’s competitiveness. However, Australia’s infrastructure base is inadequate to meet our future needs, with the Organisation for Economic Co-operation and Development recently stating that ‘Australia’s infrastructure falls short of current demand…’1. Furthermore, the Australian economy is transitioning from a period of heavy investment in the resource sector to a period of production and output. This new production phase will continue to make a significant contribution to the Australian economy. However, it is vital that we invest, and stimulate new infrastructure investment across the country, both to ensure that we support new jobs in the short and medium term as the resource investment boom tapers off, and to have the productive infrastructure in place to build a stronger economy for the future. This is why the Australian Government is committed to building the infrastructure for the 21st century. Since coming into government 12 months ago, the government has placed a heavy focus on working with state governments and the private sector to implement an infrastructure agenda that will drive the next wave of economic growth. We are doing this in three ways. The first step was to implement a strong pipeline of projects for the next six years. We did that in the budget by investing a record $50 billion in vital infrastructure projects across the country. Our budget measures will leverage over $125 billion of investment, and add one per cent to gross domestic product once the projects are completed. Importantly, we will deliver many of these projects sooner than expected by using innovative financing models. This includes WestConnex stage two, which, through a $2-billion concessional loan to the New South Wales Government, will be delivered 18 months ahead of schedule. This means that stage one and stage two will be delivered at the same time. Another example is in Perth, where we are partnering with the Western Australian Government to deliver the long-awaited Perth Freight Link under a public-private partnership. This will be the state’s first major infrastructure project delivered with a contribution from the private sector. The project will deliver a freight route directly to the Port of Fremantle, ensuring that produce can get to market more effectively and efficiently, and reducing congestion on local arterial roads. Importantly, we are building on this pipeline of projects by establishing the 1 OECD working paper – Boosting Productivity in Australia, February 2013, p. 24

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$5-billion Asset Recycling Fund. It has been clear for some time now that, while private investors are reluctant to invest in new ‘greenfield’ infrastructure projects, they are willing buyers of stateowned assets. The initiative encourages the states to sell existing assets to private investors and recycle the proceeds of those sales into new, productive infrastructure. This fund will secure the viability of many new exciting projects, like an airport rail link for Melbourne and another harbour crossing for Sydney. The second step in our infrastructure agenda was to reform institutions. We have already delivered important reforms to Infrastructure Australia, which will allow it to play a vital role in planning the next 15 years of Australia’s infrastructure pipeline. Under our reforms, Infrastructure Australia will undertake a comprehensive audit of Australia’s future infrastructure needs, and develop, in partnership with state governments, a 15-year infrastructure pipeline. The priority list will provide investors and the construction industry with a higher degree of transparency and certainty about what, where and when infrastructure projects will come to market. The third step is to reform the infrastructure system. There has been a growing concern among industry leaders and the community that the delivery of public infrastructure in Australia was inefficient and expensive, and that we were not using private sector investment to the best of our ability. Upon coming to government, we tasked the Productivity Commission with undertaking a comprehensive review of infrastructure delivery and financing. Simply, the Commission’s findings show that the system is broken and in desperate need of reform. The Commission’s report identifies that no single reform will address the infrastructure challenges facing Australia, but rather that comprehensive reforms to project financing, selection, governance and planning will be required. The implementation of many of these reforms will be critical to building a strong infrastructure base at less cost to taxpayers. I am currently consulting with state and territory governments on these reforms, and

the Australian Government will respond to the Commission’s recommendations later this year. Some of the areas we’re looking at include better selection of projects and the manner in which we plan projects; the transparency involved; how we better procure projects and reduce costs in this area; and how we better use and collect data to guide selection and execution of contracts. We’ve said from the very beginning that we didn’t want the Productivity Commission to just be another report to sit on the government bookshelf. We wanted an action plan on how we can deliver projects quicker and at less cost, so that we can get better outcomes for the Australian people and Australian businesses. If we can make the right infrastructure choices today, we can build a stronger economy and a better Australia for tomorrow.

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COMPANY FOCUS

TRENDS IN GLOBAL CONVERGENCE Globally, infrastructure finance is enjoying a long renaissance as governments continue to seek economic stimulus and long-lasting competitive enhancements, while the private sector, ranging across developers, contractors, investors and financiers, values the stability and longevity of the asset class. An accelerating theme of the infrastructure market is the global convergence of transaction participants and approaches. While the physical asset may be immoveable, the intellectual and financial capital supporting these assets has become truly global. Commonwealth Bank has responded with teams based in Sydney, Melbourne, London, New York and Houston, and is ranked number one globally for infrastructure project financing by Dealogic for the first half of 2014. Commonwealth Bank’s Infrastructure Project Finance experts Tracey Gibson and John Russell comment on some of the geographic trends that we are witnessing:

Investment capital Pension and infrastructure funds no longer seek investments in their home markets; with increased allocation to infrastructure/ alternatives, business models that embrace third-party mandates and sophisticated foreign currency management allow a global outlook. Markets and countries with stable legal and regulatory profiles, along with deliverable transaction pipelines, have become preferred investment destinations. The Canadian Public Private Partnership market exemplifies this trend; it is now an established international market with more than 200 transactions closed, and domestic capital complemented by investors from the United States, the United Kingdom, Europe and Australia. Similarly, regulated utilities are global enterprises measured by the diversification of investors and lenders from all corners of the globe.

Governments Governments are natural beneficiaries of the global trend. For greenfield projects or privatisations, attracting offshore investment or contractor capacity significantly increases competitive tension – to the ultimate benefit of the taxpayer. Australian governments have been particularly adept with direct engagement of offshore parties. The end result has been Canadian, European and United States funds opening investment offices, and contractors from those countries, plus Asia, now bidding for major greenfield projects. The one area in which governments remain somewhat parochial is risk allocation; while uniformly seeking transfer to the private sector, priorities vary notably by country and jurisdiction.

90X

Tracey Gibson, Executive Director – Infrastructure, Project Finance (Australasia)

John Russell, Executive Director – Infrastructure, Project Finance (UK/Europe)

Contractors

volume has powerfully returned, and more interesting is the arrival of dedicated infrastructure debt funds, raising investment capital, and pension/life funds hiring inhouse expertise. In addition to capital mobility, lenders continue to add to global convergence through support of national champions, while also importing house practices perceived to give competitive advantages. Witness infrastructure debt funds focus on tenor and documentation, banks highlighting construction expertise, and the ability to back transactions with bid risk on a committed fund basis. Commonwealth Bank expects global convergence in infrastructure to continue, and we are motivated by the opportunities and challenges that this brings, as transaction stakeholders will all benefit from global best practices. Our contribution will be a continuing investment in knowledge, and maintaining a strong financial profile, to give our clients and counterparts meaningful support over the long term.

The combined efforts of government entreaty and the advent of mega projects are drawing contractors together. Domestic competition and balance-sheet diversification make domestic and foreign contractors more natural allies. This has provoked the greatest reflection on transaction structures, and global experiences are applied to specific geographies – at times contrasting with the outlook of investors. A desire for harmonised terms to align with the head office location is apparent; although, with governments guiding risk allocation, this aspect of global convergence remains a work in progress.

Financiers Financiers as a collective have been both proactive and reactive towards global convergence. During the global financial crisis, members of the global bank community recessed with Commonwealth Bank and other remaining active lenders filling this void. Cross-border bank

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Building infrastructure? Choose a partner with global credentials. CommBank is ranked No. 1 for global infrastructure project finance by Dealogic^. Our winning team of infrastructure experts is backed by deep industry insights and innovative technology, and is committed to helping you realise your ambitions. Contact Tracey Gibson on +61 2 9303 8236 or John Russell on +44 20 7710 3956.

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Source: Dealogic Project Finance Review, First Half 2014 Commonwealth Bank of Australia ABN 48 123 123 124. CGM857

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COMPANY FOCUS

ACCIONA: BUILDING A BETTER WORLD ACCIONA Infrastructure covers all aspects of construction, from engineering to project execution and maintenance, leading the way in global sustainable development.

Zaragoza Light Rail

ACCIONA is a leading international organisation and frontrunner in the development and management of infrastructure, water, renewable energy and services. The company was founded more than a century ago, has invested more than $630 million in Australia since 2002, and employs more than 500 people across the country. ACCIONA Infrastructure is the oldest division within the ACCIONA group, constructing tunnels, railways, roads, bridges, ports and maritime works. The company has a solid foothold in international strategic markets, and has participated in some of the worldâ&#x20AC;&#x2122;s most important works in the last half-century, including the Ting Kau bridge in Hong Kong, the A30 project in Montreal, Zaragoza Light Rail, and the Legacy Way project in Brisbane. ACCIONA is an active participant in public-private partnerships (PPPs), having developed a total of 34 projects and a current portfolio of 22 assets. In 2012, ACCIONA won the Global Water Intelligence (GWI) Water Deal of the Year for the Mundaring Water Treatment project in Perth. The project was the first PPP in Western Australia, and consisted of the design, construction, financing, operation and maintenance of the new and existing infrastructure. ACCIONA is the lead participant in a joint venture to design, construct, operate and maintain the landmark Legacy Way

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transport project in Brisbane, Queensland, and is also currently delivering the Warrell Creek to Nambucca Heads Pacific Highway project in New South Wales, and the Pumicestone Road project on the Bruce Highway in Brisbane. In South Australia, ACCIONA is a 50-per-cent participant of the joint venture operating the Adelaide Desalination Plant for SA Water, and is bidding for water services and design-build-operate contracts in Western Australia, South Australia, New South Wales, Victoria and Queensland. ACCIONA is also part of the Helena Water Consortium that is responsible for

the finance, design, construction, operation and maintenance of the Mundaring Water Treatment Plant project near Perth. The company is proud to have won various world-renowned awards, including the 2013 International Tunnel Project of the Year, for the Legacy Way project, at the International Tunnelling Awards; the 2012 Lord Mayorâ&#x20AC;&#x2122;s Award for Business Innovation; the 2013 GWI Water Company of the Year; and various other awards for its projects around the country. www.acciona.com.au

Legacy Way

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Aubrey Layne, Secretary of Transportation for the Commonwealth of Virginia in the United States, reflects on the reforms to the state’s transport funding base amid ongoing revenue challenges. Key points: • Despite having the nation’s third-largest state-maintained road network, until recently, Virginia was ranked 40th of all the states in terms of collecting revenues for transportation. • Ongoing budgetary constraints at a federal level have forced the Commonwealth of Virginia to adopt additional revenue measures to try and mitigate an anticipated shortfall in federal road funding. • Partnerships with the private sector will be increasingly important if Virginia is to deliver the infrastructure that is needed to meet growing demand pressures. In Virginia, we have around eight and a half million citizens, and 70 per cent of the growth expected in Virginia is in our northern area, next to the capital, in six localities. It’s a lot like Melbourne, where there is a central business district but lots of area to expand, so I am very familiar with some of the challenges being faced in Melbourne’s inner city.

Our gross domestic product in Virginia is about US$426 billion (A$486 billion) – slightly above Victoria and slightly below New South Wales. We have the nation’s third-largest state-maintained road network, which means that we are in charge of around 130,000 miles of lanes. And while we are the third-largest network, until recently, we were the 40th ranked state for collecting revenues for transportation, so we had some challenges to deal with. Volume 5 Number 1

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We have a US$5 billion (A$5.71 billion) budget in transportation, of which US$2.5 billion (A$2.85 billion) is for new construction and US$2.5 billion (A$2.85 billion) is for maintenance of the current system. Of the total US$5 billion, around US$3.8 billion (A$4.34 billion) is raised by the Commonwealth of Virginia, and we depend on our federal partners for US$1.2 billion (A$1.37 billion). The latter is the most significant threat to our programme. One of the impressive things about Australia is that, regardless of party, it appears that there is the political will for infrastructure investment. That is not what I find currently in the United States, particularly at the federal level. With our budgetary issues and our ideological issues, it seems that the need to invest in infrastructure has taken a back seat. Since 2008, the federal gas tax – the tax raised per gallon – has not been sufficient. There have been general fund appropriations that have been put in several times, six to eight months at a time, which makes it very difficult to fund long-term construction projects. Complicating this, Virginia is also lagging behind the nation in economic vitality. In the United States, we are the state most dependent on federal spending. Our Department of Defense spending makes up almost 40 per cent of Virginia’s economy, and that is particularly debilitating as we go through the drawdown from the wars in Iraq and Afghanistan, and the budget crisis. Right: The dynamically priced 95 Express Lanes will open for traffic in late 2014. Source: Transurban

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Virginia is focused on changing its economy, and, quite frankly, we have to. Transportation has to play a big role in that, not only in how it supports industry and the livelihood of our citizens, but also in the sheer number of jobs that it generates.

The importance of P3s Public Private Partnerships (P3s) have been a big part of our economy. Virginia has been a leader in P3s over the years, and our goal is to build a strategic programme to attract private investment. We have learnt significantly from the Australian experience, and Australia is our most significant investor in terms of foreign dollars. Many of the large Australian firms have invested not only in our country, but also in our state, and we are very grateful to be able to share the experiences that we have had with our Australian friends. We realise, though, that the delivery of projects is changing and that global competition is increasing, so that’s why we’re focusing on revising and enhancing our P3 transactions. I’d like to talk about two P3 projects in particular – not in terms of how they were delivered, but in terms of the public policy discussion that surrounded them. The first is the I-95 Express Lanes project in Northern Virginia. This project saw the introduction in the Commonwealth of Virginia of the managed lanes and dynamic pricing concept. This is a concept in which tolling is used to deliver new capacity, but if a motorist is driving and does not want to pay the toll, they always have a free alternative. The traffic flow on the managed lanes is managed by pricing, and the partner (Transurban) is encouraged, and mandated by contract to maintain a certain flow of traffic. As that traffic flow degrades, the pricing for the road goes up. Our citizens have found this to be a great bargain for their toll dollar, because they have a free alternative should they choose not to use the managed lanes, but if they want the efficiency of moving faster, they are able to do so. This has been a revenue generation and a traffic management model that you will see Virginia continue to encourage as we go forward in delivering these projects. The next project I’d like to highlight is the Elizabeth River Tunnels project. This project is in the Hampton Roads region, and those familiar with Norfolk or Virginia Beach on the eastern seaboard

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will know that the area is heavily dependent on river crossings. The area houses the Navy’s Atlantic Fleet, so it is very dependent on mission readiness. The Elizabeth River Tunnels project cost a little over US$2 billion (A$2.28 billion), and it was undertaken with our partners from Macquarie and Skanska. In this project, we used a static toll, and there was no free alternative. In fact, the project also included the tolling of the tunnels before the expansion actually occurred. From a public policy standpoint, this project has not seen the acceptance of the new tolling that the project in Northern Virginia has. In fact, when we came to office in January 2014, we used transportation dollars to buy the tolls down, which, quite frankly, was a fairly inefficient use of the monies; but from a public policy perspective, we didn’t think that it was appropriate to charge for those tolls before the additional capacity was put on. It’s going to be a great project, but I wanted to highlight the differences between public policy and making financing decisions in that regard. Public acceptance of this project will require us to do more as we move forward, in terms of explaining how tolls will benefit the region. Certainly, it’s a vital project that had to get done because the Navy told us that if we did not increase transportation investment, they were not going to continue to invest in the area. So, I’m glad the project was done, but it is a completely different use of policy in determining how to use tolling. Another project I wanted to highlight is the intermodal improvements that we are going to implement on Interstate 66 outside our nation’s capital. This will be the next large P3 project in the Commonwealth of Virginia, and it is expected to cost between US$2 billion and US$3 billion (A$2.28 and A$3.42 billion), depending on the design, and managed lanes will certainly be a component of this project moving forward. All of these projects carry demand risk. In the Commonwealth of Virginia, we do not have the ability to take availability payments. Whether the legislature will allow that in the future remains to be seen, but, right now, the only way that we’re allowed to do P3s is through the transfer of the risk to the private sector.

Solving the transport funding challenge I’d like to talk about the historic step taken last year by Virginia to increase transportation funding in the Commonwealth. It was a programmatic approach; we believed that a single silver bullet did not exist. So, we decided to use a combination of revenues generated from user fees, and general fund revenues. At the user fee level, Virginia used to charge a cents-per-gallon levy on its gas (fuel). We converted that to a wholesale tax per gallon, so as economic activity and driving habits increased, that particular levy on the consumer would also increase. In addition, there were statewide taxes – sales taxes – that were raised to fund transportation sources and projects across the state. That was done on a revenue-neutral basis because, quite frankly, it was the only way, politically, it could get done. But it did set us up to increase revenue as economic activity picks up in the future. We also adopted two other measures for the two most congested areas of our state, and that’s where the real money was invested. In Hampton Roads and in Northern Virginia – the two large urban areas – additional taxes were raised at a local level and the monies were allocated to stay right in those areas to deliver critical projects. We’re talking approximately US$300 million (A$342 million) per year in Northern Virginia, and US$200 million (A$228 million) per year in the Hampton Roads region. Volume 5 Number 1

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These monies are given to entities like the Hampton Roads Transportation Accountability Commission (HRTAC) and are not considered obligations of the Commonwealth, so if the monies are used to raise debt, they are not considered against our triple-A credit rating. It’s an off-balance sheet financing for the Commonwealth by raising these revenues to deliver these projects. The entities that also raised these monies are P3 eligible, meaning that they can participate with our private parties in terms of delivering these projects. For an organisation like the HRTAC, there is approximately US$12–US$15 billion (A$13.72– A$17.15 billion) worth of projects that will be delivered in that region over the next decade or so. These are projects that we have been talking about for several decades, and that can now come to fruition because of the steps we’ve taken in raising the revenues. I’d like to also talk about our port. I’ve visited with some port officials in Australia, and the privatisation process that your ports have gone through here – and the process that the Port of Melbourne will be going through – have been explained to me. Privatisation was attempted in Hampton Roads and it was unsuccessful. In fact, in the nation – and particularly in the Commonwealth of Virginia – privatisation outside of transportation is limited, and that’s one of the things that I’ve enjoyed learning about in Australia. The second issue about our port is how important it will be to our economic development and in driving the transition of our economy. The projects in Hampton Roads that I outlined before are key for this port to get the goods in and get the goods out. Without the support of the transportation system, the economic benefit we hope to derive from the Port of Virginia will not be realised. The Port is centrally located on the east coast of the United States, and it is within two days’ drive of two-thirds of the United States population. We are served by multiple railroads, so, logistically, the Port is set up to be a significant economic driver for the Commonwealth of Virginia. We are blessed with no overhead obstructions from the Atlantic Ocean and a 55-foot channel, so, already, we are deep enough to take advantage of the Post-Panamax vessels coming with the expansion of the Panama Canal. 96

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But there’s one key thing that I think will set the port up for future success, and that is that if you look at coming to this part of the world through the western route, or the eastern route, we are approximately the same distance from either. We believe now that with the expansion of the Panama Canal, in times of economic or political turmoil, vessels can always reach us; and, long-term, that’s what is going to set us up for success, but only if we invest in infrastructure so that we can get goods out of the port.

The right projects for the right reasons Let me now turn to the future of the P3 programme in the Hampton Roads area and in the Commonwealth of Virginia. The key will be picking the right projects, and there are two components to that. This year, legislation was passed that mandated our Commonwealth Transportation Board – the agency that is charged with allocating monies in the Commonwealth – to mandate that projects that had previously been promoted for political reasons, or created with the guidance of the administration, would now have to be prioritised according to five criteria. The first is congestion mitigation, and the law requires that in urban areas, it has to be the most heavily weighted issue that’s considered. The second is economic development, and the law requires that in rural areas, that has to be the most heavily weighted. The three other criteria are mobility, environmental concerns and return on investment. The latter is not necessarily a return on equity, but an incremental benefit to the taxpayers and the Commonwealth. All projects selected, even our P3s, will have to go through this process, and the law requires that the next incremental benefit project, the highest scoring, should be the next one that is funded in the Commonwealth. That’s a significant change to what we’ve done in the past. We have elections every four years in the gubernatorial elections, and every two years in our House of Representatives, so hopefully this will keep the political process from pulling away at the efficiencies of delivering projects, if we can get it right. We have until 1 July 2016 to get this in place, but if we can get there, the benefits should be immense for our Commonwealth. By law, if we don’t fund the project that scores the next highest in terms of the criteria, we must

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Left: IPA Chairman Adrian Kloeden; Victorian Premier the Hon Dr Denis Napthine MP; Virginian Secretary of Transportation Aubrey Lane; and IPA Chief Executive Brendan Lyon

disclose why we didn’t, which makes us much more transparent in explaining why we are funding particular projects. The second thing that we are doing to ensure the right projects are selected is revising our P3 programme. We’ve had this programme in place for over a decade. We’ve had similar experiences to you in Australia where some have done very well, and some we wish had done a little better. But the key will be to improve the process to increase transparency and to increase competitiveness, while reducing political risk. That’s going to be a tall order, but we think that we have ways by which we’ll be able to do that. We’ve defined political risk as something that occurs late in the process. We believe that if we can get our politicians involved early in the process, we can actually reduce political risk. Then we can go back and certify to the politicians that what we intended to do, we actually did. If we can’t do that, then we have to use another procurement vehicle. It is imperative that private industry knows that once we enter into an agreement with them, there is certainty of closure. That’s key to any type of programme that will attract the type of investment from the private industry that we’re going to need to get these projects done in the Commonwealth of Virginia.

The next step will see us rewrite our P3 guidelines. We’ll brief our General Assembly, and our Commonwealth Transportation Board will adopt these new guidelines in the coming months. We’ve learned a lot of lessons as we’ve gone through the process. First of all, we’ve learned the importance of having a permanent office, with 16 full-time staff dedicated to being the champions for these projects. One thing that I’ve learnt in Australia is that you have a much better programme of assessing projects with financial input. Projects in the Commonwealth of Virginia over the years have come through the transportation secretariat. I’m one of the first transportation secretaries that is not an engineer. My background is in business, and in finance. So, it’s key, if we’re going to continue to do this, that we understand the risks that we are taking so that we can appropriately compensate the private party. The way government, at least in Virginia, evaluated risk in the past was different to the way I evaluated it when I was working in the private sector. In the private sector, I wanted to know how I was going to get paid and what was going to happen to me if something went bad. In the public sector, I’ve learned that it’s a process, and we identify the risk and say, ‘Yes, we’ve identified it,’ and we continue with the process. Volume 5 Number 1

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You will see that we will act more like a business partner in working with you in innovative ways to deliver these projects. There need to be consistent and detailed guidelines, so that every time you enter into an agreement, it’s going to be the same process. You don’t have to guess about what’s going to happen next. We’re going to continually review our assumptions to improve the process, and a big part of this is about communicating the benefits of these programmes to the public. Many members of the public still think that a P3 is a black box; something goes in and something pops out the other side. They really don’t understand what the benefits are. Before this role, I served five years on the Commonwealth Transportation Board, and I learnt that I might as well get the public involvement up-front, because I’m going to get it anyway, and it’s better to deal with it up-front. It’s the quickest way to bring these projects to fruition – to engage up-front, and not try to explain afterwards, so that’s something we’re going to focus on. We’ve also recognised that others have a lot of good ideas. I’ve already mentioned that availability payments are being done around the world. We don’t have that ability, but we certainly recognise that the way these projects are being funded is changing. We understand there will be some challenges; public funds are shrinking and traditional delivery methods are more and more difficult.

In the Commonwealth of Virginia, we have the traditional design, bid, build model; the design, build model; and then the P3 model. That has caused some issues with our legislators in the past. So, now we have to certify that when we use a P3, it doesn’t fit these other procurement methods. That is also to safeguard the taxpayers, because those other procurement methods have guidelines as to when payments can be made, when construction can start, et cetera. We’ve had a high-profile project in the Commonwealth that was said to be a P3 that was really a design-build; that didn’t go well, and we were out $US300 million (A$343 million) without a permit. Now the P3 process has taken the brunt of the criticism, but really it was the risk of getting the permit that wasn’t done. Had we chosen to do this as a design-build project, the law would have kept us from putting those monies out for construction until we had received the permit. So, we realised that getting the right procurement method is key. Governor Terry McAuliffe and I recognise that we cannot deliver the Commonwealth’s transportation projects without the help of the private sector, and without using private investment. So we will be a proponent of the process, and we look forward to working with you.

Aubrey Layne, Secretary of Transportation, Commonwealth of Virginia, United States On 22 November 2013, Governor Terry McAuliffe appointed Aubrey Layne as Secretary of Transportation for the Commonwealth of Virginia. He was sworn into office on 12 January 2014. Secretary Layne oversees seven agencies with more than 10,000 employees and combined budgets of more than US$5 billion (A$5.71 billion). Prior to his appointment, he represented the Hampton Roads area on the Commonwealth Transportation Board from 2006 until January 2014. Secretary Layne most recently served as President of An Achievable Dream Academy in Newport News, Virginia – a unique partnership between public schools and the local business community providing at-risk students with opportunities to succeed. Prior to joining An Achievable Dream, Secretary Layne was President and Principal Broker of Great Atlantic Properties. He joined the company in 1994, and was responsible for operational activities, new business acquisition and capital improvement strategy. Before joining Great Atlantic, he held various positions at Hofheimer’s Inc., and ended his tenure there as President. Secretary Layne began his career as a Certified Public Accountant with KPMG. Secretary Layne earned a Bachelor of Science in Accounting from the University of Richmond, and received an MBA from Old Dominion University with a concentration in International Business. In 2011, he completed the University of Virginia’s Sorensen Institute for Political Leaders programme. 98

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For some, a problem solved is the end of the story. For us, itâ&#x20AC;&#x2122;s just the beginning. Because when you look beyond the obvious, you discover new ideas to grow, manage risk and different ways of operating that deliver fundamentally better results. Looking for a professional services firm that takes you further? Talk to KPMG

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STAYING ON TRACK: LESSONS LEARNED THROUGH THE AUSTRALIAN AND UNITED KINGDOM RAIL FRANCHISING EXPERIENCES Almost 20 years on from the first generation of rail franchising in the United Kingdom, and 15 years on from the introduction in Victoria, enough trains have passed over enough tracks to provide a robust body of insights into the process. Stan Stavros, National Head of the Infrastructure and Projects Group at KPMG Australia, shares the lessons learned along the way. The public transport sector in Australia is ripe for reform. Governments are searching for better service for constituents and better value from their assets. Against this backdrop, the issue of rail franchising as a mechanism to achieve the value and service that government desires is naturally on the agenda again. ‘The good news is that rail franchising efforts in the United Kingdom and Australia are now 20 and 15 years old, respectively, providing a rich repository of experience for public and private sector participants to draw on as they jointly consider the best public transport solutions for the future,’ comments Stavros. KPMG has identified five key lessons that may help to inform the public transport reform agenda: • context is king – so is strong leadership • franchising is not an asset sale • structuring correctly is critical – so is avoiding too many franchises • the approach to risk transfer has fundamentally changed • contract management is a daily process.

Context and leadership can help to drive implementation The first lesson learned is that what precedes the process is just as important as the process itself. Rail franchising in Victoria occurred in a very specific context. The KennettStockdale Government had a cross-industry reform agenda, and reforming public transport was part of the bigger picture.

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This overall commitment to reforming government ownership generally helped to drive the rail franchising process; however, a critical part of the equation was both political will and clear leadership, based on real vision for what reform in the sector could achieve. Stavros notes, ‘There’s no doubt that strong leadership drove change right across public transport systems in Victoria in this period. You need strong politicians that are committed to the cause to really make it happen and to guide the process’.

Franchising is not an asset sale A second key lesson borne out of the United Kingdom and Australian experiences is that franchising is different to other types of reform and public divestment – specifically, it is not an asset sale. Franchising is a process of seeking the best global operator to operate a network in partnership with government – to bring a better customer experience at a lower ongoing cost to government. ‘While it seems like the line between privatisation and franchising is clear, the approach adopted to the initial franchising process in Victoria, while recognising the importance of delivering high-quality service, was heavily influenced by the very successful electricity and gas privatisation process that preceded it, in terms of its approach to the market,’ says Stavros. A clear distinction between franchising and asset sales is that government cannot separate itself from the assets. Typically, the

economics of running major rail systems requires significant subsidies from the government – and that’s before the delivery of major capital projects. This means that the state remains the purchaser of public transport services and can never fully remove itself from responsibility, including retaining ownership of the rail network assets, setting fares, setting broader transport policy, and planning and delivering, sometimes in partnership with the franchisee, large capital projects. ‘It’s a massive risk if you just see it as a cost-saving exercise, because there are broader considerations and expectations involved in public transport,’ says Stavros. Franchises are not highly capitalised; in fact, the franchise arrangements have to artificially create the minimum capital in business, supported by bonds and parent company guarantees. ‘Unlike when a toll road goes pear-shaped and market forces come into play to appropriately recapitalise the business, if this happens with franchises, eventually, the state will ultimately bear the residual risk, and remain the operator of last resort,’ explains Stavros. Unlike asset sales, maximising price – or minimising subsidies – should not be the primary consideration. While government may want savings, the objectives of customer experience (such as on-time running, reliability and innovation), patronage growth, and ability to help with development and implementation of capital projects are also important. ‘The initial process in Victoria

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placed significant weight on subsidy savings – and history shows those savings were not sustainable,’ comments Stavros.

Structuring of the franchise and the franchisee is critical The Victorian and United Kingdom experiences both demonstrate how important it is to implement the right franchise and franchisee structure. Victoria adopted a vertically integrated model (where the franchisee is responsible for operations, rolling stock and infrastructure), which has proven to be extremely effective. In contrast, the United Kingdom approach has created some issues. ‘The separation of operations, rolling stock and infrastructure in the United Kingdom, while to some degree the product of circumstances, has created some challenges,’ says Stavros. A less successful feature of the initial Victorian franchise model was separating the metropolitan train system into two train franchises, and the tram system into two tram franchises. ‘The split did not really drive the intended behaviours from competition, by comparison, and required significant inter-operator agreements and reduced the flexibility in the system,’ says Stavros. Overall, the lesson learned is: the fewer interfaces, the better. Where possible, the number of franchises should be contained – too many operators, some of whom have operating responsibility over small parts of the network only, limit the operating efficiencies and network-wide customer benefits that can be achieved. The consolidation of the United Kingdom and Melbourne franchises into a smaller number over time supports this. The 2009 refranchising process in Victoria also provided some other positive structural lessons. ‘The refranchising recognised the importance of the operator and attracting the best participants internationally,’ explains Stavros. ‘It also placed more weight on operating experience over infrastructure and rolling stock capability as part of the expression of interest process.’ The internal structure of the franchisee is equally important. The Victorian experience suggests that an equity model – where all key parties delivering the various components of the vertical franchise have equity participation in the entity contracting with the state – is preferable to a model where a pure operator contracts with the state, and then subcontracts infrastructure and rolling stock to other parties.

A shift in the risk paradigm Of all the lessons learned about rail franchising over the last 20 years, the shift in the general philosophy around risk transfer has been the most profound. In the 1990s, contracts pushed almost all risk into the private sector, which embraced it – there was no real concept of risk being taken by the party best able to manage it. ‘A good example is revenue or demand risk,’ says Stavros. ‘In the 1999 Victorian arrangements, not only did the state transfer full-fare box risk, there was an additional payment – the Passenger Growth Incentive – that supercharged the risk.’ More recent contracts still transfer revenue risk, as this provides a strong incentive to drive good behaviours rather than just rely on contract provisions; however, now they include a sharing of this risk with a level of upside and downside protection. ‘There is also significantly more focus on the sustainability of bids, and ensuring that there are appropriate arrangements in place around the stewardship of assets that have a life well in excess of any franchise term,’ notes Stavros.

Contract management is a daily process Throughout the Victorian and United Kingdom rail franchising experiences, an important relational lesson has also been learned: managing ‘by the contract’ is not the most effective approach. A pragmatic partnership approach is a far better paradigm. ‘If you run things by the letter of the contract, you can end up with an unworkable relationship,’ notes Stavros. That’s not to say that structure isn’t critical. Both the United Kingdom and

Other considerations In addition to the five key lessons outlined in this article, KPMG has identified some additional matters that the United Kingdom and Australian franchising experiences have taught the rail sector.

Contract extensions Arrangements that have adopted an earned right to renegotiate an extension have been effective in motivating good performance by the franchisee, and provide flexibility for the government in the context of procurement requirements. In the latest franchises in Victoria, in addition to fixed key performance indicators (KPIs), flexible KPIs were

Victorian franchising examples show that appropriate governance structures are important. The United Kingdom cycled through a number of different models – moving from the Office of Passenger Rail Franchising to the Strategic Rail Authority, then to the Department of Transport. In Victoria, the establishment of Public Transport Victoria in 2011 to manage franchise contracts has been highly effective. Having the right structure to govern contracts is critical, but so too is the practical application of a contract. ‘The team managing the arrangement needs to be able to match it with the franchisee on a day-to-day basis,’ comments Stavros. This hasn’t always been the case in both Victoria and the United Kingdom, where continuity of people through the process, right through to operations has not always occurred. ‘Often, one team, armed with advisers, comes in to do the procurement, and then hands over the management of the contacts to another group,’ Stavros explains. ‘That applies not only to government, but to bidders, as well.’ The Australian and United Kingdom rail franchising programs provide a significant body of knowledge and experience to draw on to inform the decision to franchise, the franchise structure, the procurement process and the management of contracts; however, equally, it’s dangerous to apply models from other jurisdictions without appropriate consideration of unique characteristics of the system and government’s objectives. What’s clear is that there are major benefits and major challenges to overcome – but the journey can be worth it.

introduced as part of this earned extension right and have worked well. Flexible KPIs can be changed from year to year to ensure focus on the most relevant needs of the day.

End of franchise arrangements These need to be appropriately covered as part of the contractual arrangements to ensure continuity of services and the ability to competitively tender out the services in the future. This includes ensuring ringfenced special-purpose vehicle structures, appropriate access to assets, employees and information, and the ability to novate key contracts.

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QUALITY, SERVICE AND VALUE ENCLOSED Since 1955, B&R Enclosures has built a reputation for excellence in the design and manufacture of enclosures. Everything we have learnt in that time, we’ve poured into our products and relationships. As a 100 per cent Australian- and familyowned business, B&R champions the virtues of quality, service and value. Combined with our unrivalled industry and application knowledge, we are in a unique position to meet the needs of our clients. The company encompasses four divisions: Industrial, Data ICT, Hazardous Areas and Residential Commercial. Each division focuses on the unique needs of different market segments. Together, these divisions share the strengths, resources and experience of the founding company to provide attentive customer service, innovative design and superior quality products at a competitive price. At B&R, we are justifiably proud of our products, and we strive to ensure that you have what you need, when you need it. We have a network of offices and distributors throughout Australia and internationally, meaning that wherever you are, you will be able to buy B&R products nearby. B&R Enclosures was founded by Dick Bridges in 1955, specialising in sheet metal fabrication, including electrical enclosures for domestic metering applications. With little capital, but great enthusiasm for operating his own business and a determination to succeed, Dick commenced operations in his backyard in Adelaide, South Australia. It is this determination that has sustained B&R’s growth into manufacturing plants in Brisbane, Adelaide and Sydney, 10 locations nationally, and an international network of distributors, allowing the company to increase the range, availability, quality and service to their customers. Under the direction of the founder’s son, Ken, and daughter, Chris, B&R Enclosures has grown to be the largest manufacturer of domestic, commercial and industrial enclosures in Australia. B&R holds a unique understanding of Australian Standards and regional authority specifications, and has designed its standard products to meet the vast majority of requirements. If the standard enclosures and configuration options do not meet a customer’s needs, B&R’s team of engineers can design a custom-made product to fit the requirements of any application. B&R Enclosures continues to invest heavily in design and manufacturing technologies to ensure that the products offered are at the cutting edge of the industry. New products are continually being developed, and existing

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Prices and people: Community Prices and people – panel discussion

perspectives on infrastructure reform – panel discussion

Chair: Brendan Lyon, Chief Executive Officer, Infrastructure Partnerships Australia Panellists: • Ian Holland, Director, Services Development, UnitingCare • Michael Traill AM, Chief Executive Officer, Social Ventures Australia • Catherine Yeomans, Chief Executive Officer, Mission Australia

Key points: • Effective economic and social infrastructure is a key consideration for vulnerable and low-income households. • The privatisation of public assets should be considered in terms of wider social impacts, and should be structured to deliver long-run community benefits. • The role of the not-for-profit sector will enlarge, as governments seek new models to drive efficiency into social services costs. • Social benefit bonds and ‘full service’ social infrastructure PPPs offer new opportunities to drive innovation and improvement into the social sector.

Brendan Lyon (BL): We talk a lot about reforming infrastructure markets, reforming services markets, asset privatisations and other things, and often, the unspecified impact on the vulnerable is used as a 104

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reason not to reform, and therefore used as a block for privatisations and other things. Can each of you give the audience a sense of your own engagement in the industry, and your own outlook in terms of some of these issues? Catherine Yeomans (CY): Mission Australia is one of Australia’s largest community services organisations. Last year, we worked with over 300,000 vulnerable and disadvantaged people across the nation. Our focus is on reducing homelessness and strengthening communities, and we do that by offering integrated services. We offer housing and homelessness services, we help the long-term unemployed find employment, and we work with a number of members in our community who are at risk, such as young people or young children in families, as well. We are also a community housing provider. We have over 2000 homes that we own and manage, including the $32-million Camperdown development in New South Wales. We are focused on delivering evidence-based programs to meet community need and to advocate to governments, and to influence public policy that impacts on the people that we work with.

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An issue that we can’t ignore is the number of homeless people across Australia. On any given night, we have 100,000 homeless people. In Victoria, between 2006 and 2011, the homeless population grew by 20 per cent, and it is currently at 22,000. Australia’s unemployment rate is around six per cent; youth unemployment has just dipped below 14 per cent. There are 220,000 people on the queue for public housing across Australia, so we have a chronic shortage of social and affordable housing across the nation. BL: Michael, your views? Michael Traill AM (MT): At Social Ventures Australia (SVA), we sometimes get described as a group of reformed investment bankers and strategy consultants. I was a proud part of Macquarie Bank for 15 years, where I was involved in setting up the bank’s private equity business in the late 1980s. At SVA, we have a national team of 60 people, and our goal is to try to provide, in sensible and sensitive ways, business and private equity disciplines to address some of the country’s entrenched problems of social disadvantage, and we think that capital access is a critical part of that. In fact, Mission Australia has been a partner in one of the most interesting initiatives over the past five years, where we put together a syndicate that raised $165 million, comprising a capital cocktail from government, from private investors, and from a conventional commercial lender, to acquire the failed assets of the ABC Learning childcare centres (now known as Goodstart Early Learning). Now, that organisation is an $800-million social enterprise, which is really trying to address one of the pivot-point issues around early learning and care. We have to think differently about capital access for issues of entrenched social disadvantage. While it’s early days, social benefit bonds are a small-scale example of what can be achieved. They have financial parameters that would appeal to the infrastructure sector – returns of eight to 12 per cent – and if we do that intelligently and in partnership, we can actually move the dial in terms of the funding that is available. BL: And Ian, your opening views? Ian Holland (IH): UnitingCare Australia represents the UnitingCare network of service providers. We are one of the largest employers in this country with

39,000 employees, supported by 28,000 volunteers, and that network is delivering services in aged care, residential home and other disability services, early childhood education and care, families-at-risk diversion programs, emergency relief, counselling, and a few other things. About the only area in which we are not a big player is housing. We are a very large enterprise that is engaging with a very large number of people. It is an enterprise in which social capital is our primary investment. We have a large workforce and we are highly engaged with families and individuals around community engagement and participation. We also have an interest in other dimensions of capital, and two aspects that interest us at the moment are the transition in the aged care system that is being driven by recent Commonwealth reforms, and the future demand for care and how we, as one of the country’s largest aged care service providers, are going to meet that future challenge. We are interested and involved in innovation in investment for social good, including the projects that Michael has referred to. One of our service deliverers was involved in the first social benefit bond operation in New South Wales, which recently reached its first anniversary and the first time that benefits were measured, which were thankfully

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Below: Catherine Yeomans, Mission Australia; Michael Traill AM, Social Ventures Australia; Ian Holland, UnitingCare

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Right: Catherine Yeomans, Mission Australia

positive for both the investors and for the families that the investment was designed to support. UnitingCare Australia is also heavily involved in advocacy on behalf of the people we work with, and one of our greatest areas of engagement at the moment is Commonwealth proposals – current, future and rumoured – in relation to welfare reform and how they are going to tie into the Commonwealth’s vision or otherwise around its budget. BL: As I mentioned earlier, the impacts on the vulnerable are often used by people who are opposing reform. How can the reform debate be better cast so it focuses on the outturn? How can that debate be taken forward, and how can your organisations play a more direct role in discussing the first principle outcomes? CY: In any situation, we have to actually think about the impact on everybody in our community, and not lose sight of the fact that, as you mentioned, we do have vulnerable and disadvantaged people in our community. From Mission Australia’s perspective, we are less caught up on who owns assets and who doesn’t own assets. We are more interested in what the financial impact on the people that we work with actually is. The people that we work with often have less ability to have discretionary expenditure, so any increase in cost is going to have a direct impact. BL: So they are more price-exposed? 106

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CY: Absolutely. So we need to take that into account. I’d suggest that if you are in infrastructure, you are actually in the human services sector, because if you haven’t actually got people using your hospitals, or your schools, or your roads, or any other form of infrastructure, then why on earth are you building it? You need to think about the impact that it is going to have on the communities, on the people, and certainly whether we are strengthening communities and building families, or whether we are perhaps putting in place inhibitors and roadblocks, for want of a better analogy. MT: Catherine’s earlier point about trying to be clear about the evidence base is pivotal. Having heard Jeremy Maycock (Chairman of AGL) speak earlier [see page 70], you would say there’s a pretty compelling argument about the inefficiency of government ownership of an asset. For what it’s worth, I grew up in the Latrobe Valley, which is now an area of disadvantage. As a university student, I sustained myself working with the Builders Labourers Federation, when, in that area, there were 27,000 people employed and you were told to go slow on Thursday and Friday to get double time on Saturday and triple time on Sunday. While that gave me beer money at university, it was a pretty defining lesson in the inefficiency of the operating structure. Now, there are 9000 people employed in that area, with huge and damaging social consequences, but necessary efficiencies. I’m a sufficient believer in the free market to think that, while what happened in the Latrobe Valley is a social tragedy, it is probably an economic necessity. We have to do a much better job of addressing the social needs around employment training, relocation, and, really, whatever it takes so that that community should not have been hollowed out like it was. But we need a much clearer focus about what happens in the long term when we look at these things. The impacts are both economic and social. BL: So, a much clearer up-front consideration of the impacts and mitigations than perhaps what we have seen? MT: I think it is on two fronts. You have to have a long-term view but, in our view, where governments fall down a little bit is in not recognising the need for sensitive implementation of structural adjustment. BL: Structural adjustment? MT: It’s easy to say at a high level that structural adjustment is painful, deal with it and get on with it; but for service organisations like Mission Australia

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and UnitingCare, when you see that up-front, if that’s not well supported and resourced, you do enormous long-term social damage. IH: Our organisation’s engagement in the sort of context you’re talking about particularly relates to the energy sector where we deal, through our emergency relief and other support agencies, with energy poverty and people unable to pay utility bills, so we have a very healthy interest in energy pricing in some of Australia’s states. The real issue we see is one of information asymmetry. Are regulators and businesses going to engage in meaningful attempts to address the information asymmetry that makes it very hard for consumers to trust utilities that they don’t understand, and really struggle to engage with, just in economic terms? And that trust issue goes to a broader question, which is: what does a good process in, for example, a privatisation, look like? BL: What does a good process look like? Let’s use New South Wales as an example. It has a committed policy, so what would you like to see in terms of a

process of the allocation of proceeds? What are the gateway filters? IH: If people want to see greater consumer engagement and confidence, and general public acceptance of that sort of privatisation, the key is trust. The difficulty is that it is not trust in us as service delivery organisations in the social space, and, unfortunately, it is not trust in treasury officials, or indeed trust in the companies that might wish to purchase the assets – all of which might be working very hard and very sincerely to pursue the strong case that is made around price in New South Wales. The difficulty is trust in the executives, the decisionmakers who will define the privatisation process. What you want in a state government executive that is going to carry a process like that forward is a long-term view around infrastructure, and not being driven around deficit reduction. You want longterm rather than short-term perspectives. You want a high level of expertise. You want commitment and resourcing of regulators that are fully independent and that are showing and exercising for driving down

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Right: Michael Traill from SVA

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prices and rate of return margins in a relatively lowrisk industry. Those sorts of issues present a profound barrier, and I don’t want to be pessimistic about it, but I think that there is a limited role for us in trying to drive a change in the way that state executives, in some circumstances, pursue those issues. CY: I would speak less of the actual process, in terms of the privatisation. From Mission Australia’s perspective, we would like to focus on what choices are made around the proceeds from those sales. So, if we are actually privatising public assets, why are we doing it? What is going to be the social return? Are we really thinking about the long-term investment that is required? For example, in social and affordable housing, we really believe that homelessness can be solved with a housing first approach, by actually creating homes for people, and then with some social infrastructure investment as well, developing the programmes that actually work with people to help them to sustain their tenancies. We’ve demonstrated that this can be done, and it makes a good social investment, as well, because it will relieve the government of costs into the future. It will also relieve costs on the public health system, emergency care, the justice system and crisis accommodation, so it makes good economic sense. So, we would like to be part of the partnership, talking about what we do in terms of future investment for our communities. BL: Electricity reform in New South Wales is quite a substantial opportunity – you are talking about tens of billions of dollars in windfall funding opportunities. Where would you see that usefully applied? Transport is going to be a major focus, both for social and economic reasons; however, beyond that, what do we need to see? CY: In terms of participation in the workplace, we can’t ignore the rate of youth unemployment and investing in programmes that are going to help young people to make the transition – either staying engaged in education, or making the transition from education into the workforce. Those social infrastructure investments are very important. There are also other investments that we can make, but I’ll leave my other panellists to speak to that. MT: I think that the opportunity is to invest in places where there’s clear evidence on costs and outcomes, and Australia doesn’t have a great track record of that. If you look at education, which has been a focus post-Gonski Report, the reality is that

since 2000, there has been a 45 per cent increase in real spending, and, at best, our results in terms of any objective by the Organisation for Economic Cooperation and Development (OECD) and Programme for International Student Assessment (PISA) have gone sideways and backwards, both at the top end and in terms of addressing the significant disparity between the top 25 and bottom 25 per cent. So, to Catherine’s point, our interest in policy engagement is to help to be clear and explicit around the measurement of social outcomes, and there’s a nexus always in those things between the social and economic. That’s what stood at the very heart of the Goodstart acquisition of ABC Learning childcare centres. All of the four social purpose partners recognised that the most powerful investment you can make is in the early years, when a child is aged up to five years old. If you invest early with a young child from challenging circumstances, you change the social and economic trajectory of their lives, and there is not enough of that long-term analysis, which is in part accentuated because we’ve got terribly short political cycles, particularly federally. BL: Asset sales are a real feature of today’s discussion because of the sort of reinvestment

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opportunities that they free up. But once you get past the sugar hit of that liberated capital, we have to face a much longer-term situation in Australia around rebalancing revenues to expenditures. We need to make social services delivery more efficient and more effective, because we do have demographic shifts that are changing the ratio of the amount of working people to the amount of people that need to be supported. That is going to have huge potential ramifications for you, not only as community advocates, but also as very large businesses that operate within this third sector that delivers services to the community. If you are looking at things like driving contestability into the delivery of government service programmes, particularly in the delivery of correctional services, social housing and others, there’s a profound opportunity for your sector. How do you see that discussion developing over the next few years? CY: In terms of contestability, we are already in this space. We provide a number of services that are funded by federal and state governments. BL: Do you see this as a growth area for your business? CY: Certainly I see it as a growing area, in terms of the preference for government to secure the delivery of services via a contestability model, if you like; so, large tender processes. Those tender processes actually drive behaviour. If you are running a competitive tender process, the way in which people or organisations engage in that process is going to be driven by the process. So, there are short time frames, there are probity issues, there are restrictions on what you can and can’t do with your competitors, or what we would describe as colleague organisations in the sector. If, at the same time, what government is asking for is collaboration and innovation, those factors are not necessarily being represented in the way that a tender is actually released to market. Though we have some intention, and some dialogue around what the aspirations of government are in what this service delivery looks like, we have a tender process that actually delivers the outcome that one would expect in this type of procurement process. If we actually think about strategic sourcing and are really clear about the outcome we would like to achieve by service delivery, then I think that a much more effective process could be run, in this space, by looking at strategic sourcing.

Again, it has an impact in terms of the number of players in the market, if you like, or the way that service providers, like us, need to organise themselves. If it is actually about price or the cost of service delivery, we need scale, and we need to be able to leverage. If, at the same time, we want small players, we want niche players, we want to transfer all the risk, but we want to do that to a very unsophisticated organisation, then these things are actually not necessarily sitting neatly together. We need to determine exactly what we want out of the process, and we need to design the process that is going to deliver that result. BL: Michael, do you see an equity plus altruism model entering into this sort of area? MT: I think that’s possible, and to Catherine’s point, I do think that in the social purpose space, there are serious limits to contestability. It sounds great, but as students of country systems elsewhere, particularly in education where the trajectory of performance has changed over a decade, it is actually about collaborative sharing of best practice, and pure contestability does not lend itself to that particularly readily. If you look at social benefit bonds, they tap into what matters in terms of some of the things that Left: Ian Holland from Uniting Care

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Below: Catherine Yeomans, Mission Australia, and Michael Traill AM, Social Ventures Australia

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Catherine mentioned around accessing different sources of capital, recognising that service provision is critically important, and having an outturn that is a win for government, as well. The way these work: UnitingCare developed a fabulous program called Newpin that reconnects foster care children, aged zero to five, with their birth parents through an intensive therapy programme. The economics of that are utterly compelling. If that child is reconnected with their birth parents in a stable and loving family situation, it saves the taxpayer and state $100 per day, and around $36,000 per year. If you do your net present value calculation of that, it’s close to a couple of hundred thousand dollars. The private funder takes the risk that it won’t work, so you can do your dough if you invest in that programme. But if it does work, out of those savings, the Government repays the funder, provides working capital for UnitingCare to run a pilot programme for which they might otherwise struggle to access capital, and the investor gets a reasonable return. As Ian said, we just announced the first results of those after a year – it’s early days – but there was a 60 per cent

key performance indicator reconnect rate, compared to what otherwise might happen, which is probably in the order of 20 to 25 per cent. So, you can see that this is forcing accountability, based on long-term outcomes. Government is not second-guessing how the programme is delivered, and for UnitingCare, it has been a win. We believe that clarity on outcomes, quantification of costs and returns, and ensuring that government has a clear place to play, but not actually intervening in the process or programme delivery is incredibly powerful. And there is a lot of work being done in other countries – New Zealand is doing this well. BL: Like the Wiri prison procurement (in Auckland), that sort of approach? MT: Yes. BL: Ian, do you see this as a theme? IH: I agree with Catherine. We have been involved in bidding processes and competitive tendering processes for a very long time. Whether it is bidding for aged care beds in a kind of tendering and assessment against criteria process, or whether it has been a straight-out competition against a set of fixed

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criteria for the delivery of a particular programme, we have been doing this for years. I think that we are entering a phase of some incoherence in the thinking behind what is going to happen next, and Catherine picked up on that. Are we supposed to be competing in this tender, or are we supposed to be cooperating? You are telling us to do both, and you are telling us to do it in five weeks. We are in a difficult transition, and I think that one of the risks for government and for the finance sector is that the concept of tendering could come out of this looking pretty bad. So, I think that there are some risks there, to the future of tendering, rather than the other way around. From our organisation’s point of view, the big issue is with the premise of some of this. We are having an awful lot of discussion in this country around our expenditure problem. This country has an expenditure problem, but it is not a very important one. We have a revenue issue in this country, and we are not talking about that sufficiently. Our organisation is very keen to have a discussion about revenue, about tax expenditures, about the income tax system, and about actually matching the revenue side with what most Australian people would like to see in service delivery. I am listening for the sound of that approaching conversation, and I haven’t heard it yet, but I am sure it is coming. BL: In the audience today, we have major equity and debt investors, and major regulators from right across the nation’s Federal Government and state governments. In terms of dealing with the insubstantial or the asymmetrical call on the amount of public money compared to the amount of public capital and public services that need to be delivered, what would you say is going to be the hallmark of the next few years to start to break through on the funding impasse on public sector budgets? How do we approach this problem in a sensible way? CY: We need to look at the evidence. You need evidence-based policy development. You need a breadth of views around the table, so we need to engage organisations like Mission Australia and others in the community services sector, government, other sources of funding and organisations that are actually going to be responsible for the infrastructure. There is still a very important role for government, in our view, but organisations like ours have a level of sophistication. We have a level of experience in this

space for the users, if you will, of the infrastructure, for the people who will be engaging in infrastructure. If we really want to strengthen communities, then we have to come together around this issue and really be a partnership. BL: Michael, the role of government: skilled purchaser and regulator rather than necessarily default provider? Or is there some other way? MT: The mantra for us is to engage with government in sensible partnership. The three things that we think matter are: firstly, a preparedness to have a long-term focus. That doesn’t exist enough. Secondly, an explicit focus on outcomes, not activity measures, not busyness indicators. And finally, to secure mainstream investment. Goodstart and, in a different way, social benefit bonds are bellwethers for what is possible in getting mainstream industry fund and superannuation fund participation in sensibly structured, social purpose impact investing. If you do the maths on what is possible, two per cent of a $1.85-trillion market is $35 to $40 billion to do some seriously outcomesfocused social purpose work with a recognised impact investing asset class. IH: I would add that one of the messages would be transition. The key challenge with social benefit bonds, from where we sat, was the expense and difficulty of developing the model to implement. If we want to see the superannuation funds and others investing in this, it will build their credibility – there will be rates of return in these kinds of models, but we’re 10 years away from super funds and other institutional investors being able to put nine-figure sums or upwards into this sort of model. What are we going to do with smaller sums of money out of those sectors, to build the evidence base and provide support for the design of those models so that when they become established, they become settled, we can move forward with those? Finally, I really hope that there is going to be a discussion in this country around revenue. There are some fairly squeaky wheels, and they are pretty big wheels at the moment, but I am hoping that some of the partners that we work with will take opportunities that they might not normally take, where they don’t need to step up on the revenue issue, but they might choose to, because that will allow organisations like us to then work with them to a greater degree in the future. Volume 5 Number 1

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Ian Holland, Director, Services Development, UnitingCare Australia Ian Holland’s career has included more than two decades as a policy developer, researcher, writer and advocate, with a commitment to advancing policies that support the most disadvantaged and marginalised, and that remedy injustice. He has responsibility for UnitingCare Australia’s national advocacy program around the development of services, including for the aged, people with disability, children, young people and families, and in relation to income support justice. Prior to joining UnitingCare Australia, Mr Holland spent 12 years working in Parliament House – the first two as a researcher in the Parliamentary Library, providing advice to members of parliament, and then 10 years supporting Senate committees. He led the team that prepared the inquiry hearings and report of the Senate Select Committee on Mental Health in 2005 and 2006. From 2011 to 2013, he was secretary to the Senate Community Affairs Committee, during which time he administered inquiries into former forced adoption practices, the National Disability Insurance Scheme legislation, mental health services, and aged care reform. Mr Holland has qualifications in science from the University of Sydney, and in public policy from the University of New England and Griffith University. He was a youth representative from the Uniting Church at the Assembly of the World Council of Churches in Canberra in 1991, and its Convocation on Justice, Peace and the Integrity of Creation in Seoul in 1990, as well as serving on the Assembly’s National Mission and Evangelism committee in the late 1980s.

Michael Traill AM, Chief Executive, Social Ventures Australia Michael Traill joined Social Ventures Australia (SVA) as founding CEO in 2002 after 15 years as a co-founder and Executive Director of Macquarie Group’s private equity arm, Macquarie Direct

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Investment. SVA is a non-profit organisation that has raised more than $45 million from social investors to fund outstanding ventures and strengthen Australia’s non-profit sector. SVA helps to create better education and employment outcomes for disadvantaged Australians by bringing the best of business to the social sector, and by working with partners to strategically invest capital and expertise. SVA Consulting shares evidence and knowledge to build social sector capacity, while SVA Social Finance introduces new capital and innovative financial models to help solve entrenched problems. Mr Traill is Vice Chair of Goodstart Childcare Ltd, Chairman of the Opera Australia Capital Fund, Assetic Pty Ltd, and a Director of M H Carnegie & Co. In 2010 Mr Traill was made a member of the Order of Australia in recognition of his services to non-profit organisations. He holds a BA (Hons) from Melbourne University and an MBA from Harvard University.

Catherine Yeomans, Chief Executive Officer, Mission Australia Catherine Yeomans was appointed as Chief Executive Officer in March 2014. Prior to this, Ms Yeomans served as Mission Australia’s Chief Operating Officer, and during that time held responsibility for functional areas including advocacy, media, marketing, fundraising, HR, legal, IT, procurement and property. With a law degree by academic background, Ms Yeomans has held senior management roles in a broad spectrum of fields across the corporate sector. She is a Director of Mission Australia Early Learning, Mission Australia Housing, Mission Australia Housing (Victoria) and Many Rivers Microfinance Limited. Ms Yeomans is passionate about social justice and actively speaks out against inequality on behalf of the people Mission Australia serves.

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