Future Building 2011 by Infrastructure Partnerships Australia

The Australian Infrastructure Review Volume 2 Number 1

Over the next six * years, $600 billion will need to be invested in Australia’s infrastructure. While investment in Australia’s infrastructure has already doubled in the last decade, it’s essential to continue this trend to support the nation’s growth and international competitiveness. ANZ is perfectly positioned to facilitate this investment. As an ANZ Infrastructure client you can take advantage of our unique capabilities: market leading experience in Structured Project Financing, Debt Capital Markets and Export Credit Agency funding together with our unmatched distribution capability across the Asia-Pacific+. In addition, our established track record and expertise in Project Advisory will help you structure and deliver landmark projects. Since 2008, ANZ has advised on over AUD$15 billion in projects globally.

David Roberts, Head of Project Advisory T: +61 92271908 E: David.Roberts3@anz.com David Byrne, Head of Utilities and Infrastructure, Australia T: +61 3 92734852 E: David.Byrne2@anz.com Peter Davis, Global Head of Utilities & Infrastructure T: +61 2 92271845 E: Peter.Davis@anz.com

*ANZ, Boom Time in Infrastructure, October 2010. +Basis Point, Deal Logic and Infrastructure Journal. 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. 85138 05.2011 W231040

The Australian Infrastructure Review

Contents Edited by: Gemma Peckham E: gemma.peckham@executivemedia.com.au

Foreword | by the Hon Mark Birrell, Chairman, IPA

Contributors: Mark Birrell, Jeff Hutton, Leon Gettler, Tony Featherstone, Tracy Ong, Michael Bruce, Dan Stojanovich, Brendan Lyon

The playing field has levelled: Brecht | by Jeff Hutton

Gladys vows change; one step at a time | by Leon Gettler

Design: Joanne Marchese

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

Skills crisis at tipping point | by Tony Featherstone

Super funds and infrastructure; ideal bedfellows | by Mark Birrell

Barry the Builder – can he fix it? |

IPA National Infrastructure Awards |

Queensland’s master plan: Bligh says new projects will dovetail with rebuilding priorities | by Tony Featherstone

Mulder mulls infrastructure challenges | by Leon Gettler

Getting New South Wales rail back on track | by Dan Stojanovich

English speaking: NZ pursues more PPPs | by Jeff Hutton

The challenges facing regional water equality | by Tracy Ong

Printed by: Geon Impact Printing

DISCLAIMER: The editor, publisher, printer and their staff and agents are not responsible for the accuracy or correctness of the text of contributors contained in this publication or for the consequences of any use made of the products, and the information referred to in this publication. The editor, publisher, printer and their staff and agents expressly disclaim all liability of whatsoever nature for any consequences arising from any errors or omissions contained in this publication, whether caused to a purchaser of this publication or otherwise. The views expressed in the articles and other material published herein do not necessarily reflect the views of the editor and publisher or their staff or agents. The responsibility for the accuracy of information is that of the individual contributors and neither the publisher nor editor can accept responsibility for the accuracy of information that is supplied by others. It is impossible for the publisher and editors to ensure that the advertisements and other material herein comply with the Trade Practices Act 1974 (Cth). Readers should make their own inquiries in making any decisions and, where necessary, seek professional advice. © 2011 Executive Media Pty Ltd. All rights reserved. Reproduction in whole or in part, without written permission, is strictly prohibited. Volume 2 Number 1

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Future building

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Foreword

I am pleased to present our latest edition of Future Building; the journal of Australia’s infrastructure sector. Over the past six months, we have seen a range of events that have changed the direction and tempo of the infrastructure market in Australia and, indeed, the region. New governments in New South Wales and Victoria have brought forward positive changes to their infrastructure strategies and priority projects. In New South Wales, we’ve seen important project commitments, the announcement of major public transport reforms and the appointment of a much needed coordinating body, Infrastructure

NSW. In Victoria, the government has maintained its major projects in spite of a challenging budgetary position, established an Urban Renewal Authority, and is now looking to drive reforms that increase opportunities for the private sector to invest in the state’s infrastructure priorities. Meanwhile, South Australia has successfully completed the procurement of Australia’s largest ever hospital PPP, and markets continue to develop in other states, as well as in New Zealand. Western Australia has seen healthy investment in exportfocused infrastructure, reflecting a dynamic focus on the booming resources sector. But challenges remain. The rebuilding task in Queensland and Christchurch, and the resulting delay in major projects, shows the sensitive budget position of Australia’s governments. The lack of flexibility in government budgets, coupled with the mounting demand for new infrastructure investment, demands solutions. Australia’s governments will increasingly need to grapple with a new round of reform that considers how capital can be recycled to fund new projects, and how Australia can clear obstacles to a better functioning private market for public infrastructure projects. Forums like October’s national taxation summit and the current review of state finances in New South Wales and Victoria provide important opportunities to further the reform debate in Australia. I hope you find this edition of Future Building of interest, and would welcome your feedback.

The Hon. Mark Birrell Chairman, Infrastructure Partnerships Australia

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The playing field has levelled: Brecht By Jeff Hutton

Over the past four years, former Bilfinger Berger Australia turned Valemus Managing Director, Peter Brecht, usually found himself up against much larger companies. Now Managing Director, Infrastructure at Lend Lease – following that company’s $960 million acquisition of Valemus in March – Brecht says he’s looking forward to a more evenly matched fight. 4

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The playing field has levelled: Brecht

‘Having the Lend Lease brand and its balance sheet behind us is going to be the big benefit,’ Brecht says. ‘That’s going to make it a much more level playing field than it was previously.’ More than a year after his former German parent, Bilfinger Berger AG, sent Brecht around the world to drum up support for a potential IPO of its Australian businesses, Brecht is now folding Baulderstone, Abigroup and Conneq into Lend Lease. In play are billions in hospital, transport and other infrastructure projects – as well as billions more in resources related infrastructure. Brecht says his focus is on realising the efficiencies that melding the two companies should create, without losing the human capital and corporate identities that made Bilfinger Berger Australia an attractive acquisition for Lend Lease in the first place. ‘It’s been 15 months of pretty hard yakka that has taken me outside of the business,’ Brecht says. ‘We need to deliver over the next 12 months. When someone is paying a billion dollars for your business, they want you to hit a few targets too.’ When takeovers don’t succeed, it is usually because of a failure to respect and accommodate the corporate culture and senior leadership of the acquired company. In this case, Lend Lease has retained most of the senior executives across the former Bilfinger Berger group – starting with Brecht. That’s because Lend Lease is counting on their expertise, contacts and knowledge of the infrastructure marketplace to secure even greater success. UBS analyst John Freedman, who maintains a ‘buy’ recommendation on Lend Lease, says the combined companies ought to be worth about $9.75 a share. This compares favourably with less than $7 at one point back in November. Full year net income may rise by more than half to just under half a billion dollars by June 2013. The takeover will boost Lend Lease’s construction earnings to 43 per cent of sales from 25 per cent, Freedman says. ‘It takes Lend Lease into the strongly growing engineering construction space, an area we have believed Lend Lease should have entered a long time ago,’ he says. The integration period is scheduled to run until mid-year as Brecht and Lend Lease Group Director of Operations, Scott Charlton, sort out how to meld back office operations as well as some of the other savings, which analysts say the merger will bring.

Brecht says that retaining him to run the infrastructure business sends a strong signal to management, engineers and project leaders – and clients – that Lend Lease want them to perform and carry on as before.

‘Peter has been a very successful leader of [the company] and the construction industry in general,’ Charlton says. ‘He has developed and retained a successful team and we believe he has a lot to add to the Lend Lease Group as Managing Director, Infrastructure.’ Brecht says that retaining him to run the infrastructure business sends a strong signal to management, engineers and project leaders – and clients – that Lend Lease want them to perform and carry on as before. ‘There’s not going to be a big change of priorities,’ Brecht says. ‘Lend Lease will be looking for us to grow and expand.’ Teaming up with Lend Lease may make it easier to attract new talent, too, with the company’s hefty balance sheet paving the way to compete more ably for project wins. Volume 2 Number 1

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The playing field has levelled: Brecht

‘Lend Lease has been well received in the business units. It makes our business units more attractive employers, because they are part of a large Australian company.’ By folding in Valemus’ constituent businesses, Lend Lease takes the reins of a company that in any one year would bid $20 billion worth of work. At the end of last year it had $5.3 billion of secured work in hand. It had another $1.7 billion pending. ‘Lend Lease had internal plans to get into engineering and infrastructure,’ Brecht says. ‘Acquiring our business gives them a big chunk of that.’ Valemus had already opened offices in Western Australia to vie for work from the likes of Fortescue, Rio Tinto and elsewhere in the resource sector. Abigroup already works on Rio Tinto’s rail and port projects. The infrastructure business may be well placed to take on marine work for Lend Lease on its Barangaroo project in Sydney, building on Baulderstone’s work at Port Botany, Brecht said. Diversification and enhancing the joined company’s capacity to take on work were drivers behind the takeover. That diversity will help shield the business from slumping demand in some parts of the market. Commercial construction will likely be a laggard this year, while infrastructure promises a steadier stream of work. ‘Non-residential work is dropping off, but in the infrastructure space opportunities are plentiful,’

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Brecht says. Brecht says he’s counting on support from his existing senior management, including Abigroup Managing Director, David Jurd, and Baulderstone head, Ian Luck, to help drive the integration and compete for new business. David Marchant, previously Chief Executive Officer of Australian Rail Track Corporation, took over as head of Conneq in March from Mark Elliott, who stepped down after nine years in the role. Teams and the importance of human capital feature prominently in Brecht’s thinking. Throughout the interview with Future Building, he stresses how attracting and retaining people, as well as being sensitive to how teams work together, is a precondition of long-term success. ‘We put project teams together all the time,’ he explains. ‘You need to match and complement them; you don’t just say “I’ve got these blokes free at the moment, I’ll put them together”. There’s no point putting together blokes who hate each other’s guts. As long as the project manager has a good team, they will probably pull off a good job.’ He says that the secret of success for a CEO in the infrastructure space is being across the detail and knowing how projects are put together. Brecht says he’s happy to let managers develop their own style, but he isn’t afraid to step in when bad decisions look likely.

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The playing field has levelled: Brecht

‘You have to lead by example. If you come in and try to bullshit, people in the construction business will see through it pretty quickly,’ Brecht says. ‘I don’t go off my head. When I get upset, people notice because then they know something is wrong. There’s a better way of managing people.’ His easy charm, mixed with an eye for detail and goal oriented approach, is what Scott Charlton says he’s come to expect from Brecht. ‘With Peter it’s always about honesty and integrity,’ Charlton says. ‘In meetings and just generally in business, Peter is always focused on the relevant issues on the table and getting an outcome. ‘He also has a great sense of humour – there’s a bit of the larrikin about him, so while he is all about delivery, he obviously enjoys what he does.’ That engagement with people and focus on the business makes it easier to spot potential problems, and quickly marshal resources to iron out wrinkles – before they escalate into more serious headaches. Valemus last year had 135 projects on the go. In one case, a few years ago, a $150 million project on the Pacific Highway was in danger of falling behind schedule because of heavy rain. The company initially wrote down the project profit to $7 million from its original estimate of $12 million. The company called in extra people and resources from around the country to help bring the project on track. In the end, the project was completed ahead of time and with a profit of between $12 million and $13 million.

‘The challenge is to identify problems and get in early; take action in the early stages when you can bring in resources and fix it,’ Brecht says. Projects are assessed through monthly reports, and then again through quarterly reviews that include the project team, the state manager, the state civil manager and the managing director of that business to review progress, as well as other measures such as cost to date. While the new company will be in better shape to take on larger players, it won’t be immune to the skills shortage that plagues the sector. Brecht is involved with Newcastle University to help drum up more interest in engineering among high school students. ‘The skills shortage is only going to get worse. It creates problems because not only does it drive up wages, it makes it harder to put good teams together, and that raises your risk profile,’ Brecht says. ‘We don’t do enough to encourage kids in year 10 to study maths and science so that they can pursue studies in engineering.’ When his eldest son was mulling over what to study at university, Brecht says he kept ‘studiously quiet’. The eventual decision was engineering at Sydney University. ‘I deliberately tried not to influence the oldest bloke there, but when he told me his decision, I said, “well, it’s what I’ve done for 25 years and I wouldn’t want to do anything else.”’

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Gladys vows change; one step at a time By Leon Gettler

There is no greater reminder of Sydney’s infrastructure challenges than its sometimes-shambolic transport system. The rail network is old, congested – and it is slow; the road system is clogged and incomplete; and the buses are a curious combination of overcrowded and underutilised. In recent years, moves to fix the creaking system have been plagued by broken promises, ageing assets and tangled infrastructure. Part of the frustration has been a fragmented array of transport agencies, operating independently and, sometimes, directly competing with one another.

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Gladys vows change; one step at a time

Previous page: Sydney’s transport – rail, road and harbour – is in need of immediate attention. THIS PAGE: Gladys Berejiklian addresses the media. RIGHT: Chatswood Station, Sydney. The government has promised new services on a number of rail lines.

The public in New South Wales are well aware

Significantly, she had only been in office for a few

of the problem – much of the anger unleashed on the

weeks when an outage crippled Sydney’s train lines

former government at the March election has been

and left 100,000 people stranded during the morning

attributed to taxpayers exhausted by growing travel

peak. At the time, she said commuters should continue

times and infuriated by perpetual broken promises.

to expect interruptions until the system was fixed.

In the lead-up to the March poll, the Coalition

‘We have inherited a system which has had

portrayed the state’s dysfunctional transport system

declining infrastructure and under-investment, which

as the emblem of the state’s broader infrastructure

has had a very ad hoc approach, which has been very

nightmare. Not surprisingly, Premier Barry O’Farrell

fragmented with a separate roads policy, separate rail

has made rail transport a central focus for his new

policy and separate bus policy,’ Berejiklian says.

government, committing to completing the South

‘We have essentially inherited a transport mess.

West Rail Link and commencing the massive North

We are aware of that and we know the tough decisions

West Rail Link – a project that has been promised for

we need to make to improve things. That is why we

decades but never progressed.

have embarked on this reform process.’

To ease the crowding on trains, his government

It could take 18 months or two years before

has also promised 135 new express or semi-express

commuters start seeing real changes on the network.

train services on lines including the Blue Mountains,

‘We know it is not going to change overnight,’ she

Penrith and Campbelltown. That’s significantly

says. ‘To build a world-class public transport system

fewer than the 400-plus services a day cut by the

takes time. We know there are going to be bumps in

former government to stabilise reliability on a failing

the road, but we are also absolutely convinced that

network, but new state Transport Minister Gladys

we will have a system which services the public much

Berejiklian would say it’s the first step on a long

better than what they are receiving now.’

journey back.

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One of the new government’s first announcements

Berejiklian concedes she has a massive job

was the establishment of an integrated transport

ahead of her to once again build people’s trust in the

authority – which will, for the first time, manage

system. It will take time to get it right, she says, but

planning and policy across all modes of transport.

the focus has to shift. By shifting that focus towards

Until now, roads policy and planning has been run

customer services, Berejiklian believes more people

separately from public transport. As a result, planning

will trust the system – meaning more people will use

for the transport network sometimes did not enjoy

the system.

optimal integration.

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Berejiklian says that has changed. ‘New South Wales has been crying out for this for a long time,’ she says. ‘That wasn’t good for the motorists and it certainly wasn’t good for the commuters. ‘This way, whenever there is a new public transport infrastructure project being built, there’ll be consideration of traffic issues and all the other modes. Things will be done in a holistic way, which has never been done in New South Wales. Similarly, if there are any future roads being built or any future expansion of roads, they will have to incorporate a public transport strategy within that. ‘Gone are the days when you could do one or the other without considering one or the other. Certainly we believe this innovation won’t only bring the whole of transport approach to everything we do, we are really focused on the daily plight of customers, which is really what it’s all about. ‘This whole reform process is about improving customer service.’ The simplicity and strength of the reforms, she says, is that the new body will separate planning and policy from the actual operations. ‘You want your agencies to focus on their core services and core deliverables, which is about improving customer experience and delivering services,’ she says. ‘That should be their focus. A central authority will be responsible for the planning, the programmes and the policies, and essentially setting the frameworks for what the operators do. We believe this restructure is a really critical first step, because it allows the agencies, whether it’s the provider of rail services or the provider of bus

services, to just focus for the first time on their core business. They will get very strong direction on what services are needed.’ Significantly, the new integrated transport authority will have a customer experience division that aims to make sure journeys are as simple, as safe and as seamless as possible. ‘I was quite disheartened to find that when I was first looking at public transport in New South Wales that there was this lack of focus on the customers,’ she says. Continued on page 14

Significantly, the new integrated transport authority will have a customer experience division that aims to make sure journeys are as simple, as safe and as seamless as possible.

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www.mcconnelldowell.com Australia | Asia | New Zealand | Pacific Islands | Middle East

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Gladys vows change; one step at a time

North West Rail Link

Vineyard

Mount Kuring-gai

Proposed Alignment and Stations

Wind s

or Rd

May 2011 Mount Colah

North West Growth Centre Previous stabling location

Tallawong Stabling

Glenhaven Kellyville

Stanhope Gardens

Warrawee

Bored tunnel

Norwest

ll R

Marayong

Viaduct

Wi Old

Blacktown

Existing railway

Seven Hills

Strategic road network

Turramurra

Pennant Hills Pymble Beecroft Cheltenham

North Epping M2

Epping

Macquarie University

Winston Hills Northmead

Toongabbie

Macquarie Park Eastwood North Ryde

Telopea

5km Note: This diagram is indicative only

Denistone Pendle Hill Wentworthville

Dundas

West Ryde

Rydalmere

Westmead

Parramatta Harris Park

Continued from page 11 Berejiklian has announced that the government will fast-track the development of ‘apps’ for mobile phones. These phone applications will provide realtime information about delays on the city’s rail and bus network, and ensure the customer is kept in the loop at all times. The new customer experience division will operate alongside other units covering integrated planning, project delivery, freight and regional development and regulation. Importantly, the new authority will have a dedicated division to set performance standards for operators to ensure they provide better customer service. ‘That will be part of the service agreement between the new authority and those agencies,’ she says. ‘Once the new authority is established, there will be a contract between the authority and the operators, and that contract will highlight and indicate performance benchmarks. ‘Also, things like ticketing will be done across all modes so there won’t be 10 different ticketing systems

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s Rd

Carlingford

Bus T-ways

futurebuilding

t Hill an

Cheltenham

ndso

Potential safeguarded stations

Lalor Park

Proposed stations

Thornleigh

West Pennant Hills

Baulkham Hills

Cut and cover tunnel

Cherrybrook Castle Hill

Parklea

Legend

0km

Wahroonga Normanhurst

Hills Centre

Kellyville

Quakers Hill

Waitara

Westleigh

Samantha Riley Drive

Hornsby

n Rd

Cudgegong Road

DOW

Embankment/cutting

Asquith

Rouse Hill

Schofields

Dural

Northe

Riverstone

Meadowbank Camellia Rosehill

or lots of products in different modes that don’t talk to each other,’ she says. One of the big public transport infrastructure challenges in New South Wales will be increasing the efficiency of rolling stock and infrastructure maintenance practices. Critics say that Sydney commuters, and New South Wales taxpayers, have been paying the price of restrictive work practices and unnecessarily high subsidies. Does the Minister anticipate industrial issues? She says the key is to get everyone, from train drivers to back office staff, focused on the people using the system. ‘We believe that everybody who works in public transport – 30,000-odd employees in New South Wales – have an interest in improving the system,’ she says. ‘Certainly the feedback I get when I talk to people working in public transport is that they want to feel proud of the work that they do, they want to feel proud of the service they give and they want to make sure they provide a good service to customers. That’s a common feeling throughout the entire network.

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Gladys vows change; one step at a time

We have a population the size of Canberra’s in the north-west of Sydney, and regrettably, there are inadequate transport services there to support those people. That’s irrespective of whether you sell the tickets, drive the trains or whether you are involved in the back office. ‘It’s up to me to provide that leadership and vision to allow people to have the resources to do their jobs properly, but also to make it very clear that we have an expectation about standards, an expectation about customer service and that that expectation is being driven by people who use the system.’ Berejiklian is also tackling the problem of Sydney’s ferries, which are poorly managed and heavily subsidised. Sydney’s ferries have reportedly cost New South Wales taxpayers millions of dollars a year to keep afloat. The new government’s policy explicitly commits to upgrading ferry wharves, expanding ferry services west of the Harbour Bridge and introducing the private sector to operate services. She says the way to tackle this is to bring in customer service benchmarks for the operators and make them more accountable. ‘When Sydney Ferries was a corporation for seven or eight years, they were never issued with a contract from the State Government stating what their benchmarks were and what their performance indicators were,’ she says. ‘That’s part of the reason why this service has gone backwards to the extent it has. There was no focus on customer service and no intent to grow the business and grow patronage. ‘When the Labor Government put out its most recent transport plan in February last year, they were forecasting a decline in patronage over the next 10 years. ‘We think that is completely unacceptable. We have one of the best harbours in the world, a very expensive waterways network, and to actually forecast a decline in patronage in the next decade is unacceptable. We knew we had to change this trend, grow patronage and encourage people out of their cars and onto the ferries. ‘The way you do that is by improving the

accessible. That’s why we will be franchising the Sydney Ferries network. We will be increasing services and have the private sector put to us proposals for new routes, in addition to the ones currently serviced by Sydney Ferries.’ Beyond these changes, however, it is the North West Rail Link (NWRL) that presents some of the greatest political challenges. That Sydney’s northwest sector is under-serviced by public transport is broadly accepted; it is Sydney’s main growth corridor and will increasingly become a key economic hub. But businesses in places like the Norwest Business Park in Baulkham Hills have reported major skills shortages, with potential employees turning down jobs due to the lack of public transport access. The North West Rail Link is the new state government’s biggest individual pledge, but

service and by making it more reliable and more

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Below: Sydney Harbour: The new government has committed to upgrading ferry wharves and expanding services west of the Harbour Bridge

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Canberra’s commitment is to a different project. Last year, Prime Minister Julia Gillard promised $2.1 billion in federal funding to complete the $2.6 billion Parramatta to Epping Rail Link (PERL) during the federal election campaign. Now, O’Farrell wants that project deferred and the Commonwealth’s funding re-allocated to the North West Rail Link plan he took to the state election. So far, the Commonwealth Government has stuck to its guns on PERL, arguing that the funding is not transferable, but the issue featured in the first meeting between Prime Minister Gillard and Premier O’Farrell, with O’Farrell reportedly taking heart from the discussion. For her part, Berejiklian says the state government is continuing to negotiate with Canberra. ‘This project is so critical for the future of our public transport needs,’ she says. ‘We have a population the size of Canberra’s in the north-west of Sydney and,

We don’t want to see public transport politicised; we want to see the dollars go where they are most needed. regrettably, there are inadequate transport services there to support those people. By putting the rail line to the north-west of Sydney, it not only assists those people who don’t have those public transport options, but obviously takes thousands of cars off the road, which helps all of us in getting to work and home with less congestion on the roads. ‘We have said from the outset that what is in the best interest of the people of New South Wales is construction of the North West and South West rail lines. We have made that position very clear. It’s not only what the government is saying; it’s also what the transport experts have been saying for a long time. ‘We don’t want to see public transport politicised; we want to see the dollars go where they are most needed. That’s certainly the strong case we will be outlining to the Federal Government.’ So does the government have a Plan B if the Feds don’t budge? It’s a scenario Berejiklian isn’t prepared to contemplate. ‘We don’t really want to engage in a hypothetical on this. We have been very strong on where we think the dollars should go and where the public transport priorities are,’ she says. For Berejiklian, it’s very much one strategic step at a time. ‘Restructuring is only the first step, it’s going to take some years to build the type of system we want, to get the type of system people want to use,’ Berejiklian says. ‘Regrettably, it’s not something that’s going to happen overnight. The new structure is the first step and we believe very strongly that the new structure is absolutely necessary to start building a transport system that a global city like Sydney deserves.’

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Skills crisis at tipping point

Skills crisis at tipping point By Tony Featherstone

‘Bigger Australia’ has to be the long-term answer, but more can be done now. Basic skills seem a world away from complex billion-dollar infrastructure projects. But skills and related labour force productivity are vital pieces of a labour puzzle that is threatening Australia’s economic momentum. Left unchecked, Australia’s skills shortage will drive wages higher, reduce the pool of labour for critical projects, cause delays and compromise quality in the nation’s infrastructure programme. Industry is pursuing a range of initiatives to cope with the skills challenge. Over the long-term, this must include a much stronger and sustained focus on encouraging students into science and mathematics disciplines from early school age. In the immediate term, industry is also bringing a major focus to better recognition of previous skills to fast-track qualifications – and to broadening the pool of potential employees for infrastructure projects, especially women and older workers. Governments have also partnered with industry to renew federal and state government training initiatives. All are worthy and smart initiatives, but none offer a game changer to the immediate demand for skills that is growing by the day. In the short term, temporary skilled migration holds a key – and over the longer term, we will need to accept the requirement for a bigger Australia to counter an ageing workforce and lower participation rate. A Treasury briefing to Prime Minister Julia Gillard last year said strong future immigration was ‘probably inescapable’ – a position questioned in the lead-up to last year’s federal election when both major parties argued variations on the theme that the country ‘should not hurtle down the track

Business is acutely aware of the skills risk. 18

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towards a big population’. Any small population position is a gamble. Business is under intense pressure to find enough skilled workers – at the right price – to deliver infrastructure and mining projects that will drive the next leg of Australia’s economic growth and prosperity. And these pressures show no sign of abating in the medium or long term without reform. Business is acutely aware of the skills risk. Leighton Holdings Chief Executive David Stewart earlier this year described the shortage as one of his company’s greatest challenges. Wesfarmers Chief Executive Richard Goyder has said parts of that company were losing staff to higher-paying jobs in Queensland and Western Australia. Transfield Services Chief Executive Peter Goode said in March that his company was becoming more selective about taking on national contracts, amid concerns it may not have enough staff to complete them. WorleyParsons Chief Executive John Grill says his engineering service group was bringing people to Australia using 457 visas, which allow companies to recruit skilled overseas workers for up to four years. The latest CEO survey by the Australian Industry Group (Ai Group) found skills shortages remain a major problem, and that companies expect shortages to intensify over coming years. Ai Group Chief Executive, Heather Ridout, said, ‘We remain very concerned about skills shortages and their likely impact on companies. Estimates that our economy will be 240,000 skilled people short are in line with the feedback we are receiving from enterprises.’ Continued on page 20

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Above: Welders at offshore oil and gas projects seek substantial remuneration.

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Continued from page 18 More than one-third of businesses surveyed rate the impact of the skills shortage as high; with almost half expecting skills to bite heavily by 2015. Nearly two-thirds had difficulties filling vacancies in the second half of 2010, and skills shortages were the main reason. Companies reported a lack of specialised skills required for the jobs (59.5 per cent), a lack of applicant skills and experience (54.1 per cent), and the absence of local training options (32.6 per cent). The most telling factor was that nearly half of the companies surveyed noted a lack of applicants for advertised positions – pointing to a shortage of labour, as well as skills.

Industry feedback finds that companies report vacancies across a wide spectrum of disciplines, including accountants, metal trades, machine operators – and particularly in engineering. But the skills shortage doesn’t just bite in tertiary qualified staff, business groups argue that shortages exist right up and down the skills value chain, from highly skilled through to semi skilled and unskilled workers. Ai Group’s work confirms that view, finding that companies are working hard to solve the problem, with nearly 50 per cent of firms surveyed giving management of skills shortages a high priority. Almost 40 per cent of companies have responded by upskilling existing staff, 31.2 per cent are outsourcing or sub-contracting work, while 18.3 per cent are redesigning jobs around available skills. Chillingly, 10 per cent of companies report that a lack of available labour is hampering production – directly impacting on national economic productivity. Skills shortages are also affecting transport infrastructure projects. Rodd Staples, recently appointed to lead the New South Wales Government’s North West Rail Link project team, told Future Building: ‘In the short to medium term, the infrastructure industry faces shortages of rail signalling and system engineers, power transmission line engineers, and project managers, engineers and supervisors for major civil construction projects.’ Comments from industry and corporate leaders, and surveys on how business sees skills shortages, are staggering. And they do not yet reflect the full problem, given the skill demands that will follow from natural disasters in Australia and New Zealand during the summer, and Japan’s recent earthquake and tsunami. The huge rebuilding task in Queensland could not have come at a worse time for a nation already suffering from skills shortages. Queensland Premier Anna Bligh says the damage bill for state-owned assets is expected to top $5.8 billion, as thousands of kilometres of roads and railways, and hundreds of schools and bridges, are repaired. The result, of course, is even higher demand for skilled workers who might otherwise have been available for mining or infrastructure projects. Staples says climatic events tend to have shortterm effects on the skilled labour market because the recovery process is often about rebuilding, remediation or maintenance, and not a complete

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Regional demand for highly qualified Australian workers is part of a worldwide trend in which highly skilled technical personnel are becoming a global commodity – with skills readily transferable. design or construction task. ‘However, the floods and cyclones will draw heavily on skilled trades, such as electricians, plumbers, carpenters and others,’ he said. Yet even the significant impact of Queensland’s rebuilding efforts is small, relative to the mining boom’s rapacious demand for skilled labour. With a record $130 billion of mining projects on the drawing board, resource and mining services companies are desperate to find workers to build these mines, while global demand and prices remain strong. The Age newspaper recently reported welders at offshore oil and gas projects are seeking remuneration of more than $400,000 per annum, while cleaners in remote mining projects are earning six-figure wages. Sky-high pay packets in the mining industry will become an even bigger magnet for skilled workers from other industries. The risk is that without a safety valve on skills and labour, the valuable resource industry could crowd out other important sectors, including infrastructure. And the challenge is further complicated by an increasingly globalised and mobile workforce. A big unknown is how the massive reconstruction required in Japan and ongoing development across the Asia Pacific might further complicate Australia’s domestic skills shortages.

Regional demand for highly qualified Australian workers is part of a worldwide trend in which highly skilled technical personnel are becoming a global commodity – with skills readily transferable. Rodd Staples says, ‘It is now not uncommon for highly skilled personnel to follow work beyond opportunities from one state to another, as well as across the Asia-Pacific region and beyond, including the Middle East.’ Abigroup Managing Director David Jurd sees the skills shortage as a key issue for his business. ‘We are sailing into the next infrastructure boom and with the peak at late 2012 or beyond, the skills shortage is certain to worsen,’ he says. He argues that better coordination between governments and industry holds a key to managing the call on resources. ‘To the extent that this boom is driven by public sector spending, a visible and reliable pipeline of projects is crucial to plan and manage resources. We would encourage an expanded mandate for Infrastructure Australia, and are encouraged by the establishment of Infrastructure NSW,’ he says. John Holland’s Executive General Manager of infrastructure, Chris Evans, has a front-row view of the effect of skills shortages. ‘Before the global financial crisis, we found it difficult to get skilled and unskilled workers in some sectors. Some of that pressure was relieved when the GFC struck in 2008, but it is rapidly building again. I wouldn’t say we are quite at that preGFC pinch point with skills shortages, but we are getting closer by the day,’ he says. ‘The competition for skilled talent is extraordinary, and one of the ways that it is manifesting is in higher wages. This skills shortage is already affecting infrastructure projects that need to compete for these workers, and I expect to see this problem worsen this year and next. Some infrastructure projects that were previously red-hot could be significantly impacted if they cannot keep or find enough skilled workers. Infrastructure projects work on tight margins and timelines, and this industry has a “peaky” nature. The projects will suffer under conditions of wage instability or project delays brought about by worker shortages.’ Evans says one solution is better recognition of previous experience. ‘Australian industry and government must look at ways to accelerate apprenticeships and traineeships. We need to Continued on page 24 Volume 2 Number 1

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More than you’d imagine… Leighton Contractors has undergone rapid growth and diversification over recent years. Evolving from a construction focused business, our markets now encompass the resources, energy, telecommunications, infrastructure and facilities management sectors. This has been an exciting time for the company but it hasn’t been without the challenges that accompany maturity and change. Today, we’re restructuring for future growth and leveraging our strengths to position Leighton Contractors at the forefront of our target sectors. This is creating further efficiencies within the business and will ensure our people are equipped not only to succeed, but to be integral to our clients’ success.

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As we continue to grow and diversify, it will be our values that firmly anchor our culture and drive ongoing success and sustainability. We are proud of our values; our commitment to people, to our client and industry relationships, to the environment and communities where we operate and, above all, to safety across all our clients’ work. These values are integral to the way we do business; they articulate what we expect from our people and from our industry partners. With a footprint across many major industries and with solid relationships with world-class clients and partners, we are proud of where we’ve been and the journey we are on. We look forward to continuing to be a part of the development of infrastructure to support the growth of Australian industries and the ongoing prosperity of our communities.

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New Royal Adelaide Hospital A Leighton Contractors consortium has been selected as preferred proponent to deliver South Australia’s new Royal Adelaide Hospital. The facility will be the largest and most technologically advanced hospital ever built in Australia, and one that will be recognised as a benchmark internationally. With a design on track to meet a Greenstar 4-star rating, facilities will include all single inpatient rooms and garden outlooks, 40 technical suites and a commercial precinct – establishing it as a world-class social Public Private Partnership and health facility.

Gorgon LNG Leighton Contractors is currently delivering two packages valued at almost $2 billion on behalf of Chevron Australia at the iconic Gorgon Project in Western Australia. Being the largest single natural gas project in Australia, Leighton Contractors will be drawing on our years of experience and local resources to help develop Australia’s energy needs in line with sustainable economic development and with safety as the number one priority.

Macarthur Wind Farm Leighton Contractors is investing significantly in exploring a range of options for alternative energy across the country in collaboration with our clients and technology partners, including Vestas and the AGL Meridian JV. Proposed as the largest wind farm in the southern hemisphere, the $1billion Macarthur Wind Farm will generate up to 420 mw of electricity – enough to power around 220,000 Victorian homes each year.

Hills M2 Motorway Upgrade Leighton Contractors is proud to bring its skills and experience to deliver this major Sydney arterial road on behalf of Transurban. The upgrade will reduce congestion during busy morning and afternoon periods and improve access to north west Sydney and the growing residential and business centres in Macquarie Park.

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Continued from page 21 ensure that people are properly trained, but also that unnecessary rules are not counting against people who have developed skills in other areas. We need to remove any obstacles that slow the flow of people into the workforce.’ Broadening the pool of skilled workers is just as important, Evans says. ‘We have to look at workforce diversity. For example, female participation in the construction industry is very low; we have to make careers in engineering or the trades more attractive to women. And we must think about retaining and recruiting mature-age workers in the infrastructure industry. That is certainly a focus of John Holland, which has a Flexible Futures program to help older employees work with the company to think creatively about how they can stay in the workforce and have more flexibility. This program has been very successful for us in keeping mature workers with all that experience in the workforce.’ Evans says the Federal Government should streamline the 457 visa process for recruiting skilled workers from overseas. ‘It is inevitable that higher migration of skilled workers to Australia will be needed to solve skills shortages in coming years.’ More flexible labour agreements would also help, he says. ‘As they stand, labour agreements in the infrastructure industry are a long and difficult process. We have to work with government and industry stakeholders to make these agreements more efficient, while recognising a strong commitment to training, safety and rewarding workers for productivity increases. We also have to think more about organisational culture in infrastructure firms. ‘We must ensure that the infrastructure industry is an attractive employer for skilled workers, who want a relationship with their employer that is about more than just money. We often lose sight of the non-tangible benefits, such as training, safety, working near your family, long-term employment,

and contributing to important projects that build the nation’s infrastructure.’ Ridout says more efficient skills training is also needed. ‘The Commonwealth Government has introduced some new targeted funding programs, which include an industry co-contribution (for training), and these have been taken up enthusiastically by industry. But the solution is not in one-off projects. Skilling arrangements in this country need to be overhauled. Current arrangements remain complex and bureaucratic.’ Staples says governments are becoming increasingly aware of the problem of skills

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shortages, and need to work as a team with industry to create solutions. ‘There is also a need for clear, transparent and reliable planning processes to allow industry to assess the current state of demand and to accurately forecast demand from major projects in the development pipeline,’ he says. ‘Solutions that can be derived from a collaborative approach between government, industry, schools and our tertiary institutions are most effective in a global, highly mobile economy. This work has already commenced, with some encouraging results through a range of state and federal initiatives over recent years, including a renewed focus on apprenticeships and internships. An important starting point will also be greater attention to mathematics, physics and science in secondary schools, to ensure the talent pool can easily transition to tertiary study in the next decade.’ The trouble is, Australia’s infrastructure sector needs more help now – not just in coming years or decades – to address short-term skills shortages.

Ridout says Australia needs a new approach to the development of workforce skills, and argues that population strategy is a key consideration. ‘The task is enormous, and all options need to be on the table,’ she says. The critical question is whether workforce skills can be developed quickly enough during a mining boom and at a time when new infrastructure is required to serve a growing population, while playing catch-up on the existing backlog of road, rail and social infrastructure projects. Plenty of anecdotal evidence suggests it cannot. Unaddressed, the long-term damage from the skills shortage could be significant. Former Treasury Secretary Ken Henry gave a chilling glimpse of the effect that declining labour force participation will have on the economy over coming decades, in a speech last year that drew on the 2010 Intergenerational Report. Henry said the proportion of the workforce with the highest rates of labour force participation (aged 15 to 64) will fall from 83 per cent in 2010 to 73 per cent in 2050. A fall in labour participation was a factor behind Treasury’s projections of average annual GDP growth of 2.7 per cent over the next 40 years, compared with 3.3 per cent over the previous 40 years. Many will suffer if significantly slower economic growth becomes a permanent feature. The solutions are obvious: a small-population country such as Australia needs higher levels of skilled immigration and a bigger population to offset falling labour participation rates in coming decades. Better education and training will improve Australia’s pool of skilled labour by upskilling the existing workforce. But that alone will not offset sharply lower labour force participation from the country’s most productive workers in coming decades. The long-term solution requires a blended response that includes early attraction of talent into badly needed trades and professional disciplines – as well as a sustained programme of skilled migration to reduce the impact of an ageing population and declining participation rate. But in the short term, Australia must look at an increased, expedited and streamlined use of 457-style migration programmes to capture Australia’s share of the global workforce. Tony Featherstone is a former managing editor of BRW magazine. Volume 2 Number 1

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Super funds and infrastructure; ideal bedfellows By Mark Birrell

The synergy between Australia’s $770 billion infrastructure investment task and national retirement savings has been well documented – yet structural changes to the superannuation industry are needed to cultivate sustainably higher levels of investment.

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Infrastructure investment offers up the longterm, stable returns that superannuation funds are seeking, but policymakers and stakeholders are yet to reach a consensus on the structure and reforms needed to get the most out of the relationship. Total investment in infrastructure assets by most super funds is quite low. The average Australian fund has allocated just five per cent of its portfolio to infrastructure, compared to around 29 per cent in Australian shares and 11 per cent in fixed interest products. In aggregate, Australia’s $1300 billion superannuation industry has made overall infrastructure investments of less than $65 billion,

according to 2009 research released by Rice Warner. And a substantial proportion of these investments have been made in offshore assets. It is not surprising that this outcome has been the subject of spirited public debate and analysis. Especially when you consider that infrastructure expenditure has an established link to productivity, job creation and financial prosperity. Conservative estimates show that each dollar put into infrastructure boosts economic activity by around $1.40, which benefits the 60 per cent of Australians who directly contribute to superannuation. Some leaders of the superannuation sector respond with the argument that these public policy

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This page: Pacific Hydro’s Challicum Hills Wind Farm in Victoria. AustralianSuper, HESTA and other superannuation funds invest in renewable energy companies such as IFM-owned Pacific Hydro.

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objectives overlook the core mission of the fund trustees and managers – which is to securely place members’ cash into profitable ventures. It is therefore asserted that while the objectives of investing in the nation’s rail system, airports, hospitals, ports and other critical infrastructure assets are laudable, they are not the main game. It’s certainly true that the strict obligations on a super fund are to prudently invest for the sole benefit of its members. For this reason, the idea of mandating investments in any particular asset class would be wrong and could lead to perverse outcomes. Each investment should only be made on its merits. But the debate is broader than this. There are now over 10 years’ experience of successful investments by a range of funds into infrastructure projects and companies. Indeed, the published results of expert managers like AMP Capital Investors, IFM, RREEF, UniSuper and Hastings prove that excellent returns have been gained from investments in social and economic infrastructure across the nation. It is therefore possible in both theory and practice for funds to act in a manner that maximises the benefits to members, while also contributing fresh superannuation investment into the projects that will meet the nation’s long-term domestic economic objectives. Australia should aim to exceed current projections that see the value of infrastructure investment by super funds increasing to about $120 billion by 2023. What if funds were to raise their infrastructure allocations to the commonly held upper limits of fund value – for instance to 15 per cent? If they did, a further $240 billion could be made available to the sector over the coming 13 years, amounting to $18 billion per annum that would be available for sound projects. It seems clear that some measured changes to the structure and outlook of the superannuation industry are needed. Through targeted reforms, local and international superannuation, pension and sovereign wealth funds would likely be encouraged to invest in Australian infrastructure assets. As many of the barriers faced by Australian super funds are common across the managed fund industry, it is likely that strategies to support greater investment by super funds could equally encourage a broader suite of potential investors into major projects. Australia has the fourth largest pool of investment 28

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funds generally, behind only the United States, Luxembourg and France. And it enjoys access to the fifth-largest pool of super funds, with Rice Warner estimating that the total pool of savings within the Australian superannuation market will reach $3.2 trillion by 2022. Allianz forecasts that Australia’s superannuation will remain the largest pension market in Asia for several years. If Australia is to bridge the gap between current infrastructure investment and anticipated demand, super funds will need specific encouragement and opportunities to invest in the infrastructure sector. Policy makers will assist with ‘big picture’ changes that allow the superannuation sector to better match its investment strategies to life cycles – by encouraging superannuation beneficiaries to focus on longevity risks. There is currently an almost exclusive publc focus on accumulation, with little emphasis on the post-retirement phase, when a conservative preservation strategy would be appropriate. Encouraging a shift toward annuity products becomes a key objective. Funds that offer annuity products will naturally look for the long-term, stable investments that infrastructure can provide. A shift toward annuities would be positive for retirees, because it would help to manage longevity risk and would help match super and infrastructure in a way that Australia has not managed in the past. At present there are very few long-term or lifetime annuity products available for retirees. Another area requiring focus is the sheer number of small superannuation funds. Experience suggests that some smaller funds have neither the investment flexibility nor scale to successfully undertake new infrastructure transactions; others lack the required skills in terms of specialist investment managers to properly broaden their investment allocations. Rice Warner estimates that the number of large (non-APRA) funds has decreased from around 800 to 500 in the past three years, with the trend to continue to 2013. Continued consolidation will allow super funds to invest in larger projects, reduce fees and charges to superannuants, and facilitate diversified direct investment portfolios. For infrastructure to be an active investment class for institutional investors, sufficient skills are required to understand how to align investment and revenue profiles. Superannuation funds need to make a firm commitment to the sector and invest in the in-house

Superannuation funds need to make a firm commitment to the sector and invest in the in-house expertise needed to properly access the potential that already exists in infrastructure investments. expertise needed to properly access the potential that already exists in infrastructure investments. Of course, direct government support is also crucial. A recent report from the Royal Bank of Scotland estimated that infrastructure spending commitments from governments are ‘flatlining’, with figures showing they declined by around 17 per cent in 2010/11 compared to the previous year. While the fall can, in part, be explained by the planned cessation of stimulus measures in response to the global financial crisis, it’s critical that there is sustained investment. The onus also falls on governments to deliver a long-term and transparent pipeline of investment opportunities in infrastructure projects. Super funds need to be able to see greenfield projects on the horizon if they are to commit to major projects. Likewise, the funds need to have an expectation of lower transaction costs, otherwise large projects (including PPPs) will be less keenly bid than they should be. The flow-on effects of change could be significant. A greater investment by Australian super funds would likely spur international pension and sovereign wealth funds to also invest more in Australian infrastructure assets. There is a sound investment case, but the low allocation shown by many Australian funds proves there is room for improvement. Australia’s population is expected to reach around 37 million by 2050. The ageing population, coupled with the demands that arise from economic growth, will cause further strain on the country’s public transport, roads, freight and utilities. New projects and services can be made available to meet these growth requirements, provided government and industry achieve targeted reforms that foster prudent levels of private investment – including from superannuation. Volume 2 Number 1

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Opposite: 1 Bligh Street in Sydney is one of superannuation company Cbus’ major property investments, and is due for completion in 2011.

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COMPANY FOCUS

Coping with an unCertain future by peter fagan, Mwh

australia is facing a very real infrastructure challenge: urban development and heightened customer service expectations are requiring utilities and government to upgrade and augment critical infrastructure to satisfy demand. yet, many of those projects cannot be initiated without first dealing with the issue of how to fund about $700 billion for infrastructure programs over the next decade (excluding the current repair bills of another $15 billion nationally). add to that the uncertainty about how to cope with climate change and what some consider to be an associated increase in natural disasters, and the way forward becomes even more complex.

Looking forward, rather than backward traditional planning and infrastructure standards rely heavily on a combination of historical records and forecast demand based on past experience. recent experiences in Queensland, new South wales, Victoria and northern western australia, however, highlight the need to think and plan more laterally for the future. the more recent earthquakes in Christchurch and north east Japan add further weight to the argument that we must have more resilience in our infrastructure and communities. according to the MWH Critical Infrastructure Report, seven out of 10 australians predict that australia will experience more natural disasters over coming years than the long-term average. 85% of australians believe that climate change is real and almost all advocates (92%) agree that human activity has at least some role. Most (58%) see a strong link between climate change and human activity. 75% of australians believe there is a link between climate change and the frequency and severity of natural disasters (25% a large impact, 50% a small impact). Climate change demands an approach that allows infrastructure and communities to cope with and recover from natural disasters more quickly and effectively. while infrastructure and communities cannot be made invulnerable, they can be made much more resilient. building infrastructure that can better withstand significant events is important; however resilience and the ability to recover quickly and easily is perhaps even more so. resilience may mean the updating of australian Standards to mitigate future damage and allow ‘business as usual’ to be resumed more rapidly. an example would be requiring masonry construction for the ground floor of buildings in flood-prone areas. the MWH Critical Infrastructure Report identified that a staggering 98% of australians believe our government should be spending money to make our infrastructure better able to cope with natural disasters. 66% could see the benefit of decentralising our critical infrastructure so an entire system is not shut down when impacted by an event as was the case earlier this year in Christchurch when the city was without water and sanitation for days on end.

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in rural and more remote areas where isolation can slow the flow of building materials or labour, distributed infrastructure makes these communities more able to deal with recovery issues locally. also critical is the need to build resilience into our communities. the development of volunteer service organisations and local disaster plans is an example and one that has been proved to be effective in bushfire prone parts of the country. beyond that, there is a case for the establishment of a national natural Disaster relief fund, as is the case for the new Zealand and Japan recovery efforts. Some argue that the cost associated with building resilience into our infrastructure and communities is prohibitive, but when a whole-oflife assessment that considers the likely increase in size and frequency of weather events is conducted, it shows that such an approach is actually more economic in the long run. this is particularly the case if the cost of disruption and repair is factored in.

Peter Fagan

Funding the future the current political landscape interferes with a rational debate of how to fund forward-thinking infrastructure initiatives. our tax base across australia is shrinking, hence the interest in taxes on mining and big business. these debates, like the infrastructure discussion, are issue-specific in that the cash that would be raised by one option or the other is quarantined to a particular outcome. Consequently, we are still left unable to fund infrastructure and the needs of the nation. in short, the debate that is needed is not being had. Currently, we debate ‘this project versus that project’, we debate what we can afford based on minority input into critical national decisions and we never really discuss how to fund the whole of what we require. we must begin to look at how to deliver value to each project, and to our communities, as opposed to just how to pay for things on a one-off basis. the nation must begin that debate now if we are to cope with the uncertainty of both population growth and climate change. Peter Fagan is the Asia Pacific Practice Leader, Sustainability for MWH, a global engineering, construction, technology and consulting company. For more information, please contact him at Peter.Fagan@mwhglobal.com.

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Building Resilience Infrastructure and communities cannot be made invulnerable to the impacts of climate change or natural disasters, they can only be made more resilient. Infrastructure can be built to better withstand threats, or in a manner that allows faster and more effective restoration or replacement, minimising disruption to services. MWH is a global consulting engineering firm, recognised for its leadership in water, infrastructure development and environmental management.

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For 40 years we have been helping all layers of Australian government to plan, design and construct more reliable and resilient infrastructure. We identify strongly with the issues facing our cities, towns and rural communities and are determined to make a positive contribution to Australia’s critical infrastructure for future generations. For more information, please visit mwhglobal.com

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Barry the Builder – Can he fix it?

Left: Sydney’s ferries look set to receive an overhaul under Barry O’Farrell’s reign.

Infrastructure looks set to enjoy something of a renaissance in New South Wales under the new state government. But with great expectations and tight budgets the task is daunting – success may come down as much to managing expectations as it does to managing budgets.

Following a landslide victory in March’s state election, Premier Barry O’Farrell has already said that he’s looking to build a legacy as the ‘Infrastructure Premier’ – and he’s made early commitments that show a very positive momentum in that regard. The government has already made a series of significant project commitments from Opposition. In the first term, they include a new North West Rail Link, a new motorway in Sydney (to be determined by Infrastructure NSW), and a $700 million convention centre public private partnership (PPP) at Darling Harbour. Early indications point to a government that’s not shy about a commitment to delivery, with infrastructure taking centre stage in the first 100 days. The North West Rail Link in particular is moving quickly. Rodd Staples, the respected former head of the Sydney Metro Authority, has already formed a project delivery team and market soundings are underway. Meanwhile, the Premier’s own department has taken the reins on the Convention Centre project, which should reach the market in October. Continued on page 36 Volume 2 Number 1

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COMPANY FOCUS 1

[1] Abignano era helmet [2] M2 Motorway tunnel NSW, 1994 [3] Terrey Hills Golf Course NSW, 1991 [4] National Survey Manager Brett Lehmann at Bogantungan QLD, 1984 [5] M7 Light Horse Interchange NSW, 2005 [6] Abigroup founder Gennaro (Jim) Abignano laying 99” pipes on the Comenara Parkway, 1964 [7] Abigroup built the largest number of facilities for the Sydney Olympics including the Sydney SuperDome: the venue for the basketball and gymnastics (it is now known as Acer Arena) [8] Chichester Dam NSW, 1983 [9] Gateway Bridge duplication QLD, 2009 [10] Coffs Infrastructure Alliance NSW, 2009 [11] Abigroup staff and paving machine at Pearce’s Corner on the F3, NSW, 1989.

ABIGROUP CELEBRATES 50TH ANNIVERSARy Abigroup celebrated a major milestone recently as the company turned 50. Events were held at Abigroup sites and offices around Australia to mark 13 April 1961 when Italian emigrant Gennaro ‘Jim’ Abignano first registered his small Sydney earthmoving business as G.Abignano Ltd. Fifty years on and several name changes later, the company that Jim created now has a turnover of $2.5 billion and is one of Australia’s leading and most diverse contractors with expert teams delivering works in areas including roads, buildings, rail, mining services, water, tunnels, bridges, telecommunications and energy. Managing Director David Jurd, who has been with the company since 1991 starting as a Site Engineer, puts the success of the company down to its hands-on, no nonsense culture. ‘The fundamentals of what we do have never changed,’ said David. ‘That’s probably the thing I’m proudest about – we bat at the big end of town now and people recognise that we’re straight shooters. We’re the same as decades before, but now we’re a $2.5 billion business.’

Abigroup’s founder Gennaro ‘Jim’ Abignano, Abigroup’s Managing Director David Jurd and NSW Transport Minister Gladys Berejiklian cut the ribbon to officially open Abigroup’s new Head Office

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Major projects that the company has completed over the years include Bayswater Power Station, the M2 motorway, a number of the Sydney Olympic venues including the SuperDome, the M7 motorway, the Monash Freeway Upgrade and the duplication of the Gateway Bridge. Major projects that the company is currently working on include: y the $1.4 billion Queensland Children’s Hospital; y the $1.14 billion Adelaide Desalination Plant; y the $759 million Peninsula Link motorway in Victoria; y the $460 million Hunter Expressway (Western Section) in NSW; and y the $50 million Reid Alexander Interchange project in WA. These projects, together with other recent wins, provide Abigroup with an order book of $5 billion – its largest ever – as the company enters its 50th year. A high-quality book about the company’s history has been produced and every current Abigroup employee received one as an anniversary present. The book contains interviews with employees both past and present who have played their part in the development of the company. Visit www.abigroup.com.au to view chapters from the book. As part of the 50th anniversary celebrations Abigroup formally opened its new Head Office on Sydney’s North Shore on 7 April. The NSW Government’s Transport Minister Gladys Berejiklian was the guest of honour and together with Abigroup’s Managing Director David Jurd and the company’s founder Gennaro ‘Jim’ Abignano she cut the ribbon to mark the opening at a function held in the new offices which are located on four floors of the iconic Zenith buildings in Chatswood. The office fit-out was carried out by Abigroup’s NSW Building team and was completed to the highest standards with quality finishes and a showcase main reception area. The Zenith deal includes naming rights to Tower B. The office boasts a variety of environmental features including energy efficient lighting and services and a 4 star Green Star office interiors V1.1 as-built rating has been applied for from the Green Building Council of Australia.

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R o a d s · B u i l d i n g · B R i d g e s · R a i l · T u n n e l s · WaT e R · M i n i n g s e R v i c e s · T e l e c o M M u n i c aT i o n s · e n e R g y · M a R i n e W o R k s

Strong. Innovative. Diverse. It’s Abigroup. National Head Office p 02 9499 0999 Level 20, The Zenith Tower B 821 Pacific Highway Chatswood NSW 2067 www.abigroup.com.au

Supporting our rise as one of Australia’s leading contractors is one core principle: We are a hands-on contractor. We always have been. The benefit of this for our clients is that Abigroup retains control over quality, delivery, cost and timing of our projects, ensuring clients are provided the high quality end result they expect—on time, every time.

A driving force in Australian construction and infrastructure delivery for 50 years.

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Barry the Builder – Can he fix it?

Continued from page 33 The announcements haven’t stopped with flagship projects; O’Farrell has taken early and important steps in the sphere of infrastructure policy. The formation of Infrastructure NSW, chaired by former Premier Nick Greiner, with former Sydney Water and AAPT Managing Director Paul Broad as the Chief Executive, is one example. The radical overhaul of the transport agencies under Director General Les Wielinga is another. If Infrastructure NSW does its job well, by the end of this year New South Wales will have a detailed, 20year infrastructure strategy. This strategy will get down into the detail of where future transport, water, energy and health projects will be delivered, and how they relate to the state’s land use and economic strategies. The 20-year infrastructure strategy will also be used to inform a five-year committed project pipeline. It will include all capital projects worth more than $100 million – from hospitals to rail lines and everything in between. And Infrastructure NSW is equipped to perform. The legislation introduced into the Parliament in May provides the agency with wide-ranging powers to step in and take control of projects if they falter. The focus on creating certainty about the state’s infrastructure priorities is welcome news for a private sector bruised by the rapidly changing project landscape seen in recent years. The appointment of Nick Greiner is in itself an important signal. He has strong reform credentials, and oversaw a period of rapid reform and change during his tenure as Premier. One of his biggest legacies is the widespread use and development of the PPP model, which saw billions invested in road projects such as the M4, M5 and M2 motorways, and a suite of build-own-operate-transfer (BOOT) projects in the water sector. More recently, Greiner’s role on the boards of major infrastructure companies also gives him a good understanding of the challenges facing the private sector. And Greiner’s reform credentials will likely be important. The huge and growing backlog of projects and lack of flexibility on the state’s balance sheet mean the O’Farrell Government will need some direct and fearless advice – not least about how it can create the financial capacity to deliver the level of new infrastructure that the community expects. In lieu of reforms, with a $7 billion rail project and a to-be-confirmed multi-billion dollar motorway 36

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Early indications point to a government that’s not shy about a commitment to delivery, with infrastructure taking centre stage in the first 100 days. already committed, other new projects look difficult to fund, at least in the short term. Twenty years of strong global economic prosperity made it easy for some governments to hide from the need for meaningful micro-economic reform, but New South Wales is no longer in that position. Expectations from the public and business sector about better infrastructure outcomes are high, and creating the capacity to meet these expectations will require politically difficult reforms. Of course, the scale of O’Farrell’s win leaves him well equipped with a massive electoral mandate to effect change. The good news is that the government has shown an early appetite to undertake some of these reforms. It has announced that it will enter a long-term lease for the desalination plant at Kurnell, and the market is already being engaged on franchising Sydney’s ferry services. The government has asked outgoing Sydney Water Managing Director, Dr Kerry Schott, to oversee the desalination plant leasing before she leaves her post later in the year. But to really get New South Wales buzzing again, the O’Farrell Government will be asked to go much further. The long list of transport projects that need to be considered by Infrastructure NSW will need to include the missing links in Sydney’s motorway network, the F3M2 connection, the M4 East, the M5 East duplication and the F6 Motorway in southern Sydney. It will also need to consider long-term projects like an M9 far western orbital. Continued on page 38

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AWARD-WINNING QUANTITY SURVEYORS AND CONSTRUCTION COST MANAGERS TO THE INFRASTRUCTURE SECTOR

www.wtpartnership.com.au

We draw on over 60 years of local and international experience to deliver the very best cost advice to our clients in the infrastructure sector. Our expertise spans the project life cycle from feasibility through to completion across all contract and procurement types. Our expertise includes:

TRANSPORT PUBLIC & CIVIC INFRASTRUCTURE RESIDENTIAL, COMMERCIAL & INDUSTRIAL LAND SUBDIVISION REMEDIATION WATER POWER AVIATION RESOURCES

Knowing the true cost of works at all phases of the project enables our clients to make decisions which result in optimum project outcomes. To find out how we can assist on your next project contact Nick Deeks on +61 2 9929 7422, email ndeeks@wtpartnership.com.au or visit our website.

AUSTRALIA Adelaide Brisbane Canberra Gold Coast Hobart Melbourne Perth Sydney BRUNEI CHINA ESTONIA GERMANY GREECE HONG KONG INDONESIA IRELAND ITALY MACAU NEW ZEALAND SINGAPORE SPAIN SWEDEN UNITED KINGDOM VIETNAM

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Barry the Builder – Can he fix it?

Right: Newcastle Port could be a candidate for asset sales.

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Continued from page 36 On the rail network, the plan will need to consider ultra-high value projects, like a new Harbour crossing and a CBD relief line, on top of a radical upgrade in signalling and rolling stock over the coming decades. Other transport investments will have to be factored in, like a decision on replacing the other half of the urban train fleet not touched by Waratah Trains, the replacement of the aged XPT and XPlorer country trains, and the replacement of the Sydney Ferries fleet. On top of multi-billion dollar futureproofing projects, the state will need to liberate enough money to deliver its part of the duplication of the Pacific Highway, which will cost the Federal and State Governments another $7 billion to finish. And then there is the Princes Highway duplication – a massive task all on its own. None of those projects come cheap. And that’s before you start to consider the desirability of replacing a range of hospitals from the 1960s and 1970s that are coming to the end of their economic lives, or the new health, education, justice, water and freight network investments that will be required to deal with economic and population growth. In short, the list of projects likely to be identified by Infrastructure NSW is going to be important, it’s going to be long and it’s going to be expensive. In September, O’Farrell will receive an economic audit of the state’s financial position. The audit, being overseen by Treasurer Mike Baird and acting Treasury Secretary Michael Lambert, will deliver a picture of the state’s assets and liabilities and outline the opportunities for reform. The economic audit can be judged a success if it spells out a strategy to rein in the state’s expenses and drive up service quality. It will need to identify how the state’s budget can be transformed to provide a sustainable way to fund recurrent service costs, and fund the short and longer-term capital investments identified by Infrastructure NSW.

An appropriate program of asset sales is an obvious avenue to support infrastructure investment. Candidates for an asset sales programme could include the state-owned ports in Newcastle, Kembla or Sydney, the state’s forestry businesses, and some public sector maintenance and construction functions. The energy sector too will hold opportunities for windfall revenues, although the current half-pregnant structure makes it a much less straightforward proposition. A fractious public debate and internal divisions in the former state government saw a headlong pursuit of a compromised reform model that has left the energy sector in a mess. All generators remain publicly owned, but the output of many has been sold to the private sector – along with the retail businesses. This effectively leaves the state halfway to a poor reform – with no easy way back. Proper reform would have delivered the state a clearcut, competitive and efficient energy sector, and potentially delivered billions for renewed investment in vital infrastructure. But there are still opportunities to salvage value from the state energy sector. Part of the generation sector remains in full public ownership, and so do the transmission and distribution businesses. O’Farrell has commissioned an independent inquiry, headed by Justice Brian Tamberlin, to identify a way to fix the energy mess. Hopes are high that the inquiry, due to report later this year, will unambiguously call for a reform plan that will see the straightforward sale of the remaining generators, and a process to sell the part-reformed generators to the private sector. Of course, major reforms, like privatisations, service outsourcing and meaningful public sector reform, need to be tackled sensitively in a way that engages the public and debunks the myths. Beyond its own budget measures, there is no doubt that New South Wales will also be looking for Canberra to play its part. O’Farrell was quick to point out after the election campaign that New South Wales largely missed out in the first round of Infrastructure Australia funding. The day after the state election, O’Farrell said of Sydney: ‘Now this is a city that has 20 per cent of the nation’s population, and yet in the first round of Infrastructure Australia funding, we got less than two per cent of the funds.’

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High expectations that New South Wales would be the beneficiary of billions in federal infrastructure funding for new transport links amounted to nothing beyond planning study support and the funding for the Hunter Expressway. The state was even forced to return the money it received for planning studies, because it axed the Sydney Metro while it was in the procurement phase. In spite of much of the media commentary at the time, it wasn’t the merit of the projects like the M4 East or Metro network that stopped them winning support. Nor was it a lack of quality in individual submissions. Rather, it was the lack of an integrated strategy for the state’s infrastructure networks that meant New South Wales fell at the funding hurdle. O’Farrell has already tasked Infrastructure NSW as the primary interface with Canberra for federal funding; and there have already been several rounds of meetings between O’Farrell and Prime Minister Gillard, as well as Federal Infrastructure Minister Anthony Albanese.

There are still funding issues to be resolved, not least the competing priority commitments of the Parramatta to Epping Rail Link (PERL) and the North West Rail Link – but there are positive signs that a resolution may yet be reached. Whatever the case, the election of the O’Farrell Government clearly holds a lot of potential for new thinking and renewed momentum to plug the infrastructure gap. And it’s clear the new government recognises the need to engage the know-how and investment of the private sector if it is to begin to tackle that challenge.

SYDNEY PORTS

2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10

07 ,5 27 17 1,9 4,0 0 8 7 1,7 ,3 78 14 1,7 20,1 8 1 1,6 ,3 4 5 39 1,4 6,2 3 7 5 1,3 70,1 6 1,2 ,31 61 9 6 1,1 9,2 0 85 1,0 0,4 99

GROWING AND WORKING TOGETHER

total container trade 2000/01 to 2009/10 (teUs)

SYDNEY’S PORTS FACILITATE OVER $50 BILLION OF TRADE EACH YEAR, WITH AN ANNUAL CONTRIBUTION TO THE NEW SOUTH WALES ECONOMY IN EXCESS OF $2.5 BILLION. To meet the future demands of international trade, Sydney Ports is increasing capacity at Port Botany with the construction of a third container terminal. The $1 billion Port Botany Expansion is due to be operational in 2012, providing more options for importers and exporters. For more information please visit www.sydneyports.com.au

www.sydneyports.com.au Volume 2 Number 1

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Key infrastructure figures in the O’Farrell Government

Barry the Builder – Can he fix it?

BARRY O’FARRELL Premier Barry O’Farrell has served in the New South Wales Parliament since 1995. He has a strong interest in infrastructure policy and projects, having served as the Chief of Staff to the Transport Minister in the Greiner Government. O’Farrell spent a lot of time consulting with the infrastructure sector in Opposition, including on the architecture and function of Infrastructure NSW.

O’Farrell says, ‘without Federal Government assistance, without working with the private sector, without the state doing better, we will not solve the problems across this state’. O’Farrell says, ‘without Federal Government assistance, without working with the private sector, without the state doing better, we will not solve the problems across this state.’ For their part, the New South Wales public are expecting real changes. In the days after the election, a website doing the rounds – www. hasbarryofarrellfixednswyet.com – was greeting visitors with a giant ‘NO’. While it was then (and is now) far too soon to expect the new government to have delivered real change – it is a reminder that public expectations are high. The change of government in New South Wales has marked a paradigm shift in the state’s reform agenda – there is now a unique opportunity for reform, that is matched by a public appetite and expectation of change. The early indications are that the opportunity won’t be wasted. 40

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Volume 2 Number 1

ANDREW STONER Deputy Premier and Leader of the Nationals Andrew Stoner joined the Parliament in 1999, following a career in small business and the public service. He has held a range of infrastructure portfolios in opposition, including roads and ports. Prior to the election, Mr Stoner mooted options for network tolling mechanisms to fund PPP projects in Sydney. MIKE BAIRD Treasurer An investment banker and son of former Transport Minister Bruce Baird, Mike was elected at the 2007 election. He is a strong supporter and advocate for the need to reform public administration – including active support for the 2008 proposal to sell the state’s electricity sector. GLADYS BEREJIKLIAN Transport Gladys Berejiklian – a relative newcomer to the Parliament – has held the transport portfolio for five years. First elected in 2003, her career before politics included a period as a political adviser, before a successful career in banking. GREG PEARCE Finance and Housing Greg Pearce is a former Freehills Partner with a good understanding of financial management and reform. The reform of the allocation of acts by O’Farrell means that Pearce also holds control over most of the state’s assets – and will be important in driving reform in areas like social housing and water. DUNCAN GAY Roads and Ports One of the government’s most experienced MPs, Duncan Gay, supported high-speed rail in his 1988 maiden speech, which would position Canberra Airport as an alternative second airport for Sydney. He has held mainly infrastructure related portfolios, including previous stints in roads and industry portfolios. BRAD HAZZARD Planning and Infrastructure, Minister Assisting the Premier on Infrastructure NSW Brad Hazzard held a wide range of portfolios in Opposition, picking up responsibility for planning in 2007 and infrastructure in 2008. He will oversee the delivery of a new planning act for New South Wales, and will be responsible for the day-to-day operation of Infrastructure NSW. JILLIAN SKINNER Health Jillian Skinner has flagged a greater role for the private sector in healthcare provision, specifically in the treatment of chronic diseases, but is yet to go into any detail. Jillian wants to overhaul hospital emergency departments by providing patients with real-time information on waiting times.

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IPA National Infrastructure Awards Independent Judging Panel: The 2011 Finalists and Winners of the National Infrastructure Awards were selected by an independent judging panel of senior public and private sector leaders. IPA thanks the panel for their dedication to the awards. The panel comprised: - Tony Shepherd, Chairman, Transfield Services -

Mark Birrell, Chairman, Infrastructure Partnerships Australia

Adrian Kloeden, Chairman, Serco Asia Pacific

Peter Duncan, then Director General of the Department of Services, Technology and Administration

John Fitzgerald, Deputy Secretary, Victorian Department of Treasury and Finance

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Project of the year

Winner: The prestigious Project of the Year for 2011 was awarded to Queensland’s Gateway Upgrade Project. Right: Gateway Upgrade Project Team.

Project of the Year – Sponsored by Arup Winner: Gateway Upgrade Project Leighton – Abigroup joint venture Companies involved: Abigroup; AECOM; Aurecon; Cardno; Coffey International; Conneq; Evans & Peck; Leighton Contractors; Queensland Motorways; Sinclair Knight Merz; SMEC and VSL Australia. The massive $2.12 billion Gateway Upgrade Project is a Queensland Government initiative delivered by Queensland Motorways, with design and construction by the Leighton – Abigroup Joint Venture. Delivered progressively, the upgrade has provided motorists with a safer, smarter and more durable motorway. Totalling 24 kilometres and delivered during a construction boom, this complex project involved the duplication of Brisbane’s iconic Gateway Bridge, as well as the upgrade of some 16 kilometres of the Gateway Motorway south of the Bridges. The project also saw the refurbishment of the existing Bridge; and a new seven-kilometre motorway running north from the Bridges. Despite the challenges, value for money outcomes were delivered through innovative design, efficient construction methodologies and exemplary

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performances in safety, environment and community engagement. The project was completed seven months early and delivers a major enhancement to Brisbane’s road estate. IPA congratulates the Queensland Government, Abigroup, Leighton Contractors, Queensland Motorways Limited, AECOM, Aurecon, Cardno, Coffey International, Conneq, Evans & Peck, Sinclair Knight Merz, SMEC and VSL Australia on this outstanding project. Previous recipients of Project of the Year include: 2010: Melbourne Channel Deepening (VIC) 2009: Headquarters Joint Operations Command Centre (CTH) 2008: Eastlink Motorway (VIC) 2007: NSW Schools PPP (NSW) Continued on page 44

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2010 National Award Winner

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Above: Newcastle Coal Terminal. Right: South Australia’s Northern Expressway.

Continued from page 42

Project of the Year finalists Newcastle Coal Infrastructure Group Project Newcastle Coal Infrastructure Group Companies involved: Allens Arthur Robinson; Aon; Aurecon HATCH; Australia and New Zealand Banking Group; Blake Dawson; Department of Environment, Climate Change and Water NSW; Environmental Resources Management; Ernst & Young; Federal Department of Sustainability, Environment, Water, Population and Communities; Hunter Valley Coal Chain Coordinator; Infrastructure Capital Group; Inteplan; Minter Ellison; Newcastle Port Corporation; NSW Department of Lands; NSW Maritime; Wood Mackenzie; WorleyParsons. The Newcastle Coal Infrastructure Group (NCIG) was formed to address major coal export infrastructure capacity issues from the world’s largest coal export port. The project involves the progressive construction and operation of a new 66mtpa coal export terminal of Kooragang Island at the Port of Newcastle. Construction of stage one of the new facility has a capacity of 30mtpa and was completed in June 2010. In August 2010, NCIG achieved Financial Close for the Stage 2 expansion of the port to increase capacity to 53mtpa. Both stages of the project will cost an estimated $2 billion. The project and related upgrades will increase exports by more than $6 billion per year. It will also increase the flow of coal royalties to the New South Wales Treasury. The development is expected to underpin 5000 jobs in the region.

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South Australia’s Northern Expressway Project Fulton Hogan; South Australia Department for Transport, Energy and Infrastructure; York Civil. Companies involved: AECOM and Dare Sutton Clarke The $564 million Northern Expressway is a joint project between the Commonwealth and South Australian governments. The project delivers significant national benefits because it increases the efficiency, safety and reliability of the national transport network. The project is the largest road construction project in South Australia since the 1960s, and consists of a 23-kilometre high-speed roadway, separate pedestrian and cycle pathways, and the upgrade of Port Wakefield Road. Since opening to traffic in September 2010, the Northern Expressway has improved traffic conditions for residents in Angle Vale and the northern suburbs near Main North Road, delivered better access to Adelaide for freight transport travelling via the Sturt Highway, and enhanced road safety for the near 15,000 vehicles traversing the route daily.

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ABOVE: Sydney Airport’s Runway 25.

Sydney Airport’s Runway 25 – Runway End Safety Area Project Sydney Airport Corporation Limited Companies involved: Aurecon; Baulderstone; Cardno; Civil Aviation Safety Authority; EnergyAustralia; NSW Roads and Traffic Authority and Sydney Water. To comply with new global safety requirements, Sydney Airport was required to undertake a significant upgrade of the east-west and two northsouth runways, to allow additional space and safety requirements to accommodate the new A380 aircraft. The 07/25 runway end safety area consists of an 8100 square metre concrete land bridge, making it Australia’s first suspended RESA deck. The challenging project had to be undertaken on a complex site, building over Sydney’s main southwest wastewater outfall pipeline and the M5 East tunnel, and involved the realignment of the airside perimeter road and Energy Australia’s 132kV gasimpregnated high voltage cables, which are unique in the southern hemisphere. Numerous benchmark structures were required needing the development and use of self–compacting concrete – Australia’s first use. The $99.7 million investment in this project has provided a fully compliant runway in terms of safety for aircraft, including the new A380.

Continued on page 46 Volume 2 Number 1

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IPA National Infrastructure Awards

Government Partnership Excellence Award – Sponsored by the University of Wollongong’s SMART Infrastructure Facility

Right: Rick Turchini and IPA Chairman, The Hon. Mark Birrell.

Winner: M2 Motorway Upgrade NSW Roads and Traffic Authority – Client; Transurban – Manager and Operator

Chairman’s Prize – Rick Turchini From time to time, IPA’s Chairman confers an individual award, recognising an outstanding individual who has made a sustained personal contribution and provided industry leadership to the national infrastructure sector. In 2011, IPA’s Chairman Mark Birrell presented the Chairman’s Prize to retired Baulderstone Managing Director Rick Turchini, for his career-long contribution to infrastructure. As part of Australia’s infrastructure sector for over four decades, Rick Turchini has been part of delivering some of Australia’s most important projects. Rick began his career in the electricity sector as a civil engineer, before joining Leighton Contractors in 1981 as a project manager. Over time, Rick became the General Manager of New South Wales and the Australian Capital Territory divisions of Leighton, and led projects including the M5 South West Motorway – Australia’s first modern PPP; the Eastern Distributor; Westlink M7; Sydney Harbour Casino and Angel Place. After a short retirement, Rick returned to a full-time executive role as the Managing Director of Baulderstone in 2005 – an organisation he successfully led for five years – delivering highprofile projects including the Royal Women’s Hospital in Melbourne; the Tullamarine – Calder Freeway Interchange Alliance; Optus headquarters in Sydney; and the Phu My Bridge in Vietnam. Throughout his career, Rick has made a significant investment in industry associations, including his service on the Board of Infrastructure Partnerships Australia, as well as senior roles with the Australian Constructors Association and Civil Contractors Federation – amongst others. At the end of last year, Rick retired as the Managing Director of Baulderstone. IPA would like to acknowledge Rick Turchini for his outstanding service to our association and sector. 46

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The Hills M2 Motorway is a 21-kilometre four-lane motorway, owned and operated by Hills Motorway, a Transurban subsidiary. The motorway links Sydney’s lower north shore and north-west regions. Around 100,000 vehicles travel on this motorway each workday, along with more than 17,000 bus passengers. The M2 Motorway Upgrade Project will widen the motorway, increasing its capacity to accommodate projected population growth and increased transport needs. The project used an innovative approach to fund the $550 million capacity enhancement, with the Hills Motorway to finance the project on behalf of the state through an extension of the concession term and a one-off tolling increase. This project is expected to deliver more than $1.7 billion in economic benefit to the state, but has removed the requirement for taxpayers to fund the extension. The Hills M2 Motorway Upgrade Project is being delivered by Hills Motorway in partnership with the New South Wales Government and the RTA, with completion anticipated in 2013. The Government Partnership Excellence Award recognises a genuine partnership in the development and delivery of public policy objectives. Judges looked at the scale, size and complexity of projects and how risk was allocated, as well as achievement of time, cost and quality objectives. Other finalists: • Borallon Correctional Centre Queensland Corrective Services – Client; Serco Asia Pacific – Manager and Operator • Gold Coast Rapid Transit Corrs Chambers Westgarth – Legal Adviser to the State; PwC – Commercial and Financial Adviser to the State; Federal Department of Infrastructure and Transport; Queensland Department of Transport and Main Roads; and Gold Coast City Council.

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Contractor Excellence Award – Sponsored by the Royal Bank of Scotland Winner: Darra to Springfield Transport Corridor John Holland The Darra to Springfield Transport Corridor – Stage 1 is the first integrated road and rail project for South East Queensland. It is a major transport initiative to service the future needs of Brisbane’s growing western corridor. Stage 1 of the project involves the construction of a new passenger railway line from Darra to Richlands; construction of a railway station, bus interchange and park and ride facilities at Richlands and a duplication of the Centenary Highway from two to four lanes from Richlands to meet with the existing Logan Motorway interchange at Carole Park. Stage 1 reached practical completion in November 2010, four months ahead of schedule at an estimated cost of approximately $800 million. The Contractor Excellence Award recognises innovation and best practice in the construction and delivery of infrastructure projects. Other finalists: • The Gateway Upgrade Project Leighton – Abigroup Joint Venture • South Australia’s Northern Expressway Project Fulton Hogan and York Civil

Advisory Excellence Award – Sponsored by Hansen Yuncken Winner: The New Royal Adelaide Hospital Ernst & Young – Commercial and Financial Adviser to the State Companies involved: Clayton Utz; Macquarie Capital Advisers Limited and South Australian Crown Solicitor’s Office The NRAH project involves the construction, maintenance and provision of hotel services at a new hospital to replace the ageing Royal Adelaide Hospital. It is being delivered as a PPP with a capital value in the order of $1.7 billion, making it the largest project of its kind in Australia’s history. NRAH will be South Australia’s flagship public hospital, and will include single rooms for all inpatients. It will offer more operating theatres and procedure rooms, a 30 per cent increase in intensive care beds, and a significant increase in emergency care capacity. The project will deliver high-quality healthcare and provides a model for other major clinical hospital projects in South Australia and around the country. The Advisory Excellence Award recognises excellent advice that allows a project to progress and break new ground. Consideration was also given to the scale, complexity and difficulty of the project. Other finalists: • The Ararat Prison Project KPMG – Commercial and Financial Adviser to the State; • Gold Coast Rapid Transit PwC – Commercial and Financial Adviser to the State; Corrs Chambers Westgarth – Legal Adviser to the State. Volume 2 Number 1

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Above: Darra to Springfield Transport Corridor.

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IPA National Infrastructure Awards

Right: The new Royal Adelaide Hospital. Below: Port of Brisbane.

All nominees in the category should be recognised for overcoming significant complexities, not least of which is their procurement during extraordinarily difficult economic times.

Financial Excellence Award – Sponsored by Conneq Winner: Port of Brisbane Privatisation Macquarie Capital Advisers Limited – Financial Adviser; Queensland Treasury Companies involved: Deloitte; PwC Q Port Holdings (QPH), a consortium comprising four of the largest and most experienced infrastructure investors in the world, was the successful bidder for the 99-year lease of the Port of Brisbane. The QPH consortium, advised by Macquarie Capital Advisers, comprises Global Infrastructure Partners (GIP), Industry Funds Management (IFM), and QIC Global Infrastructure (QIC) on behalf of its managed funds and Tawreed Investments Ltd., a wholly owned subsidiary of the Abu Dhabi Investment Authority (ADIA). The sale, completed in the face of significant opposition, delivered a return to the state of $2.1 billion. The structure of the transaction also saw the investment of around $200 million to upgrade the Port of Brisbane Motorway transferred to the private sector, freeing up additional public capital for other projects. 48

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Other finalists: • Ararat Prison Project; Peninsula Link PPP Commonwealth Bank of Australia – Financial Adviser; Bilfinger Berger Project Investments – Technical Adviser • M2 Motorway Upgrade Transurban • Peninsula Link PPP Linking Melbourne Authority – Client; PwC – Lead Strategic and Financial Adviser to the State; Royal Bank of Scotland – Sponsor. Continued on page 50

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Our business is one of Australia’s most awarded, and we’re proud to have delivered the Darra to Springfield Transport Corridor Stage 1. We have the resources, experience, skills and award winning performance to manage and deliver your next project. If you have a key project on the horizon, think John Holland.

Find out more, visit us at johnholland.com.au We understand...

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IPA National Infrastructure Awards

Right: Sydney’s Desalination Plant.

Continued from page 48

Operator and Service Excellence Award – Sponsored by PwC Winner: Sydney Desalination Plant Veolia Water Australia Veolia Water operates Sydney’s Desalination Plant on behalf of Sydney Water, providing high-quality drinking water for Sydney. The plant can provide up to an average of 250 million litres per day – drinking water for up to 1.5 million people, or enough water to fill more than 100 Olympic-sized swimming pools daily. Veolia Water operates the Kurnell plant with a team of 34 people, turning seawater into potable drinking water via 36,000 reverse osmosis membranes. Flexible operations ensure that the plant can increase or decrease water production, standby, shutdown or restart quickly – providing Sydney with a guaranteed, non-rainfall dependent drinking water source integrated into the broader water supply system. Veolia has engaged with the community and exceeded service level and quality requirements consistently, since the plant was commissioned. The Operator and Service Provider Excellence Award recognises world-class operation of infrastructure. The judges considered efficiency in delivery and operation, management of team and stakeholder relationships, and general satisfaction of stakeholder groups. 50

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Other finalists: • The Borallon Correctional Centre Serco Asia Pacific • The Lane Cove Tunnel Transfield Services

Smart Infrastructure Project Award – Sponsored by the Australian Department of Infrastructure and Transport Winner: The Remote Area Essential Services Program (RAESP) – Providing essential indigenous services Parsons Brinckerhoff – RAES Program manager; CleanTeq – Technology provider Companies involved: WA Department of Housing and WA Department of Health The Remote Area Essential Services Program (RAESP) provides essential services like sewerage, power and water to 89 remote Aboriginal communities. The program has been managed by Parsons Brinckerhoff since 2005. The location of these communities means that access to town water and other services is not available. Naturally elevated levels of nitrate in the groundwater supply had meant that water quality did not meet the Australian Drinking Guidelines. Parsons Brinckerhoff has worked with the WA Department of Housing, the

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IPA National Infrastructure Awards

Department of Health, technology providers and the community to develop a solution to remove the nitrate from the potable supply. Commonly used technologies such as reverse osmosis and ion exchange were ruled out, meaning a unique solution was required. Parsons Brinckerhoff is undertaking a trial of denitrification technology, which uses bacteria to effect nitrate removal and is simple, requiring only a single pump to push water through a media chamber, resulting in low power usage. The process also conserves water and does not generate a waste stream. The simple technology requirements translate into less user inputs and less frequent maintenance scheduling. This project is the first time a biological denitrification treatment process will be used in Australia to treat a potable supply. The technology will be trialled in one of the communities in March 2011. The Smart Infrastructure project award recognises excellence in conception and commission of smart technologies to deliver better infrastructure services – and takes into account Infrastructure Australia’s key themes. Other finalists: • Sydney Water’s dual purpose pipeline – Wastewater and recycling innovation Sydney Water and Leighton Contractors • The Woodlawn Bioreactor – Turning waste to energy Veolia Environmental Services

The Smart Infrastructure Grant – Sponsored by the Australian Department of Infrastructure and Transport IPA is pleased to partner with the Department of Infrastructure and Transport in the awarding of a $25,000 grant for research to be undertaken in the area of smart infrastructure. Nominees were assessed on their research scope and potential application of their research to create greater efficiencies in new and/or existing infrastructure. Winner: Green Infrastructure – Connecting people with landscapes through urban retrofitting. Centre for Sustainable Design, University of Queensland. The intent of this research project is twofold – on one hand, to develop a practical approach to the integration of green infrastructure in the densification of existing inner urban areas, with particular emphasis on the consequent changes of land use and development planning; and on the other hand, to recognise how social innovation is a potentially powerful concept, capable of anchoring urban change more firmly into the community fabric. This project aims to challenge people to think differently about the big issues affecting communities, and to test practical ways to integrate innovative approaches into responses to unmet social needs. The project will examine ways to foster socially innovative strategies for enabling long-term healthy communities early in the urban retrofit process.

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Below: Communities developed as part of the Remote Area Essential Services Program.

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Queensland’s master plan: Bligh says new projects will dovetail with rebuilding priorities By Tony Featherstone

In recent times, Queensland has seen a lot of cloud and not much silver lining. Huge demands on the state budget, a difficult but important asset sales program, and then – just as things appeared to get back on an even keel – Queensland’s south was devastated by floods, as the far north was hammered by Cyclone Yasi. THIS PAGE: Coal is Queensland’s largest export industry. RIGHT: Queensland’s infrastructure took a battering from Cyclone Yasi.

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With the damage bill estimated to top $5.8 billion, questions are being raised about how reconstruction will affect the timing and status of other badly needed Queensland infrastructure projects, such as the Cross River Rail, the Eastern Busway, upgrades to the Pacific, Bruce and Warrego highways, and the Toowoomba Second Range Crossing. And, just as importantly, how will these projects be funded in light of an already staggering reconstruction bill? In this interview with Future Building’s Tony Featherstone, Queensland Premier Anna Bligh remains optimistic about the future of infrastructure development – but realistic about the challenges. Following is an edited transcript of the Queensland Premier’s interview.

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Future Building: Premier, how badly was Queensland infrastructure damaged after the floods and Cyclone Yasi? What were the main infrastructure assets damaged? Premier Bligh: When 99 per cent of your state is disaster-declared, the damage is going to be extensive. From Brisbane to Cairns and all points west, we have sustained serious damage to roads, bridges and rail, as well as the infrastructure that is at the heart of all communities – schools, parks, walkways and community halls. In all, the floods and cyclones wiped out 9170 kilometres of the state-owned road network; about 4750 kilometres of rail network was damaged; 387 schools were damaged to some extent; and about 90 state-owned bridges and culverts were washed away. Future Building: How are the state’s infrastructure rebuilding efforts progressing? Which assets still need more repair than others, and how long will it all take? Premier Bligh: We have got on with the job with remarkable speed. By early April – 100 days after the first flooding event – more than 6800 kilometres of roads had been repaired. More than 4200 kilometres of flood-affected rail was back on line, including the Western Rail Line, which was re-opened three months ahead of schedule. Only one damaged school is still closed and 55 of the 90 washed-away bridges are back in operation [at time of press]. That’s been a gargantuan effort from our work crews. But there is still a long way to go until we are completely rebuilt, and rebuilt stronger. Future Building: Your government has allocated several hundred million dollars to local councils to begin rebuilding. How important is this initiative, and what is your assessment of how local councils have begun their infrastructure repair programs? Premier Bligh: More than $400 million has now gone out the door to councils the length and breadth of the state, and it has been allocated at record speed. This is joint federal and state money and it has been possible to distribute it so quickly because the Queensland Reconstruction Authority has allocated funding using a new process that cuts red tape and speeds up payments. That’s a Queensland first. It means those communities can start rebuilding immediately, rather than go through lengthy application processes. That’s a big relief for councils because they are facing a damage bill that will ultimately top $2 billion, and the quicker they can get on with the job, the quicker they can return some normalcy to their regions. Volume 2 Number 1

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Right: Queensland’s Coal Mining industry will receive attention via CoalPlan 2030.

Future Building: Will the rebuilding efforts see new infrastructure priorities in Queensland downgraded, or other new projects delayed or shelved? Premier Bligh: The Queensland Reconstruction Authority has been working with state, Commonwealth and local authorities, and industry, to plan and prioritise the $5.8 billion reconstruction effort. The authority, through its Operation Queenslander roadmap, will provide the short-term infrastructure investment priorities for government, with long-term infrastructure investment priorities still outlined in planning documents, such as the proposed Queensland Infrastructure Plan (QIP). Future Building: What impact is the mining boom in regional Queensland having on infrastructure needs? I understand some regional

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towns, such as Mackay and Rockhampton, desperately need better infrastructure to cope with an influx of mining workers. What are your government’s priorities for regional infrastructure development? Premier Bligh: A social impact assessment is required for all declared significant projects. This process assists decision-making on the extent of new or expanded infrastructure required in regional towns and cities to meet demand generated by major resource developments. Through these assessments, government and proponents are able to collect and analyse information about the social and cultural issues, population change, and community and social relationships that are likely to occur as a result of a project. This also allows government and business to develop strategies for mitigation, management, monitoring and review.

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In addition, in 2010 the Queensland Government released CoalPlan 2030, which proactively anticipates the infrastructure needs that will be driven by the mining boom in regional Queensland. CoalPlan 2030 examines the potential growth path for the Queensland coal industry over the next two decades and details expected infrastructure requirements to support the continued growth of what is Queensland’s largest export industry. Future Building: How is the state’s vital coal rail and port infrastructure faring after all the flooding in Central Queensland? Premier Bligh: Heavy rains and unprecedented floods during December impacted the coal industry’s January and February production and export levels. This was due in most part to major flooding of a number of mines, and the closure of the Blackwater and Moura rail systems for four and

three weeks respectively. Although coal exports during December were largely unaffected, January exports dropped by 36.5 per cent and February exports by 11.6 per cent. March brought a strong rebound in exports of 40 per cent over February tonnages. Queensland’s coal export throughput is expected to return to preflood levels soon. All coal rail networks, including Goonyella, Newlands, Blackwater, Moura and Western, are now open, and QR National and Pacific National both have 100 per cent rolling stock capacity availability, which is currently well in excess of demand. All five coal export ports and six coal terminals are operating with 100 per cent capacity available. All major roads and airports servicing the coalfields have re-opened. Volume 2 Number 1

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The states actively work together on an ongoing basis through the COAG Infrastructure Working Group to identify key areas that could benefit from mutual cooperation between the jurisdictions. Future Building: Premier, what are your key priorities for the long-term development of Queensland infrastructure? What are the key transport infrastructure initiatives? Premier Bligh: The government reviews key infrastructure development priorities on an ongoing basis as part of our long-term planning processes. For the first time in Queensland, these priorities will now be reflected in the one document, the QIP, due later this year. QIP will become the key tool, closely aligned with the proposed Queensland Regionalisation Strategy (QRS). Key long-term priorities in QIP will include managing growth while preserving the environment and the liveability for which our state is famous. Future Building: What are the state’s biggest infrastructure bottlenecks, in your view, and how do you plan to address them? Premier Bligh: Current preparation of QRS and QIP involves identifying priority infrastructure needs, including bottlenecks and deficiencies. This is being reassessed in light of the natural disasters. The release of QRS and QIP later this year will map out the Queensland Government’s strategy for addressing the state’s infrastructure needs and priorities. Future Building: Is the Federal Government doing enough to support the development of Queensland infrastructure, in your view? Premier Bligh: The establishment of Infrastructure Australia in 2008 and the Building Australia Fund signalled a significant and welcome change in the Commonwealth’s involvement in infrastructure funding and facilitation. 56

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Building Australia funding was put towards the Gold Coast Rapid Transit project, sections of the Ipswich Motorway and sections of the Bruce Highway between Cooroy and Curra. Funding was also provided for the Cross River Rail feasibility study. Infrastructure Australia’s role in identifying strategic infrastructure bottlenecks and helping unlock them is important to Queensland in the resources boom, as is Federal Government funding towards infrastructure. Obviously, Queensland would welcome further funding assistance from the Federal Government and has put forward a number of projects for consideration. These include the Cross River Rail project, the Eastern Busway, upgrades to the Pacific, Bruce and Warrego highways, and the Toowoomba Second Range Crossing. Also put forward for funding consideration were the Abbot Point Coal Terminal [near Bowen] and the CopperString Mount Isa to Townsville electricity line. Future Building: Is COAG doing enough to get the states to work together on infrastructure development? Is there enough state cooperation on infrastructure development, in your view? Premier Bligh: The states actively work together on an ongoing basis through the COAG Infrastructure Working Group to identify key areas that could benefit from mutual cooperation between the jurisdictions. Recent examples of outcomes achieved through this process, all of which reduce cost for industry and encourage participation across jurisdictions, include the National Prequalification Scheme for non-residential building and civil road and bridges construction contracts. The National Licensing Scheme, which harmonises licensing requirements for economically important trades, particularly in the construction industry, was also an important consideration. Of course, the agreement to a new National Public Private Partnership Policy and Guidelines was a good outcome for industry and governments. Queensland will continue to collaborate with our interstate colleagues and industry to identify further opportunities for cooperation and reform that will help facilitate infrastructure development and delivery. Tony Featherstone is a former managing editor of BRW magazine.

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COMPANY FOCUS

Wonthaggi desalination plant: Welding of pipe sections leading 84 km to Melbourne

FUNDING FUTUrE INFrASTrUcTUrE Australia faces an exciting period of growth and transition. Demand for our energy resources is booming, not only from growing Asian economies but here at home. We are renewing our schools and hospitals, and making our cities more sustainable as we transition to lower carbon economy. Our goals are ambitious and never before has the role of the private sector been so important. Westpac Institutional Bank is determined to take a leading role in these changes. While global capital markets have been shaken in recent years, Westpac has the scale, skills and depth to match the right financing to the job. Global capital markets may have changed but it doesn’t mean we need to scale back our goals. As federal and state governments safeguard balance sheets we expect Australian policymakers to build on our country’s robust track record of private investment in infrastructure through private investment and public private partnerships. That’s because the scale of the work ahead is huge and government can’t do it alone. Australia will need about $420 billion of new investment in energy and associated infrastructure to meet growing demand at home and abroad. The federal government requires 20 per cent of electricity to be derived from renewable resource by 2020. The bill will likely include about $140 billion of investment in the electricity sector and $8 billion in gas pipelines. Even if equity backs 40 per cent of the

bill, that still leaves about $250 billion which will need to be raised through debt markets. For Westpac, that means working closely with our customers to provide them with an understanding that can form the basis of a competitive business opportunity - whether it involves a wind farm in South Australia or a gas pipeline in southern Queensland. Westpac Institutional Bank has over 3000 people with a global footprint spanning Asia, the UK, the US and New Zealand. Our expertise has helped launch some of the country’s most important infrastructure projects such as arranging and underwriting finance for Victoria’s $3.6 billion desalination plant at Wonthaggi in November 2009. But we need to build our partnership with government. For Australia to realise its infrastructure goals we need a clear pipeline of projects and a rebalancing of risk with government. That should assist in unlocking funding from Australia’s pool of superannuation. We are thinking of the future; identifying the key players and the right capital solutions. We’re determined to take advantage of our knowledge in this market so we can continue to play a leadership role. Mark John Managing Director Property, Government & Infrastructure Westpac Institutional Bank

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COMPANY FOCUS

Achieving SAfer infrAStructure By Dr MichAel Shirley

infrastructure developers balance a range of considerations in meeting the world’s insatiable infrastructure needs. Among the drivers for this infrastructure is the emerging goal of safer infrastructure. Many challenges present themselves in getting infrastructure right: determining funding and securing finance, embedding sustainability and innovation, ensuring flexibility to meet future needs and building adaptability to climate change. infrastructure development in its essence is improving service and amenity to communities - delivering a blend of economic, environmental and social benefits. As environmentally sensitive infrastructure has matured to become the norm, it is a community centric view of infrastructure development that is elevating safety. Safer infrastructure thinking does not merely aspire to ensure that members of community or those involved in its development, construction and operations are unharmed by existence of the infrastructure. Progressive approaches are seeking to create infrastructure that anticipates safety risks and seeks to remove these at all design stages. transport is the obvious focus for safer infrastructure; however, recent climatic events in Australia and seismic events globally have highlighted that safe power and water infrastructure is equally crucial. for transport infrastructure such as road and rail, the focus is on minimising or removing occurrences of construction and operational fatalities and injuries. in the rail sector, we are seeing a focus on rail’s interface with roads. comprehensive grade separation is an obvious step that has safety and efficiency benefits for both sets of intersecting infrastructure. continuing developments in intelligent transport Systems (itS) enables smarter and safer rail signals and communications solutions including systems that assist drivers in detecting potential collisions and assertive systems that take automatic action. the biggest challenge and opportunity, however, is in achieving safer road infrastructure. in Australia, road authorities have placed major efforts on improved road safety to reduce fatalities and major injuries in the face of growing vehicle numbers and congestion. Worldwide, the challenge to address road safety is staggering in scale and urgent in need. globally, 1.3 million people die every year as a result of a traffic collision. rapid population growth and increasing urbanisation and exploded levels of vehicle ownership in developing nations mean that these statistics are set to worsen significantly. the criticality of this issue has seen the united nations launch a Decade for Action for road Safety (2011-2020) that will deliver against a range of strategies to improve

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global road safety management, achieve safer infrastructure and vehicles, improve road user behaviour and provide better post crash care. Achieving safer infrastructure is particularly urgent as middle and low income nations – who are most affected by road fatalities – reach critical stages in their economic development and begin rapidly increasing their infrastructure. in Australia, the transport infrastructure sector has a role to play – not just in addressing our own road safety challenges, but in driving innovation and transferring knowledge globally. Sinclair Knight Merz (SKM) is committed to this goal and we have already begun to realise the benefits of developing safer infrastructure, delivering projects with enhanced outcomes for our clients and our communities. On a recent upgrade to the hume highway, one of Australia’s major highways and busiest road freight routes, the safety in design process ran successfully throughout the entire project. this approach seeks to provide a safe environment during the construction and operation of an infrastructure project, where the design needs to address road safety issues such as provision of adequate sight and stopping distances, layout of barriers, and an adequate level of lighting and so on. in this context of a rural freeway carrying large numbers of heavy vehicles, innovations included: • new intersection layout types designed for heavy truck traffic - providing a two-stage turning movement that allows the heavy vehicle to stop in the median of the highway and assess oncoming traffic. • Applying 3D visualisation techniques to assess safety need and impact of the position of earth mounds that remove the impact of headlight glare at night for opposing traffic on one carriageway of the highway and any realigned adjacent local roads. • Adjusting designs of sedimentation basins along the road corridor to address the risk of slipping and drowning. • flattening embankments alongside the carriageways to decrease potential truck roll overs. SKM embraces the challenge of improving safety in our communities and we are excited about the role we can play in achieving great infrastructure outcomes.

Dr MIchael ShIrley General Manager, Buildings & Infrastructure, SKM

Dr Michael Shirley is General Manager, Buildings and Infrastructure at leading engineering, sciences and project delivery firm Sinclair Knight Merz.

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Mulder mulls infrastructure challenges By Leon Gettler

Victoria’s new Minister for Public Transport and Roads, Terry Mulder, knows that he has a big job ahead of him. The need for new infrastructure investment is acute, the budget’s capacity is limited – and even once the decision is made, new projects will take time to come onstream. Expectations from industry were running high; with a number of major projects announced by the former government – like the Melbourne Metro Rail Tunnel – supposed to come to market in the near future. But a challenging budget has seen the Baillieu Government pause to take stock of where it is at, what it can afford – and where the state needs to go. ‘The previous government included projects in its transport plan that were unfunded,’ Mulder says. ‘A number of these unfunded projects are now under review, such as WestLink, or in early planning stages, such as the Melbourne Metro rail tunnel. ‘I am keen to see projects get moving, but competing priorities for project funding from the Commonwealth and a much tougher fiscal climate for Victoria means that some of these projects have a difficult funding future or will take a little longer. ‘The unfunded projects that were priorities for the former government also have to be reassessed in the development of our new Metropolitan Planning Study. We’ve got to take account of the projects that we committed to, like the Avalon Airport, Doncaster, Rowville and Melbourne Airport rail links. ‘Clearly, Victoria, like other states facing huge infrastructure demands, must look seriously at the role of the private sector and how it can assist in delivering much-needed projects. Victoria has a great record in partnering with the private sector in building city-changing infrastructure, and I am confident that 60

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we can continue to do this in the future. Given budget realities, I think the State Government has little choice,’ Mulder noted. A welcome development was Mulder’s recent recommitment to the massive Regional Rail Link. When the Coalition assumed office it found that the project was going to cost nearly $1 billion more because of escalations in costs for signalling and land acquisition. Just as challenging was Canberra’s decision to defer the payment of $500 million in federal funding as the Commonwealth reshuffled its own priorities in light of the Queensland and Victorian floods. Continued on page 62

There is no doubt that the project will provide massive benefits for the suburban and regional rail system...

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Continued from page 60 For his part, Mulder can see the sense in the Regional Rail Link. ‘There is no doubt that the project will provide massive benefits for the suburban and regional rail system, so now the decision is made, we are going to get on with it; we’ll go to the market and seek the best outcome from the industry.’ ‘There is enormous interest from the construction industry in the project, and we are expecting very competitive bids,’ Mulder says. The Regional Rail Link is a complex and expensive undertaking, and involves complex engineering challenges, including working along existing rail corridors. ‘We recognise that this project is important, and we’re actively engaging with industry and other stakeholders to make sure we get the best possible project, at the best possible price for taxpayers,’ Mulder says. ‘When you consider that we’ve got Regional Rail Link, Peninsula Link, the Sunbury Rail Electrification and the South Morang Rail Extension underway, there is a massive amount of work going on in Victoria.’ Victoria’s huge growth in population in recent years – and an even bigger increase in public transport patronage and road congestion – has put strain on Melbourne’s transport network. Infrastructure challenges on the railways pose difficulties, and congestion on the roads impedes buses, trams and private vehicles. Victoria also needs to improve coordination between modes.

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A key problem is that State Government investment has not kept pace with Melbourne’s runaway population growth. Metropolitan Melbourne has expanded by more than 600,000 people in the past nine years. Such a growth rate suggests that the city could overtake Sydney within 20 years. But because investment in infrastructure has not matched the increase in population, roads and public transport networks around the state are increasingly choked. With an antiquated and overburdened rail network and port limitations, the costs to the economy are mounting. Mulder understands the challenges ahead and says that the government has a number of key priorities for roads and public transport over the coming years. ‘Our key priorities for public transport over the next three years are to expand the network and to get the basics right. This includes better maintenance, increased frequency, improved punctuality and reliability and improved safety, so people aren’t afraid to use our trains at night,’ Mulder says. ‘Getting the fundamentals right will represent a major step forward for the public experience of our public transport network. ‘We’re backing this up with a $900 million investment over four years to speed up basic maintenance, such as concrete sleepers and new wiring to fix years of neglect. These minor investments will have a major effect on the rail network’s reliability.

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While the budget is tight, we never want to be in the situation where we do not know what projects need to be built when capital becomes available. ‘To deal with some of the overcrowding issues, we are also overseeing a large rolling stock program, including 40 new trains and 50 new trams.’ Mulder also has an eye to the future projects that Melbourne needs – with a range of feasibility studies underway for new public transport projects in the state. ‘A feasibility study has begun into a rail link to Rowville. Planning studies will also be conducted for rail links to Doncaster and to Melbourne Airport, and we will be building new railway stations at Southland and Grovedale. We will begin construction of the Avalon Airport rail link in our first term. ‘Construction of the South Morang railway extension and electrification of the railway line to Sunbury are also progressing. The planning study on the Melbourne Metro Rail Tunnel is continuing. ‘While the budget is tight, we never want to be in the situation where we do not know what projects need to be built when capital becomes available.’ In terms of roads, Mulder is upbeat. ‘I’m really focused on a dual strategy of improving Melbourne’s arterial roads and also addressing the bottlenecks on the regional road network. ‘In addition to completing the Peninsula Link and major upgrades to the M1 (Monash-CityLinkWestgate), the M80 or Western Ring Road, and Anthony’s Cutting on the Western Highway, a series of bypasses will be built to improve road traffic flow throughout Victoria. This includes the KilmoreWallan bypass, a longer Dingley bypass, and construction of a Koo Wee Rup bypass to fix local and tourist traffic congestion.’ A key priority for the new government is the establishment of the independent Public Transport Development Authority. This new agency will be the primary liaison point with public transport operators and other agencies. It is needed because the system has been dogged by a lack of coordination and fragmentation between agencies on the public sector side, according to Mulder.

‘At the moment there are so many different agencies and brands in the public transport area, commuters are rightly confused about who is in charge. We are going to change that,’ he says. ‘The Authority’s first job will be to audit all Victorian public transport assets and report publicly on the value and condition of those assets and the cost of renewing them to bring them up to 21st century standards. ‘It will also promote the extension of the public transport network, especially rail, and help deliver a safe, punctual, reliable and clean public transport network. ‘Another function for the new Authority will be to ensure services are integrated and priorities for expansion are identified and acted on. ‘It will be governed by an independent board, including a Chair and other members with highlevel expertise in the rail industry, and will report to Parliament twice a year.’ The Authority will also be charged with the role of ensuring that public transport projects do not run over budget. Mulder says: ‘The Public Transport Development Authority will be specifically charged with identifying key priorities and ensuring they are addressed in a timely and cost-effective way. ‘Some projects are going well, but other projects have been half-baked and have led to massive cost blowouts. Regional Rail Link is a key example, blowing out in cost by at least $1 billion. In other cases, the former government didn’t even provide proper power supply for new rail stations, meaning that trains won’t be able to run. These are elementary problems that need to be fixed.’ A priority for Mulder is an ambitious study into a future rail connection to Melbourne Airport. ‘The number of people travelling to and from Melbourne Airport was 26.3 million in 2009-10. It is growing rapidly. Nearly 90 per cent of them go by car, taxi or by shuttle from an off-airport car park,’ he says. Volume 2 Number 1

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infrastructure challenges By 2030 the airport will service nearly 60 million passenger movements so we are likely to need a mass transit system to Melbourne Airport in the future. ‘By 2030 the airport will service nearly 60 million passenger movements so we are likely to need a mass transit system to Melbourne Airport in the future. ‘We are committed to exploring a rail link to Melbourne Airport and to commence constructing a rail link to Avalon Airport within four years. We have allocated funding for a study into the Melbourne Airport Rail Link, which will identify the best route for a new rail link. ‘Planning for the project will investigate the preferred option of a centrally located terminal at Melbourne Airport. The proposed rail link would allow for services to commence at Flinders Street Station and stop at Southern Cross to allow easy transfers between other Metro trains, trams and buses. ‘An airport rail link would reduce traffic congestion on the busy route to the airport, and provide travellers, who must currently use private cars, buses or taxis, with more options to easily travel to and from the airport. ‘More detail on potential timing, costs and the operating environment for the new rail line will be developed following the initial study.’ 64

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The RACV says that Melbourne’s outer metropolitan arterial roads need urgent improvement if the city is to cope with 1.4 million more cars within 20 years. How does his government plan to deal with the increase in Melbourne’s cars? ‘Our big investment in the rail network will give commuters the option to leave the car at home, but we also recognise the need to invest in improving the arterial road network. Public transport usage is growing at seven per cent a year, while growth on Melbourne’s arterial road network has slowed to just 0.5 per cent a year,’ he says. ‘We are providing money for planning, land acquisition and the commencement of construction of the next stage of the Dingley Bypass during our first term. Construction of the current stage, from Springvale Road to Perry Road in Keysborough, is expected to be completed in 2013. The construction of the next stage of the bypass will start immediately after. ‘Other projects under construction include Peninsula Link and Anthony’s Cutting, which will significantly improve travel in outer metropolitan Melbourne.’ Rural roads are another priority. There is a serious backlog in resurfacing, and some major roads in rural areas need sealing. Mulder will oversee a $160 million fund to support local authorities in bringing the state’s local roads under control. ‘Forty rural councils will be able to apply for up to $1 million from the fund each year over the next four years. We are also developing a Transport Solutions Plan that will identify regional transport needs and bottlenecks, potential transport solutions to freight, logistics and ports bottlenecks, and priorities specific to the agriculture industry and other industry sectors. The Transport Solutions Plan will draw on regional transport studies and stakeholder consultation, ensuring the right priorities are identified and funded.’

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s Mulder also points to a suite of other road projects, like the Kilmore Wallan Bypass. That project, worth $130 million, will start in 2013/14. ‘We will also fund half the cost of the Princes Highway West duplication between Winchelsea and Colac. The Federal Government has already committed to providing half of the total $515 million. We will provide $10 million initially for design and land acquisition, with the balance being rolled out in sync with the Federal Government releasing funds for the project.’ Mulder is keen to progress the next round of major projects across Victoria, but the state of the

budget means funding is tight. ‘Getting the next tranche of major projects done is going to be hard for Victoria. We have a lot of demand and not much flexibility in the budget,’ he says. ‘But we have got smart people in the public sector, smart people in the private sector, and there is a lot of will in the Cabinet to get things done well,’ he says. ‘What we really need to do now is to get new thinking about how the private sector can play a bigger role in getting these projects off the ground.’

Delivering harmonious, useful and more resilient infrastructure.

Image: Kurilpa Bridge, winner of 2010 Consult Australia Awards for Excellence and 2010 Engineers Australia excellence award © Christopher Frederick Jones

Arup works with a range of clients to deliver innovative solutions to world-leading infrastructure design projects across the globe. These clients rely on our experience, excellence and breadth of skills in major project delivery, from geotechnics, water engineering, bridge design and tunnels, to site development, rail, mining, maritime engineering, waste and highway design. We also bring together expertise from our consulting business to push the boundaries of thinking in design. Our multi-dimensional thinking, multi-faceted people and multidisciplinary skill ensures we deliver infrastructure that works for people and the world at large.

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Getting New South Wales rail It is often said that infrastructure is the lifeblood of the economy. In Sydney, the roads and heavy rail networks are undoubtedly the arteries that sustain both the city and the economy – unfortunately, it’s a city and an economy plagued by congestion and inefficiency. Building more roads and laying more tracks are only part of the solution to unclogging those arteries; we also have to look to efficiency and governance to make real progress and reap real economic rewards. 66

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Getting New South Wales rail back on track?

back on track By Dan Stojanovich

The performance of Sydney’s trains may appear to be a local, parochial problem – but it goes to the very core of economic competitiveness. Every minute lost on late-running trains, every commuter who jumps in their car and enters the congested road network to avoid clogged or uncomfortable trains, and each dollar demanded from the taxpayer to subsidise inefficient practices on the rail network reduces New South Wales’ national and global competitiveness. Viewed through that prism, the operation of the rail system in New South Wales is an issue of acute importance. In each of the last five financial years, the figures have deteriorated, and every year government funding has grown to meet the shortfall. In 2005-06, RailCorp required a taxpayer subsidy of $6.77 for every passenger journey. Worse, by 2009-10, that figure had surged to $8.33 per passenger journey. It doesn’t take an economics scholar to work out that the current arrangements are unsustainable. It would be a brave politician that argued rail in New South Wales doesn’t need greater investment, but repeatedly doing the same thing is unlikely to suddenly yield a different result. Investment without reform won’t fix the problem. That is not to say that public investment in RailCorp hasn’t yielded results. A mixture of good senior management and significant investment has seen a rapid improvement in performance standards. This improvement in operating performance is commendable, but it does not resolve the ongoing issue of unsustainable cost escalations, or flagging service levels; which raises the question: What is the best way to deliver cost and quality improvements on New South Wales’ railways? A major new discussion paper into rail reform argues that New South Wales has the opportunity to answer that question. The paper doesn’t claim to have all the answers, but it does demonstrate that genuine alternatives to the current system do exist. And they work.

The discussion paper, Franchising Passenger Rail Services in NSW: Preliminary Assessment and a Way Forward, provides a reform blueprint for the new State Government to begin to answer that question. While the paper focuses on New South Wales passenger rail services, there are lessons for rail and other transport operations across the nation. The discussion paper by Infrastructure Partnerships Australia (IPA) and Aegis Consulting argues that competition in rail service delivery could offer improved customer service and greater cost certainty for taxpayers. A well-considered and wellcontracted franchising model could allow New South Wales to transform the way the rail system operates and deliver a customer focus and experience that has been missing.

A major new discussion paper into rail reform argues that New South Wales has the opportunity to answer that question. The paper doesn’t claim to have all the answers, but it does demonstrate that genuine alternatives to the current system do exist. And they work.

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While franchising rail operations in Sydney and the state’s interurban network to the private sector may seem radical to some, it has strong precedents in other Australian and offshore jurisdictions. This means that New South Wales is in the enviable position of being able to learn from the successes and mistakes of those who leapt before them. The paper examines those experiences and establishes a pathway for New South Wales to consider and implement service delivery reform. The paper argues that ‘in a context of low customer satisfaction, constrained patronage growth on rail, significant inefficiencies and a huge projected growth in population, it is now appropriate to give real consideration to alternative models that will deliver better outcomes for commuters – and for taxpayers’. This assertion is backed by evidence from domestic and international case studies. The paper goes on to say that ‘in broad terms, the Australian and global experience of the private operation of public transport has delivered significant benefits in terms of cost certainty and cost efficiency to government – while delivering much higher customer service levels’. The key recommendation of the paper is that the New South Wales Government undertake a special commission of inquiry into the opportunities that exist for competitive franchising on the rail system. In exploring the opportunities for reform in New South Wales, the paper reviews the experiences in a number of jurisdictions, including: • The United Kingdom (open access and tendered concessions) (1993); • Sweden (tendered and network concessions) (1990); and • Victoria (tendered concessions) (1999). In each of these cases, a full separation of infrastructure management and service delivery was instituted. Both Sweden and Victoria retained infrastructure ownership and management in public hands, while the United Kingdom initially privatised this function but later resumed control because of a range of factors. The United Kingdom and Victorian approach initially sought to transfer all operational and revenue risk to the private sector and provide incentives for franchisees to invest in rolling stock and infrastructure upgrades. In both cases, this led to early service issues and financial problems with some franchisees, which caused each jurisdiction to revise these arrangements. 68

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Lessons were learned from both examples. Current franchise contracts enable revenue sharing between government and franchisees with incentives for growth in patronage revenue (United Kingdom); or incentives for infrastructure improvements (Victoria). Fares are regulated in Victoria, and in the United Kingdom fares are regulated for commuter routes where customers have limited alternatives to rail. In Victoria, the government has resumed control of regional services. According to the paper, in both the United Kingdom and Victoria, franchising has led to improvements in service quality, customer satisfaction, punctuality and volume of services, as well as significant investments in new and refurbished rolling stock and infrastructure. In both the United Kingdom and Victorian experience, the operating subsidies did increase beyond what was anticipated, but this was driven by a massive surge in patronage post reform. And in Victoria’s case, cost recovery levels achieved across Melbourne’s train and tram network is now around double what is achieved in New South Wales. Sweden took an entirely different approach. Concerned with the rising burden of subsidising uncommercial local and regional rail lines, it transferred responsibility for these to local government and permitted them to franchise rail service operations through competitive tendering. Meanwhile, the central government chose to retain ownership of the monopoly rail service provider that only operates on profitable lines. Competition here has reportedly reduced overall network operating costs by between 20 per cent and 40 per cent. The paper argues that ‘there is now a clear opportunity for New South Wales to undertake major reforms in the way passenger rail services are delivered through the introduction of competition and contestability in the provision of public transport service delivery’. Of course, privately operated public transport services are not a new phenomenon, with private entities already operating across much of the New South Wales bus network, part (and soon all) of the ferry network and the light rail system. Added to this, the New South Wales Government has recently announced that it will tender the rest of the Sydney Ferries network. The paper argues that the improved outcomes on these privately operated networks only strengthen the call for reform to the state’s passenger rail services.

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Although Sydney’s passenger rail network has enjoyed significant improvements in its reliability in recent years, rail services in New South Wales continue to perform poorly in terms of both financial and customer service performance. Beyond the economic measures, customer complaints rose by 23.9 per cent in 2009/10, and cost recovery has decreased markedly since 2007. It is not that various public sector approaches have not been tried. Over the past 13 years, the New South Wales rail system has undergone significant disaggregation and re-aggregation. Currently, RailCorp owns the state’s rail infrastructure and is the sole provider of passenger rail services. It mirrors the former State Rail Authority (SRA) prior to 1996. Between 1996 and 2004, the natural monopoly infrastructure components of the rail system were separated from the contestable, service delivery functions. However, interface and reliability problems have seen a regression in the structure – a case of ‘back to the future’. The case for reform is compelling. Patronage demand increased by 5.2 per cent in 2007-08 and is currently growing at about 2.9 per cent – well above the historic annual average increase of 1.9 per cent. Annual growth in passenger demand adds pressure to RailCorp’s infrastructure and services and increasingly risks pushing passenger loading on trains above the acceptable level of 135 per cent. But patronage growth poses another challenge to taxpayers. More people and greater demands require additional services, in turn increasing operating costs. Government affordable transport policies cap the allowable fare increases to movements in the Consumer Price Index.

This has given rise to a situation where the loss incurred by RailCorp on passenger journeys was 14 per cent higher in 2009 than 2005. Over this time, government has had to increase its recurrent and capital funding for RailCorp to support train operations and the renewal, maintenance and upgrade of infrastructure. In the context of a stretched government balance sheet, insufficient flexibility within the constraints of the AAA credit rating and a huge demand for new capital investment – including in extensions to the rail network – the paper argues that it is time to give real consideration to modernising passenger rail services. So could franchising work in New South Wales? The paper argues that ‘given the benefits, when weighed against the costs, franchising the New South Wales passenger rail system to the private sector is a proposition worthy of further consideration’. It goes on to suggest a realistic method of consideration in the form of a series of key recommendations to the New South Wales Government that would test its costs and benefits in practice.

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Asserting that the overarching goal of reform to rail services should be the pursuit of greater customer satisfaction at greater value to taxpayers, the key recommendations of the paper are: 1. Undertake a Special Commission of Inquiry on improving rail service quality and efficiency, including a detailed investigation of the potential to franchise part or all of the New South Wales passenger rail system to the private sector. The guiding objective of the Inquiry should be to identify options to achieve increased rail customer satisfaction, at less cost to government. The Commission of Inquiry should be led by a suitably qualified individual or team of experts and be able to draw on sufficient resources to fully examine the necessary issues. Consultation with and submissions from government agencies, industry, business, unions, the community and regulators should be sought to ensure as broad a range of views as possible are considered. 2. Resolve the features required to support an effective franchising model that represents value for money for the community. These features should inform the terms of reference of the Special Commission of Inquiry and concern the appropriate roles of government and the franchisee. Based on our examination of other franchising schemes in Australia and internationally, these features include: • Government should retain public ownership of all rail assets and provide infrastructure and rolling stock for purposes of franchising. • Fares should continue to be regulated by the government. • Government should assume the responsibility for preparing standard operating timetables. • Government should assume the responsibility for network planning. Network planning should be informed by an operating plan, demand analysis, customer requirements, economic analysis, engineering analysis and risk assessment. • Government should bundle below rail maintenance with passenger services and allow franchise operators to bid for funding for project upgrades. This would create incentives for operators to plan for long-term maintenance and invest in the network. The timing of this may be most appropriate after an examination of the potential of the Clearways program in promoting future competition. This examination should consider whether opportunities have been created for open access or tendered concessions on any or all of the sectors in the rail system. • The relationship between the government and franchisee should be governed by a contract of around eight to 10 years with a further option to renew the contract. • Franchise contracts should be clear and simple, with measurable objectives that provide for continuous improvement in the delivery of services. To ensure this, contracts should: - Explicitly identify any government funded Community Service Obligations that the franchisee is expected to deliver. - Include relevant, measurable and achievable performance indicators that: › are linked to customer requirements; › can be benchmarked; › can be independently verified; › support trend analysis; and › form the basis of payments or penalties to the franchisee. 3. Consider whether the New South Wales Government, as the infrastructure owner, should assume risk in the rail network and simplify the network to improve operating efficiency. While franchising offers opportunities to attract private sector innovation, investment and efficiency into the rail network, government should at an early stage determine its own investment levels. Government or private investment would need to be linked to network planning to have the optimal impact on operating efficiency. 70

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4. Immediately commence planning for a limited demonstration project for rail franchising in Sydney. It would be useful for benchmarking and comparison purposes to establish a pilot franchising project in advance of any wider application of a franchising model that might be recommended by the Special Commission of Inquiry. In our preliminary analysis we have identified the Eastern Suburbs Railway and Illawarra lines as the most suitable for a demonstration project, because this sector is already operationally separate from the wider CityRail network. The performance of the demonstration project could inform the findings of the Inquiry. 5. Begin an immediate assessment and market sounding for potential franchising of the operation and maintenance of the CountryLink network. The CountryLink network could provide a discrete system that is an early candidate for franchising. It bears a range of similarities to inter-urban networks in Europe, North America and Asia, which have been subject to successful franchising for many years. Accordingly, the feasibility of franchising CountryLink services should be assessed in conjunction with the Inquiry. In recognising the many political and public pressures on large-scale reforms, this paper does not seek an instant overhaul. Rather, it calls for a real consideration of the options and selection of the best value for money outcome. The pathway to reform would include a public inquiry and consultation with key stakeholders. The basic premise of delivering better customer experiences at less expense to the state should guide the inquiry and any final decision thereafter. Of course, ferry franchising is a vital test case for public transport reform in New South Wales. While there are challenges in franchising Sydney Ferries, they pale in comparison to the sheer scale and complexity of reforming the state’s rail services. Nevertheless, the success of the ferries transaction – and the will of the new government to make real changes – will be the staging ground for a much deeper reform toward better services and more infrastructure in New South Wales.

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COMPANY FOCUS

includes road and rail, ports and social infrastructure. Given just how much work needs to be done in the public and private spheres, realistic advice and reliable delivery of finance has never been more important.

Risk clarity to unlock capital

David Roberts Head of Project Advisory, ANZ

The time is now Just as the requirements of the resources sector heat up, our public network of transport and social services needs renewing following decades of underinvestment. Historically just three per cent of GDP in Australia has been invested across the infrastructure sector. Between the 1970s and about 2005, the average age of Australia’s infrastructure ballooned to 21.1 years from about 15.7 years. The last significant build of infrastructure was more than 10 years ago when Sydney was preparing for the Olympics. Bringing the age of infrastructure back to its long run average of between 18 and 19 years will take about $600 billion by 2017, or about 7.6 per cent of GDP. The required investment drive in Australia

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While Australian Government balance sheets emerged from the GFC in relatively good condition compared with other mature economies, demand to produce surpluses means the public sector can’t make the infrastructure investment on its own. Roberts says “Turning to the private sector will relieve pressure on balance sheets and help ensure projects are completed on time and on budget. Simplifying and clarifying risk associated with these projects will help unlock capital building up in superannuation funds.” Super funds offer significant capital and they typically have a requirement to invest a portion of their money in alternative assets, which usually includes infrastructure. But many super funds have small teams that have to sort a multitude of options. Straightforward risk profiles can help get their attention. Government has already shown it’s willing to shoulder some of the operational risk that transport projects can face. In Victoria the state government opted to have its 25 kilometre $890 million Peninsula Link motorway built through an availability model which means the project operators avoid full patronage risk. Roberts says, “There’s room for melding the patronage model that was at the centre of the well documented financial failures with the availability model. Measuring risk throughout the life of a project and its impact on investors is a model that may become more commonplace in the future. Capping government’s exposure helps limit potential costs while providing the necessary support to make a project more financially viable for both investors and debt providers.” Private sector funds and new financing models will be key to driving renewal of the country’s infrastructure amid booming

Simplifying and clarifying risk associated with these projects will help unlock capital building up in superannuation funds. demand for investment. ANZ is ideallyplaced to play a leading role as an advisor, arranger and lender. That’s because it has a proven track record of pulling the pieces of this complex puzzle together. With skin in the game, ANZ is vitally interested in getting these projects to work. In fact, come to think of it, we all are. ANZ Contacts: David Roberts, Head of Project Advisory T: +61 2 92271908 E: David.Roberts3@anz.com David Byrne, Head of Utilities & Infrastructure, Australia T: +61 2 92734852 E: David.Byrne2@anz.com Peter Davis, Global Head of Utilities & Infrastructure T: +61 2 92271845 E: Peter.Davis@anz.com

Age of Australian Infrastructure Capital Stock Age of Capital Stock Years

22.5

17.5

15 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 Source: ANZ Economics & Research, 2010

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Risk clarity to unlock capital

David Roberts Head of Project Advisory, ANZ

Capping government’s exposure helps limit potential costs while providing necessary support to make a project more financially viable for both investors and debt providers.

Age of Australian Infrastructure Capital Stock Age of Capital Stock Years

22.5

17.5

15 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 Source: ANZ Economics & Research, 2010

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English speaking: NZ pursues more PPPs By Jeff Hutton

In more than 150 schools throughout New Zealand, teachers and principals are forced to scramble for buckets when it rains. As water rots carpets and damages walls, school principals make repeated calls to tradesmen to patch up buildings. Why? Because in the decade to 2006, the government of the day oversaw a poorly executed renovation spree that saw poor craftsmanship and materials deliver substandard outcomes. The scandal will result in NZ$1.5 billion in damage; about a tenth of the country’s NZ$13 billion worth of school assets. But the embarrassment of the programme – which saw the government fail to adequately manage its risks – has created a public appetite for greater private sector involvement in infrastructure – particularly in education. Since his election, Prime Minister John Key and his NZ National Party Government have moved quickly to begin spelling out a pipeline of public private partnership (PPP) projects – the most recent a package of schools announced in April. 74

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But even with a softer public attitude to PPPs and the popularity of the Key Government, the public sector is still taking a cautious approach to PPPs. Officials warn that the shape of PPPs and their justification will differ from overseas markets. Deputy Prime Minister Bill English – who also serves as the country’s Minister for Finance (Treasurer) and Infrastructure – vows that there will be more projects to come if, as widely expected, the Key Government is returned at the election in November 2011. ‘We see the role of PPPs expanding,’ English says in an interview in his Wellington office on the eve of his government’s first announcement that it will build two schools through a PPP model in Hobsonville Point, north-west of Auckland. ‘We own NZ$220 billion in assets. About twothirds of those are physical assets, and we need to manage them better.’

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Last year, the Key Government unveiled the country’s first PPP ...to build and operate a 1000-bed men’s prison in Wiri in South Auckland. NZCID estimates the project is worth about NZ$500 million. English’s party has vowed to match his country’s per capita GDP with Australia by 2025. The trick is to woo private sector investment while maintaining broad community support. The breakneck reform pace under Labour Finance Minister Roger Douglas, and some high-profile failures in reforming public services and undertaking asset privatisations, still looms large in some Kiwis’ minds. The decision by Air New Zealand to take a stake in Ansett shortly before its collapse, and the failed reform of New Zealand’s railways, later sold back to the government, are two examples of when New Zealanders have felt short-changed. ‘The average Kiwi saw private involvement in infrastructure leading to job losses and big profits for companies,’ said Stephen Selwood, Chief Executive of New Zealand’s Council for Infrastructure Development (NZCID). Last year, the Key Government unveiled the country’s first PPP, inviting bids from the private sector to build and operate a 1000-bed men’s prison in Wiri in South Auckland. NZCID estimates the project is worth about NZ$500 million. ‘Wiri prison is a sort of test case,’ Selwood says. The country’s schools initiative is a second small step. New Zealand spends NZ$500 million a year on its schools and it expects a pipeline of about NZ$100 million – NZ$200 million a year in the coming years, English says. New Zealand’s growing embrace of PPPs is focused strongly on driving up the value for money achieved in procurement, and enhanced service quality. In the coming years, it’s hoped that PPPs will help drive cultural change among school boards and other public bodies, encouraging officials to consider expenses linked to the life of an asset and adopt skills and lessons learned from similar projects across New Zealand. ‘We do not see PPPs as a funding mechanism,’ says Richard Forgan, Executive Director of the Treasury’s National Infrastructure Unit. ‘They are a

procurement and service delivery mechanism, and we are interested in them as a way of improving value for money. The National Infrastructure Unit is a new department within Treasury that oversees infrastructure priorities and coordinates planning. Delivering Wiri prison as a PPP is expected to include performance requirements that may be more valuable than bottom line government spending, Forgan suggests. The operator will need to show improvements in inmate rehabilitation. ‘We expect prisons to be secure, obviously. But we want the prison operators to support rehabilitation of the inmates, too,’ Forgan says. ‘That has a real benefit of reducing the strain on the police and the whole of the justice system.’ So far it’s in social infrastructure, defence and housing where the government is most likely to put PPPs to use. English says over the next few years, should the government win re-election, he’ll be looking for private participation in affordable housing, using models in Australia as a guide. The government will also be looking for help from the private sector to help consolidate its defence facilities. ‘We’ve got NZ$15 billion of state housing, and there are models in Australia of non-state provision that could be instructive. New Zealand has done nothing in that area over the past 10 or 15 years.’ Housing New South Wales’ Bonnyrigg social housing PPP is one project that has captured attention from Wellington. Last year, the New South Wales Government announced the completion of stage one of the 12-year, $733 million project that will eventually provide 2332 private and public housing dwellings. The project, delivered by Westpac, Spotless, Becton and St George Community Housing, will see a 70/30 split between private and public housing, and will do much to renew the area’s prospects.

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Under the PPP – the first of its kind in Australia to provide social housing – Westpac and Becton Property own the development, while Spotless and St George Community Housing are the service providers. ‘We are getting started on that,’ English says. ‘Credible market participants like Westpac are getting started on that and saying they are interested.’ Defence is also a likely candidate for more private sector participation. The government unveiled its first defence white paper since the late 1990s, setting out a blueprint for the next 25 years. Some 1400 jobs, mainly in support and IT roles, may be contracted out to the private sector. The white paper is targeting about NZ$250 million in savings, in part by consolidating bases and back offices, as the government makes way for about NZ$4 billion in new ships and aircraft. The government is reportedly planning to consolidate its central North Island defence hub at Ohakea Air Base. That could mean moving operations from Waiouru and Trentham to Ohakea. ‘Defence has a five-year plan for significant efficiency and rationalisation and we would expect PPPs to be a big part of that,’ English says. ‘We are gleaning what we can through the PPP discussion.’ One challenge may be attracting significant foreign interest, given the slow ramp-up of the pipeline and the comparatively modest size of New

One challenge may be attracting significant foreign interest, given the slow ramp-up of the pipeline and the comparatively modest size of New Zealand projects. English knows that the government will have to do more if it wants to attract the Leightons and Lend Leases of the world. 76

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Zealand projects. English knows that the government will have to do more if it wants to attract the Leightons and Lend Leases of the world. ‘Contractors may look at our pipeline and think they would be better off in Western Australia,’ English says. Forgan at the National Infrastructure Unit says projects need a minimum price tag of about NZ$100 million, before they will realistically be considered for delivery under a PPP. That’s a higher minimum threshold than in Western Australia, where the state’s treasury has stated projects above $50 million will be assessed for suitability for PPP procurement models. Western Australia, too, has been competing to attract private interest and investment for its projects. Western Australia has brought forward a range of PPP projects, including the Mundaring Water Treatment Plant – due for completion in 2013; a 5000-vehicle multistorey car park; the 327-bed Midlands Health Campus; and soon, a new prison project at Kalgoorlie. ‘What we’re interested in is good price tension in the market. The more people we can attract, the better. That means developing a pipeline of projects,’ English says. ‘The feedback from the Australian operators is that “well, when it has a few more zeroes on it we’ll come and see”.’ Bankers say that while both New Zealand and Western Australia are showing promise, their primary attention, for now, remains on Victoria, New South Wales and Queensland. Said one veteran banker: ‘Victoria does a big PPP every year. When they have a project on the go, we send them our “A-team” every time.’ English said he expects interest from mid-tier Australian operators and service providers that aren’t put off by the smaller scale of the projects. ‘We are hoping to attract operators who are able to be a bit innovative and interested in smaller scale. ‘We’re not ruling anyone out.’ Serco says it’s keen to participate in suitable projects in New Zealand as the pipeline firms up. ‘Serco is committed to building capability in New Zealand, as we see opportunities in a number of sectors,’ says Emma Needham, a Serco executive. ‘New Zealand is a long-term, strategic and attractive opportunity for Serco.’

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New Zealand’s evolved and stable regulatory system and economy, coupled with its deep pool of talented engineers, financiers and other specialists – and an easier labour market – should help to make New Zealand attractive to Australian companies, says Martin Welsh, New Zealand’s Sydney-based Consul General. ‘The ease of doing business and a relatively competitive taxation regime support the investment argument.’ In the short term, New Zealand’s PPP pipeline appears likely to focus on social infrastructure projects. The NZ$1.7 billion Waterview Motorway in Auckland, for instance, is currently being bid as a competitive alliance between contractors and the New Zealand Transport Agency. But business expects the next round of major transport projects, such as the expansion of the NZ$2–3 billion Waikato Expressway from Auckland to Hamilton, to be considered for delivery under a PPP. The expressway is part of a national network that the government has labelled Roads of National Significance. Other parts of the network too, including Transmission Gully motorway and a motorway between Puhoi and Wellsford, may be considered for private delivery. But Forgan said any new motorway offered as a PPP would likely be a greenfield project, rather than an extension of an existing asset. ‘It’s early days investigating use of PPPs in road projects, and there’s always the question as to whether to trial such a model on an expansion to an existing asset, or something new and more self-contained,’ Forgan says. Support for the alliance model for transport infrastructure runs deep, in part because under the alliance model, the government assumes much of the risk if development proposals are blocked by environmental assessments and other objections, NZCID’s Selwood says. Bid costs are another barrier to entry for overseas contractors. Modest pipelines risk making the effort of cobbling together a bid uneconomic. ‘There is a perception by government that the existing NZTA is pretty efficient in procurement procedure. But it’s a perception; we just don’t know,’ Selwood says. ‘We’ve never had a competitive model so we just don’t know.’ Still, as traffic congestion in Auckland intensifies, and as prices for New Zealand’s biggest commodity

exports, including wool, dairy and lamb test new record highs, worries are mounting that the country’s infrastructure faces a growing funding gap. Over the next decade New Zealand will need to spend NZ$40 billion on transport, electricity transmission, broadband and local council infrastructure, such as water and sewerage. The New Zealand infrastructure sector says that the country faces a sizeable funding gap in economic infrastructure over the next 20 years – over and above the reconstruction of Christchurch. Key investments include a broadband network rollout and a backlog of investment in public transport, roads and water infrastructure. Plans for a rail loop through Auckland’s CBD face a NZ$2 billion shortfall. Upgrading the national rail network also faces a NZ$3 billion shortfall. ‘We haven’t done any significant rail construction in this country for more than 100 years,’ Selwood says. ‘Companies like Leighton have that experience across Australia’s states.’ Existing budget limitations have been further exacerbated by the reconstruction requirements from the devastating Christchurch earthquake. The stretched public sector balance sheet and mounting funding gap will likely strengthen arguments in favour of the value for money outcomes achieved by private delivery models. Even so, PPPs will be of limited use in Christchurch, at least in the short term, where engineers and emergency workers struggle to bring some sense of normalcy to the country’s secondlargest city. Portable toilets still dot neighbourhoods. City residents had to boil drinking water until early April. The only sounds in the CBD, where the earthquake was concentrated, are the wind and the crackle of walkie-talkies. More than 900 buildings will need to be demolished or repaired, including stores that for now still contain their merchandise, and restaurants where cups and plates remain where patrons left them in the rush to escape. ‘We need a coordinated reconstruction effort, and that ideally means only digging up streets once to repair sewerage and other services,’ Forgan says. The Christchurch earthquakes impacted on an area that accounts for about 17 per cent of the country’s GDP. English says he’s not ruling any procurement models out for the reconstruction efforts. Volume 2 Number 1

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This page: Upgrades to Auckland’s roads should put wind in New Zealand’s sails.

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‘The government is going to be open to any proposition that will get more done sooner and at a reasonable price, because it’s so important to rebuild confidence,’ English says. Even so, with government determined to pay for the rebuild through savings, and worries of a credit downgrade looming large, Selwood says PPPs will need to be part of the mix.

‘There is a stronger impetus now for PPPs.’ As well as rebuilding lives and restoring confidence in Christchurch, there is a broader goal at stake for New Zealand: an obsession, of sorts, with recapturing the glory years when preferential access to the United Kingdom for its wool and lamb helped make New Zealand one of the wealthiest countries. An often stated goal is to be ranked in the upper half of the 29 countries that make up the Organisation for Economic Cooperation and Development (OECD). But every year New Zealand’s standing seems to ebb. In 2009 it ranked 23rd out of 29, with the country’s overall output of goods and services the equivalent of about $25,000 per person. That put New Zealand just ahead of the Czech Republic. Australia ranked 16th. The National Party’s stated aim ahead of its 2008 general election win was for New Zealand’s GDP per capita to match Australia’s by 2025. English admits that’s going to be a tough slog as Asian economies clamber for Australia’s energy and mineral wealth. Upgraded roads in Auckland and a favourable exchange rate ought to put more wind in New Zealand’s sails, he says, adding that the country is competing for scarce capital and skill. Infrastructure development over the next few years is one way to have a better environment that supports manufacturing and logistics, he notes. For better or for worse, New Zealand lacks many of the severe bottlenecks that are plaguing Australia’s major cities and ports. But despite these advantages, English is right to argue that it will be a big ask. New Zealand’s GDP would need to grow by an average of four per cent a year (compared with about 2.5 per cent now) by 2030, when the country’s population is expected to have risen about 17 per cent to just under five million. According to the World Economic Forum’s 201011 Global Competitiveness Report, New Zealand’s infrastructure was considered the biggest obstacle to business. Almost one in five respondents to the survey said that an inadequate supply of infrastructure was their most problematic factor for doing business, outranking access to finance, or tax arrangements. ‘We have an opportunity to get on top of our infrastructure priorities in the next three to five years and be in pretty good shape,’ English says. ‘We don’t have the huge demands for growth already pressing down on us, like Australia.’ Continued on page 80

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Continued from page 78 But the optimism of government and public sector leaders about a greater role for private finance still faces its share of opponents. The school PPP in April was greeted by predictable opposition from the teachers’ union, who accused the government of a ‘bulldozer’ approach and a lack of consultation with educators. ‘Principals and teachers should be focusing their attention on teaching students and spending less time on maintenance,’ English says. He downplays worries that the opposition may seize on mishaps in PPPs overseas to torpedo efforts to expand their use in New Zealand. ‘The public is indifferent as to how it will be delivered, but they will be demanding about the quality of services,’ English says. ‘The public get their services and the government is focused on value for money – so we’re making the private sector sweat it.’ As PPPs gain more currency in New Zealand, English stresses that he will be examining how to improve on the model, learning from the Australian experience and reinterpreting it for the domestic market.

Tight credit and managing demand risk are some of the biggest issues determining how PPPs are structured and whether they go ahead in New Zealand. ‘The private sector is more worried about the downside than they were seven or eight years ago,’ English says. ‘We are trying to pick up the best of the Australian models and move them further, based on the state government experience,’ English says. ‘If anyone in the Australian industry is interested in pushing the model a bit further, we’re open to that.’ He said that New Zealand is looking for more innovation in how PPPs are financed and structured, citing approaches to PPPs in Victoria and Queensland. English says he’s proud of the progress his government has made in recent years and encourages Australian businesses to watch this space. ‘Eighteen months ago we didn’t have anyone in government who knew anything about this stuff,’ English says. ‘We’ve covered a lot of ground and the pipeline will build up to a point that will get more attention in the Australian market over the next two or three years.’

‘We are trying to pick up the best of the Australian models and move them further, based on the state government experience,’ English says. ‘If anyone in the Australian industry is interested in pushing the model a bit further, we’re open to that.’

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The challenges facing regional water equality By Tracy Ong

In July 2010, the United Nations amended the universal declaration of human rights to include access to clean, safe water as a fundamental right. You would think then that all people in Australia would enjoy access to safe, secure water and wastewater services, right? For most Australians, particularly those in metropolitan areas, this isn’t a problem. In New South Wales, Sydney and Hunter Water customers enjoy water with 100 per cent compliance with the Australian Drinking Water Guidelines (ADWG). But for many of those living in rural and regional parts of the state, accessing safe, secure and efficiently priced water and sewerage services is much less straightforward. For one, the majority of regional water consumers are paying more for their water and sewerage compared with those in metropolitan areas of the state. Based on a uniform household consumption rate of 200kL per annum, close to 65 per cent of the state’s local water utilities have higher ‘typical residential water bills’ than the metropolitan average.

We are concerned that customers in regional and rural areas are not receiving adequate service and are exposed to water quality risks, particularly in New South Wales and Queensland.

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Many of New South Wales’ rural and regional residents are also at heightened risk of drinking water contamination. In 2008–09, 12 local water utilities failed to meet minimum microbiological water quality standards. Between them, these utilities serviced over 25,000 connected properties. Put simply, higher prices coupled with a heightened contamination risk mean that large numbers of rural and regional consumers are paying more than their city counterparts, but cannot expect the same quality standards. This could not be any better illustrated than by the fact that half of the 12 utilities that failed to meet minimum quality standards in 2008–09 had above average water prices, including three whose prices were close to 20 per cent above the average price across the state. These facts are certainly concerning, but they are by no means surprising – having been extensively documented in recent years. An AECOM report, prepared for Infrastructure Australia (IA) earlier this year, found that some regional communities – particularly in New South Wales and Queensland – are ‘exposed to a greater risk of illness from pathogens, algal toxins and other physical and chemical contaminants,’ with ‘sections of the community with weakened immune systems particularly at risk’ (AECOM, 2011). Similar concerns have also been raised in recent months by the National Water Commission and the Productivity Commission. Yet despite this strength of evidence on the challenges facing the state’s regional water sector, a

clear pathway for effective and lasting reform has successfully evaded government, at both the state and local levels. A new report by Infrastructure Partnerships Australia (IPA) and Castalia Strategic Advisors seeks to buck this culture of inaction and to restore price and standard equality for regional water consumers. The report, Regional water equality in New South Wales, brings a fresh perspective to the key challenges facing the sector, as well as their underlying causes. The report finds that weak governance frameworks and a lack of functional separation, corporate accountability and commercial incentive are all key contributors to the sector’s underperformance. By outlining an alternative and practical pathway for lasting and effective reform of the state’s regional water sector, the report also builds on the existing range of reform options. Reform advocates, to date, have focused almost exclusively on the forced amalgamation of local councils into county councils, regional water corporations or voluntary alliances. Undeniably, such amalgamations will ensure much-needed scale as well as other flow-on economic benefits. Amalgamations also go to the very heart of the problem; that there are considerably more utilities operating in regional New South Wales – with the vast majority of these run by general purpose local councils – compared with other states (see Figure 1).

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Left: Regional water supplies run a higher risk than urban supplies of containing contaminants like green algae.

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Figure 1 – Water utilities by state or territory State or territory

Number of water utilities

New South Wales

109 (including 106 local councils and three metro utilities)

Queensland

72 local councils and regional water utilities

Australian Capital Territory

Single state-wide utility

Victoria

16 (including three metro utilities and 13 regional utilities)

Tasmania

Three regional water utilities

South Australia

Single state-wide utility

Northern Australia

Single state-wide utility

Western Australia

Five (including one single state-wide utility and four small local utilities)

(Source: AECOM, 2011) * Includes Sydney Water, Hunter Water and Sydney Catchment Authority

However, as effective as they would be, forced amalgamations will ultimately have to be imposed on unwilling councils and, as such, are both politically and operationally difficult. A failure to appreciate these difficulties and to look at alternative options for generating scale and other operating efficiencies is, according to the report, a key reason for the lack of reform progress in New South Wales to date. The report concludes that in the absence of forced amalgamations, the next most effective and lasting reform pathway is to better ‘incentivise’ local councils to change their operating structure, while better ‘supporting’ them through the change process. Underpinning this approach is a fundamental understanding that while structural change must be implemented by the local councils themselves, the ‘incentive’ for change must ultimately be shaped and driven by the State Government. According to the report, effectively incentivising local councils to adopt a more efficient operating structure, above all, requires a strengthened regulatory framework. The current regulatory framework, articulated in the Best-Practice Management of Water Supply and Sewerage Guidelines, is found by the report to be ‘light handed’ at best and fundamentally incapable of bridging the gap with respect to water quality and pricing. The fact that less than 30 per cent of local utilities are achieving 100 per cent compliance with the Best-Practice Guidelines is a clear illustration of this. This ‘light handed’ approach also extends to pricing. In contrast to metropolitan utilities, and the private sector operating under the Water Industry Competition Act 2006, local utilities are free to set 84

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Left: The Prospect Filtration Plant provides 85 per cent of Sydney Water’s drinking supplies, and was privately financed, constructed and operated.

their water and sewerage prices independently of regulation. The report finds that this absence of pricing oversight has stifled the incentive for efficiency gains, innovation and continuous improvement, contributing to greater price rises in regional areas, relative to the cities. To counter this weak governance and lack of accountability on the part of utilities the report recommends, as a minimum, mandating compliance with all relevant plans, guidelines and standards contained in the State Government’s Best-Practice Management of Water Supply and Sewerage Guidelines, including the health-critical elements of the ADWG. The paper also calls for greater oversight of pricing decisions, including bringing local utilities under the authority of the Independent Pricing and Regulatory Tribunal of New South Wales (IPART). Ultimately, these changes would establish a legal obligation on utilities to meet minimum standards, rather than simply a recommendation to do so. Hand-in-hand with a weak regulatory framework is, according to the report, the failure to effectively link local utility performance with state financial support. Decades of poor financial performance by regional water utilities has entrenched a culture of reliance on State Government subsidies. Reflecting

this, funding commitments for the Country Towns Assistance Scheme – the principal state funding program for local utilities – now exceed $1.1 billion. Successive governments have failed to drive improvements by directly linking these subsidies to utility performance, creating a situation whereby local utilities not only have no legal obligation to meet the Best-Practice Guidelines, but also no meaningful financial incentive to do so. According to the New South Wales Office for Water, local utilities must comply with all 19 requirements – including 10 for water and nine for sewerage – of the Best-Practice Guidelines in order to qualify for state subsidies. However, a utility is deemed to have complied if it ‘has made significant progress towards these requirements and has a plan and clear target in place to meet all the requirements’. The report finds the current requirement for utilities to comply with Best Practice Guidelines in order to be eligible to deduct a dividend to be similarly ineffective. The State Minister for Water can – under the Local Government Act 1993 – disallow a local council from deducting a dividend if it has not substantially complied with Best-Practice Guidelines, and can also ‘direct a council to comply with any particular aspect of the Guidelines before making any further deduction’.

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The reality, however, is that the vast majority of utilities simply do not have the capacity to pay a dividend, and therefore have little incentive to comply. In 2008–09, only three per cent of utilities proposed to pay a dividend from the surplus of their water supply or sewerage businesses. The report identifies stronger linkages between CTAS funding and compliance with Best-Practice Guidelines, as well as additional funding specifically linked to marked performance improvements, to be key components of an incentive-driven approach. Importantly, the report argues that any additional state funding will only be necessary in the short to medium term, with performance improvements eventually enabling savings for government as demand for CTAS funding eases. A further key conclusion of the report is that a large number of regional utilities stand to gain considerable benefits from the outsourcing of water and wastewater investment and operations to a single private provider. This would involve a number of local councils, perhaps structured along catchment boundaries, collectively outsourcing their water and wastewater investment and operations to a single private service provider, under a PPP or other concession. With several notable exceptions, private sector engagement in the regional water sector has been largely non-existent. In contrast, the state’s metropolitan utilities – and their customers – have realised considerable benefits from private sector

Given the potentially severe consequences for public health of a breach of drinking water quality standards, compliance with the health-critical elements of the ADWG should be mandatory for all utilities.

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engagement. As just one example, the privately financed, constructed and operated Prospect Filtration Plant provides 85 per cent of Sydney Water’s drinking supplies – equating to 3000 megalitres a day. The report finds that outsourcing to a large private sector operator will instil necessary degrees of commercial incentive and corporate accountability in the delivery of water and sewerage, enabling local councils to: l protect and grow their revenue bases; l allow for a high degree of local control and autonomy, including the retention of water and sewerage assets in council ownership; l facilitate greater commercial efficiency and long run viability, as well as essential managerial and technical expertise; and l improve the sector’s ability to better coordinate integrated water cycle management across whole catchments and areas. The benefits of outsourcing will, according to the report, ultimately flow through to regional consumers and ratepayers in the form of more stable and sustainable water supplies and pricing that more accurately reflects the reasonably efficient cost of supply, as well as reduced health risks. Above all, the report finds that joint outsourcing of water and wastewater investment and operations would, through the realisation of economies of scale, private sector efficiencies and technological innovation, address the poor financial performance of a number of local utilities. Crucially, this would in turn enable utilities to address the current under-investment in regional water and sewerage infrastructure. Latest available figures suggest that close to 40 per cent of the state’s 106 local water utilities are unable to generate an adequate return for their capital investment, and are presently operating at a loss. This poor financial performance is mirrored in the performance of the regional water sector as a whole. In 2008-09, the sector recorded a net loss after tax of $27 million, as well as an Economic Real Rate of Return (ERRR) of just 0.6 per cent. In stark contrast, the two metropolitan utilities, Sydney Water and Hunter Water, reported combined profits in 2008–09 of $220 million, and an ERRR of close to 1.7 per cent.

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According to the report, it is this poor financial performance on the part of a number of utilities that underpins their inability to meet minimum quality and pricing standards, as they are simply unable to invest enough to increase the efficiency and effectiveness of their infrastructure. The report estimates the sector’s annual capital expenditure requirements to be in the order of $790 million in 2008–09, or around four per cent of the total sector-wide asset replacement value of $19.9 billion. Actual capital expenditure in 2008–09 was around 3.4 per cent of total replacement value, suggesting that while local utilities are, on average, spending enough to cover replacement costs and growth, they are not investing enough to increase the efficiency and effectiveness of their water or sewerage infrastructure. State Government subsidies delivered through the CTAS, while assisting to contain this shortfall in recent years, have been unable to plug the gap and, as a result, a growing infrastructure investment shortfall has arisen. IPA’s report has estimated this investment shortfall to be in the order of $150 million per annum (in real dollars). A comparison of investment levels across the regional water sector with the state’s metropolitan utilities further illustrates the extent of this investment gap. Even when discounting the Sydney Desalination Plant, the paper finds that regional utilities are, on average, spending about half the amount being spent by Sydney and Hunter Water (see Figure 2). The report also compares capital expenditure levels of utilities in other states and territories (see Figure 3 on the following page). Moreover, the report finds that annual capital expenditure of around four per cent of total asset replacement value is only adequate if asset replacement is in a long-run steady state. In practice, assets such as water distribution pipes are likely to have been originally constructed in waves corresponding to population growth spurts as well as increasing access to reticulated water between the 1950s and 1970s. Given their low profitability, the capacity of utilities to undertake sizeable capital works programmes in order to cover these ‘lumpy’ costs is, according to the report, simply not there.

Outsourcing would enable local councils to reverse this growing shortfall, whilst at the same time enabling the State Government to reduce the reliance on its CTAS. Longer term, this will allow scarce State Government funds to be re-allocated to other infrastructure sectors facing chronic under-investment, such as local roads and rail. The report finds that a handful of councils have already taken proactive steps in respect to outsourcing, including Bega Valley Shire Council. Due to an influx of sea-changers combined with holiday makers descending on towns in the summer holidays, the capacity of Bega Valley Shire Council to provide sewerage services was being severely stretched. Under an alliance agreement with Tenix, Bega Council has been able to significantly upgrade its existing wastewater systems, whilst at the same time increasing efficiencies and reducing costs. This included upgrading five existing wastewater treatment plants, as well as building five new plants to service smaller villages. The alliance has also enabled Bega Council to reduce its capital and operational expenditure through the introduction of innovative Membrane Bio Reactor (MBR) technology. Rather than relying on a traditional gravity sewerage system, the deal introduced a pressure sewerage system that has meant the council is able to reduce its pump stations from 25 to one,

Figure 2 – State regional water sector and metropolitan comparison – annual capital expenditure (as a percentage of total fixed asset value)

(Source: Castalia analysis, 2011)

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Figure 3 – Annual capital expenditure of water utilities (as a percentage of total fixed asset value) – state and territory averages

(Source: IPA analysis based on the WSAA 2008-09 National Performance Report, and NSW Office for Water’s 2008-09 Performance Benchmarking Report)

as well as introduce MBR technology, which allows it to recycle high-quality effluent for irrigators, taking pressure off potable water supplies. Tenix will operate the plants – which remain under council ownership – until the end of the contract in 2017, with an option to extend the contract for an additional five years. The $75 million project means that the council can lock in its operation and maintenance costs over the life of the 10-year contract, while building capacity for further growth. However, on the whole, proactive reform on the part of local councils has been lacking. As a result, while Sydney Water and Hunter Water continue to raise the bar for water utilities in other states, particularly in respect to innovative re-use and private outsourcing, the state’s regional water sector trails further and further behind. In a positive sign for the industry, the new State Coalition Government has revived an inquiry started by the previous government on regional water reform, with the state Office of Water recently announcing it will come up with recommendations on sustainable water and sewerage treatment services. Given the extent of the longer-term challenges facing the sector, particularly in respect to its growing infrastructure shortfall, it is highly unlikely that government will recommend the status quo. 88

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Equally, however, while forced amalgamations would provide much-needed scale and associated economic efficiencies, these benefits are likely to be outweighed by political difficulties, making this approach equally as unlikely. Accordingly, an incentive-driven approach may provide the only viable pathway for restoring pricing and quality standards parity for the state’s regional water consumers. Importantly, this pathway could also provide the only means for local councils to manage their mounting obligations to ratepayers, consumers and the environment. But for this incentive-driven approach to be successful, the report argues, councils must also be appropriately ‘supported’, particularly in managing any financial and operational impacts associated with a change in their operating structure. A key component of this support will be assisting local councils to engage meaningfully with private sector operators. In this regard, the report cites the considerable potential for an ‘advisory’ body that could assist local utilities to achieve best quality and value in collective outsourcing and in its broader negotiations with the private sector. The report also cites the benefits that an advisory body could bring in assisting local councils to evaluate and deliver other largescale infrastructure projects – beyond water and wastewater – in a cost-effective and efficient manner. Queensland’s Local Government Infrastructure Service (LGIS) is cited as a possible example in this regard. The LGIS, a joint initiative between the Local Government Association and the Queensland Treasury Corporation, assists local government in the procurement and delivery of cost-effective infrastructure. Within the water sector, the LGIS offers local councils assistance in all areas of delivery of both water provision and sewerage services, including construction, operation and retail. LGIS also investigates the potential for collaboration between local councils, which could facilitate economies of scale, supported by centralised maintenance programmes. IPA will be publicly releasing its report in coming weeks.

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Infrastructure supporting our future.

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Future Building 2011

Articles inside

The challenges facing regional water equality | by Tracy Ong

English speaking: NZ pursues more PPPs | by Jeff Hutton

Getting New South Wales rail back on track | by Dan Stojanovich

IPA National Infrastructure Awards

Skills crisis at tipping point | by Tony Featherstone

Mulder mulls infrastructure challenges | by Leon Gettler

The playing field has levelled: Brecht | by Jeff Hutton

Barry the Builder – can he fix it?

Queensland’s master plan: Bligh says new projects will dovetail with rebuilding priorities | by Tony Featherstone

Super funds and infrastructure; ideal bedfellows | by Mark Birrell

Foreword | by the Hon Mark Birrell, Chairman, IPA