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Between a rock and a hard place By Jeff Hutton
Between a rock and a hard place
Between a rock and a hard place
A constrained fiscal position and a slump in revenues have seen South Australia forfeit its triple-A credit rating, and substantial reform is needed if the state is to claw back control of its budget, writes Jeff Hutton.
BELOW: Artist’s impression of The New Royal Adelaide Hospital
With a soaring Australian dollar hammering manufacturing, and tumbling commodity prices denting mining profits, South Australia saw its triple-A credit rating downgraded earlier this year.
The move was not unexpected. Premier Jay Weatherill has been unabashed in his support of putting continued expenditure ahead of the state’s triple-A rating.
The fact remains, however, that South Australia’s capital investment future looks bleak without a sustained period of reform.
Runaway expenses, dwindling tax receipts and the requirement to invest in infrastructure continue to exacerbate the pressure on the state’s bottom line.
Weatherill has argued that the government must push ahead with key projects, including $109 billion of resource, defence, health and transport projects in the pipeline, saying that scaling back capital spending in line with sagging revenues would only risk bottlenecks in the future and shift the burden onto taxpayers.
Weatherill, who took over from Mike Rann as Premier in October 2011, says forfeiting the triple-A rating was a straightforward decision.
‘We did that deliberately,’ Weatherill says during a recent interview.
‘We needed to maintain capital spending and ensure job creation. That was our emphasis. It was about the long-term economic viability of the state.’
While the state remains committed to pushing ahead with a number of large projects, including the revitalisation of Adelaide Oval, the New Royal Adelaide Hospital and the duplication of the Southern Expressway, fiscal pressures continue to loom large.
The most recent state budget saw deferrals on a number of infrastructure projects, the state’s ability to invest in major infrastructure moving forward will require a mixture of luck and prudent judgement.
Weatherill says the challenge is striking the right balance – one that preserves capital projects and job creation without seeming too much of a spendthrift.
‘It was a matter of financial prudence,’ Weatherill says. ‘We wanted to respond to the economic conditions responsibly, while keeping the future economic development of the state on track.’
Working with the private sector
As European debt woes and an economic slowdown in China and the United States undermine business and consumer confidence in Australia, the South Australian Government has shown a strong appetite to share risk with the private sector to secure investment, analysts say.
‘The current government is much more openminded to a variety of ways of unlocking private sector investment than past administrations,’ says Adelaide-based Rob DiMonte, Managing Partner for Deloitte Touche Tohmatsu in South Australia.
In the non-mining sector, perhaps the best example has been the $2 billion New Royal Adelaide Hospital – one of Australia’s largest health public private partnerships (PPPs) and the largest PPP in the state’s history.
Between a rock and a hard place
The 800-bed hospital – which is being built by the SA Health Partnership, comprising Leighton Contractors, Macquarie Capital Group, Hansen Yuncken and Spotless – is scheduled for completion in 2016.
Weatherill says the tighter balance sheet, coupled with the government’s determination to shield the state from the ravages of a climbing dollar and other external shocks, would inevitably mean a broader role for the private sector in fulfilling the state’s infrastructure requirements.
Additionally, ensuring maximum value for money for taxpayers will be at the forefront of the government’s infrastructure strategy.
While none of the state’s upcoming infrastructure projects are currently slated for delivery through the PPP model, Weatherill says that is not reflective of the government’s reluctance to embrace the model.
‘We will choose the PPP model when they make sense,’ Weatherill says.
‘It made sense to transfer the building and maintenance of the [NRAH]. It transfers risk to the private sector.’
Treasurer Jack Snelling says that PPPs like the New Royal Adelaide Hospital are effective because the state can transfer construction and maintenance risk to the private sector, allowing it to focus on delivering clinical services.
‘PPPs enable the state to focus on what it should be focusing on, which is the quality of its public services, while the private sector can focus on the quality of the infrastructure that houses those services,’ Snelling explains.
‘With the split of that risk allocation, both the state and the private sector benefit; the state through value for money, and the private sector through return on its capital.
‘The challenges for governments in the future will be to ensure that the key criterion in tendering PPPs remains value for money, and the process for doing that remains very competitive.’
While Snelling says there will be many projects over the forward estimates that ‘will be built and managed by the government’, the private sector will still be called on to play a significant role in the delivery of major infrastructure.
‘When value for money for government and the South Australian taxpayer is competitive, we will look at options as to how those projects could be built under a public private partnership,’ he says.
Snelling says PPPs deliver well maintained and quality public infrastructure over the life of the contracts so that current and future generations can benefit from a state-of-the-art project.
‘For the private sector, PPPs present a great opportunity for return on capital if they do meet the conditions of their contract.
‘The private sector works very hard to meet the standards in their contracts, so it continues to receive the service fee revenue that comes with the partnership.
‘We believe there are several opportunities where those partnerships will serve South Australians well today, but, just as importantly, serve South Australians well into the future.’
Dealing with a difficult budget
Snelling’s second state budget, which he handed down on 31 May 2012, forecasts an $867 million deficit in the year ending June 2013. That will narrow to $778 million the following year. The main culprits are slumping budget, tax and GST revenues, which have been written down by a further $2.8 billion over the period 2011–12 to 2014–15, including a $700-million reduction in 2012–13.
The pace at which the government reaps tax will slow by 7.2 per cent in real terms during the 12 months ending June 2013. After that, tax revenue is expected to recover and the government hopes to return the budget to surplus by June 2016.
The combination of lower revenue and sustained capital works spending will double the debt over the next four years to $8.8 billion.
While Standard & Poor’s reacted by lowering its rating of the state government’s ability to service its debt from triple-A to double A-plus, Weatherill says other states may also have to face up to a new reality.
‘The global financial crisis had a substantial effect on revenue because global uncertainty drove down demand for resources and their contribution to revenue,’ Weatherill says. ‘Each state has to do it in its own way.’
Forced to take drastic action, Snelling found $430.7 million in new savings in the state budget.
Numerous projects were either deferred or cancelled. A planned $500 million tram line for Adelaide was cancelled, while the government delayed electrification work for some rail lines, including the Gawler and Outer Harbour. That added about $373 million to the state’s balance sheet through to June 2016.
Between a rock and a hard place
The government also said it would wait two years to buy land for a future rail corridor to Aldinga, saving almost $13 million.
BELOW: The existing Olympic Dam site
But it wasn’t all gloom for infrastructure spending
The government announced an extra $110 million toward separating freight and commuter lines at Goodwood – a project that attracted more than $200 million in Commonwealth funding in this year’s federal budget.
Snelling says the project will be vital to driving up efficiencies in the delivery of heavy freight.
A total of $192 million was also committed to roll out three electronic healthcare systems that boost storage systems for test results, improve imaging for scans and x-rays, and deliver better patient access to information.
The government will commit $75 million to build supported care accommodation for the disabled, including $13.5 million to close down the 40-yearold Strathmont Centre.
Overall, the state’s infrastructure program will see investments of $10.8 billion over the next four years, with some $2.9 billion of work slated for the fiscal year to June 2013.
Among the big-ticket items are the $1.88 billion Adelaide desalination plant, the $535 million redevelopment of the Adelaide Oval – a key part of the development of the Riverbank precinct – and the new Sustainable Industries Education Centre at Tonsley, the former site of the Mitsubishi auto assembly plant.
‘The government is funding record levels of infrastructure investment to build for future generations,’ Snelling says.
Spending on transport and infrastructure, including work on the Adelaide Oval, will climb to $1.3 billion, while a health spend of $4.9 billion is also slated for 2012–13, up 5.6 per cent on last year.
The 800-bed New Royal Adelaide Hospital will comprise a large slice of that spending. The hospital, combined with the South Australian Health and Medical Research Institute, is slated to be the hub of medical research in the state.
The project sits at the heart of the state government’s ambition to create an ‘arc of development’, as Weatherill describes it, along the city’s Riverbank precinct.
The hospital and research centre will concentrate 7000 clinical and medical research jobs in the city centre.
Baulderstone is spearheading the $535 million redevelopment of the Adelaide Oval, which got underway in March 2012. The staged redevelopment is slated to wrap up in March 2014.
Deloitte’s DiMonte says the decision to press ahead with its infrastructure program underlines the importance of infrastructure spending to underpin economic growth.
‘The government recognised there needs to be a balanced approach,’ DiMonte says.
‘It’s not all about austerity.’
Olympic hopes dashed…
Minerals remain a bright spot for South Australia, but the lustre is coming off. The state could only boast four mining projects at the turn of the 21st century. Now it has 20, with another 25 considered to be in the advanced stages of planning, but unfortunately, the proposed $27 billion expansion of BHP’s Olympic Dam site has now been mothballed – with some analysts warning that this may put doubts into other planned projects.
Olympic Dam accounted for just under half of the $65 billion of resource-related projects in the pipeline in South Australia. University of South Australia Professor Richard Blandy says the Olympic Dam expansion would have boosted economic growth by some four per cent per year, with activity at the mine projected to account for about 10 per cent of the state’s gross product.
Between a rock and a hard place
While the withdrawal of the expansion is a serious setback, it’s not fatal.
‘Even without the Olympic Dam expansion, there’s a significant amount of expansion in that sector alone,’ DiMonte says.
Among them is Oz Minerals’ Carrapateena copper / gold mine, which was discovered under South Australia’s PACE program.
And Snelling argues the state needs to be more than a resource economy.
‘We need to be a state that, into the future, doesn’t just dig things up, but makes things as well,’ Snelling says.
‘That is why growing our advanced manufacturing sector is one of the government’s key priorities.’
The government has ruled out road tolls, Weatherill says, pointing to the government’s election promise on the issue.
‘It was an election pledge,’ Weatherill says. ‘We’ve been able to increase infrastructure spending without road tolls.’
Snelling downplayed remarks he made in June at a post-budget breakfast that he would have to give consideration to proposals to build a road toll in South Australia.
‘I would naturally give that consideration, as a Treasurer would with any proposal that is put forward to government,’ Snelling says. ‘But at the time I also said that no-one has currently come to me with a proposal, and I don’t think anyone will.’
The issue became more prominent after the head of the state’s Transport Department, Rod Hook, said in June that the next government in South Australia would need to find new ways to fund road infrastructure, with tolls an obvious candidate.
Hook said that if South Australia wants to continue to receive federal support, road tolls would have to be considered in the 2014–15 budget, which will be after the next state election.
‘It is very unlikely we will ever get a toll road in South Australia fully funded by the private sector paid for by tolls,’ Hook said.
Snelling reiterated the point that the government has no current plans for road tolls, but even so, he doesn’t expect the issue to go away.
‘As part of the rigorous assessment of the submissions it receives, Infrastructure Australia requires project proponents to show that they have considered all the options, including on the matter of financing.
‘This has already occurred once with the Northern Expressway, and will happen with future road projects.’
One thing is overwhelmingly clear: the fiscal pressures facing South Australia are showing no signs of abating.
If South Australia is going to fund its ambitious infrastructure program, there will have to be heavy lifting to restore the state’s finances.
South Australia, together with Victoria, achieved historic micro-economic reforms in the 1990s, including the privatisation of its publicly held electricity and port assets. While those reforms have bolstered the state over the past two decades and held down the costs of electricity that have blighted New South Wales and Queensland, it also makes the job of reforming the budget harder for the current crop of political leaders.
While the recent state budget saw some positive progress, with operating expenses to be cut by $430.7 million over the next four years, significant heavy lifting still needs to be done.
Policymakers in South Australia are going to need to take some difficult steps to decrease the cost of public service delivery, and look at new taxation revenues to increase funding capacity.
And while these are welcome first steps, South Australia needs to face up to the fact that a prolonged effort to rein in operating expenses will need to be accompanied by a broader debate about the funding options needed to help deliver the next generation of projects.
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