Future Building 2013 V3 N2 by Infrastructure Partnerships Australia

The Australian Infrastructure Review Volume 3 Number 2

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

ANZ forecasts up to $400 billion will be invested in Australia’s infrastructure over the next three years.1

provider of capital and advice to the infrastructure industry, ANZ is uniquely positioned to help clients and investors.2

Upgrading our existing infrastructure and delivering new infrastructure requires considerable capital expenditure. It’s a significant undertaking but it’s a critical investment towards improving our national productivity. Sustainable economic growth and the future prosperity of Australia depend on it.

Our extensive network across 28 markets in Asia Pacific means unparalleled access to diverse pools of capital and a wide range of investment and partnering opportunities to assist our clients build Australia’s future.

That’s why ANZ is committed to supporting the infrastructure industry. As a leading

David Byrne Global Head of Utilities and Infrastructure Phone: +61 3 8655 7552 Email: David.Byrne2@anz.com

anz.com 1 ANZ analysis. 2 No.1 for Australia Loans Bookrunner Ranking, Dealogic 9mth 2012. Australia and New Zealand Banking Group Limited (ANZ) ABN 11 005 357 522. ANZ’s colour blue is a trade mark of ANZ. Item No. 85931 11.2012 W318441

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The Australian Infrastructure Review

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

Contents

Future Building is published by:

Foreword | by The Hon Mark Birrell, Chairman, IPA

The Hon Ted Baillieu MLA

Sir Rod Eddington AO

Jim Miller

Scott Charlton

Eminent Panel

The Hon Anthony Albanese MP

The Hon Warren Truss MP

Richard McIndoe

Public Sector Reform Panel

Graham Bradley AM

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

DISCLAIMER: The editor, publisher, printer and their staff and agents are not responsible for the accuracy or correctness of the text of contributors contained in this publication or for the consequences of any use made of the products, and the information referred to in this publication. The editor, publisher, printer and their staff and agents expressly disclaim all liability of whatsoever nature for any consequences arising from any errors or omissions contained in this publication, whether caused to a purchaser of this publication or otherwise. The views expressed in the articles and other material published herein do not necessarily reflect the views of the editor and publisher or their staff or agents. The responsibility for the accuracy of information is that of the individual contributors and neither the publisher nor editor can accept responsibility for the accuracy of information that is supplied by others. It is impossible for the publisher and editors to ensure that the advertisements and other material herein comply with the Trade Practices Act 1974 (Cth). Readers should make their own inquiries in making any decisions and, where necessary, seek professional advice. © 2013 Executive Media Pty Ltd. All rights reserved. Reproduction in whole or in part, without written permission, is strictly prohibited. Volume 3 Number 2

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Foreword I am delighted to introduce the latest edition of Future Building, the journal of Australia’s infrastructure sector. Infrastructure is now a welcome and common feature in public policy debate – and with a federal election due on 14 September, this will increasingly be the case. It is critical that the election debate focus, in large part, on the reasons for Australia’s stagnant productivity. This will necessarily demand a careful consideration of the policy options that exist to reform Australia’s infrastructure markets. The efficiency of Australia’s infrastructure services, particularly transport and utilities, is a key underpinning of Australia’s global competitiveness. Reforms to infrastructure markets therefore offer the opportunity to see a return to a strong, positive improvement in economic productivity and national prosperity. During 2013, IPA will be a strong advocate for investment in nationally significant transport infrastructure projects (which result from an objective prioritisation process and transparent business cases), and we will champion marketbased policies that encourage fresh investment in areas like energy and water. IPA will also be encouraging the major political parties to support regulatory and tax environments that make the delivery and operation of major projects feasible in the coming decade. In the context of the coming election, this edition of Future Building details the proceedings of Infrastructure Partnerships Australia’s Partnerships conference, which was held late 2012 in Melbourne. Partnerships is the most significant gathering of business, policy and political leaders from across the nation. Each of our speakers provided generous and honest views about the reforms that must be considered, resolved and implemented if we are to see meaningful and sustained progress toward a better Australia.

I trust that you will find this edition both relevant and thought-provoking, and I would welcome any feedback that you may have. In the meantime, my best wishes for a successful 2013.

The Hon Mark Birrell Chairman, Infrastructure Partnerships Australia

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The Hon Ted Baillieu MLA Despite facing significant budgetary challenges, the Victorian Government remains committed to its substantial infrastructure program, according to Premier The Hon Ted Baillieu MLA.

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The Hon Ted Baillieu MLA

Generations of Victorians have inherited a remarkable legacy in this state, fuelled by gold at one stage, now fuelled by agriculture and driven by ambition and aspiration, innovation and ingenuity. Infrastructure is important to us all, because our forefathers built wisely. They built for the future and we have been the beneficiaries. They laid down the critical infrastructure that is so essential to our economy these days. We think of the Hoddle Grid, our irrigation schemes, our railways, our utilities, our ports, our power generation, our civic infrastructure, remarkable city buildings, churches, town halls, bridges, roads, and, more recently, CityLink, EastLink, Southbank and Federation Square. We do have a remarkable legacy, and that has contributed to Victoria being a leading state over many generations. A state with only three per cent of the land mass, but producing 25 per cent of the GDP; a state with the fastest-growing city in Australia, the largest manufacturing centre, the busiest container port and the largest curfew-free major international airport. A state with abundant energy supplies, greatquality water, the largest exports of food and fibre, and the most important transport networks that export produce to key overseas markets. That’s the picture of a competitive state and the strengths of the Victorian economy. They are all underpinned here by a thriving, multicultural base, and Victoria is a gateway to the world. What we have represents not only a great legacy, but also a great opportunity, and that’s what we seek to nurture and promote. We’ve got advantages that other jurisdictions would simply love to have. That is why infrastructure – particularly productivity-enhancing infrastructure – is so important to economic growth. We know that there is a shift of industrial activity away from inner and central Melbourne, and to the north and outer-west, and south-east. We know that for industries that constitute the bulk of Victoria’s economy, such as the freight and logistics industry, there’s an urgent need to build infrastructure that improves those connections. We’re now in an effort to build the next major city-shaping project for current and future generations. It is a fact that a failure in a time of prosperity to balance spending in favour of infrastructure has left us with a major infrastructure deficit. That has occurred at the very time when construction costs have escalated and are pricing us out of infrastructure. Now there is less money to spend across Australia.

There is significant financial uncertainty for the states. We face our own challenges from unsustainable budget positions that we have inherited We should be trying to get ahead, or at least keep up; but we’re finding we have to spend to catch up, and there are now significant costs and consequences, economically, if we don’t address this shortfall. A ‘do nothing’ approach would cost $20 billion by 2020, with $6 billion of those costs in Melbourne alone due to working hours lost, delays, inefficiencies and congestion. I’ll give you an example: during the typical morning Melbourne peak, the boom gates at Springvale Road are down for 50 minutes, which is around 40 per cent of the duration of peak time. That occurs every day, as it does at Mitcham Road, where the boom gates are down for 45 per cent of the time around peak. We’re seeing up to 250 trains passing through each of those crossings every day. Those crossings at Springvale and Mitcham, which have caused crippling bottlenecks for years, will be gone as a result of decisions in this term. The travel times in these areas will be reduced significantly. Part of our plan to increase the efficiency of the road networks via a $350 million commitment over three years has focused on those road separations. That’s just one small part of what we’re seeking to do in infrastructure. We’re obviously facing significant challenges. There are international challenges. There are national challenges associated with significant policy uncertainty, leadership uncertainty and financial uncertainty, and particularly through the distribution of the GST. There is significant financial uncertainty for the states. We face our own challenges from unsustainable budget positions that we have inherited. We inherited major cost blowouts on many projects, and some of those we’re still facing. We faced a writedown of more than $6 billion in GST just a few months Volume 3 Number 2

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before our budget. We have had a very significant reduction in our share of GST compared to other states. We also faced stamp duty and land transfer writedowns. That’s our budget position and our revenue shortfall. To give you an idea, this has been a bigger hit to Victoria’s revenue than what occurred during the global financial crisis in 2008; only this time, there’s no bucket of money from the Commonwealth to make up. Faced with those challenges, we have taken a very clear path, with four key streams. We are going to rebuild budget capacity and we are going to run a responsible budget in this state: that is first and foremost.

In Victoria, there is absolute clarity about what needs to be done in terms of infrastructure. I don’t think there is a project that we haven’t looked at 6

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Secondly, we’re going to focus on productivity. Thirdly, we’re going to try to do whatever we can to grow our markets internationally and locally. Fourthly, we’re going to assist industry that is in transition. When it comes to a responsible budget, that means containing expenses, it means getting debt under control, it means a responsible wages policy, and we’re sticking to it. It means maintaining a triple-A rating. Critically, at this point, it’s about building budget capacity, over time, to have the funds available to provide services and get the balance of infrastructure right over time. We’re not alone in that challenge. To illustrate that, we carried out an exercise: we looked at the net operating balance of the states and, indeed, New Zealand and the Commonwealth. We looked at the net operating balance over the four years of our term. Yes, if you’re wondering about the federal figures, they’re adjusted to be on the same accrual basis as the states. It shows quite clearly, in 2011–12, only two states showing a surplus. If you aggregate the net operating balance over four years, only two states – only two jurisdictions – are showing an aggregate operating surplus, and a modest one at that: Victoria and Western Australia. The days of plunging states into debt and being bailed out by the Commonwealth are simply over. We’re going to spend money wisely, but while as a state we can play our part, we’re heavily dependent on Commonwealth financial support for particular infrastructure projects. The Commonwealth raises more than 80 per cent of revenue in Australia, but the states are responsible for 40 per cent of the expenditure. That’s a fundamental imbalance. To put it another way, the Commonwealth’s revenue is seven times that of Victoria’s, and that is obviously significant and gives them greater capacity. In Victoria, there is absolute clarity about what needs to be done in terms of infrastructure. I don’t think there is a project that we haven’t looked at. The challenge is to find a way of financing those projects and funding them, and we’ve seen some of the problems with that recently. We’ve laid that out in a detailed submission to Infrastructure Australia. Our priority projects are identified under four themes: major city-shaping projects; getting the most out of the infrastructure that

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we have; planning for longer-term infrastructure; and priorities for national land transport issues. The key issue is how projects are funded, and how they are delivered. From our point of view, we’ve got to get a better deal than the one we’re currently receiving from the Commonwealth. In our 2011 submission to Infrastructure Australia, we sought $640 million to advance the East West project, the Melbourne Metro tunnel, and other major cityshaping projects. We’ve since made another comprehensive submission to Infrastructure Australia that identifies six major city-shaping projects and 32 other important projects that we believe deserve funding. The six major city-shaping projects are East West Link, the M80 upgrade, the Melbourne Metro, the Rail Capacity Program on the Dandenong rail, the Port of Hastings and the Interstate Freight Terminal. We believe it’s time the Commonwealth got behind these major productivity-enhancing projects. It’s time the Commonwealth listened to its own body, Infrastructure Australia, and business groups such as the Business Council of Australia (BCA), and gave the states the funding to get nationally significant projects to the market as soon as possible. We are seeking that initial contribution that helps with planning and getting the projects ready to go.

Unlike the states, the Commonwealth has borrowing capacity at its disposal that would not compromise a triple-A credit rating. So, today, I’m inviting the Commonwealth to provide greater certainty to the community, the private sector and the states about infrastructure funding, and that could involve revitalising the Building Australia Fund. The Fund is there, but it is fundamentally empty. It could involve the Commonwealth committing to make a longer-term stream of payments to fund availability-based PPPs. It is clear that the Commonwealth needs to act to allow the states to progress vital transport projects. While it’s disappointing that we haven’t seen that investment from the Commonwealth, we’re determined to push ahead, and we’ve done so. We’ve committed $5.8 billion this financial year – the biggest ever funding, excluding fiscal stimulus payments – to infrastructure investment in this state. That includes important new projects valued at over $2.5 billion, including the revised Regional Rail Link, the Bendigo Hospital, the Ararat and Ravenhall prisons, and the $1 billion Regional Growth Fund. This year alone there will be more than $40 billion of projects and public sector capital projects, including PPPs, underway in Victoria. We’ve also advanced plans for the development of the Port of Hastings to handle containers. Hastings Volume 3 Number 2

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is a natural deepwater port, and land has been reserved for the development for more than 30 years. The port will provide significant benefits to the state, including manufacturers and distributors in south-east and regional Victoria. It will address substantial interest in container throughput, and relieve bottlenecks and congestion, while growing jobs. We’re also taking the next step to deliver major transformation of projects, such as the Metro Rail Tunnel and the East West Link. In terms of Melbourne Metro, we’re moving to expand the metropolitan passenger rail network and increase services to Melbourne’s growth areas in the north-west and south-east. We have to find an added capacity at the centre of the network, and we’re doing this by planning for the Melbourne Metro. It is a revised plan: a rail tunnel between South Kensington and South Yarra, with five new underground stations. I’m very pleased to announce that the government has declared the Melbourne Metro under the Major Transport Project Facilitation Act. That allows for the preparation of a comprehensive impact statement as a precursor to construction. Assessing the impact of the Metro will obviously involve community consultation – that’s to be expected. This declaration shows that we’re serious about the Metro project and will be in a position to begin the construction when the funding becomes available. A second east-west crossing is also vital to Melbourne’s prosperity. Anybody who’s been through that morning peak, particularly if they’re from the west, understands that very well.

We quietly urge the Commonwealth once again, and indeed their counterparts here in Victoria, to get behind this vital productivity-enhancing project. To date, that hasn’t happened 8

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The East West Link will provide critical additional freight capacity and reduce the reliance on the West Gate and the M1, as well as connecting the port. It will transform how people move around this city in a way not seen since CityLink. I’m pleased to report that preparations for the development of the East West Link are also proceeding well. We’re preparing a robust business case for the project as a matter of urgency, and we aim to have it completed by early [2013]. Once it’s completed, we anticipate that detailed environmental assessments will begin, and in the near future we will announce that direct declaration of East West Link under the Major Transport Project Facilitation Act. While we are using our power to move this project forward, we quietly urge the Commonwealth once again, and indeed their counterparts here in Victoria, to get behind this vital productivity-enhancing project. To date, that hasn’t happened. This project will be vital to Victoria – it’s important for jobs, and it would be a huge boost to economic development in this state. We certainly welcome the initial commitment from the Federal Opposition for $1.5 billion towards the construction of the project. We are also actively engaging with the private sector in this project. We’re extending our efforts to key markets such as China, Victoria’s number one trading partner. I’ll be leading a super trade mission to China. It will be the largest ever trade mission to leave this country and will involve more than 400 Victorian businesses and 650 people representing 15 sectors of our economy, including many from the financial, construction and professional services sectors. As part of that mission, I’ll be delivering a highlevel investment presentation, which will showcase Melbourne’s and Victoria’s strengths across a range of sectors to leading Chinese financiers and businesses at the investment round table initiated by the Victorian Government. As for foreign direct investment – including from China – let me make it very clear: Victoria welcomes foreign investment. We support investment and we want to attract a greater share of investment from Victoria’s number-one trading partner. This state has had foreign investment behind its infrastructure for many decades, and we welcome that. It’s good for jobs, it’s good for

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growing our economy, it enhances our liveability and it builds on the state’s competitive advantage. We’re also putting in place the necessary framework for Victoria to achieve best practice for planning, procurement and delivery of these infrastructure projects. We have established a High Value, High Risk unit, dedicated to ensuring that major projects over $100 million are subject to rigorous scrutiny and avoid the cost blowouts that have been associated with projects in recent years. We are also developing long-term strategies to help guide Melbourne’s and Victoria’s growth through the Metropolitan Planning Strategy and the Victoria Freight Logistics Plan. Now, at the risk of talking about something I’ve been talking about for years, and about which I am passionate, I want to talk about construction costs. It’s all very well to have a pipeline of projects, but that won’t mean anything in terms of addressing our infrastructure backlog if they’re too expensive to build. Tackling the issue of construction costs is

Tackling the issue of construction costs is essential if Victoria and Australia are going to have the infrastructure they need essential if Victoria and Australia are going to have the infrastructure they need. The escalating cost of construction is pricing us out of critical infrastructure of the future. We cannot have a situation in which a single grade separation in metropolitan Melbourne on a rail or a major road costs between $250 and $300 million. We simply can’t afford to be priced out of infrastructure and the jobs that go with that. It’s taken three COAG meetings and a year of passionate promotion by Victoria for federal Labor and the Commonwealth to agree to an inquiry of any sort into the escalating cost of construction. We sought a Productivity Commission inquiry and the Prime Minister resisted. We sought the support of the BCA. We sought the support of the industry. We had that. We pushed the case. We now have the Commonwealth prepared at last to have an inquiry. Unfortunately, it will not be a Productivity Commission inquiry – it is to be conducted by a threeperson panel, and the composition of that panel will be critical to the success, or otherwise, of this project. The states made it very clear that it has to be an independent panel, and that it has to be a panel that’s resourced independently from the Commonwealth. So far, we’ve had resistance from the Commonwealth and, indeed, the South Australian and Tasmanian governments said there was no problem [with construction costs]. The notion that there isn’t a problem with construction costs is completely false. In the COAG discussions around the construction cost inquiry, there were some who suggested we should not include any reference to industrial relations. This is the leadership of the country saying we shouldn’t mention industrial relations in continued on page 12 Volume 3 Number 2

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Port Botany Terminal 3, New South Wales Hutchison Port Holdings awarded Laing O’Rourke the civil and rail infrastructure works contract for a new container terminal at Sydney’s Port Botany.

Laing O’Rourke Engineering the future With four decades of experience in local engineering-led, multi-disciplined and cost-effective construction solutions, Laing O’Rourke is currently delivering some of the most exciting and complex infrastructure tasks throughout Australia and Asia.

phone: web:

+61 2 9903 0300 laingorourke.com.au

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Ichthys Cryogenic Tanks and Accommodation Village, Northern Territory

FMG Train Unloaders, Western Australia

MTR Express Rail Link upgrades, Hong Kong

Brisbane Airport Expansion, Queensland

In partnership with global LNG tank specialist Kawasaki Heavy Industries, Laing O’Rourke will engineer, procure and construct a network of four massive cryogenic tanks for the $34 billion Ichthys LNG Project. In addition, Laing O’Rourke is delivering the 3,500-bed Howard Springs Accommodation Village for the LNG workforce.

Laing O’Rourke is delivering two new train unloader plants as part of a major expansion of the FMG port facility in the Pilbara region of Western Australia. The works include new buildings, dust control systems and ducting, two conveyor systems, all pipework systems and the installation and precommissioning of the train unloader systems.

Laing O’Rourke is currently delivering three high-profile Express Rail Link upgrades for Hong Kong’s MTR Corporation, one of the world’s largest mass transit providers. Across the three projects, Laing O’Rourke is providing complex civil and rail infrastructure solutions that are critical for the successful delivery of the project as a whole.

Brisbane Airport Corporation is undertaking major upgrades to its domestic facility to provide a worldclass gateway to Queensland and cater for booming passenger numbers. Laing O’Rourke successfully delivered a series of projects including airside satellites, the terminal access ‘skywalk’ and the largest single-structure carpark in the Southern Hemisphere.

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The Hon Ted Baillieu MLA

The CFMEU’s unlawful and illegal blockade of Grocon cost not only the company, but it also cost the industry, it cost the state, it cost reputation, and it cost taxpayers continued from page 9 this inquiry. We know that a productive industrial environment rewards efficiency and provides value for money. That’s why we introduced a new Victorian Code of Practice for the building and construction industry. That is set to deliver much better value for money for the state’s infrastructure projects. We’ve established a Construction Code Compliance Unit to implement, monitor and uphold the new guidelines. We demanded the Australian Building and Construction Commission (ABCC) be reconstituted and the Fair Work Act be amended. We call again on federal Labor and the Commonwealth to show some leadership and immediately introduce legislation to address what most fair-minded people in the business and the wider community realise is an unacceptable situation. We saw that unacceptable situation at work in Melbourne in September. The CFMEU’s unlawful and illegal blockade of Grocon cost not only the company, but it also cost the industry, it cost the state, it cost reputation, and it cost taxpayers. We were appalled, and I think most fair-minded Australians were appalled, to see the behaviour of the CFMEU leadership. Thuggish behaviour, unruly behaviour, unlawful behaviour and blockading a legitimate building site where all the employees who work on-site simply want to go to work, is unacceptable. It took our Prime Minister, sadly, three weeks to declare that this was grossly unacceptable. The Supreme Court had declared on two occasions that this was unlawful behaviour. It took three weeks for the Prime Minister to say, ‘this is unacceptable’, but having said that it was unacceptable, she was not prepared to do anything about it. 12

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I say this to the CFMEU leadership: you had in place an unlawful blockade for three weeks. You’ve done enormous damage to the industry, to taxpayers, to the reputation of the industry and to the company. Those blockading the site should have withdrawn immediately. It was so declared. They should have respected the orders of the Supreme Court. To others who seem to regard an unlawful and violent union practice as just part of the so-called industrial game – they have to start showing respect for the law as well, because this goes to the heart of the cost of construction. There is no use having a pipeline of projects – projects that we simply can’t afford. Having innocent parties being forced to negotiate their way out of illegal, thuggish and threatening behaviour is a form of extortion. People are entitled to insist on the protection that our laws provide. Things have to change in Victoria, and we are determined to make that change and make Victoria’s workplaces as productive as possible. Militancy, particularly from the CFMEU, is to the detriment of all of us, and that culture is contributing to escalating costs of construction and contributing to pricing us out of infrastructure in the future. There is an international eye on this issue, and we would be foolish to ignore it. Victoria’s always been a leader when it comes to infrastructure. Despite the challenging economic situation, we’ve got record infrastructure spending, a pipeline of projects, the framework to deliver on those projects and the responsible economic management framework. We’re keen to see the Commonwealth get onboard. We’re keen to see that we’re all improving our competitive positions across this country, and certainly in Victoria. We’re keen to get a handle on construction costs, getting to the bottom of that. As I said before, the 50,000 people who were living here in Melbourne in the early 1850s laid down the heritage that we inherited. They laid down a legacy 150 or 200 years ago, when there were barely 50,000 people. If they can do that, we can do likewise. It’s not time just to catch up – we want to get ahead, and I look forward to joining you in making that happen.

THE HON TED BAILLIEU MLA Premier of Victoria

Ted Baillieu was sworn in as the 46th Premier of Victoria and Minister for the Arts on 2 December 2010. He was born on 31 July 1953 in Melbourne. Ted studied architecture at the University of Melbourne, and throughout his public life has retained a keen interest in planning. Before entering Parliament, Ted was a Director of Knight Frank, a Trustee of the Melbourne Convention & Exhibition Trust, a Board Member of Tourism Victoria, and a Partner with Mayne & Baillieu Architects. He has also served as a Board Member of the Melbourne Comedy Festival and the Australian Children’s Television Foundation. In 1999, Ted became the Member for Hawthorn. On entering Parliament, he held a number of shadow ministries, including Tertiary Education and Training, Gaming, Planning, and the Arts. Ted was elected as Leader of the Victorian Liberal Party in 2006, and became Premier of Victoria following the Victorian State Election in November 2010. Ted is passionate about improving the lives of Victorians, and has a clear plan to encourage a growing competitive economy, make services work, provide a government Victorians can trust, foster strong families and vibrant communities, secure our water supplies, and create a healthy environment.

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Sir Rod Eddington AO

Sir Rod Eddington AO Australia’s governments must commit to a rational, evidence-based debate about how market creations can play a role in solving the infrastructure stasis, says Sir Rod Eddington AO.

My message today is that without substantial changes, Australia’s governments cannot afford the level of infrastructure investment demanded by both the economy and the community. Victoria and New South Wales have just a few billion dollars left in additional investment opportunities that they can make without constraining their credit ratings. Queensland and South Australia have both been downgraded because the call for public expenditure on recurrent capital items has outstripped the capacity of those states’ budgets, and this story is replicated across the Federation. While the Commonwealth itself retains substantial budget capacities, these would quickly evaporate if the Commonwealth sought to fund the backlog alone, without leveraging investments to drive substantial changes to state finances. The Commonwealth’s capacity is real, but it is by no means adequate. The private sector is the key. To deliver a sustained increase in the level of infrastructure investment, Australian governments must undertake substantial and wide-reaching reforms to fund infrastructure. This includes through increased revenues via targeted taxation, tolling and other user charges; reducing operating expenses to deliver substantial operating surpluses; experimentation and refinement of models to increase private investment; and the recycling of capital by privatising appropriate existing public assets to fund new infrastructure and shifting the investment burden for these assets to private owners. The debate about productivity must mature beyond simple restatements of the problem. We must move further towards a genuine process to examine, debate and resolve the reforms needed to bring forward major transport utility and social

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infrastructure projects that will, in large part, underpin national productivity. In the mid-1980s, Australia’s governments faced similar challenges of inflexibility in their balance sheets, and declining productivity. Policymakers responded with the progression of market-based reforms that underpinned our growth through two decades. The floating of the dollar; the deregulation of the financial sector; the lowering of tariff and trade barriers; National Competition Policies and related, but incomplete, deregulation of infrastructure markets; the progressive liberalisation of labour markets; the reform of taxation and prudential regulation; and the development of the Commonwealth superannuation guarantee all represented part of a continuum of reforms that benefited the wider economy and spurred both innovation and investment across the nation, including in infrastructure. The National Competition Policy (NCP), in particular, seeded bold reforms to create efficient infrastructure markets in areas including freight rail, aviation, telecommunications and the beginnings of a National Electricity Market (NEM). Taken together, these reforms, and others that followed through the 1990s, facilitated Australia’s most sustained period of economic expansion and productivity growth. For instance, the liberalisation of the banking sector in 1985 was a fundamental step forward. It allowed the entry of both foreign capital and global expertise, and saw the development of worldleading innovations, including the public private partnership model. While the impact of China’s, Japan’s and Korea’s appetites for our resources must be acknowledged, two decades of uninterrupted economic growth

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would not have been achieved if not for the newfound flexibility of our national economy. But that process of reform has stalled, and so has our productivity growth. Australia’s ability to compete will be increasingly hampered by inefficient infrastructure unless real solutions are found. Those solutions, I believe, will lie primarily in market-based responses. Markets in infrastructure sectors like energy and communications are reasonably well understood in the community. Prices vary according to demand, and efficient price signals are sent for both consumption and investment. But in other areas, like transport – and in some parts of the country, water and social services – the concept of reform and efficient markets is not well understood. Markets exist where supply meets demand, where efficient pricing meets the cost of capital and operation, and where there are sufficient numbers of buyers and sellers to provide for the discovery of an efficient price. The challenge for Australia is to begin an honest, rational and evidence-based debate about how market creations can assist in solving the funding challenge, particularly in infrastructure. I would suggest that the best place to start, if we are going to be serious about productivity, should be completing the National Electricity Market reforms: they have to be our first priority. Completing the NEM requires Queensland, New South Wales and Tasmania to provide their remaining electricity assets to the market, so that the NEM can finally operate, without distortions and inefficiencies, across the nation.

The challenge to Australia is to begin an honest, rational and evidence-based debate about how market creations can assist in solving the funding challenge, particularly in infrastructure The inefficient pricing of electricity causes substantial pain to Australian households, and it’s eroding the capacity of our businesses to remain competitive. In 1995, the National Competition Policy agreement saw Australia’s NEM states restructure government monopoly electricity businesses to promote efficient markets. That was well received not only here, but globally. The reforms were difficult, but they delivered real results. Only Victoria and South Australia have achieved competitive, wholly private electricity sectors. In the other states, some or all of their assets are either publicly owned or privately owned. In many cases, much of it is still government-owned – prices are regulated by governments, and the result is inefficient pricing and distortion. But I would argue that policymakers in the states where the reform is incomplete should be confident in the outcome of well-executed reform. Since privatising the state’s electricity assets between 1995 and 1997, power prices have been consistently lower in Victoria than in any other NEM state. In 2011, an Ernst & Young study found the price Volume 3 Number 2

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For most road users, access to the road network appears ‘free’ at the point of use because the current opaque charging structure does not provide motorists with visibility of the charges they pay paid per megawatt hour in Victoria increased by just seven per cent in real terms from 1996–2010. Over the same period, prices in New South Wales and Queensland increased by 45 per cent and 46 per cent respectively. The defence rests its case. But, of course, reform is not easy, as the divisive policy debates that have dogged energy reform in New South Wales demonstrate; but it’s important to get the right reforms in place, because the consumers benefit. Full electricity reform also represents the best opportunity to break the back of Australia’s broader infrastructure funding shortfall. In New South Wales, the sale of network assets would improve the state’s bottom line by between $40 billion and $50 billion. This would represent a generational boost to the state’s budget capacity, and equip New South Wales to make transformational investments in new economic and social infrastructure. The same could be said in other parts of the country. Turning to transport, change is not easy. Transport shortfalls across freight and passenger networks are imposing substantial productivity constraints on our nation. By some estimates, congestion on the road network nationally is stripping more than $12 billion from the economy this year alone. In Melbourne, road congestion will probably shred something like $4 billion from the state’s economy this year. For most road users, access to the road network appears ‘free’ at the point of use because the current opaque charging structure does not provide motorists with visibility of the charges they pay. And the current

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approach does not and cannot adequately reflect the time and location of road use. In the freight sector particularly, the pricing disparities between road and rail have distorted the market. Only five per cent of total road cost to freight users stems from road access charging, while for rail freight, track charges account for between 30 and 40 per cent of rail freight costs. The historic response to mounting demand has been to add more capacity to the transport network, and this will clearly remain an ongoing requirement. But there are limits to supply-only responses, and Australia’s major cities are facing a situation in which they can no longer only seek to build their way out of trouble. Policymakers must begin to face up to the challenges and opportunities that are posed by road network congestion, including through the exploration of rational market signals for access to our road networks.

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In the medium term, a mixture of new revenue and expense measures will be needed to provide a pool of funding to advance well-considered, well-conceived projects Now, I know the political complexity of pricing reforms in the national market is considerable, and remains a persuasive force towards retention of the status quo. The reform pathway for achieving change will require a number of steps, and the creation of a number of competitive submarkets, and it’s likely that large-area road pricing for freight vehicles will be the first step.

But experience shows that these kinds of reforms require champions. And now, with congestion hurting the abilities of businesses and the amenity of households, it’s time to begin a mature, dispassionate debate about the options posed by the development of a rational transport market. I do not see this kind of reform as either immediately possible or, in some cases, immediately acceptable to the motoring public. But we must

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continued on page 20

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COMPANY FOCUS

SMARTER TRAVEL UNLOCKING CITIES – THE CURE FOR URBAN CONGESTION With 60 per cent of the world’s population predicted to live in urban areas within 20 years, cities across the globe are grappling with increasing congestion and the impact this can have on their economic and social fabric.

Given the adverse effect that congestion has on productivity, inward investment, air quality, overall attractiveness and liveability of a city, the urgency to find smarter ways to move people around cities has never been more pertinent. In today’s economic and environmental climate, the role of more sustainable movement, such as walking, cycling, public transport and not travelling at all by encouraging smarter working, is a key factor for cities in retaining a competitive advantage. To achieve wider economic, environmental and social benefits, innovations in sustainable travel need to be actively encouraged and progressed by both the public and private sectors. We need to consider how to make better use of what we have and dissipate people across networks to make them work more efficiently.

Viable transport strategies are based on a number of core themes: •

• •

•

planning, which allows the delivery of the right solutions at an appropriate cost accessibility to services and facilities supporting urban development that generates a high level of trips to locations with the appropriate level of public transport accessibility and/ or capacity, thus reducing the need to travel by car improving the capacity and accessibility of sustainable modes of transport, such as trains, buses, walking and cycling. This includes the multimodal interchange between different forms of transport, as well as attractive fare pricing schemes facilitating the efficient distribution of freight while minimising its impacts on the transport network.

Transport behaviour change There is increasingly compelling evidence that car use has passed its peak and entered a long period of decline. It appears that the costs of owning and running a car, environmental impact, and the increased use of portable electronic devices making public transport journeys productive, mean that public transport is increasingly a mode of choice. Increasing the accessibility of existing and growth employment areas is a strategy that will be delivered by rail and active travel schemes. In the United Kingdom there has been a

18X

50 per cent increase in rail demand over the past 10-12 years. In an Australian context, it is anticipated that by 2031, public transport trips in Perth will increase from 345,000 today to close to one million. In addition, trends in growth sectors like financial and business services require different working environments to traditional sectors. Higher capacity transport links into concentrated business centres will determine the success of this employment growth, as this allows greater employment densities to be created, at which the productivity of organisations tends to be greater.

The future of public transport Developing infrastructure to keep a city moving by providing realistic and attractive sustainable mode choices is at the top of the agenda for government strategy and policymakers as well as users. There is an increased focus on city transport plans that are centred on moving people rather than moving private vehicles. The focus for public and private investment is implementing and/or expanding the accessibility and efficiency of public transport systems such as bus and rail. This has the additional benefit of improving air quality by reducing reliance on carbon inefficient travel, coupled with improving public health by ensuring greater uptake of active travel modes; satisfying public health priorities. Significant funding is being allocated to cycling in cities around the world, including New York, Sydney and London, where bicycles account for the British capital’s fastest growing mode share. In addition to a cycle hire scheme aimed at occasional cycle users and tourists, £168 million has been allocated for the design and implementation of 12 cycle superhighways. These routes will provide safer, faster, more direct and continuous routes strategically located to serve the busiest commuting corridors into central London.

Positive change Public transport strategies involve significant time and cost inputs in the planning stages to ensure they deliver for now and the future. Getting the transport mix right is of national importance as cities compete on a number of fronts and on a global scale for liveability, as a financial/business hub and as a preferred tourist destination. Making better use of exisiting transport networks in cities is pivotal. This needs

The author – Rose McArthur

a strong application of travel demand management (TDM) to ensure that what we have is being used to its optimum levels. Future cities will be a well-balanced mix of improved application of home working technologies and attitudes towards it, lowcarbon vehicle technology, peak spreading by implementing TDM strategies to alleviate overcrowding and spread demand, as well as the pivotal increase in the use of active travel modes; all of which create positive change socially, economically and financially.

About Sinclair Knight Merz Sinclair Knight Merz (SKM) works with clients globally to address their unique infrastructure requirements. SKM has extensive experience in providing city leaders with strategic transport advice and has a track record in successful travel demand management planning. Rose McArthur is SKM’s practice leader for sustainable travel, specialising in travel demand management and the field of development-related travel planning – specifically the use of planning regulations to deliver sustainable growth in transport terms. She works to support and mentor individuals wanting to get involved in the travel planning discipline, and lectures on this topic internationally.

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We are committed to helping our clients achieve. Developing sustainable transport planning solutions and cost-effective travel strategies for public and public sector clients.

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Sir Rod Eddington AO

continued from page 17

But formal institutions can only inform the public debate. Only Australia’s governments can drive and lead these kinds of changes

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begin the discussion about the options, the trade-offs and the opportunities to make Australia’s freight and passenger transport networks work better. There are some issues around water, as well. They are important, and again some of the same sorts of signals apply. The creation or completion of markets in electricity, water and transport are important reforms, and are fundamental to the productivity debate. But solving the infrastructure funding challenge will require us to go further still. Governments cannot expect to be able to fund a larger capital expenditure program, or even sustain the current levels, without substantial reforms to their own costs. I spoke earlier about the opportunities that exist for asset sales, and they are genuine opportunities to get projects moving in the short term. But the recycling of capital must be accompanied by a complex period of reform to lower the cost of public service delivery; this will be both complex and challenging. Governments must return to a position in which they are routinely delivering net operating surpluses, because those surpluses fund capital investment. The past decade has seen growth in the operating expenditures by Australia’s governments outstrip their revenue growth. Without reform, New South Wales will see social security and welfare costs escalate by 6.6 per cent per year, and health by 6.2 per cent per year. But revenue growth is projected to average just 4.9 per cent. In Victoria, Michael Vertigan’s review of state finances found that Victoria’s budget position has declined since the early 2000s, with average annual spending growth outstripping average revenue growth. Queensland’s and South Australia’s budget challenges are also well known. Health costs alone are projected to increase from 15 to 26 per cent of all Commonwealth spending by 2050, and the cost of public health will eclipse the total revenue of most states by the early 2040s. Without reform, governments won’t be able to fund all the promises they’ve made, and we’re not the first to have to think about that. In 2011, on public sector reform, the United Kingdom’s Prime Minister, David Cameron, said: ‘I want one of the great achievements of this government to be the complete modernisation of our

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public services. Like every other western industrial nation, we won’t sustainably live within our means with unreformed public services and out-of-date welfare systems.’ We know it’s difficult. But the central goal for government must be the delivery of the best possible services at the best value to taxpayers. The reforms I’ve outlined are not all immediately possible; they will be very difficult, but they are ultimately necessary. In the immediate term, new projects will have to be funded through the sale of existing assets, through public sector borrowing, through tolls and through the engagement of the private sector. In the medium term, a mixture of new revenue and expense measures will be needed to provide a pool of funding to advance well-considered, wellconceived projects. The development of rational markets in transport, utilities and public services must be the central focus. What Australia is missing in all of this is a uniting national context within which to undertake reforms. The experience of the NCP shows that a burning platform is required to drive consensus about change. I would argue that that burning platform exists, because governments, business and the community are in agreement about the need for better infrastructure outcomes. The roles of formal institutions, like Infrastructure Australia, the Productivity Commission and the National Water Commission, and the important contributions of bodies like Infrastructure Partnerships Australia, are all substantial in doing the heavy lifting to articulate the case for change. But formal institutions can only inform the public debate. Only Australia’s governments can drive and lead these kinds of changes. What is needed is a formal process to examine the rationale and requirement for change, and to provide a uniting national process to identify, assess, experiment and implement the transformational changes that will allow Australia to better its contemporary challenges. I’m sure that the Partnerships conference will deliver clear recommendations about the sorts of changes we need; and that its proceedings will help us to ignite the national reform debate.

SIR ROD EDDINGTON AO Rod Eddington is non-executive Chairman (Aust & NZ) of J.P. Morgan, Chairman of Infrastructure Australia and non-executive Chairman of Lion. Educated as an engineer at the UWA and then Oxford University as Western Australia’s 1974 Rhodes Scholar, Sir Rod’s career began in transport and aviation and he went on to become CEO of Cathay Pacific, Ansett Airlines and British Airways, before retiring in late 2005 and returning to Australia. In 2005, Sir Rod was awarded a Knighthood by the British Government for service to civil aviation, and in 2012, an Officer of the Order of Australia (AO) for service to business and commerce. In

addition

maintaining

non-executive

directorships with News Corporation, CLP (China Light & Power) Holdings and John Swire & Sons, Sir Rod also serves as Chairman of Victorian Major Events Company and President of the Australia Japan Business Cooperation Committee.

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Jim Miller Investor demand remains strong, and yet Australia’s infrastructure gap continues to grow. The problem is not a lack of capital; it’s a lack of projects, according to Macquarie Capital’s Jim Miller.

Everyone is in unanimous agreement about the need for nation building and the need for big developments, but how do we take that next step? There are three key points. Firstly, our infrastructure gap is growing, and I think it’s particularly pronounced because of the concerns in the resources sector, which really has been a significant contributor to Australia’s overall growth. Clearly, as that moves through its cycle, there is a challenge to the impetus that it can give our economic situation. The second point is that investor demand has never been stronger. Everyone’s got a sense of that, and hopefully we can make sure that message is clear. The third point is looking at how we can reframe the debate with government. The key point – it’s been mentioned before and I’ll emphasise it again – is that there is not a lack of capital; there’s a lack of projects. So how do we address that project issue? If we look at the delay in addressing the infrastructure backlog, the unfortunate situation is that the government sees spending on infrastructure as a cost. It’s not seen as an investment, even though it creates its own revenue stream for government and therefore should be looked at through those eyes. Looking at the backlog, in 2011 it was estimated at $750 billion, but now, according to Deloitte, it is $920 billion. Irrespective of how it’s calculated, it is growing, and we’re not getting on top of this issue as an industry, and as a country. The productivity issue gets talked about a lot, but what does it mean? What is the cost of that lost productivity? McKinsey have done some work, saying that it will cost the government $90 billion per annum in revenue by 2017. And each year, the shortfall between our current level of productivity and our long-term historical average keeps compounding. The gap that we are 22

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talking about over the next five years is in the order of 10 to 15 per cent; in 10 years, that will be 36 per cent, and in 20 years it will be 84 per cent. This is a real issue. That compounding effect is very significant and has a real cost. Doing nothing has a real cost. The McKinsey analysis was great in terms of putting a number on that cost, so that when you’re framing the debate you can actually say there is a genuine cost to not investing in infrastructure. Looking at listed infrastructure, the market has been very strong, with outperformance over 20 per cent in the last 12 months. Interestingly, a number of assets in the regulated asset base sector – a wellaccepted delivery mechanism for infrastructure – are listed here in Australia, and are now trading comparable to the unlisted infrastructure sector. That’s really the first time we’ve had that paradigm since the financial crisis, and it’s a very positive development in terms of showing the listed infrastructure market’s ability to participate in these projects. It underscores the point that we don’t have a shortage of capital. Obviously, the unlisted market has been active and continues to grow. These are very clear and unambiguous facts. So what’s the problem? The problem is on the supply side. The fundamental challenge we have at the political level is this fiscal issue. Governments need to get debt down, and they need to generate surpluses. When government spends on infrastructure, unfortunately the way they generally account for it is as a cost to their profit and loss on their budget surplus position. In a private business, that would go onto your balance sheet as an investment, and then the income or costs would go through the profit and loss. But we need to be clear. Unfortunately for governments, that cost goes straight through to the

operating surplus, and therefore hits the budget. We genuinely need the debate about infrastructure being an investment, not a cost. It’s a hard debate, but unfortunately, unless we can start articulating that debate better as an industry, we’re going to continue to see a lack of appropriate funding mechanisms for these projects. The Federal Government is trying to get back to surplus in the short term, but we’ve got a longterm issue, and it’s a demographic issue; we’re not able to change that. The deficit position is going to significantly deteriorate as the ageing population moves through. So this debate, again, is a really important debate because this issue is certainly going to be around in our lifetimes and beyond.

The Federal Government is trying to get back to surplus in the short term, but we’ve got a long-term issue, and it’s a demographic issue; we’re not able to change that Looking at some of the solutions for governments, obviously the good news is that patronage risk models don’t go on the government balance sheet, at least in the short term. But there’s the theory that those models are dead. While we have seen the Volume 3 Number 2

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financial failure of some projects, they delivered the infrastructure, even though the private sector lost out. Patronage forecasting is the nub of the issue, and once again we welcome the initiatives of the various governments in terms of trying to bring that debate out more. The numbers have been poor in the past, and, looking forward, more accurate forecasting is possible. We say that because it’s the learned experience, and we say that because empirically, if you have a look at the numbers for a number of the roads, you can see that the forecasting error in the short term has been significant, but that the gap has closed materially over time, particularly over the longer term. The longer-term forecasting has been okay, but it’s not going to be perfect, and not all the projects will respond the same way. But hopefully these numbers give the confidence that the long-term forecasts are getting more accurate. The key point is that deals are still getting done in that space. There are more than $15 billion worth of transactions happening. Small deals are happening in Australia, like the hospital car park elements, but overseas, larger deals are similarly getting done across a range of sectors. A quote from former Treasury Secretary, Dr Ken Henry, in my view, is a useful illustration of where we’re at as an industry. Henry said: ‘Australia does not have the infrastructure – that’s obvious – for another 14 million people... We don’t even have the mechanisms for thinking about what sorts of infrastructure we’re going to need.’ While it’s clear that we don’t have sufficient infrastructure now or going forward, it was interesting to me that Ken went further and stated that we don’t have the mechanisms for thinking about those 24

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solutions going forward. The reality is that we do have those mechanisms, and there has been a lot of work done by governments on that in terms of Infrastructure Australia, Infrastructure NSW, Projects Queensland and other initiatives in other states. But clearly we need to do a better job of getting out there and selling that message and engaging with governments. Looking at the innovation in the United Kingdom, the momentum and the political will that’s been built up in Canada, and the deals we’re seeing in other markets, there is a real experience that these things can happen, and I’m hopeful that we can contribute to unlocking that backlog going forward.

JIM MILLER

Executive Director Head of Infrastructure, Utilities and Renewables, Australia and New Zealand, Macquarie Capital Limited Jim joined Macquarie Group Limited in 1994, and has over 18 years’ experience across a range of sectors in Australia, New Zealand, Asia, North America and Europe. In the infrastructure and PPP sector, Jim has led over $100 billion worth of transactions, including transport infrastructure, energy and utilities, and social infrastructure assets.

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making the difference

Project Management

Control Certainty Confidence To successfully deliver large scale complex infrastructure projects you need an independent, proactive project manager with in depth expertise from business case to asset management. A Project Manager that gives you control, certainty and confidence. That’s what you get from Turner & Townsend’s locally based, globally supported, multi-awarding-winning project management team.

For more information on our project management services please contact: Darren Munton t: 02 8245 0000 e: darren.munton@turntown.com

Martin Londra t: 02 8245 0000 e: martin.londra@turntown.com

www.turnerandtownsend.com.au

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WELCOME TO THE NEW WORLD OF BILFINGER The 25th of September 2012 marked a defining point in history for Bilfinger Project Investments. It represented the end of a transformation for Bilfinger, from its traditional construction company roots, to a broader based international engineering and services group. A clear sign of this change is the new logo, which ties together all of the companies in the Bilfinger group under a uniform brand identity. The new logo, with the dual-coloured continuous interlaced ribbon, symbolises Bilfinger’s multi-faceted, interconnected competencies in the lifecycle of a project, as well as self image as a networked company. In addition, the range of Bilfinger’s services will be clearly recognisable through the bond created between operating units and the new brand. Since subscribing to an investment in Docklands stadium in 1997, Bilfinger has invested over $300M in equity in Australian PPPs. Bilfinger’s Australian construction legacy includes many significant infrastructure assets, including the Graham Farmer Freeway in Perth, the 3rd Runway at Kingsford Smith Airport in Sydney, the CLEM7 tunnel in Brisbane and the CityLink project (including the Bolte Bridge) in Melbourne amongst others. Following divestment of our construction businesses in 2010, Bilfinger’s activities in Australia continue as Bilfinger Project Investments Australia – a specialist PPP sponsor, investor and asset manager, who currently provide asset management services for Australian projects with a value of over $2 billion. Bilfinger Project Investments as a PPP specialist has sponsored, delivered and provided asset management services for over 40 PPP projects worldwide, with a combined value in excess of $15 billion. Bilfinger has operations in four regions across the globe – the UK, Europe, North America and Australia, with Australia being a key component of Bilfinger’s strategy to invest diversely, both geographically, and across sectors. As such, Bilfinger Project Investments will continue in its role as a long-term sponsor, investor and asset manager in Australian PPPs.

WE’RE TRANSFORMING THE FUTURE. WE MAKE IT WORK.

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PROJECT INVESTMENTS

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Scott Charlton Network pricing will inevitably have a place in the transport network to manage demand and upgrade transport infrastructure, says Transurban Chief Executive Scott Charlton. Infrastructure has been a constant in my career, and I am very keen in my role to advance our industry, and for Transurban to play a big part in that policy debate. I’ll get straight to the point that I’d like to make. In the not-too-distant future, we will see variations of network pricing in Australia in order to better utilise our transport infrastructure. Whether it’s corridor charges, congestion charges, demand pricing or distance-based tolling, network pricing will have to be introduced to fund infrastructure, manage demand and promote public transport alternatives.

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It’s very important to talk about all three of those, because people will hear what they want to hear. The contractors will hear, ‘great, we’re going to fund infrastructure with this’; the press will hear: ‘managed demand – you’re talking about congestion tolling,’ so that is going to be difficult publicly. The government will hear ‘you want to promote public transport,’ and that’s positive. I think it’s important that all three of these things are managed together. Looking at our major motorways, it’s obvious that we need new capacity and we need to find better ways to utilise our existing assets.

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We have to use our transport networks more efficiently, and find ways to manage demand. That could mean anything from cheaper night tolls for trucks, to high-tech freeway management systems that are now being installed, tolled corridors shared with public transport, and integrated transport network pricing to encourage the use of public transportation. These discussions are not easy, and, in particular, road pricing seems most sensitive for governments, users and communities. But I believe we are approaching a tipping point on this issue. That being said, we have to work in today’s reality – with the flexibility to deal with tomorrow’s possibilities. I will not go into great detail about the infrastructure challenge facing Australia; most of us are all too familiar with that, and we get bombarded every day about the growing backlog and how we continue to fall behind. But, using Sydney as an illustration, we know that the problem is urgent. Recent data has shown that there will be another one million people in the western suburbs alone over the next 20 years. Freight volumes at Port Botany are expected to increase more than threefold by 2031. Passenger volumes at Sydney Airport are predicted to more than double by 2029, and congestion on motorways such as the M5 already spreads far beyond the traditional peak periods.

So it’s little wonder that the project to widen the M5 Motorway was top of the agenda during the most recent New South Wales election. Peaks are growing and spreading – they are eating up the capacity of our roads. The M5 has grown dramatically from 1996 to today, and there are a couple of interesting points to note. Traffic at all times of the day has increased, and it is now as busy in the ‘counter-peak’ period as it is in the traditional peak period.

Using Sydney as an illustration, we know that the problem is urgent. Recent data has shown that there will be another one million people in the western suburbs alone over the next 20 years

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That’s a reflection of the changing nature of our population and employment centres – and how much the orbital network in Sydney is being used. We are all also acutely aware of the funding challenges to finance infrastructure. To put it simply, governments have a handful of choices: raise taxes, take on debt, sell assets or apply user charges. None are particularly palatable to taxpayers – but neither is trying to navigate a network at breaking point. Not so long ago, a blunt conversation about network pricing would have been difficult and fanciful; but I believe the discussion has reached a stage of maturity where public attitude appears to be shifting towards an acceptance that tough decisions must be made, and the planning processes now need to turn into delivery processes. I believe the public is willing to accept more and diverse user charges if they can see the benefit to their lives. There continues to be a lot of talk – particularly in the Sydney context – about network pricing as a potential option for funding infrastructure and managing demand. There is already a form of network pricing in fuel taxes, which account for about 38 cents per litre of fuel costs. This tax, however, is not transparent to the public, nor is it clear how it transfers into a delivered road service or makes people’s lives better. Transurban, in general, supports the concept of network pricing to simplify user charges and make them more consistent and transparent. We also believe that network pricing can deliver more efficient utilisation of transport infrastructure across the spectrum. But there are still a number of fundamental questions that need to be answered before any such scheme could gain traction. And, of course, there is also the political reality of what governments are prepared to progress. In recent months, the New South Wales Government has ruled out congestion charges, but has left road-pricing mechanisms, such as distancebased tolling, on the table. In Victoria, the government has stated that it does not favour a congestion charge, but wants improved network management across all roads. In this context, it’s interesting to consider the parallels between road pricing discussions and 30

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recent ‘peak-pricing’ initiatives implemented in the New South Wales electricity network. Being an electrical engineer, I understand these initiatives can be controversial; but from an engineering and efficiency perspective, they are essential. The aim is obviously to simply regulate demand towards the times in the network where there is existing capacity, as illustrated in the peak, shoulder and off-peak pricing for residential electricity use in New South Wales. To build out a system – whether it’s electrical or road transport – to fulfil the unrestricted demands of the peak periods is, by definition, uneconomical. It’s much more effective to make use of the underutilised capacity of the existing infrastructure, and to shape the demand across all the alternatives. If you look at just one of our Sydney motorways – the Eastern Distributor – there are peaks in the AM and PM periods, but the motorway has excess capacity during other parts of the day. The question is – could peak pricing change this profile? Or could discounts during the off-peak periods produce a better transport outcome for Sydney? Consumers accept the concept of peak or demand pricing in the context of electricity and other utilities, but shy away when the same concepts are discussed for transport infrastructure. As IPA has said in the past – and I think it’s a great line – roads are the ‘last great unpriced utility’. Is this because motorists believe they must travel at certain times and do not see alternatives? One key fact in the road pricing debate is that a significant number of motorists do have an option regarding when they travel. Some studies suggest as much as 40 per cent of travel in the afternoon peak is discretionary. By applying pricing to regulate demand, our cities are avoiding – or at least deferring – the need for significant capital outlay. This pricing can also be a source of funds for future transport projects. We are asking people to consider their travel more deliberately, and question the time of day they need to travel, or by what mode they need to travel. Pricing restrictions could be a bitter pill to swallow for a country that prides itself on high standards of living. Avoiding difficult initiatives will result in uneconomical decisions on infrastructure delivery and the further build-out of existing roadways that are only fully utilised for a small number of hours a day.

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A number of road pricing options have been tried and tested, with varied results, in cities such as London, Singapore, Stockholm and in Sydney, with peak-hour tolling on the harbour crossings, which was introduced by the previous government. Before we get to implementation, though, we have to ask: What would network pricing be aiming to achieve? Is it designed to generate funding for future transport infrastructure? Or is it about managing demand? Or, potentially worse, could it be used for short-term revenue raising? Whatever form network pricing takes, public transport must be part of the equation. Just as some drivers may choose to avoid peak periods, others might avoid using the car altogether. This would be a great result for our cities, but it is only possible with real choice provided by extensive public transport. On this front, cities such as London and Singapore are well ahead of our major Australian capital cities. We also need to guard against a system that becomes a form of regressive tax. That is, it could transfer the greatest burden to those who live in the outer suburbs or fringes of our cities; those who may be the least able to afford it. Any network pricing scheme has to look at the whole transport network to ensure a functioning system and fairness of options for the travelling public.

Finally, any network pricing scheme would have to consider the needs of many stakeholders across the total transport networks. If we look at the Sydney scenario again, there are a number of concessions in place with the private sector that make this problematic. These are fundamental – and fairly complex – issues that would need to be resolved before we can go down a fully integrated network pricing path. So is there a perfect system? No, obviously not. However, we need to be pragmatic and get on with what we can do now in order to provide meaningful progress against transport congestion. Besides, what we plan and know today will inevitably evolve into some other form in the future, with the changing of technology and demographics. Right now, however, governments can take measures to provide flexibility in new concessions to account for forecast changes in the pricing and demand management landscape. This would allow for options such as peak and offpeak pricing to be introduced over time to maximise infrastructure use. These provisions – like most others – can be priced and managed by the private sector. Getting moving now on infrastructure also means looking at innovative solutions to manage demand. We can make more of our existing road space – and this needs to be part of the discussion.

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Smart freeway management systems, such as the one in use on CityLink, provide one option. They represent network management at work – and can be utilised more broadly. These are incremental – not radical – solutions. But they all contribute to a better-functioning system. I can’t talk about innovation without discussing our Express Lanes project in the United States. It’s a great example of a pragmatic approach – and one that could work well here in the Australian context. The lanes are on a 22-kilometre section of the Capital Beltway – the ring road around Washington DC and one of the most congested corridors in the United States. We have built two dynamically tolled lanes in each direction, next to the eight existing freeway lanes, so motorists will have the choice of travelling free or paying for a more reliable journey. The price will fluctuate in real time, depending on demand, to maintain a minimum speed or minimum level of service. The express lanes also support public transportation and carpooling options, with buses and cars with three or more passengers travelling for free. We are guaranteeing a speed of at least 45 miles per hour on these lanes. Think about that for a moment: this is one of the busiest roads in the United States, and we are guaranteeing that you can travel at least 70 kilometres per hour any time of the day or night. Have you ever missed a flight or turned up late to your child’s event? What price would you put on a more reliable trip?

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The political will for this project comes from the fact that we are building new capacity and upgrading ageing structures. Before Transurban got to the Capital Beltway, there were four congested lanes in each direction that you could travel on for free, and 40-year-old structures in need of urgent repair. When we finish, there will still be four lanes for free. The difference is that now people have a choice to avoid the congestion. It’s essentially a pay service for the time-poor commuter that also offers the same service to buses and the carpooling public for free. And, of course, it is about managing demand around peak periods. It’s also worth noting that this project would not have got off the ground without US Federal Government funding assistance in the form of a special loan for transport infrastructure under the Transportation Infrastructure Finance and Innovation Act (TIFIA). The US Government has some innovative longterm and patient capital assistance funding to leverage infrastructure, unlike the Australian market. The government capital in our projects has had a leverage effect of 5X. While funding is a topic for another day, we strongly believe it is worth pursuing this type of government support here in Australia. So could Express Lanes work here? Why not?

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Scott Charlton

Let me just make it clear: we haven’t identified a specific application yet. The current concessions don’t allow it, nor are we negotiating for this outcome, just to make it clear. But when you read survey results like those released by the NRMA – that one in four commuters spends up to 1.5 hours a day travelling to and from work – it becomes a pretty compelling proposition. To conclude, I want to reiterate a few points. In the longer term, or maybe even in the medium term, network pricing will have a place in the transport network to manage demand, promote public transport and fund the upgrading of transport infrastructure. Governments have been making great progress in setting out their visions and priority projects with long-term transport plans. But now is the time to get delivering. We know the cost of sitting on our hands – and it is too high. But we are going to have to be pragmatic in our approach. We cannot wait for the perfect solution. We have to take on some immediate opportunities and be able to layer on that work over time. And that means using every possible lever – from user charges, to diverse funding sources, to innovative ideas, all the while providing the options and possibility to move to more efficient network pricing models down the line, as demand – and hopefully the community understanding – continues to grow. Transurban very much looks forward to being involved in this valuable work and being part of the debate.

SCOTT CHARLTON

Chief Executive Officer, Transurban Scott Charlton joined Transurban Group as Chief Executive Officer in July 2012. Scott has a wealth of experience in developing, funding,

constructing,

and

operating

infrastructure assets, and working with some of the sector’s leading corporations, including Lend Lease, where he was Chief Operating Officer for global operations (2010 to 2012). Prior to this, he was Chief Financial Officer at Leighton Holdings, and a Managing Director of Deutsche Bank. Scott is an engineer by training.

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COMPANY FOCUS

A HANDS-ON APPROACH TO INNOVATIVE INFRASTRUCTURE As one of Australia’s premier road builders, with a number of major projects currently underway across the country, Abigroup’s success stems from its early and ongoing high performance in the transport sector. In the past 15 years, the company has delivered some 1500 lane-kilometres of motorway around Australia, including some of the most complex sections of Australia’s transport network and through some of the most challenging terrain and conditions. Responsible for the delivery of $6.5 billion worth of the national road infrastructure in recent years, Abigroup’s success is derived from more than just delivering on a brief; also from continually innovating and providing its clients with a solution, not just a service. Some of the most important infrastructure and construction projects in the country have been delivered by Abigroup and the company is poised to continue this success into the future. Despite the company’s illustrious career in the roads sector, Abigroup’s National Operations Director, John Kirkwood, is quick to point out that the company is a leader in more than just roads.

34X

‘We have one of the country’s largest construction portfolios in the health sector, where we are currently delivering the Queensland Children’s Hospital, Cairns Hospital redevelopment, Westmead Millennium Institute’s new Medical Research Facility and the Campbelltown Hospital early works. ‘In addition we continue to unlock value for our clients in the resources sector through the delivery of critical pit to port infrastructure.’ John goes on to attribute the company’s success to a couple of core principles. ‘Abigroup has a hands-on approach to contracting that is unmatched in Australia. ‘We own and operate one of the largest construction plant and equipment fleets in the southern hemisphere, operate our own concrete paving yards and have our own in-house expertise and blue collar workforce – providing the company with unbeatable control over a project’s critical path, no matter the sector.’

Some of Abigroup’s high-profile road infrastructure projects that have been completed or are under construction include: D2G Ipswich Motorway upgrade, Banora Point Pacific Highway upgrade, Karuah to Bulahdelah Pacific Highway upgrade, Macleay River and Floodplain Bridge, Hunter Expressway - Kurri Kurri to Branxton, Albury Wodonga Hume Freeway project, Woomargama Bypass, Peninsula Link and Southern Expressway projects. Abigroup’s hands-on approach to delivering infrastructure and rewarding and encouraging innovation across its workforce has supported the company’s rise as a leading provider of quality projects across diverse disciplines. It has also led to the growth of expert teams dedicated not only to traditional core areas of engineering and building, but also to key specialisations including national rail, water, energy and mining services businesses.

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R OA 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 · E N E R G Y · MA R I N E WO R K S

Strong. Innovative. Diverse. It’s Abigroup. 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

www.abigroup.com.au

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Eminent Panel

Chair: The Hon Mark Birrell, Chairman, Infrastructure Partnerships Australia The Hon Nick Greiner AC, Chairman, Infrastructure NSW Nicholas Moore, Chief Executive and Managing Director, Macquarie Group Mark Romoff, President and Chief Executive Officer, The Canadian Council for Public Private Partnerships James Stewart, Chairman, Global Infrastructure, KPMG

With Australia struggling to fund its infrastructure backlog, the Eminent Panel examines some of the priority reforms for governments, and considers the international experience in Canada and the United Kingdom. Mark Birrell: Looking at the issue of productivity and the economic circumstances facing Australia, what are your observations about the challenges and opportunities for dealing with the infrastructure backlog? Nick Greiner: The overriding challenge is to stop talking to ourselves. There is broad agreement – from government, the private sector, constructors, consultants and financiers – that productivity ought to be a major driver of criteria for an infrastructure program. It’s almost at a tipping point. We need to be fair dinkum and say that most of the things that are being suggested are making pretty slow progress – things like deregulation of pricing, the sale of assets in certain states, and other sorts of pricing and demand management reforms.

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The challenge is to take the economic or business view and explain it to the public, because you’ve got to bridge the gap. Looking at New South Wales and Queensland, why are they so recalcitrant regarding various reforms? It’s essentially because of the judgement of political leaders, on both sides of the fence, about the political acceptability of the reform program. You’ve actually got to win the politics; you can’t eliminate the politics. I do think that if we look around the world, we have a remarkable level of agreement about the fact that infrastructure is holistic – it’s not just building stuff. It starts at demand management, it starts at managing your existing assets better, it starts at operating improvements – all those things are actually the first things.

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The Government of Canada and our provinces are all focusing very much on what you would expect: job creation, economic prosperity and global competitiveness At the end of it, you get better ‘built’ infrastructure. But you really start at the operational, pricing, regulatory end. I think we have agreement, but we’ve just got to get governments and their constituents to the same point in the debate. Nicholas Moore: I remember flying into Melbourne 21 years ago, and it was a different city. Unemployment was 10 or 11 per cent and state debt was $31 billion. There was a real hunger and an appetite for things to change. We don’t have that hunger today, because we have unemployment at five per cent and things are going well. People may be nervous, but we don’t have that same hunger for reform that we had then. From a political standpoint, there is a unanimous view that more reform would be good, and that more infrastructure would be good, but we all know there is short-term pain for the longer-term benefits. The short-term pain of reform is what weighs against the long-term implementation of the sorts of programs and plans that we talk about. The political cycle is inescapable. We have to be prepared for the political cycle and the economic cycle to be changing. It’s not a question of waiting until the world changes. A lot of work can be done with the states. It’s actually taking place in Victoria and New South Wales, and other places. Those states are looking at longer-term plans, and are starting to get ready in case the opportunity or need arises. We can’t overlook the fact that we’ve been involved in a very substantial commodities-driven resources boom over the last few years. And, practically, the economy can only fit in so much investment. So to have had an infrastructure boom while the resources boom was taking place obviously wouldn’t have fit into the economy. There has to be a

certain queuing that takes place, and, to an extent, the political cycle allows that queuing to work through. Mark Birrell: Nicholas, you’ve been involved in breakthrough projects like CityLink and WestLink M7. Do you have hope that you can continue doing those sorts of projects in tough times? Nicholas Moore: I think historically you’ll find that those projects happen more in the tough times than in the good times. They naturally happen when the commodity cycle slows down. I’m not saying it will, but if it does come in, we would naturally expect those projects to step up. That’s why it’s important for governments to look at those projects, to prioritise those projects and to do the necessary work with the local communities and the local networks to see how they work, so that they are actually ready to move with those projects. Mark Birrell: Mark, looking at the Canadian environment, how many of the infrastructure issues you are facing are common with Australia, and how many are distinct? Mark Romoff: We’ve been fortunate that we weathered the global economic crisis quite well in Canada, and our economic fundamentals are strong. We have a government that is very committed to deficit reduction. But our situation is a bit different in that we find ourselves snuggled up to the United States, and are historically quite dependent on that market for our own continuing growth. The Government of Canada and our provinces are all focusing very much on what you would expect: job creation, economic prosperity and global competitiveness. The focus is shifting to how we can become more innovative and how we can become more of a global player. The governments across Canada have made significant investments in innovation agendas, focused around the ability to

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The real challenge for the British Government at the moment is to recognise that the world has changed and that traditional methods of delivering infrastructure are no longer necessarily applicable develop and commercialise new technologies and get them out into the marketplace. Infrastructure development is an equally high priority, and the Government of Canada is now developing a National Infrastructure Plan. The plan will address the requirements at the federal level as well as at the provincial and local levels, and the government has initiated a comprehensive consultative process, engaging public and private sector leaders right across the country. It’s the first time this comprehensive approach has been taken, and it will pay dividends because it’s building a national, coordinated infrastructure development strategy. Also, the government is pursuing international trade arrangements with selected countries to strengthen economic and commercial ties with key partners, which in turn will enable Canadian companies to become more active and successful globally. Concluding a fair trade agreement with the European Union is one of the highest priorities. Finally, there’s a focus on talent development. Canada, like many countries, is not able to sustain its population levels through the normal process, so we are very actively looking to attract talent from around the world – the government has revised its immigration policies and programs to make it easier to attract talent. MB: Canada has a similar federation to ours – are you seeing a cooperative federalism? MR: There’s a healthy dynamic between our Federal Government and the provinces and territories that make up the country. Each of these jurisdictions is confronting exactly the same set of issues, and this 38

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has fostered greater collaborative efforts to address them and has prompted a constructive dialogue with the Federal Government. That mechanism works well. The challenge is to ensure that you have alignment in processes from province to province, and that’s an effort that’s taking place now. If you think about the approach taken to PPPs, Ontario and British Columbia are the most active provinces in that domain, and while their respective procurement models are somewhat different, they are both recognised as first-rate. More generally, the various provincial procurement agencies are committed to sharing best practices and lessons learned, to improving the efficiency of processes, and to continually adapting the Canadian model to keep it at the leading edge. This is a defining feature of the Canadian approach to PPPs. MB: James, we’ve got a lot of Australian companies going to Canada to invest in infrastructure projects and get involved in PPPs. Could we look right now to Britain and learn from experience that was similarly productive, or are we looking at a Britain that’s going through a real change in its policy appraisals? James Stewart: The United Kingdom is in a double-dip recession, so the British Government is desperate to create growth. It’s worth noting that it is a federal system, rather than a state and federal system. It has tried many things over the last 18 months. The interesting thing is that it keeps returning – sometimes reluctantly in my view – to infrastructure as the fuel for economic growth. The real challenge for the British Government at the moment is to recognise that the world has changed, and that traditional methods of delivering infrastructure are no longer necessarily applicable. One of the advantages the United Kingdom has is that something like 65 per cent of infrastructure is delivered through the private sector as the result of the privatisation program, and is paid for by consumer charges. The advantage is that all of that 65 per cent of infrastructure is off the government’s balance sheet, because it’s delivered by regulated industry and paid for by the consumer. The government is recognising that the existing regulatory structures are not necessarily fit for purpose

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to continue to deliver that level of infrastructure in the new world that we live in. So we are seeing major reforms in the electricity market and the water market to cope with the changes in the market. The other thing we are seeing in the United Kingdom at the moment is a desire to reduce operating expenses. We are seeing a major program of reform of public services, which is designed to bring down the cost of these services. I would say there’s a bit of schizophrenia about that reform: there is a recognition that the private sector has to get involved more in public services, but there is a political nervousness about the word ‘privatisation’, and there’s even a political nervousness about the word ‘outsourcing’. So people are looking for a new model that isn’t necessarily commercially that different, but that will certainly have a different political message behind it. Another important issue is the difference between funding (the means to pay) and finance. Finding the means to pay for infrastructure is far more important than finding the means to finance it. And certainly in the United Kingdom, we are seeing some really interesting ideas being put forward as to how we might pay for infrastructure in the future. I think we will definitely see more consumer charging, and we are seeing the first signs of people looking at hypothecating tax. Someone said this morning that you could pay for infrastructure by increasing tax; you could also pay for it by hypothecating existing tax streams and using the long-term cash flows to pay for infrastructure. We are also seeing much more use made of local taxation, in terms of using business rate taxes within a community to fund new infrastructure. A trend in the United Kingdom, and indeed in Australia and around the world, is that cities are increasingly becoming driving forces of a country’s economy, and therefore infrastructure investment in cities is becoming more important. Because there is less money coming from federal governments, cities are becoming more self-dependent in the way they invest in their own infrastructure. MB: A major initiative of the British Government has been trimming its public sector costs so it can free up capital. How is that tracking? JS: I think it’s going reasonably well. Quick wins have been achieved, and they are now getting

to the hard stuff. Personally, I think the real benefits will only come when they genuinely do reform the delivery of public services. They are struggling with this at the moment. My personal view is that they’ve probably achieved about 20 per cent of what they want to achieve, and they’ve got to genuinely reform public services to deliver the rest. MB: Nick, you’ve spoken before about how we should be talking more about operational efficiency. Can you expand on that as the real challenge? NG: Governments operate in silos more than most other institutions. There is a natural tendency to go to the project end first. There’s been debate in New South Wales about whether there is a connection between the operating reform of Railcorp and the capital program; and there are different views. I think the answer is obvious: the answer is yes – not only in a funding sense, but also because the productivity of the existing assets is clearly where you should start. If you can get more trains across the bridge in an hour, well that’s the step you should take before you need another bridge – it’s obvious. I think it’s politically difficult: it’s where jobs are; it’s where public sector jobs are. In Australia, we Volume 3 Number 2

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don’t yet have even the theoretical debate that takes place in the United Kingdom about a public services marketplace. One of my old advisors, Gary Sturgess, was involved with the Serco Institute, and others in the United Kingdom, in terms of developing a market for public sector services. If you can’t get real change in how we deliver the service, then simply building more stuff and delivering it and using it the same way is not really going to be a very good outcome. MB: Looking at the availability of capital for projects, Nicholas, what are your observations, in terms of both debt and equity? NM: I think the equity story is probably consistent with where it’s been over the last few years. The appetite is there, and it continues to grow. If you’re an investor looking at what you can invest in around the world, you may start with the bond market, where there are negative real returns in most markets. Cash is not very attractive. If you look at equities, people are relatively nervous, and you can see the lack of activity in the equity market, reflecting the nervousness of investors out there. Infrastructure has always been sort of slotted in as somewhere that you get a GDP-plus style of return, but without the necessary volatility you’ll see from the equity market, and certainly higher than the bond markets are paying today. That attractiveness of equity in infrastructure continues, and it’s certainly our experience when we deal with investors globally. Very few infrastructure investors seem to be saying, ‘We’ve got enough, come back later.’ There still seems to be an unmet demand. The debt story is more complex. Certainly since the financial crisis, and since the new Basel III regulations, the ability of project finance banks to lend long-term has come in substantially. A lot of project finance banks are now out of the market. As a consequence, the term of the project finance debt – if it is available – has come in, and obviously these are very long-dated projects. What’s been encouraging is the bond market for these projects. As I mentioned before, bond yields are very low. The actual bond market in the United States has probably never been more active, so the attractiveness of these projects for bond financing continues. And institutions are looking not just to equity investment, but also at debt investment, either directly 40

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or through debt funds out there. They have the longterm liability that’s certainly indexed to inflation, and sometimes to more than inflation, because it’s linked to actual underlying real earnings in the economy, which are much more GDP-related. Accordingly, we find pension funds, superannuation funds – people with long-term liabilities – saying that the infrastructure equity and the infrastructure debt are actually interesting. Now, that hasn’t made up for what’s happened with the banking market, which has largely pulled out of the space, but it is an increasing area of interest and activity. Broadly speaking, there is as much money out there in absolute terms today as there has ever been. Good projects continue to get not just mild interest out there, but enthusiastic interest, in terms of people wanting to participate in the sector overall. MB: And that’s something the leaders of government – especially state governments – want to hear as they progress to these large projects in particular. NM: They should be very confident, provided it’s a sensible project – and the market will rapidly tell them that. We talk about debt and equity as two different things, but if you’ve got a long-dated liability in terms of people’s pension entitlements, which box you put it in is legal semantics at the end of the day. What you want to see is an income stream that will reflect the underlying economy, going forward. So debt and equity, theoretically, should have the same level of interest for these institutions, and we’re increasingly hearing that. MB: One of the new flows of funds into Australia has been Canadian pension funds. Mark, I’m interested in your observations of the ongoing interest and the degree of specialisation they are bringing to bear to their infrastructure investments. MR: There is no shortage of capital. It’s more about good projects. If there’s a good project, there’s lots of capital around. We’re fortunate, as we have a couple of very big projects coming on in Canada. Canadian pension plans continue to scour the world for opportunity, much to the chagrin of some in Canada. It’s more a function, quite frankly, of the size of projects in Canada. When the projects get big enough, there’ll be interest on their part; when they can generate the kinds of returns that they’re able to generate overseas, they’ll invest more at home.

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I think you’ve seen a fairly healthy interest from our pension plans here in Australia, and particularly in the United Kingdom. It’s both an interest on the part of our plans, and a huge interest on the part of the British Government to attract them into the market. There’s more opportunity there, and I would encourage you to work hard to market Australia because there are competitors out there. As you know, it’s not just our pension plans, but also our companies that have developed a bit of a base of expertise in the PPP space that are now keen to take that capability international. The industry in Canada is looking very carefully at what’s happening in Australia, and is very interested in pursuing more opportunities. I think you’ll see it from both the financial side – the pension plan interest – and also from the industry’s interest in partnering with local firms in Australia, and making a contribution to infrastructure development here. JS: From a European developed markets point of view, I wouldn’t be nearly so bullish. There is a fundamental problem. Compare Canada and the United Kingdom, for example. In Canada, infrastructure projects tend to be rated single A. In the United Kingdom they are rated double B-plus, which is below the pension fund risk-rating threshold. So, in the United Kingdom, pension funds will not invest in projects during the construction phase at the moment. The British Government has made quite a dramatic move. The government has offered – if there isn’t private finance available – to guarantee the debt on any infrastructure project. And when I say any

infrastructure project, this ranges from governmentfunded projects, like roads, right through to a port development, which a private sector port operator would be developing completely on its own. The reason for this is that the government is worried that the availability of debt finance is constraining the private sector from actually developing projects. And so they are saying, ‘We will stand behind these projects should you not get private finance.’ One of the big advantages is that if the debt is guaranteed by the British Government with its triple-A rating, then pension funds will be able to take the debt right from the outset. The United Kingdom is not alone in pursuing this kind of intervention. If you take Brazil as an example, the state bank, funded by tax revenues, finances pretty much 100 per cent of all of Brazil’s infrastructure projects at the moment. MB: Give us some sense of your optimism about Britain. Have you got a more upbeat assessment? JS: I’m very upbeat. There’s been a lot of press about the Private Finance Initiative (PFI), but to me it’s a lot of political hot air. It has been politically advantageous for various politicians, particularly some of the backbenchers, to have a go at PFI – it’s career-enhancing for them. The reality is, if you look at the PFI market, deals continue to be done. I remain very optimistic, not only for the publicly funded infrastructure, but also because most of the infrastructure in the United Kingdom – £40 billion a year – is delivered through the regulated utilities and they have an extremely

The industry in Canada is looking very carefully at what’s happening in Australia, and is very interested in pursuing more opportunities. I think you’ll see it from both the financial side – the pension plan interest – and also from the industry’s interest in partnering with local firms in Australia Volume 3 Number 2

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good track record of both delivery and raising capital in the markets. MB: In conclusion, Nick, you’ve mentioned before that we’ve got a consensus, but we need to make sure others hear it. One of the issues is recycling capital, selling existing assets and using the revenue to create new assets. A classic example is the Queensland Government selling the Golden Casket lottery and using that money for infrastructure. It was well received, it was logical and it was overdue. The public is still hesitant, or needs better education on the value of recycling capital. What are some tips? NG: I’ve got no tips at all. I have failed to persuade the body politic in New South Wales. I do think you have to start from the outcomes, both in market and consumer terms, and in 42

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infrastructure user terms. I don’t think we’ve done that very well in talking about the impact of changes in the electricity market – the sale of assets in New South Wales and Queensland in terms of future electricity price pressure and in terms of capacity to create some balance sheet space. You do have to start with the benefits to the consumer. We tend to say a bit from our point of view that it’s good for productivity. Productivity sounds like more work for less pay to the average punter. I think the word productivity is not well developed in a public sense. The reality is, of course, that vested interests, particularly the unions in the case of electricity assets, are very determined, more for philosophical and emotional reasons than practical reasons, because I think they have very little to lose. I think you need to go to the consumer benefit and work back, rather than starting from the industry broadly defined and working forward, which is what we tend to do. MB: James, your notion behind the privatisation effort: is the sting out of the debate yet? JS: The advantage in the United Kingdom is that you only get your capital receipt once, and it’s right at the beginning. We are 20 years past the capital receipt, so no one talks about the issue of capital receipts when talking about privatisations in the United Kingdom. To me, the thing that bedevils infrastructure investment when it’s funded within the public sector is political cycles and political changes of mind, and the short-term thinking that comes with that and the fact that capital budgets are set for a maximum of four years. What we have to do is create long-term funding cashflows for infrastructure, which allow people to plan over the long term. And that is incredibly difficult in a publicly funded environment, but much easier within a privatised, regulated utility structure. For example, the British water industry has delivered £80 billion of investment over the last 20 years: a consistent £4 billion a year. The main debate we are having now is about the impact that the fiveyear regulatory reviews have on the investment cycle. Reforms are being looked at to smooth out the investment curve within the regulated utilities, and to avoid the mobilising and demobilising of the supply industry around the regulatory reviews and the inefficiencies that this creates.

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Eminent Panel

THE HON NICK GREINER AC Chairman, Infrastructure NSW

Nick Greiner was Premier and Treasurer of New South Wales from 1988–1992. Since his retirement from politics, he has been heavily involved in the corporate world as Chairman of several large companies and as the Deputy Chairman and Director of others. In June 2011, he was appointed as Chairman of Infrastructure NSW. He is also a member of the Federal Government’s Review of GST Distribution Committee. Nick is a Member of the Board of Governors, the Committee for Economic Development of Australia (CEDA) and a member of the Corporate Council, and The European Australian Business Council (EABC). He is also a Trustee of the Sydney Theatre Company Foundation. Nick holds an Honours Degree in Economics from The University of Sydney, and a Master of Business Administration with High Distinction from Harvard Business School. In the Queen’s Birthday Honours List of 1994, he was awarded a Companion of the Order of Australia for public sector reform and management and services to the community, and in 2001 he recieved the Centenary Medal. He is a Life Fellow of the Australian Institute of Company Directors, an Honorary Fellow of CPA Australia and a Life Member of the South Sydney Rugby League Club.

NICHOLAS MOORE

Chief Executive Officer, Macquarie Group Limited As Chief Executive Officer of Macquarie Group, Nicholas leads Macquarie’s continued development as one of Asia Pacific’s leading financial services providers. Prior to this appointment in May 2008, Nicholas was the head of Macquarie’s investment banking division, which included the Group’s leasing, infrastructure, financing and funds management, as well as its global advisory and securities business. Nicholas’ responsibilities included the growth of the Group’s successful infrastructure business and he has served on the boards of a range of listed and unlisted infrastructure entities.

MARK ROMOFF

President and CEO, The Canadian Council for Public-Private Partnerships Mark Romoff is President and Chief Executive Officer of The Canadian Council for Public-Private Partnerships (CCPPP). Established in 1993, CCPPP is a national non-partisan, member-based organisation with broad representation from across the public and private sectors, whose mission is to promote innovative approaches to infrastructure development and service delivery through public-private partnerships with all levels of government. Previously, Mark was Founding President and CEO of the Ontario Centres of Excellence, driving successful commercialisation of new technologies, developing the next generation of entrepreneurs and enabling new company start-ups through seed capital investments. Earlier in his career with the government of Canada, Mark served as Executive Director in the Department of Industry and in the Department of Foreign Affairs and International Trade as a senior diplomat in Nigeria, Mexico, Malaysia, Japan and the United States. He is a member of the Board of Directors of Career Edge Organization, the Quebec City Conference, the Central Canadian Public Television Association and the i-CANADA Council of Governors. He has a Bachelor of Science from McGill University, a Masters in Applied Science from the University of Waterloo, and is a graduate of the Harvard University Kennedy School of Government Senior Executives Program and the Directors Education Program of the Canadian Institute of Corporate Directors, and holds the ICD.D designation.

JAMES STEWART OBE

Chairman, Global Infrastructure, KPMG James joined KPMG in May 2011 as Chairman of KPMG’s Global Infrastructure practice. In the last year, James has visited around 30 countries to discuss their infrastructure investment plans. Prior to joining KPMG, James was Chief Executive of Infrastructure UK, and before that, Chief Executive of Partnerships UK. In these roles, James was at the centre of the British Government’s thinking on PFI and PPPs, and has had significant involvement in many of the major projects and programs in the infrastructure market; including Crossrail, LIFT, and Building Schools for the Future. James was responsible for the publication of the United Kingdom’s first National Infrastructure Plan.

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COMPANY FOCUS

FUNDING INFRASTRUCTURE DEVELOPMENT: THE A$770 BILLION MIRAGE? Despite huge investments in infrastructure initiatives over the last decade, there is a perception that Australia’s infrastructure investment backlog seems to have been stuck at A$770 billion. Is this perception driven by faulty forecasting or is the backlog of infrastructure spending simply too big? While partly explained by the relatively Whilst investment and construction in loose nature of forecasting infrastructure Australia has been very strong, this is projects, the rate of development of nonlargely resource driven resource infrastructure (urban infrastructure) Chart 1 compares urban infrastructure does seem slow and expensive. This is project financing against project financing despite the considerable commitment by all for the natural resource, energy, and utility levels of government to improving the stock sectors over the past decade. of infrastructure since the mid 2000s. What The expectation for 2012 is that urban other factors are at work? infrastructure financing will decline while There is no doubt that Australia is in the financing for natural resource projects middle of a capital expenditure boom. In (particularly liquefied natural gas (LNG) its Economic Outlook, the Organisation for related) will show a significant increase. Economic Co-operation and Development While the recent falls in commodity (OECD) forecasts that in 2012 and 2013, prices will lead to a slowing in miningAustralia will have the highest ratio of related capex, it will remain well above the investment to gross domestic product (GDP) historical average for many years to come. in the OECD at around 28 per cent – close to Urban infrastructure has not directly double that of the United States and Europe. benefited from the same strong economic In its recent report, the Business Council drivers in the way that the resource of Australia estimated the investment sector has. Urban infrastructure has also pipeline in Australia at A$921 billion. The experienced at least two fairly obvious growth in this pipeline has been driven by constraints. natural resources – which represents 46 per cent of total Chart 1: Pinvestment. roject finance volumes in Australia

The primary and secondary impacts of the GFC The very constrained funding environment of the GFC limited the availability of capital for infrastructure to bank finance, and it became considerably more expensive. In addition, as a result of the GFC (or policies to mitigate the GFC), the financial position of all governments has been significantly weakened, reducing governments’ capacities to sponsor and fund infrastructure spending.

Crowding out There is no doubt that the natural resources boom has had some ‘crowding out’ effect on urban infrastructure. There is less capacity for urban infrastructure projects to attract and afford the necessary design, development, construction and operational skills for large complex projects. However, it is worth noting that the first half of 2012 has seen some cooling of the resources boom in response to slowing Asian economic growth, which may help to alleviate some of these impediments. A less obvious, but crucial constraint, however, is the way in which governments approach procuring infrastructure. In the case of urban infrastructure, government is typically the major sponsor and driving force behind its development. With most of the infrastructure construction, operation and ownership skills in the private sector, this leads to the requirement for various forms of ‘public private partnership’ to bring new urban infrastructure into being.

To find out more contact authors: John Martin Managing Director Head of NAB Advisory 02 9237 1091 Dave Roberts Head of Infrastructure & Natural Resources Advisory NAB Advisory 02 8220 5400

Chart 1: Project finance volumes in Australia

44X

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The Hon Anthony Albanese MP

The Hon Anthony Albanese MP Breaking the nexus between the electoral cycle and the infrastructure investment cycle remains the biggest challenge for policymakers, according to Federal Infrastructure and Transport Minister, The Hon Anthony Albanese MP.

The world does indeed face troubling economic times. Uncertainty within the European Union, the United States’ slow recovery, and China’s weakening growth continue to affect international financial markets, consumer confidence and government budgets. The Treasurer called the economic uncertainty a ‘white-knuckle ride’. It’s a good description. It would be all too easy for governments in these situations to become gripped with fear – reacting only to immediate threats and hanging on for dear life. And, given the political circumstances of the Parliament for which the Australian people voted in the last election in 2010, I think that would be reinforced as an easy, but understandable, option. But to do so would be counterproductive, and that is not the approach of this Federal Government. The challenge for infrastructure policy is simple. We need to break the nexus between the electoral cycle, which is short-term, and the infrastructure investment cycle, which, by definition, is over a much longer period. That’s why I am particularly passionate about the conference themes of economic reform, competition, sustainable funding and efficient infrastructure. These are themes that sit squarely at the heart of my portfolio. I’m proud of the long-term view that this Labor Government has taken – and continues to take – to boost productivity. On investment, we are delivering a record $36 billion through the current Nation Building Program. No other Federal Government in our history has directed this much towards improving our nation’s roads, rail tracks and ports. We’ve doubled the roads budget, we’ve increased the rail budget by more than 10 times, and we’ve committed more to urban public transport since 46

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2007 than all governments combined from Federation right through the 107 years up to 2007. The Bureau of Infrastructure, Transport and Regional Economics (BITRE) has calculated that the Nation Building investments will result in benefits more than two and a half times their cost – or $2.65 to the nation for every dollar invested. That’s a real productivity dividend. I am proud that our infrastructure agenda extends far beyond the money we have injected through the Nation Building Program. The government has made a concerted effort to rethink the way in which we identify future needs, prioritise projects and then fund them. The game-changer in this process was the creation of Infrastructure Australia four years ago. IA has enabled us to prioritise our investments so as to maximise the economic return. This can, from time to time, create some friction with state governments if their pet projects are not given automatic support; but so be it. IA has removed the politics from decision-making, so that funding decisions are based on transparent and national – rather than electoral – interest. Infrastructure Australia has also had responsibility for ambitious reform work, including the development

of the first National Ports Strategy, the National Land Freight Strategy and the National Public Transport Strategy. Recently, the Council of Australian Governments (COAG) endorsed the National Ports Strategy as representing a common sense reform. A logical extension of this policy framework is the National Land Freight Strategy. The Strategy is the result of broad consultation with both governments and industry – with 70 organisations and individuals providing submissions. Freight is central to national productivity and international competitiveness. Improved freight planning will increase Australia’s competitiveness, lower the costs of doing business, and improve the use of our road and rail networks. The National Land Freight Strategy provides a framework for a coordinated, national freight network of our ports, and the road and rail that link them, to ensure that we get the best out of our existing infrastructure and identify what we need in the future. It also makes a range of recommendations on matters including the use of more productive freight vehicles, dedicated rail freight infrastructure, and

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linking proposed ports with transport corridors needed for exports, including for our mineral resources sector. The Strategy also seeks to establish mechanisms to develop a long-term pipeline of infrastructure projects attractive to both government and private investors, and to ensure that the right investments occur at the right time. The government’s national urban policy indicated an expectation that by 2014, states would develop their own 20-year freight strategies that align with national directions, as part of the Nation Building 2 Program. It also indicated that the National Land Freight Strategy would inform future Australian Government investments and reform policies. Australia faces an enormous freight task in coming decades. Movements are expected to nearly double to 1000 billion tonne kilometres by 2030. The road and rail projects required to meet that demand have a long lead time. We need to invest – and invest right now – if we are going to meet this expected growth. And we are doing so. Since coming to office, we have embarked on the largest, most extensive modernisation of the nation’s Interstate Rail Network in almost a century. We’ve upgraded one-third of the interstate rail freight network, upgrading 3800 kilometres of existing track and replacing the old timber sleepers with 3.4 million new Australian-made concrete sleepers. Thanks to this investment, we can expect a sevenhour saving on the trip along the busy rail route between Brisbane and Melbourne. In response, Woolworths – one of the biggest freight carriers in the nation – has begun transferring from road to rail 34,000 tonnes of dry goods. This is a case of public sector investment leading to private sector activity, working in harmony to deliver economic benefits for the nation. Woolworths is able to make that commercial decision because the line is now faster and more reliable thanks to nine separate new passing loops, better crossings and signalling systems, and the removal of tight curves. This was not an easy decision for Woolworths. There are new transfer arrangements and new deals with rail carriers. Woolworths’ decision is removing 1000 B-double trucks from our highways, leaving the air cleaner and our roads safer. 48

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Once the planned investments in rail are finalised by 2016–17, it is expected that the northsouth interstate rail market will grow by more than 30 per cent. There are plenty of other examples I can give you. For example, the rail trip across the nation to Perth used to take 53 hours; now it takes 44, thanks to track improvements, such as the extra passing loops. That means it is now feasible for express trains to use the line, attracting business from large parcel carriers such as Star Track Express and Australia Post, who are transferring Perth-bound deliveries from road to rail. continued on page 50

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

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RECORD INVESTMENT IN RAIL OPENS NEW OPPORTUNITIES FOR AUSTRALIAN BUSINESS An efficient and reliable interstate rail freight network is vital to supporting and growing a productive national economy, Australian Rail Track Corporation (ARTC) CEO John Fullerton says. So when the Southern Sydney Freight Line (SSFL) was formally opened for business in early January, and with it, a major freight bottleneck on the eastern seaboard of the nation removed, it proved a significant milestone in ARTC’s multi-billion-dollar investment program into improving the nation’s rail infrastructure. By separating freight from passenger services and removing the accompanying seven-hour-a-day curfew, the dedicated freight line speeds up the movement of trains through southern Sydney and improves the overall reliability and travel times of interstate rail freight between Brisbane and Melbourne. ‘With the freight task across Australia growing – it is expected to double by 2020 and triple by 2050 – ARTC is very much focused on working with our customers and industry to convert freight onto the rail system, because it’s far more competitive than ever before,’ Mr Fullerton says. The new $1 billion, 36-kilometre SSFL provides a tripling of capacity for the rail corridor through the south of Sydney, and forms part of record investment in the nation’s interstate rail network. Alongside projects such as curve-easing works on the North Coast of New South Wales, improvements to the ballast condition between Sydney and Melbourne and upgrades to the Metropolitan Freight Network in Sydney, rail’s claim for Australia’s land freight task is being transformed. ‘We’ve invested a lot – and it’s now about demonstrating to our customers what this investment into the network means for their business,’ Mr Fullerton says. ‘Capturing more freight onto rail means creating value, improving reliability and lowering costs, and that’s why our investment has targeted areas to improve rail’s reliability and capacity on that important freight journey between Melbourne, Sydney and Brisbane. ‘Customers want confidence that their freight will arrive at the terminal when it’s meant to – we recognise that we are part of a complex chain, and we’re absolutely committed to working with the industry to make it more competitive.’ Fullerton says ARTC will continue to work with government, customers, rail operators and stevedores to take full advantage of the capacity that is now available to move freight off the road and onto our rail network. ‘This not only helps ease congestion on our roads, but also improves national productivity,’ Mr Fullerton says.

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It is hard to envisage any government having the financial capacity to completely meet all of the nation’s infrastructure needs continued from page 48 Key to the success of our National Land Freight Strategy is a growing network of transport intermodals. This government has committed to 11 intermodals either operating today or under construction around Australia. In Sydney, we are bringing the Moorebank Intermodal Terminal online; as important a project as there could possibly be for Sydney. It’s hard to overestimate the importance to the Australian economy of the Moorebank freight transfer hub – an opportunity talked about for a long time, but almost lost. But it will now be delivered and it is in the perfect position, connected to the port of Sydney but also, importantly, on the interstate rail freight line and close to road networks in Sydney. With Port Botany freight expected to grow at seven per cent per annum, Moorebank will generate at least $10 billion in economic benefits, remove 1.2 million trucks each year from Sydney’s congested roads, and create 1700 direct long-term jobs. The size of this unique site means that trains up to 1.8 kilometres in length can operate at the terminal. Moorebank is a perfect example of how the Federal Government can use its ownership of land to unlock private sector activity. The government is seeking experienced people to form a board for a Government Business Enterprise that will deliver the intermodal. [GBE has since been appointed.] The GBE will oversee remediation of the site and manage the tender process, but then, importantly, it will be a private sector company or consortium that will design, build and operate the new facility. 50

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Moorebank will complement our work disentangling the freight and passenger lines along Sydney’s northern and southern rail corridors, including the northern Sydney freight corridor. It will also complement our big program of improvements at Port Botany. These all form a broader investment program to create a seamless national economy. We need to carefully and deliberately target the bottlenecks and the congestion that cost our economy billions of dollars in lost productivity. It is this same principle that will guide the second Nation Building Program to take effect from 2014/15. This second Nation Building Program, to run until 2018-19, will focus on four central themes. They are: Innovation, Moving Freight, Connecting People, and Safety. Through the Innovation theme, investment will be in smart infrastructure, planning, research, evaluation and compliance. There is much that technology can offer to eliminate, or at least forestall, the need for more expensive transport infrastructure spending. For example, smart infrastructure, such as electronic signage on our urban highways, has been shown to improve traffic flows by up to 15 per cent, helping to curb congestion, and there is nowhere better to see that operating than on the Monash Freeway in Melbourne. Through the Safety theme, the Australian Government will build upon the national leadership role in road safety, making significant investments in local roads and black spots. The $500 million we have already spent during the current Nation Building Program is removing nearly 1500 black spots, which in turn is preventing 4000 crashes each year. Under the Connecting People theme, we will pursue the productivity of our highways, roads and rail corridors while directly targeting pinch points and alleviating urban congestion. And through the Moving Freight theme, we will further extend and connect our road and freight linkages – particularly at our ports and intermodal facilities. State and territory governments recently put submissions to Infrastructure Australia and my department for consideration, and these projects are currently being assessed against the themes outlined. It is hard to envisage any government having the financial capacity to completely meet all of the continued on page 52

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continued from page 50 nation’s infrastructure needs. That is why we have engaged in a deliberate, targeted program to attract private finance to public infrastructure. More generally, BITRE has found that the construction of the nation’s infrastructure in 2010–11 was more than twice the level of a decade ago – in real terms. Private sector infrastructure investment has grown by one-third under this Federal Government, against a backdrop of the biggest global economic downturn in more than 80 years. One way we have done this is through the establishment of the COAG Infrastructure Working Group. With the advice of this group: • we have harmonised pre-qualification regimes in the construction industry, reducing duplication and red tape for those tendering • we have reformed the process of alliance contracting and PPPs, driving greater value for money • we are driving best practice in the procurement and delivery of infrastructure. This has meant greater private sector participation in the delivery of key infrastructure projects by making it simpler and cheaper for firms to bid on projects. Another major initiative is the National Infrastructure Construction Schedule (NICS). The NICS provides greater clarity and certainty to industry by outlining the whole Australian infrastructure picture – from projects identified as potential priorities, to those in the planning and feasibility study stage, through to committed construction projects. It collates the infrastructure commitments of all the different tiers of government into a single project pipeline. It also provides the information that industry will require to place a tender. It’s the first time all of this information has been available in one place, providing industry

with a level of clarity not previously available. The NICS site is dynamic and will continue to be enhanced and adapted to improve its functionality. An RSS feed has been added so that users will receive an alert when new projects are listed, or changes are made to projects. In recognising the pressures of financing infrastructure, particularly in constrained finance markets, we created the Infrastructure Finance Working Group (IFWG). Brendan Lyon from IPA served in that group, together with a group of nine of the nation’s leading private and public infrastructure experts. It was chaired by Jim Murphy from Treasury. The approach I have taken to policy development is to break the old model. The old model was that the transport department did some work, they did some submissions and then Treasury and Finance commented on it, and after that process was over, some of you in the room might get to comment on the outcomes. That’s not the approach that I’ve taken. The model that I’ve taken is to have the whole of government – so you get your central agencies engaged, Treasury, Finance, Prime Minister and Cabinet – and the private sector around the room when the policy is being written. You’re far more likely to get better outcomes that are well received and understood, and with problems having been ironed out before the release of the policy, if you have actually had that collaborative approach to policy development, and this is something that I have done across the board. The IFWG report, which was publicly released in June 2012, calls for a suite of reforms to encourage greater private sector finance. The Federal Government is now considering, or responding in practice to, each of the recommendations.

In recognising the pressures of financing infrastructure, particularly in constrained finance markets, we created the Infrastructure Finance Working Group (IFWG) 52

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One step that we are already in the process of taking is changing the Income Tax Assessment Act to further encourage private investment. Shortly, we will be introducing into the Parliament new tax provisions for infrastructure projects of national significance. These will allow losses generated by designated projects to be exempt from the Continuity of Ownership Test and the Same Business Test, and uplifted at the government bond rate. We have also released another publication in the continuing stream of work on patronage forecasting. In 2011, I had the opportunity to speak at the Patronage Forecasting Symposium in Canberra. One of the keynote speeches was by Dr Robert Bain – a renowned international expert from the United Kingdom. We have drawn on Dr Bain’s considerable knowledge by commissioning a new report entitled Disincentivising overbidding for toll road concessioning. It draws on international experience. It has some practical recommendations on how we can

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discourage the situation where ‘overbidding’ for future concessions might occur in toll road projects. Addressing this issue of overly optimistic bidding is very important if we are to successfully engage with the private sector to help fund and finance our major motorways. I mentioned earlier the improvements in road and rail productivity, resulting in part from investment – both from the public purse and from private partnership. The remaining piece of the puzzle is smarter regulation. The introduction of single national regulators for the heavy vehicle sector and for rail and maritime safety will generate up to $30 billion in benefits over the next 20 years. At the same time, it will reduce the number of transport regulators across Australia from 23 to three. This equals less red tape, less time spent complying, and less confusion. This is a practical reform that has been supported by state and territory governments and

that has, from time to time, called upon the private sector to back in and encourage the ongoing reform at times when people were looking to stall it in order to continue to entrench bureaucracy in the various states and territories. The American business guru Paul Meyer once said, ’Productivity is never an accident. It is always the result of a commitment to excellence, intelligent planning, and focused effort.’ There is no doubt that this is true. There is also no doubt that we face uncertain times. Yet this should not be an excuse for avoiding the hard work of microeconomic reform. It should be a spur for us to do more, not less. We must continue to work smarter in the way we approach our entire infrastructure environment – an environment that requires a holistic approach to planning, investment, construction and maintenance, and regulation. Only then can this nation really achieve its best.

THE HON ANTHONY ALBANESE MP Minister for Infrastructure and Transport Anthony

Albanese

the

Minister

for

Infrastructure and Transport, and the Leader of the House of Representatives. Minister Albanese was first elected to Federal Parliament in 1996 as the Member for Grayndler. He served as a member of the Shadow Ministry from 1998 to 2007. Minister Albanese has an Economics Degree from Sydney University. His seat of Grayndler is located in Sydney’s inner west, where he has lived all his life. Minister Albanese was born on 2 March 1963 in Sydney, New South Wales.

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CAPABILITY REVIEWS AS A DRIVER FOR THE SUCCESSFUL DELIVERY OF MAJOR GOVERNMENT INFRASTRUCTURE PROJECTS BY PAUL FORWARD AND IAN SUTHERLAND, EVANS & PECK The delivery of major government-funded infrastructure projects has a history, both locally and internationally, of cost/time overruns or underperformance of solutions. Projects that fit into this category are often characterised by one or more of the following features: poor client leadership and accountability, unsuccessful project team integration and collaboration, skills and knowledge within the project team that do not match the project’s complexity, and little focus on achieving best value-for-money outcomes. The high-profile failure of publicly funded major projects has tarnished the reputation of governments and agencies in the public’s eyes. As a result, many governments in Australia and overseas, particularly the United Kingdom, have made a commitment to achieve better value for money from public spending, including an imperative to focus on the delivery of benefits to project customers at reduced costs. The challenges facing governments to reduce deficits and to retain credit ratings, as well as new pressures to cut funding but deliver better outcomes, has resulted in a shift in the role of government in ensuring the successful delivery of major projects.

Changes to government approval processes The United Kingdom Government, for example, has recently established a Major Projects Authority (MPA) within the Cabinet Office’s Efficiency and Reform Group to ‘... bring about the successful delivery of major projects across central government...’ This is a transformational – not incremental – change process that is being driven by the highest levels of government in the United Kingdom. Among other objectives is the pursuit of large-scale reductions in the whole-of-life costs of major projects. Target reductions quoted are of the order of 20 per cent in real terms. At the heart of these new procedures is the responsibility of departments to demonstrate to government that they have the organisational capability to successfully deliver major projects. Previously, the focus of assurance was on the robustness of the project’s business case. Now, there is an additional need for agencies to assure government that they have the appropriate project team capability that can be trusted to deliver the expected benefits. On a recent study tour of the United Kingdom (as part of a broader assignment for Australian governments), Evans & Peck Managing Director Peter Wood

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was informed by senior United Kingdom civil service officials that they consider a prerequisite for improving major project delivery to be an improvement in ‘owner capability in project leadership’. This ethos translated into the recent establishment of the Saïd Business School at the University of Oxford, which will design and deliver a new ‘Major Projects Leadership Academy’ for the United Kingdom Cabinet Office. The Academy will seek to ‘develop a cadre of world-class major project leaders within the Civil Service to direct major government projects of high complexity and cost...’ Within the United Kingdom, a new approach to the management of major projects is therefore being adopted. The new approach involves: • a mandatory increase in central government oversight and assurance of projects • greater collaboration between agencies • adoption of best practice program and project management processes • early private sector involvement to broaden the search for best valuefor-money solutions • an approach to procurement that encourages greater competition • an acceptance that major projects can be affected by unpredictable external influences • a stronger focus on the affordability of projects, within tight budget constraints.

Demonstrating capability to deliver Over time, the capability of agencies to deliver major projects changes. Agencies learn by doing. Key resources leave agencies, and new capabilities are acquired. Moreover, the scale and complexity of major projects is increasing, with more mega projects valued in excess of $1 billion being undertaken. Therefore, the risk of learning on the job is too great for governments to bear. Early demonstration in the project life cycle of an agency’s capability to deliver is essential. The structured Capability Review process used by the United Kingdom, New Zealand and Australian governments to review the capability of agencies to deliver government programs provides a methodology that can be adapted to focus specifically on the capability to deliver major projects. (See Susan Teasey and Paul Forward, ‘Capability Reviews: Central Pillar in a High Performance Public Sector’, June 2012 at www.evanspeck.com/papers.aspx.)

The approach is not an audit of past performance, but rather an independent assessment of an agency’s current and future capabilities necessary to deliver government programs and policies. It is a constructive tool to prioritise areas for improvement and to provide assurance to government of agency capabilities. A Capability Review involves consideration of evidence and discussion with stakeholders in three key strategic capability areas: leadership, strategy and delivery. The three capability areas are relevant to the delivery of major projects, although the specific issues addressed in a traditional Capability Review need to be adapted to focus on the specific organisational challenges facing the delivery of large-scale, complex programs and projects. Underlying many of the cost/time overruns or underperformance of solutions are issues that relate to client leadership capability, including accountability, project team integration and collaboration, and skills and knowledge to match the project’s complexity. In terms of the strategic capability, agencies need to demonstrate that their project management team has a rigorous and structured process of generating, evaluating and filtering solution options that represent affordable and value-for-money outcomes. Similarly, an agency’s team needs to be able to demonstrate that it has the required skills and expertise to engage the private sector to effectively deliver the preferred solution and to manage the delivery process.

A new approach to project delivery The reputational risk to governments and agencies resulting from poor delivery of complex infrastructure projects requires a more rigorous approach to assess the capability of the project management team and its project delivery methodology. The changing environment facing governments requires a new approach to project delivery. The Capability Review methodology provides an approach to independently assess agency capabilities to respond to the more demanding infrastructure environment. Evans & Peck is a global advisory firm with specialist expertise in the infrastructure and resources sectors. We provide project and business advisory services to clients within Australia and internationally. Further information about Evans & Peck is available at www.evanspeck.com.

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The Hon Warren Truss MP The infrastructure backlog in Australia is beyond the capacity of governments to fund on their own. The solution will lie in regulatory reform and a greater role for the private sector, according to the Leader of the National Party, The Hon Warren Truss MP. As we all know, there are various reports around that have put Australia’s infrastructure gap at somewhere between $700 billion and $800 billion. This gap will never be filled entirely. There will always be new projects that come forward, and expenditure needs will always rise beyond our capabilities. We know that we have to invest more and we need to do it now. If we don’t, it’s going to cost Australia dearly. Productivity will continue to decline as congestion rises, impacting on economic growth, not to mention its social toll, adding to the stress and the anxiety of daily life. The Liberal and National parties have already made significant commitments for infrastructure expenditure should we be elected to government. Recent announcements have included commitments towards the East West Link in Melbourne, the M4 East extension in Sydney, and the Gateway Motorway North project in Brisbane. We’ve renewed earlier commitments to the upgrading of the Pacific Highway, the Bruce Highway and the Toowoomba Range Crossing. We’re committed to supporting the Gateway WA project in Perth, the Melbourne to Brisbane railway line, and the Midland Highway in Tasmania. And, of course, there will be much more. 56

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But government budgets at the moment are awash with debt and deficit, and unfilled and unfunded commitments. Clearly, given the sheer size of the task ahead of us and the current budgetary position of the Commonwealth and state governments, government investment alone is not going to be enough. It’s going to take a combination of government and private funds, together with regulatory reform, to enable this investment. As you would all be aware, the government has just begun negotiations with the states and territories about the next federal–state road and rail funding agreement, which is due to commence in 2014. The year 2014 seems to be something of a magical year with this government. Like lots of things lately, the money will not have to be found until after the next election. Nonetheless, there will need to be significant contributions towards funding infrastructure on top of the commitments that are being made, like disability reform, mental health care, dental programs and, of course, education, amongst others. The agreement on the size and priorities of the next federal–state agreement is some way off, but the program needs to be focused on taking productivityenhancing projects from concept to construction, and then completion.

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The Hon Warren Truss MP

When Labor spent not one but two stimulus packages, the rhetoric proclaimed a Nation Building agenda. Yet, the Business Council of Australia estimates that only 14 per cent of the total spending announced under that Nation Building agenda actually went to productivity-enhancing infrastructure – and, of course, many of the projects have not yet been completed. Studies have shown that investment in infrastructure has a positive effect on economic growth and has a higher return on investment than spending in other sectors. As a government, and as a nation, we need to place a higher value on ensuring that we have a modern and integrated multimodal national transport network. The Coalition has a track record of investing in worthwhile projects to grow our economy, and to build our communities and connect our regions. In May 2002, the Coalition announced its plan to create what was then a revolutionary new national land transport policy. When AusLink was introduced in 2004, it represented the most significant change since Federation to the way in which national transport infrastructure is funded. For the first time, investment in road and rail was based on a longer-term agenda, and of course it was built around corridor studies that addressed the longer-term freight task. The Coalition remains committed to the AusLink program; the current government has renamed it but has essentially kept it in existence, and we’re also committed to its subelements, like Roads to Recovery, the Black Spot program and the strategic regional roads program. We’re also committed to a new bridges renewal program to fund the upgrade of some of the 20,000 local bridges across the country that are nearing the end of their lives.

Substantial upgrades are often beyond the financial resources of local governments and, as a result, many bridges now have strict weight limits imposed upon them, impacting productivity. Infrastructure Australia was established in 2008, with great expectations that it would help to focus investment on delivering ‘nation-building’ projects. Minister Anthony Albanese said in 2007: ‘By operating at arm’s length from Ministers, Infrastructure Australia will ensure decisions are no longer based purely on political interests or the margin of a particular seat.’ Then the government went on to choose multibillion dollar projects for its Nation Building Program without prior Infrastructure Australia approval. In fact, the most prominent South Australian project, the O-Bahn, was reportedly chosen by Prime Minister Kevin Rudd and the South Australian Premier of the day during a late-night walk around Hobart’s cold streets. We all know that the $2.1 billion election commitment for the Parramatta to Epping rail link in Sydney wasn’t considered by Infrastructure Australia before its announcement, and there was no costbenefit analysis that has been publicly released. The Infrastructure Australia pipeline is choked with much-needed projects that have failed to move from concept to planning, or from design to construction, and that have no timetable for completion. On the other hand, the role and process of Infrastructure Australia is not well understood or explained. I still come across people who think that all they have to do is get a tick-off from Infrastructure Australia and suddenly the money will appear for their project to proceed. Sadly, it’s not that simple. I also think Infrastructure Australia can do more to help explain its processes and why particular projects have been chosen for approval. As an example, I was surprised that the 2012 priority list gave the next stage of the Bruce Highway upgrade – which Volume 3 Number 2

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happens to be in my electorate – a rating of ‘early stage’, even though the route was chosen years ago, and the planning and design was well advanced. Yet, the Cross River Rail project in Brisbane was listed as ‘ready to proceed’, when we all know that the state government hasn’t yet decided how it’s going to address the congestion issues in an affordable and responsible way, and whether this is going to end up being a $1 billion project, a $4 billion project or a $40 billion project. From the Coalition’s perspective, we’re keen to support Infrastructure Australia and give it a meaningful role in project assessment. We will task Infrastructure Australia with creating a pipeline of projects. This pipeline will need to look at least 15 years ahead, with a review every five years to provide a timetable for future priorities and investment. This will be created collaboratively with the states and territories, and will provide a comprehensive and evidence-based framework to encourage investment. We want Infrastructure Australia to be well ahead of the game so that there are no delays in bringing projects to fruition because assessments haven’t been undertaken. We’ll also require all major Commonwealthfunded infrastructure projects to undergo a full costbenefit analysis by Infrastructure Australia before they proceed. We’re committed to Infrastructure Australia; we want it to work. There needs to be a strong understanding within the community that its role is permanent and that it is going to play a key role in developing our priorities for the future. And it needs to be visionary and forward-thinking so that there aren’t delays in bringing projects to the construction stage because assessment work has not yet been undertaken. The Coalition is also committed to reducing red tape for business, improving our international competitiveness and maximising value for money in projects. It is bewildering that around 40 per cent of funding for infrastructure projects is spent before a bulldozer arrives on site. Community consultation and protecting our environment are important, but the fact that projects take years to get through the planning and approval process is something that clearly needs to be addressed. A recent report by the Business Council of Australia found that resources projects are 40 per 58

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cent more costly in Australia than in the United States, hospitals cost 62 per cent more, schools 26 per cent more and airports a staggering 90 per cent more. Now, this is a comparison with the United States; not exactly a low-cost country, not a country that takes shortcuts in relation to approval processes, but for some reason the costs of these projects are much higher in Australia. These costs are holding back our capacity to deliver the infrastructure that we need. Now, a lot of this is about regulation and the willingness of governments of all political persuasions to respond to community complaints about a particular issue with another tranche of regulations. Since Labor was elected in 2007, the RuddGillard governments have introduced 16,000 new regulations, while repealing less than 100. And that was in spite of Labor’s election commitment to abolish one regulation for each new one that was introduced. Now, I know this isn’t easy, but we have to seriously tackle the burden of regulation if we are going to deliver projects in this country efficiently and on time. While total investment in infrastructure has increased dramatically in recent years, private sector investment has only marginally increased over the same period. In Australia, infrastructure investment by super funds has been of interest to policymakers for a number of years. The introduction of compulsory superannuation 20 years ago has seen investment in superannuation funds in Australia soar. Today, 12 million Australians have around $1.3 trillion invested in superannuation funds. It is estimated that over the next 15 years, this could rise to up to $5 trillion. Traditionally, superannuation funds have had a limited role in infrastructure financing in Australia. Research on Australian Prudential Regulation Authority (APRA) regulated super funds has indicated that only around five per cent of their total asset allocation is in infrastructure. Previously, IPA has estimated that if we get the regulatory settings right, super funds could provide an extra $18 billion in additional infrastructure investment each year. This could go a long way towards helping fund the vital infrastructure we need to improve productivity across Australia.

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Significant investment in Sydney’s transport network is long overdue, and much of that investment will only be achievable through partnerships between the private sector and governments Super funds will not take risks with members’ funds, and they expect solid returns on their investments. Government and industry need to work together to get the regulatory settings right so that we can begin to fill this infrastructure deficit. At the last election, the Coalition committed to infrastructure bonds. There is no ‘silver bullet’ and no one policy measure that will stimulate the unprecedented levels of investment required to provide the sort of infrastructure Australia needs to continue to grow and be innovative about the way in which we source the funding for important projects. That approach must harness business and governments to work more constructively to provide Australians with a quality transport network that represents value for money. In June 2012, the Infrastructure Finance Working Group’s report was released. The Working Group brought together Australia’s major private investors and their representatives to look at avenues for regulatory reform to encourage investment. This report addressed many of the hindrances to private sector investment: high bid costs, the lack of a clear project pipeline and risk allocation, to name a few. Given the task ahead of us, we need to look at all the options and find innovative ways of structuring financing and risk allocation to get the maximum value for investment, and a larger number of projects underway. Earlier this year (2012), I held a meeting with a number of private sector investors, super funds and others, and while all were actively considering potential infrastructure investments, none of this investment was in Australia. It seems strange to me that we have Canadian pension funds looking at infrastructure projects in

Australia, but our own funds are looking for projects in Canada and, for that matter, other parts of the world. Maybe the grass is greener on the other side of the fence, but we’ve got plenty of work that needs to be done in this country. There needs to be a political will to get projects under construction. But the private sector should not wait for governments to get projects underway. Some time ago, I suggested that companies with ideas and infrastructure projects in mind should come forward and tell governments of their interest. If they are prepared to make it happen, so are we. New South Wales has taken some steps in that regard. The New South Wales Government is considering an unsolicited private sector offer by Transurban to design and construct the F3 to M2 link: a much-needed project that has been languishing for some time. A proposal to put tilt trains on New South Wales’s intercity and regional passenger routes has the potential to put fast trains on existing tracks much more affordably than a Very Fast Train. As we all know, significant investment in Sydney’s transport network is long overdue, and much of that investment will only be achievable through partnerships between the private sector and governments. From our perspective, our door will always be open to talk to people who have innovative projects that they’re interested in being a part of, to try to find a way to make them happen. And in cooperation with state governments, I think we can move these projects along much quicker, and deliver real results for Australia. We are also looking at a number of innovative ideas, including leveraging the government’s AAA credit rating to provide cheaper loans for projects on Infrastructure Australia’s priority list. Volume 3 Number 2

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We believe these sorts of initiatives may assist the private sector and local governments to make priority projects a reality. I want to assure you that we are committed to speeding up the pace of major infrastructure delivery. We will have more to say about our final commitments on policy measures to leverage greater private sector investment in infrastructure closer to the next election. We need 21st-century solutions if we are to have a 21st-century infrastructure system. Too often, when we talk about infrastructure, we do so in the context of costs. Of course, the costs are real and have to be addressed, but we forget about the opportunities that projects may offer. The importance of better road and rail networks that actually link into ports to get products to markets – here or overseas – in the most efficient way possible cannot, and must not, be underestimated. Those productivity gains are the difference between winning and losing in the ever-changing domestic and global marketplace. So, when I look at infrastructure across Australia, I see the costs, but I also see the costs of not getting on with genuine nation-building to take us into the next 20 years. Our miners will continue to mine and process resources for the world. Our farmers will continue to produce food and fibre for an ever-hungrier world. But they will only be competitive if our infrastructure system is world-class. We have to ensure that our infrastructure is geared to meet those growing demands, and that our communities can share in that growth.

THE HON WARREN TRUSS MP

Leader of the Nationals, Shadow Minister for Infrastructure and Transport Warren Truss is a third-generation farmer from the Kumbia District near Kingaroy. He entered Federal Parliament in March 1990 as a National Party Member representing the electorate of Wide Bay. In 2007, Warren was chosen as the Federal Parliamentary Leader of The Nationals. He is also Shadow Minister for Infrastructure and Transport. Warren was a Minister in the Howard Coalition Government for 10 years. He was appointed Minister for Customs and Consumer Affairs in October 1997, and a year later, Minister for Community Services. In July 1999, Warren assumed the position of Minister for Agriculture, Fisheries and Forestry, where he served for six years. He became Minister for Transport and Regional Services in July 2005, and in September 2006, Warren became Minister for Trade. Before entering Parliament, Warren was a Kingaroy Shire Councillor from 1976 to 1990, including seven years as Chairman. He served as President of the Burnett District Local Government Association and as Chairman of the Fraser Coast–South Burnett Regional Tourism Board. He was Deputy Chairman of the Queensland Grain Handling Authority, and a member of the State Council of the Queensland Graingrowers Association.

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THE BEST ENHANCEMENT TO YOUR ENGINEERING PLANS. At Deakin University there is no such notion as going ‘back to the drawing board’. When you are looking to revise your career plans in the field of engineering, the best enhancement for your profession is a Bachelor of Engineering degree. Deakin’s School of Engineering has an enviable reputation for its links with industry and in producing specialised graduates who are qualified in a variety of engineering disciplines. To achieve this, our degrees are modern and forward focussed with an emphasis on utilising design principles to solve complex and ill-defined problems. With the flexibility to study wherever you are, at a pace to suit your personal circumstances, Deakin Engineering is an ideal choice when balancing work and personal life. As a further enhancement, our undergraduate degrees are continuously being accredited by Engineers Australia to ensure your qualifications are recognised internationally. So, don’t change your engineering plans, enhance them with an undergraduate or postgraduate degree at Deakin University. Visit deakin.edu.au/scitech/engfb or call 1300 DEGREE (1300 334 733) for more information. CRICOS Provider Code: 00113B

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Richard McIndoe

Richard McIndoe Energy market reform has stalled in Australia. As energy demands continue to rise, governments need to again maintain the reform agenda towards a competitive and efficient national energy market, says EnergyAustralia Managing Director, Richard McIndoe.

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Energy supply is of fundamental importance to every society and economy. It is technically complex, highly capital-intensive, and long-lasting. It’s also a topic that is very much in the public eye. Energy is a fascinating area of public policy because of the many choices it presents. With the emergence of climate change as a key public issue, and rapidly rising energy prices (at least in part) coincidently, these choices have been brought into the realm of public debate more than ever before. Reflecting on the history of the energy supply industry in Australia, and the choices that were made in its development, gives us a better understanding of the present, and therefore better informs the choices we need to make for the future. The guiding principle in the development of our domestic energy markets has been that a sustainable energy supply is best achieved through a competitive market, supported by effective regulation. This has transformed a supply system that was based on state-owned, fully vertically integrated monopolies into a sustainable supply system based on decentralised, commercially based decision-making. We should be proud of these achievements. The National Electricity Market (NEM) has delivered. It has met reliability standards. It has encouraged new investment. Wholesale prices (excluding carbon) are lower today than at market start. At the retail level, we have numerous retailers competing for customers with some of the highest churn rates and price discounting in the world. But is the energy market fully efficient? Is it as productive as it could be? Have we reached the end of the reform journey? I would contend that the answer to these questions is: ‘clearly not’. We can see this reality in measures of productivity across the industry. Low productivity today is a result of low and inefficient capital utilisation across the energy industry. We have an inefficient mix of plant, which is poorly placed to respond to changes in energy demand. This inefficiency is contributing to the rising energy prices that make for daily headlines in the national press. So what’s gone wrong? What changes are we seeing in energy demand that drive this inefficiency? And what are the responses to ensure a functional and more efficient national energy market? There are certainly a lot of external pressures on energy markets. While Australian policymakers

have tended to prefer efficient markets and effective regulation for the energy sector, there have also been a series of choices by other external stakeholders that have affected how we supply and consume energy; choices that have put the energy system under a lot of pressure. As a society – governments, industry, and consumers – we are asking more of the energy system than ever before. We want our energy greener and we want to use more of it at peak times, but then somehow we expect it to be cheaper. Premium solar feed-in tariffs have provided a subset of households with access to low-cost, renewable energy, while making energy supply more expensive for every other consumer. A price on carbon – a measure we support – also puts upward pressure on energy costs; however, fixed carbon prices at such globally high levels, together with restrictions on the use of low-cost abatement, only add unnecessarily to this cost. It is also absolutely clear that rising peak demand is driving up energy prices, and that timeof-use price signals are needed to address this; however, governments, who claim to be worried about energy prices, continue to regulate prices to prevent these important price signals being passed through to consumers. As a result, customers are not encouraged to adapt their consumption patterns, and the industry needs to invest billions of dollars in plant and equipment that is used for less than 100 hours each year. The energy market is resilient. It has survived a drought. It has survived the failure of a few retailers. It has survived incredible carbon policy uncertainty. It has survived the uneasy mix of public and private

The energy market is resilient. It has survived a drought. It has survived the failure of a few retailers. It has survived incredible carbon policy uncertainty Volume 3 Number 2

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ownership in the competitive sector that continues to this day. And it has so far managed to survive the misalignment between good energy policy and good energy politics. Over the past three years, the pursuit of broader political objectives has started to impact the policy stability of the energy sector, and has put the energy market under incredible pressure. Since the 1980s, there has been a decline in the relative contribution to GDP from goods-producing industries, such as manufacturing, and a rise in the contribution from service industries. More recently, the mining sector has grown as developing countries like China and India are using more and more of Australia’s abundant mineral resources. This change in Australian industry has significant implications for energy use. First, service-related industries are less energyintensive and therefore we have seen a decline in Australia’s overall energy intensity, even though energy production has increased. Second, there is a change in the composition and location for industry demand. Household demand for grid-connected energy has also declined in recent years, and the relationships that customers have with their retailers are also fundamentally changing.

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Consumers are seeking a deeper relationship: they want advice and support on how they can better manage energy in their homes. New technology, such as smart meters and software that lets customers take full advantage of them, will give customers a greater capacity to manage their demand. Innovative products and tariffs will emerge on the back of that technology. This includes tariffs that empower consumers to better manage their energy usage, lower their carbon emissions and reduce their bills. We are already seeing the introduction of products such as solar PV and solar hot water for consumers to install in their homes as a means of managing their energy use from the network; however, regulation will be a key barrier to these important changes. Historically, Australia’s energy sector has been a source of considerable prosperity for all Australians by providing access to low-cost energy for businesses and households. It is imperative that the sector continues to meet the future economic, social and environmental challenges of the country. If it performs poorly, the international competitiveness of major Australian industries will be undermined, our economy will suffer and our standard of living will decline. Therefore, any discussion on the requirements and pathways for a functional and efficient national energy market should begin with an assessment of how we transform energy supply to meet these structural challenges and changes in consumer demand. Energy reform is a partnership. It takes a lot of stamina in a reform journey where governments, industry and consumers all need to work together. I would like to talk about two key areas in which government and industry must work together to achieve sustainable, low-cost energy supply for consumers: retail price deregulation, and the Renewable Energy Target (RET). First, retail price deregulation. The motivation behind the introduction of the NEM and other competition reforms was a desire to raise the efficiency and productivity of electricity supply in eastern Australia by taking advantage of potential cost savings from the interconnected state networks. In essence, the NEM should have boosted productivity levels by allowing more efficient use of generation and network capacity. While we have

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A major contributor to poor productivity performance in the sector has been the need for considerable investment in peaking generators and networks to match peak demand for a small number of days each year seen wholesale electricity prices decline in real terms, or stay stable in Victoria, there have been other factors in recent years that have outweighed the gains from the NEM structure. A major contributor to poor productivity performance in the sector has been the need for considerable investment in peaking generators and networks to match peak demand for a small number of days each year. Ultimately, low productivity means low capital utilisation and higher energy prices. As energy prices have gone up, we have seen increased community pressure on governments to respond. This has made retail prices a major political issue, with the natural reaction of most politicians to date being to seek to artificially manipulate the

market for short-term political gain. Unfortunately, the market just can’t deliver on that populist electoral promise of lower electricity prices. When governments owned and operated the power system, they could get away with setting retail prices below actual costs and/or crosssubsiding a particular class of users to satisfy social and community expectations. Ultimately, it was all taxpayers’ money. This is not the case today. Victoria remains the only state that has introduced retail price deregulation. As a result, Victoria is reaping the rewards of a highly competitive retail market in which standing offers are a substantially smaller part of the overall retail market, and households have the

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choice of more than a dozen retailers competing for their business. Competition has broadened beyond price, and includes a variety of innovative product and service offerings. In fact, the St Vincent de Paul Society has observed that the deregulated, competitive retail market in Victoria does more for low-income households than retail price regulation in states like New South Wales and Queensland. An example: the variety of offers available in the market means that households with high energy use can choose retailers that offer products with higher fixed costs and lower variable costs, while those households with lower energy use can choose a different retailer with the opposite product offering. These same households can then access a discount on these rates and a further discount if they pay on time. Retail price regulation is a one-size-fits-all approach, and the discounts available in the competitive market are linked to this inflexible regulated product. This does not benefit many lowincome households. Retail price regulation and the introduction of flexible (or what is often referred to as time-of-use) pricing structures is also critical if we are to help customers to manage their energy use throughout the day and get the most from their energy expenditure. Time-of-use pricing is also imperative if we are to begin to tackle peak demand and improve the productivity and cost structure of the energy industry. Today, retail price deregulation is the single most important reform that is required for Australia’s energy markets if we are to deliver tomorrow’s opportunities. What about the Renewable Energy Target? One policy area where we have the opportunity to stop and reflect on our objectives and the impact of their delivery is the RET. There is a lot to like about the RET. It is one of the few current policy settings that have bipartisan political support, and it has successfully encouraged new renewable generation investment. It uses a market price signal that encourages leastcost deployment. However, a key question that faced the Climate Change Authority in its review of the RET was how to define the 20 per cent target. Rather than rush out and take a position, we commissioned some analysis from ACIL Tasman. This modelling found that, unchanged, the current 20 per cent Renewable Energy Target will actually deliver over 25 per cent 66

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renewable energy at a cost of nearly $54 billion from now until 2030. In the context of falling demand, this target could be recalibrated to deliver the original policy intent of 20 per cent renewable energy, while reducing the overall cost of the $54 billion subsidy by $25 billion. Across the economy, $25 billion is a big saving to consumers – $840 each – in the context of rising energy prices. The current design of the RET also puts incredible pressure on the wholesale electricity market. A policy that forces new capacity to be built in an already oversupplied market, with falling demand, calls into question the sustainability of the market itself. While policy stability is very important, we need to balance this with a scheme design that can adjust to fluctuations in demand and not impose unnecessary costs on the economy and our customers. In conclusion, Australia has shown that it has the capability to build a sustainable, world-class energy system that underpins economic, social and environmental performance. Building on the existing energy supply infrastructure, we can work towards lower carbon emission levels and maintain high levels of supply reliability. We can introduce smart grid technology, and we can deliver power more efficiently to customers, giving them more information and greater choice about the way they use energy. The opportunity, but also the obligation, for Australian governments, is to maintain the reform agenda towards achieving a functional, competitive and efficient national energy market. This market works, but we need to be careful that we don’t ask too much of it, as it could begin to break down. Australia’s energy markets have served us well. We should protect and develop them. We need to get out of regulating prices and get on top of peak demand to ensure the sustainability of the energy sector. We need to tidy up the raft of climate change schemes – including the RET – and move to a leastcost approach to emissions reduction and renewable deployment at sustainable levels. We need to support gas development and gas markets to the benefit of industry, consumers and the community. But, most importantly, we need to get the politics out of energy supply.

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RICHARD MCINDOE

Managing Director – EnergyAustralia (formerly TRUenergy)

Asia Pacific region. Under his management, CLP has become the largest international investor in the Australian, Chinese and Indian energy sectors, and is currently one of the largest international

Richard Mclndoe has been Managing Director of TRUenergy (now EnergyAustralia) since early 2006. He is also a member of CLP Holdings’ Finance and General Committee. EnergyAustralia is one of the three largest energy companies in Australia. The company has over A$8 billion worth of assets located across the eastern states of Australia, and employs close to 1800 people on a direct or contract basis. Until mid-2006, Mr McIndoe was responsible for the development and management of the CLP Group’s international electricity business in the

IPP companies in the Asia Pacific region. Mr McIndoe is Director of the Energy Supply Association of Australia Board. He was previously a Director of Electricity Generating Company of Thailand (EGCO) – a Bangkok-listed energy company – and was Chairman of Roaring 40s Renewable Energy – CLP’s 50:50 joint venture. Mr McIndoe was based in Asia from 1993 to 2007. Prior to joining the CLP Group, Mr McIndoe worked for a major international power station developer, and for the investment bank SG Warburg, based in Hong Kong and Jakarta.

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COMPANY FOCUS

CONSTRUCTING A VALUABLE EDUCATION In a booming world economy with an increasing population, developing the buildings and infrastructure that will support an improved standard of living throughout the 21st Century and beyond is critical.

Australia’s resources and infrastructure industry continues to expand. With it, so does the need for skilled workers. The University of Southern Queensland (USQ) offers two undergraduate qualifications in the construction field: the Associate Degree in Construction and the Bachelor of Construction. With both of these programs, a student can major in either Civil or Management. Construction students develop skills to plan, construct, operate and maintain buildings and infrastructure works. Students learn about construction materials, scheduling of works, estimating costs for projects, management of site works, monitoring construction expenditure, foundation construction, utilising building technologies, structural methods and the provision of building services. Construction professionals work closely with a wide range of people so project management skills are an important part of the program at USQ. We aim to make you a creative and

professional part of the construction team, an effective communicator and a skilled manager. USQ’s construction programs prepare you to solve problems related to the design and construction of buildings and infrastructure and provides you with the opportunity to benefit the community in many ways. You are able to specialise in either the civil engineering or management aspects of the profession. As a construction professional, you could be responsible for the planning or construction of: • commercial buildings for offices, banks and shops • residential buildings, including highrise apartment blocks • industrial buildings for production, storage and distribution • industrial complexes such as petrochemical plants • public service buildings such as hospitals and schools

•

major civil infrastructure works such as railways, urban and country roads, freeways, bridges, tunnels, airports, docks and harbours. When you have significant buildings and infrastructure to be planned and constructed, professional constructors need to be part of the building team. Construction offers a wide range of career opportunities. As a construction professional you can work in an office, or on-site in the middle of a city, or in the countryside, or even offshore. You can work for yourself in a private capacity or you could work for either a multinational construction firm or the public sector. As well as the many exciting opportunities in Australia, there are great opportunities overseas, in a wide range of building and development projects, including infrastructure. Choose from full-time, part-time while you work, or any combination that works for you or your staff. If you study online (distance education) you have the flexibility to study when and where you choose. Online study is fully supported as you are sent all your study materials Throughout your study, you will find that as well as academic learning, we place a strong emphasis on practical work. Students do their practical work together in small groups, and learn from others. Class sizes are generally smaller, so you get to speak to the lecturer directly. Construction, Engineering and Spatial Science programs offered by distance education do have Residential Schools that you need to attend. Residential Schools provide invaluable opportunity to engage with Academic staff in the Faculty of Engineering and Surveying and provide the opportunity to gain practical hands-on experience. The residential school commitment is usually one week per year on campus. Construction research has taken off at USQ in construction project and production management, particularly in relation to construction procurement, lean construction, and quality management. USQ has a number of doctoral students currently pursuing research on monetary retentions, performance security, quality management of repetitive construction work, and construction innovation. www.usq.edu.au

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Find the right program for you and don’t look back.

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Public Sector Reform Panel Funding infrastructure will inevitably mean cutting waste in the public sector to ensure states are living within their means. The Public Sector Reform Panel looks at some of the opportunities to drive greater efficiency in the delivery of public services.

Chair: Brendan Lyon, Chief Executive Officer, Infrastructure Partnerships Australia Dr Kerry Schott, Head of the NSW Commission of Audit; former Managing Director of Sydney Water Terry Moran AC, Chairman, Barangaroo Delivery Authority; National President, Institute of Public Administration Australia Graeme Samuel AC, Managing Director and Head of Melbourne, Greenhill Caliburn; former Chairman of ACCC

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Public Sector Reform Panel

Brendan Lyon: What is it that Australia needs to do if we’re going to surmount our productivity and infrastructure challenges? Kerry Schott: In New South Wales, what is really needed is a lift in management of the public sector to enable the budget to be run with a surplus of around $500–$900 million per year, which could be used to fund social infrastructure, in particular. And you would’ve seen with the most recent New South Wales Budget that it is designed to do just that by the end of the four-year term, and I’m optimistic that they will get there earlier. Terry Moran: The big issue is financing. I’ve argued quite strongly that although some major pieces of infrastructure can be adequately done through PPP mechanisms, particularly if there are some different assumptions made about how risk is shared between the government and the private sector, there are still a lot of projects that won’t be suitable for a PPP approach. In order to get those done, governments need to wrestle the issue of debt to the ground. I think there’s a credible argument to be put to the community that parcels of debt can be raised for large infrastructure projects, if assurances are given, namely: • that the delivery of those projects is not through normal departmental or agency-based arrangements, but is actually put out into a Special Purpose Vehicle with private sector boards and CEOs to make things happen • that there is a plan to repay the debt over time • that the projects chosen for this treatment have come through an exacting period of analysis and that the projects to be funded are the most important on the basis of some credible approach to analysis. The public is wary of debt, particularly when government raises large amounts of debt and it’s not clear to the public what the debt is being devoted to. To break through that wariness, you not only need some political figures to decide to have the conversation with the community, but you also need a different approach to what debt is, how it’s used and who’s responsible for making things happen. All of this has to lead to large pieces of infrastructure that members of the public can see, feel and use when they are completed. Graeme Samuel: There is leadership needed at the political level to explain to the public exactly what is involved in infrastructure funding.

Firstly, state governments need to recognise that there are a lot of assets tying up a lot of cash that can be used for infrastructure funding, and those assets ought to be sold. They don’t need to be owned by government. Secondly, the funding of a lot of infrastructure can be done on a user-pays basis, but who in government is ever prepared to say that they are going to work towards the development of a toll road, or of network pricing or road pricing? They are politically unacceptable, because we won’t take the leadership position. Users should be able to pay and should be required to pay for everything other than social infrastructure. I’m a big advocate for PPPs, but, equally, I think there are some greenfield infrastructure investments that will never be put out on an economically or commercially viable basis as a PPP, because the risks are just too great, particularly post-GFC. Therefore, it requires careful analysis by government, and it requires the government taking that risk on its own books, but not necessarily on the budget. Equally, it requires explaining that there is a point in time at which infrastructure development will be able to be sold or privatised, and the debt repaid. There’s an awful lot of explanation involved in those things. One other thing in respect to PPPs: if they are properly structured and there’s a proper allocation of risk, they should inevitably work. There will always be failures, like there are failures in corporate Australia from time to time. I’m bemused by the fact that whenever a PPP fails, it’s seen to be a failure by government, rather than a failure by the private sector that has either determined that it’s going to be the provider of the infrastructure under the contract with government, or by the lenders. BL: What is it that will create the burning platform for changes to happen? TM: I suspect it will be individual projects that the public is led to understand well and accept. Politicians will have to get back to explaining the problem and what might be done about it. We are in a situation where politicians are pushed in the direction of being risk-averse because of the criticisms they face if anything goes wrong, even if they’re not responsible.

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They are wary of being speculative about possibilities in public debates because they find that they are held accountable – in a very precise way – for something they were trying to build support for in the first place. It’s the nature of the political debate and, frankly, business is not always as constructive nor comprehending of the realities of democracy in this field as it might be, and nor are the media for that matter. BL: Graeme, looking at market-wide reforms, you’ve had a lot of experience at the National Competition Council, and later at the ACCC; how is it that those sorts of reforms might be implemented, and do you think they ever will be implemented? GS: Yes they will, but it will require leadership. In Victoria, when Jeff Kennett became Premier, he introduced reforms that no previous leader would have even contemplated, in terms of competition policy, and in terms of dealings with local government, the amalgamation of councils and the development of infrastructure, although the balance sheet of the state was not looking good at the time. I’m still bemused that some states refuse to contemplate the sale of electricity assets. It just

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bewilders me that leadership can’t be taken. That was the Kennett process. Paul Keating took an extraordinary leadership role in undertaking the National Competition Policy. He got the Hilmer Report, got the Industry Commission – as it was at that time – to then report on the benefits to Australia, and the productivity benefits were measured in thousands of dollars – I think $5500 per individual in terms of productivity growth. Ultimately, he said, ‘Look, here are the sorts of things that work.’ It went from big infrastructure issues – electricity, water, gas, things of that nature – through to some of the smallest things. It was the leadership shown by Keating and by Kennett – of saying ‘this needs to be done’, and showing the political leadership to explain it. BL: A lot of discussion has been about the triple-A rating and the degree of headroom on the budget from different jurisdictions as the major constraint in getting a deeper, wider program of infrastructure projects funded and delivered. Do you think there’s scope for a National Competition Policy-style approach to public sector service delivery?

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KS: The current budget position in the states is the burning platform, and I do think that each of the state governments has to get moving to be able to even fund their operating expenses. We are starting in a position where in New South Wales – at least for the last five years – the increasing debt has been used to cover operating expenses; it hasn’t been used to cover capital. The other important thing is the need to be efficient in our service delivery, and one of the examples that the NSW Commission of Audit came across was the John Hunter Hospital in Newcastle, which was a successful PPP. B ut i t c oul d h ave b e e n a lo t b e tte r ha d m or e se r v ic e s b e e n in c lu d e d in th e out sourc i ng a r ra n g e me n ts . We need to be much more flexible with those things. It doesn’t look like much over a one-year period, but over a 20-year contract, it’s a lot of money. TM: When the Productivity Commission evaluated the economic impact of NCP, they concluded that it had contributed around 1.5 to two per cent of GDP growth. Five years ago, when the Productivity Commission did modelling and an analysis of what was then called the National Reform Agenda, they concluded that over a 25-year period, if it was fully implemented, the National Reform Agenda would add between nine and 12 per cent to GDP at the end, recurring every year. That’s what stimulated both sides of politics to have a go. There is now a massive microeconomic reform program underway in the Australian hospitals sector to help deliver both greater efficiency and the aspirations behind the National Reform Agenda. Service delivery can always yield efficiencies, particularly if you deploy more public servants to the front line and diminish the size of many head offices in the big systems. All the action should be at the point where services are delivered, through hospitals, schools or TAFEs. That’s happening in New South Wales, it’s happened in Victoria, it’s sort of happening in Queensland and it’s certainly underway in Western Australia. But those reforms are not going to put a lot of money on the table for infrastructure investment, unless you see some share of the GDP growth that will eventually come as a result of those reforms.

The infrastructure investment challenge is more immediate, and it has to have a different sort of debate in order to take the public in the right direction. The best way to do that is around particular projects that are highly rated, that people will find some sense in, and that people want to support. BL: While health service delivery is not infrastructure, the various Commissions of Audit have shown that health operating expenses are a major constraint on the ability to fund infrastructure – or, in fact, anything else – and we are facing a situation in which every state will have the cost of its healthcare delivery eclipse its revenues by about 2042. What sorts of things do you think governments will need to start to front up to in order to bring operating expenses down and start to repair their financial positions? GS: This is a really sensitive political issue. Back in the early 2000s, three or four of us got together to have a look at the funding of operating expenditure on health. There’s one thing that’s really interesting about health: it’s seen as being something that’s different. Health is ripe for being subjected to the disciplines of competition, but everyone who’s involved in health will tell you that it’s not appropriate and that competition should not apply. There’s absolutely no reason why we can’t introduce competitive disciplines into health. It basically says to everyone, there’s a Medicare base that’s a safety net for everyone, but beyond that you are entitled to actually choose the place from which you acquire your healthcare, with funding from government through some form of a voucher system. It doesn’t matter whether you go to the Alfred Public Hospital or the Epworth Private Hospital – either way, you’re funded for your healthcare. Then what happens, of course, is you impose some real competitive disciplines between the Epworth Private and Alfred Public hospitals, and it starts to get really interesting. But the moment you mention that, it becomes subject to all sorts of manipulations of the truth; that’s why it’s fundamental to remember that there is a foundation there – a protective foundation, which is the Medicare scheme. A colleague of mine – Simon Blair, who’s now Group Executive, International Financial Services at the Commonwealth Bank of Australia (CBA) – went over to see the World Bank on this issue. He found that this concept of introducing market-based Volume 3 Number 2

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I’m relatively relaxed about the operating costs in health, and the role that the Commonwealth is playing in picking up a lot of the growth funding after 2014 competition for healthcare was readily acceptable in third-world countries and worked a dream. But it was not acceptable in any more developed countries, and you’ve got to ask yourself why. TM: Activity-based funding, which is really the working through of management accounting into bundled services delivered by public hospitals, has been successful in Victoria for 15 years, and it’s the reason why delivery of hospital services in Victoria is, on several measures, much more efficient than in other states. Activity-based funding, together with the sort of radical devolution of responsibility out to the local hospitals that New South Wales and other states are implementing, will pull back the inefficiencies within the hospitals over time and provide the basis for then going to a much more competitive environment. You can’t go there without the intermediate step, because in some states, people don’t know what it costs to deliver certain services in certain hospitals. Until you do that, you don’t have the basis for competition. For some time now in Victoria, because of this benchmarking, many public patients are being put into private hospitals quite satisfactorily. The other point is that Victoria has had more successes than failures in PPPs for hospitals. The Royal Children’s was a PPP success, along with the Comprehensive Cancer Centre, which is now underway. Early on, there were some smaller hospitals that failed, and I think it was a question of scale and, frankly, a bit too much risk. But the bigger PPPs have

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worked, and they have produced terrific buildings and terrific operations. You could even have more PPPs in education. New South Wales has done it with schools, and Victoria, I think, has done it with groups of schools, rather than individual schools. BL: Kerry, any views on health? KS: The activity-based funding model being introduced to New South Wales is driving a lot of change, including such novel things that a hospital should actually know, like how much running a ward costs. I’m relatively relaxed about the operating costs in health, and the role that the Commonwealth is playing in picking up a lot of the growth funding after 2014. There is a lot of pressure on budgets before that date. With school PPPs, it’s really important when a successful PPP is being done that the community gets involved in what has happened and what the outcomes have been. We are not very good at telling people what’s been done, and how the teachers like it better or what’s working well. We really need to put a bit more effort into that. BL: I’d like to touch on the NBN. What are your thoughts on its model and ultimately the market structure it’s going to create? GS: The process that’s been established for the investment in that network is the only one that could’ve been done. It’s well-known that several of us at the ACCC had argued for the structural separation of Telstra in order to enhance competition in the future.

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Competition in telecommunications is moving to a whole new paradigm as a result of the building of the NBN. What is now being built is the only sensible, commercial and economic decision that could’ve been made. There’s been glib political talk that we’ve got a monopoly NBN; well, of course we’ve got a monopoly. There are many people who would argue that you can’t afford one NBN, let alone two or three or four of them. We are developing infrastructure for this century, or at least for the next 50 years, that, in terms of providing a high-speed broadband network, is fundamentally sound and, with the role of the ACCC in dealing with pricing structures by the NBN, will work out very well indeed. There’s an issue about cost-benefit analysis. The cost has two business plans; the cost has been established and there will always be a minor increment in their costs as things go along. But the cost has been established. The financial returns have also been established according to two business plans, and they have been examined. They show an internal rate of return of 7.1 per cent. The real issue about benefits is twofold. There’s a social benefit associated with the development of the NBN, which relates to about 25 per cent of the geography of Australia. That’s the 25 per cent that’s rural and regional Australia, and we have a social contract with them that says they will have services that are as good as possible on an equitable basis to

what we have in the more densely populated parts of Australia. It’s difficult to assess that. It’s a political and social decision that has been made for decades in this country in respect of dams, roads and trains, and everything else in infrastructure. The other element is this: when you look at highspeed broadband, some look at it in a very short-term perspective. What is, I think, virtually impossible for the best economists and the best visionaries, is to establish what true high-speed broadband will offer, not five years down the track, but 10 and 20 and 30 and 40 years out, because that’s the nature of the lifetime of this particular infrastructure. We need to recognise that there’s a social investment, and it’s going to inevitably lower the rate of return down to that 7.1 per cent. And we need to recognise that what we are building is that multi-lane highway for broadband that will take us out for 30 or 40 or 50 years, that will replace that 100-year-old copper infrastructure, which is now badly degraded and needs to be replaced. And finally, just think in the more visionary sense about the sorts of benefits we can get. Think about it in terms of health and the other things you could do, and think of the benefits that flow from it. TM: At the time this was done, there was a debate about whether or not you could subject the NBN to a cost-benefit analysis. I strongly supported the argument that if you tried to do a cost-benefit analysis that embraces things in addition to the economic considerations, you would have had pie in the sky stuff that would’ve invariably been wrong. The only way to be sensible was to subject it to a full, rigorous commercial analysis to generate Volume 3 Number 2

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evidence that there would be a commercial return, which is the seven per cent internal rate of return already mentioned. If you did that, you would be confident that in time, you could sell off the network. And you’d only have a question of whether, in the hands of the new owners, you would have a utility rate of return where you would deregulate what they could earn. My preference would have been a regulated utility rate of return on the network once it was built. So I’ve always found all the comments coming from business about the need for a cost-benefit analysis on the NBN to be curious. Would a retailer prefer this analysis to an internal rate of return when planning investments in supermarkets? Using a cost-benefit analysis technique would have just made it even easier to justify the project and the spend, rather than the more rigorous approach that was taken, which was a proper assessment of the internal rate of return. When the first business plan was done, again people in government insisted that it not be analysed by colleagues in government because they didn’t necessarily have the commercial skills. BL: It’s an exceptionally good point. Almost all the discussion about getting projects done in the immediate term has focused on privatising assets that already exist. How important is it that you avoid experiences like the Yoy Lang move by the Cain Government in the 1980s? When they ran out of money to complete the power station, they privatised a small part of it with no market context, and in fact that part of the generator ended up being ring-fenced out of the National Electricity Market for years to come. Is there a risk we might see governments not have a clear idea of the structures of things like water markets, start to privatise parts of water utilities and ultimately retard a longer-term competitive market in whichever sector they are moving in? KS: I think that in electricity, the sooner we get into privatising everything and moving to NEMtype structures properly, the better. The appropriate structure for water is less clear, and different jurisdictions are going in different directions. Queensland seems to be reversing what it had first done, so appropriate structures in water need a bit of attention. But we should keep an eye on what has happened in both the United Kingdom and the longterm franchising that the French do, and whether or not that’s more efficient. It is really important. 76

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TM: We have fallen out of the habit of remembering what happened in Victoria when Alan Stockdale was Treasurer. We have also forgotten that the nature of the industry structure he was responsible for, in respect of the energy sector, was very innovative in the world at the time. In fact, I would argue it’s still serving Victoria very well. Alan Stockdale, the other ministers in the government, and the officials they worked with, actually did Australia a service, because they didn’t just sell the whole system off, which is what happened later with Telstra. Instead, they broke it up and went for the maximum level of competition. Similarly, the franchising of public transport systems is still a good model, and more of that could be done around the country, because of the sheer difficulty of selling lots of those types of assets. We are at a point where there’s huge scope for creativity on how to do things, and the only caution I’d enter is the Anna Bligh (former Queensland Premier) caution. She lost office for a number of reasons. But the thing that traumatised other politicians most about her experience is that she came back from an election and proceeded to privatise the assets, without going to the people beforehand to say she was going to do it. In Victoria, if the government came out now and said, ‘we are going to privatise water,’ I think they’d have an Anna Bligh experience. I think any government would. GS: If you look at the National Competition Policy reforms and at what the Kennett/Stockdale Government did in Victoria, there are some really interesting disciplines. The first one was to say, ‘Competition must apply to every sector of the economy and to every business operation, whether it’s government-owned or not, unless there’s a good, independently assessed public interest reason why it’s not.’ The second was: ‘Does government really need to build this, and does government really need to own it?’ BL: What is the one thing you’d say to governments about what they need to be doing over the next couple of years to get these things moving? GS: Reintroduce National Competition Policy as a major reform issue as part of the COAG Reform Council. We should adopt the same

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process that was adopted there, which is to say that if you comply with the reforms, if you undertake the reforms, you get part of the benefit in terms of payments by the Commonwealth. If you don’t comply, you don’t get the benefits. TM: One of the reasons we are in a mess with infrastructure in Australia is that some decades ago, we gave up trying to plan the big cities strategically. For land-use planning and for infrastructure planning, the time horizon is 20 or more years, so it’s not short-term. If you do that planning, you can cheaply reserve the land that you’ll later need and start to have a real grasp of what the priority projects are. Land-use planning also includes where you put residential developments, and where you put commercial developments. The tragedy of Melbourne is that the western suburbs have broken the pattern that has been here since World War II. That is, you are now seeing huge

residential tracts without places where people can get a job. People have therefore needed to get across the Yarra to the CBD or to the eastern suburbs for a job, and that’s what is killing a lot of the infrastructure through congestion. Sydney and Brisbane have similar problems. Unless you do plan strategically, you end up with the problems we’ve got at the moment, and you end up with much greater costs when you try to create remedies for the absence of strategic planning in the first place. All of that planning is a precondition of being smarter and more creative about how you fund particular pieces of infrastructure. KS: The most important thing to do is just get on and do it. There’s a general consensus about many things in the infrastructure space, and there doesn’t seem to be a sufficient sense of urgency to actually get bulldozers out.

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DR KERRY SCHOTT Head of the NSW Commission of Audit; former Managing Director of Sydney Water Dr Kerry Schott has had an extensive career within the infrastructure and investment sectors, and is currently a member of the Infrastructure Australia Board. Previously, Kerry was Managing Director of Sydney Water. Kerry was a non-Executive Director of the Sydney Water Board from 1997 to 2001. She recently led the Commission of Audit for the New South Wales Government. She previously spent 15 years as an investment banker, including as Managing Director of Deutsche Bank and Executive Vice President of Bankers Trust Australia. She has been Deputy Secretary, NSW Treasury, an economic policy adviser with the Reserve Bank of Australia, the Commonwealth Government and an academic at University College London and at Oxford University. Kerry has been Chairman of the Water Services Association of Australia, NSW Environment Protection Authority and the NSW Film and Television Office. She has also been a director of Australian Airlines Limited and the Film Finance Corporation Limited. She was a member of the Corporations and Securities Panel, and a Trade Practices Commissioner.

MR TERRY MORAN AC Chairman, Barangaroo Delivery Authority National President, Institute of Public Administration Australia Mr Moran has had a varied public service career, working with successive Australian federal and state governments in public policy and public sector management. Mr Moran’s early career as a CEO focused on building Australia’s education and technical skills capacity. In 2000, he was appointed Secretary of the Department of Premier and Cabinet in Victoria, where he played a leading role in developing an ambitious national reform agenda, subsequently agreed to by all states and the Commonwealth Government, and many initiatives to improve planning and service delivery in the state. Mr Moran was Secretary of the Department of the Prime Minister and Cabinet from March 2008 to September 2011, overseeing further development and implementation of this national reform agenda,

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particularly through social policy. Mr Moran was also responsible for overseeing work on national security and international policy, environment, industry and economic policy, and coordination of government administration, including Cabinet support. Mr Moran also played a lead role in driving reforms to the Australian Public Service.

GRAEME SAMUEL AC Managing Director and Head of Melbourne, Greenhill Caliburn Graeme was Chairman of the Australian Competition and Consumer Commission until July 2011. He took up this position in July 2003. He was also an Associate Member of the Australian Communications and Media Authority until July 2011. Graeme has pursued a professional career in law and investment banking, from which he retired to assume a number of roles in public service and company directorships. He was a Partner of the law firm Phillips Fox & Masel from 1972 to 1980, Executive Director of Hill Samuel Australia Limited and subsequently Macquarie Bank Limited from 1981 to 1986, and co-founder of Grant Samuel & Associates in 1988. Through his professional career, Graeme has specialised in mergers, acquisitions and defence, competition law, and interaction with governments, both federal and state. He has played a leading role in many well-recorded takeover defences, including BHP (takeover bids by Robert Holmes a Court), Nicholas Kiwi, and many others. During his eightyear term as Chairman of the ACCC, he was involved in assessing over 2000 merger proposals submitted for review by the Commission. This included analysing the transactional stages of many of the submitted mergers, and in every case a detailed analysis of the relevant markets, covering most industries in the Australian economy. Graeme’s public service roles, across a range of activities, but prominently as President of the National Competition Council (1997–2003) and then as Chairman of the Australian Competition and Consumer Commission (2003–2011), have involved extensive interaction with business, and federal and state governments.

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

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Telecommunications 1997 relating (Cth). incidents of non standard workAct practices to Telstra andpits manholes. incidents of non standard work practices relating to pits Telstra and manholes. the Network Integrity area, we encourage developers and builders to contact us Conscientious developers always always check where existing Telstra assets prior BecauseIn every development is unique, Telstra NI actively encourages all developers, Conscientious developers check the where the existing Telstra are assets are prior BecauseIntegrity every development is unique,developers Telstra NI actively encourages all developers, In the Network area, we encourage and builders to us in the Conscientious Telstra recently modified PID or ‘Pit In policy in an effort developers check where the existing to ensure network assets and infrastructure areDriveway’ not affected by orcontact included to commencing development. 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An example of this is when pits or manholes pits“building and Because every development is to unique, Telstra purchased land in Victoria and developed it(gas, into electricity, a residential estate. end up in manholes. customers’ proposed driveways! This canTelstra lead serious Health NI and and paths were installed, and new utilities (gas, electricity, water) were provided. and paths were installed, and new utilities water) were provided. end up Safety in customers’ proposed driveways! This can lead tothe serious Health and as well as for Telstra staff, the general andan property owner, encourages all developers, contractors, builders members The site was surveyed, drainage, roads and Telstra paths the developer did not did consult with about existing Telstra Telstra Damageactively to therisks Telstra network continues to bepublic antoarea of area concern. Inor the past Unfortunately the developer not consult with were Telstrainstalled, about existing Damage to thestaff, Telstra network continues be of concern. In as the pastUnfortunately Safety risks for Telstra the general public and the property owner, as well potential liability breach of and Such a development As a result, who bought blocks found network (pipe/ (pipe/ four financial years Telstra has had anHealth average ofSafety 20,000 incidents of network of the public to for contact Telstra asanearly as possible in the development and assets. new utilities (gas,customers electricity, andbought water) wereTelstra provided. As a customers result, who blocks found Telstra network four financial years Telstra has had average oflegislation. 20,000 of network assets. potential liability for breach of Health and Safety legislation. Suchincidents aits development also nationally. prevent from exercising its rights access assetsIntegrity and cable and manholes) in developer theirin front yards. Subdivision permits usually state the damagemay nationally. That’sTelstra nearly 55 damages per day! Intoday! Network Integrity we process to discuss and register their PID inquiry. Unfortunately, the did not consult with Telstra about cable and manholes) their front yards. Subdivision permits usually state the damage That’s nearly 55 damages per In Network we may also prevent Telstra from under exercising its rights to access itsAct assets and granted the Telecommunications 1997 (Cth). must atmust their cost provide “clear title” totitle” prospective property owners.owners. ensure infrastructure compliance with thewith strategies put in place toplace avoidtodamage and to and to developer existing Telstra assets. As a result, customers who bought blocks developer at their cost provide “clear to prospective property ensure compliance the strategies put in avoid damage infrastructure granted under the Telecommunications Act 1997 (Cth). This would include relocating all utilities that be relocated - including protectDamage Telstra’sTelstra’s valuable assets.network NI works to avoidtothe of:risks This wouldnetwork include relocating all utilities thattoneed to their be relocated - including protect assets. NIcontinues works avoid to the valuable Telstra torisks bethe an area of: of concern. found Telstra (pipe/ cable and need manholes) in front yards. Telstra recently modified its the PID general or “Pit In Driveway” in an effort to avoid Telstra assets prior –toprior sale of developed land. Developers easily • Injury or death to workers or public Telstra –assets to the sale of the land. Developers canobtain easily obtain • the Injury orfour death to workers orDriveway” the general public In past financial years, Telstra has hadinpolicy ananaverage of 20,000 Subdivision permits usually state thedeveloped developer must atcan their own Telstra recently modified its PID or “Pit In policy effort to avoid incidents of non work practices relating to Telstra pits and manholes. access to this information about our assets obtaining Telstra “Dial • Damage to Telstra’s assetsdamage to ‘clear this information about our by assets by obtaining Telstra “Dial Before • of non Damage to standard Telstra’s assets incidents of network nationally. That’spits nearly 55 damages per cost access provide title’ to prospective property owners. ThisBefore would incidents standard work practices relating to Telstra and manholes. Conscientious always check where the owners existing Telstra assets are prior Because every development unique, Telstra actively encourages all developers, You Dig” plans. But indevelopers this case, newthe property owners now face theface cost of cost • The significant costs ofcosts repairing damagedamage faced NI byfaced Telstra and those You Dig” plans. Bututilities in thisthe case, new property now of • every The significant of is repairing bywith Telstra those day! Indevelopment Network Integrity, weTelstra ensure compliance the strategies include relocating all that need to berecently relocated – including Conscientious developers always check where the existing Telstra assets arethe Becausecontractors, is unique, actively encourages alland developers, to commencing development. A developer purchased land inprior Victoria builders or members of theNIpublic to contact Telstra as early as possible relocating Telstra’sTelstra’s assets. parties parties responsible relocating assets. responsible to Telstra commencing development. A developer recently purchased land in Victoria contractors, builders or members of the public to contact Telstra as early as possible put in place to avoid damage and to protect Telstra’s valuable assets. assets – prior to sale of the developed land. Developers can and developed it into a residential estate. The site was surveyed, drainage, roads in development process to discuss and registercustomers. their PID inquiry. • Disruption to services and inconvenience to Telstra • theDisruption to services and inconvenience Telstra customers. and developed it access into ainstalled, residential estate. Theabout site(gas, was surveyed, drainage, roads in the development to discuss and register theirtoPID inquiry. NI works to process avoid the risks of: easily obtain to thispromotes information our assetsstrategies, by obtaining and paths were and new utilities electricity, water) were provided. Network Integrity proactively damage minimisation Network Integrity proactively promotes damage minimisation strategies, and paths were installed, and new utilities (gas, electricity, water) were provided. • injury or death to workers or the general public Telstra ‘Dial Before You Dig’ plans. But in this case, the new property Unfortunately the developer didYou not consult Telstra about Telstra Damage tocircumstances the Telstra network totobe an area of concern. Innetwork the past together with the “Dial Before You Dig” service, to with raiseto what we call existing “cable Under no circumstances should anyonecontinues try to move ormove alter Telstra’s network together with the “Dial Before Dig” service, raise what we call “cable Under no should anyone try or alter Telstra’s Unfortunately the didofnot consult with Telstra about Telstra existingnetwork Telstra (pipe/ Damagefour to the Telstra network continues to be an area of concern. In the of past •infrastructure damage to authorisation. Telstra’s assets owners now face theWe cost relocating Telstra’s assets. assets. adeveloper result, customers whoconduct bought blocks found financial years Telstra has Under had anthe average 20,000 incidents network in As Australia. frequently cable awareness presentations infrastructure without authorisation. Telecommunications Act 1997 awareness” in Australia. Webought frequently conduct cable awareness presentations without Under theofTelecommunications Act 1997awareness” assets. cable As a result, customers who blocks found Telstra network (pipe/ four financial years Telstra has had an average of 20,000 incidents of network • the significant costs of repairing damage faced by Telstra and manholes) their front Subdivision permits usually state the damage nationally. That’s damages perwork day!on Inwork Network Integrity we toorCouncils, Developers andinUtility Companies. This year alone NI have (Cth) only persons authorised by nearly Telstra can undertake Telstra’s assets or to Councils, Developers andyards. Utilityyards. Companies. This year alone NI have (Cth) only persons authorised by 55 Telstra can undertake on Telstra’s assets cable and manholes) in their front Subdivision permits usually state the owners. damageensure nationally. That’s nearly 55 damages per day! In Network Integrity we andowned those parties responsible Network Integrity proactively promotes damage minimisation developer must atthan their cost provide “clear title” to prospective property with strategies put in place to avoid damage and to presented more than fifty Cable Awareness presentations to the industry enter a enter facilitya compliance owned or operated by Telstra. Interfering (including unauthorised presented more fifty Cable Awareness presentations to the industry facility orthe operated by Telstra. Interfering (including unauthorised developer must at their cost provide “clear title” to prospective property owners. ensure protect compliance with the strategies put in place to avoid damage and to This would include relocating all utilities needservice, to be relocated NIand works toisavoid the risks of: the disruption to assets. services to Telstra strategies, together with the ‘Dial Before that You Dig’ to raise- including including the new NBN Company. entry or• tampering) withvaluable thewith infrastructure is ainconvenience criminal offence under including the new NBN Company. orTelstra’s tampering) the infrastructure a criminal offence under the This would include relocating all utilities that need to be relocated including protect•entry Telstra’s valuable assets. NI works to avoid the risks of: assets – prior to sale ofinthe developed Developers can easily obtain Injury or death to workers or the general public CriminalCriminal Code Act 1995 (Cth). customers. whatTelstra we call ‘cable awareness’ Australia. Weland. frequently conduct Code Act 1995 (Cth). Telstra access assets –toprior to sale of theabout developed land.by Developers can easily obtain • Injury or death to workers or the general public this information our assets obtainingand Telstra “Dial Before •Developers Damage toexpensive Telstra’s assets Developers can avoid rework rework and costs bycosts contacting NI before cable awareness presentations to councils, developers utility can avoid expensive and by contacting NI before access to this information about our assets by obtaining Telstra “Dial Before • Damage to Telstra’s assets You Dig”This plans. Butalone, in this case, the presented new property owners now face the cost of •Under Theno significant costs of repairing damage faced by Telstra andTelstra’s those beginning work. Recently the developer ofanyone a site inatry NSW interfered with circumstances should to move or alter beginning work. Recently the developer of site in NSW interfered with Telstra’s companies. year NI have more than 50 cable You Dig” plans. But in this assets. case, the new property owners now face the cost of • The significant costs of repairing damage faced by Telstra and those relocating Telstra’s parties responsible assets by raising footpath levels without first consulting Telstra in relation to its to its awareness assets by network raising footpath levels without firstauthorisation. consulting Telstra in relation Telstra’s infrastructure without Under the presentations to the industry – including the new NBN relocating Telstra’s assets. parties responsible •Telecommunications Disruption toThe services and inconvenience to Telstra customers. proposed works. The works significantly reduced access to theauthorised public proposed works significantly reduced access to thetelephone public Act 1997 (Cth),toonly persons bytelephone Company. • Disruption toworks. services and inconvenience Telstra customers. Network Integrity proactively promotes damage minimisation strategies, booth and encroached on a Telstra booth and on a pillar. Telstra pillar. assets or enter a facility Telstra canencroached undertake work on Telstra’s Network Integrity proactively minimisation together with the “Dialpromotes Before Youdamage Dig” service, to raisestrategies, what we call “cable Under no circumstances should anyone try to move or alter Telstra’s network owned or operated by Telstra.try Interfering (including unauthorised These are just examples of how developers and canpresentations with the some “Dial Before You Dig” service, to raisecable whatbuilders we call “cable Under no circumstances should anyone toUnder movethe or alter Telstra’s networkAct 1997 together awareness” in Australia. We frequently conduct awareness infrastructure without authorisation. Telecommunications In another example, a pole with Telstra telephone lines was not relocated prior to In another example, a pole with Telstra telephone lines was not relocated prior to awareness” incosts Australia. We frequently conduct cable awareness presentations infrastructure without authorisation. Under the Telecommunications Act 1997 entry or tampering) with the infrastructure is a criminal offence under avoid the of rework and repairs by consulting Telstra Network to Councils, Developers and Utility Companies. This year alone NI have (Cth) only persons by Telstra can undertake onthe Telstra’s assets or land being subdivided by aauthorised Developer. This oversight resultedresulted in work the pole remaining landpersons being subdivided by aTelstra Developer. This oversight in pole remaining to Integrity Councils, Developers and Utility Companies. year alone NIto have (Cth) only authorised by1995 can work on (including Telstra’s assets or the Criminal Code Act (Cth). about theirthan proposed plans prior This to the commencement presented more fifty Cable Awareness presentations the industry enter a facility owned or operated by undertake Telstra. Interfering unauthorised presented more than fifty Cable presentations to the industry enter aentry facility or operated Telstra. Interfering (including unauthorised of works. NI looks forward toAwareness working with the building industry toincluding the new NBN Company. orowned tampering) with thebyinfrastructure is a criminal offence under the including the new NBN Company. entry orCriminal tampering) with the infrastructure is a criminal offence under the Developers can avoid expensive rework and costs by contacting NI achieve the best outcome for our customers. Code Act 1995 (Cth). Criminal Code Act 1995 (Cth). before beginning work. Recently, theand developer a site inNI New Developers can avoid expensive rework costs by of contacting before Developers can avoid expensive and costs by contacting NI footpath before with South Wales interfered withdeveloper Telstra’s assets by raising levels beginning work. Recentlyrework the of a site in NSW interfered Telstra’s These are justare some of how of developers and builders can avoid These justexamples some examples how developers and builders canthe avoid the beginning work. Recently the developer of a sitefirst in NSW interfered with assets by first raising footpath levels Telstra in Telstra’s relation without consulting Telstrawithout in relation consulting to its proposed works. Theto itscosts ofcosts rework and repairs by consulting Telstra Network Integrity about their of rework and repairs by consulting Telstra Network Integrity about their assets by raising footpath levels without first consulting Telstra in to telephone its proposed works. The works significantly access to relation the public plans prior commencement of works. looksNIforward to working works significantly reduced access toreduced the public telephone booth and proposed proposed planstoprior to commencement of NI works. looks forward to working proposed works. The works significantly reduced access to the public telephone booth and encroached on apillar. Telstra pillar. with thewith building industryindustry to achieve the bestthe outcome for our for customers. encroached on a Telstra the building to achieve best outcome our customers. booth and encroached on a Telstra pillar. In a pole withwith Telstra telephone lines was notwas relocated Network Integrity is contactable on 1800on810 443810 or 443 or Network Integrity is contactable 1800 In another anotherexample, example, a pole Telstra telephone lines not toprior to In another a pole with telephone lines was not relocated landexample, being subdivided by Telstra a Developer. This oversight resulted in theprior pole remaining email F1102490@team.telstra.com email F1102490@team.telstra.com relocated prior to land being subdivided by a developer. This oversight land being subdivided by a Developer. This oversight resulted in the pole remaining

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

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COMPANY FOCUS

FROM INDUSTRY PIONEER TO MARKET LEADER Founded by Dick Bridges in 1955, and specialising in sheet metal fabrication, including electrical enclosures for domestic metering applications, B&R has grown to be the largest manufacturer of industrial enclosures, cabinets, racks and switchboards in Australia. Under the direction of the founder’s son Ken and daughter Chris, B&R Enclosures remains an Australianowned and operated business, which encompasses four divisions: B&R Industrial, B&R Data Systems, and B&R Domestic Commercial trading through Hager B&R and B&R Ex Systems Pty Ltd. Each division has a focus on the unique needs of their different market segments. Together, these divisions share the strengths, resources and experience of the founding company to provide attentive customer service, innovative design and superior-quality products. In 1994, B&R Enclosures started a successful partnership with Hager, a European electrical solutions manufacturer, to offer the Australian domestic and commercial markets a full range of high-quality enclosures and switchgear. B&R Data Systems was established in 2006 to cater to the specific needs of the data and ICT market. These divisions are backed by the manufacturing, sales and distribution network of B&R Enclosures, with the addition of an experienced, dedicated sales and product development team with a detailed understanding of this specialised market. B&R’s offer was further increased with the establishment of B&R Ex Systems Pty Ltd in 2009, specialising in the supply of hazardous area electrical equipment into chemical, oil, gas and dust-filled applications. B&R Ex Systems’ highly qualified staff have over 100 years’ industry experience, and operate out of a dedicated TÜV-certified facility in Riverwood, Sydney.

World-class manufacturing facilities B&R Enclosures manufactures a range of products for a variety of industries and applications, with manufacturing plants in Brisbane, Adelaide, Sydney and China. B&R utilises state-of-the-art technology to produce their renowned, high-quality products. B&R’s offerings to the market include electrical enclosures for residential and commercial buildings, new infrastructure developments, industrial controls, mine processing, the oil and gas industry and data centres. B&R’s drive for excellence is reflected by its constant investment in the latest design and manufacturing technologies. A professionally qualified team of engineers and designers use the latest 3-D computer design systems to develop and improve a wide range of enclosure solutions, and to ensure maximum product usability.

80X

A commitment to quality B&R is committed to building quality into each stage of design, manufacture and distribution. B&R has demonstrated a commitment to quality, recognised internationally on the Lloyd’s register, and has achieved and maintained the standard of ISO9001:2008.

The B&R experience B&R Enclosures’ commitment to being a service-based business has never changed. Close customer relationships are the cornerstone of their business. B&R listen carefully, because their innovative product ideas are driven from deep market insight. One of B&R’s philosophies is to offer products at a competitive price. Our understanding of applications, rules and regulations is reflected in products that can be counted on to perform strongly and safely across every state in Australia. B&R stays at the forefront of new technologies in order to exceed their customers’ expectations. To find your local B&R Enclosures office and view the full product offer, visit www.brenclosures.com.au

future building Volume Volume 3 Number2 2 3 Number future building

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Here’s to a

ighter future

Providing solutions to major infrastructure projects across Australia, B&R Enclosures manufacture and supply a full range of electrical enclosures to meet any project requirements.

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3/25/13 12:48 PM

Graham Bradley AM

Flexible labour markets are essential if Australia is to meet its national economic objectives and deliver the many projects in the pipeline, says Business Council of America Deputy President, Graham Bradley AM.

I have been asked to comment on the fundamental importance of improved labour markets to our chances of successfully delivering many of the projects that are included in the unprecedented potential project pipeline, which our political leaders so often assert will underpin Australia’s economic growth for the next decade. So I will cover three themes: Firstly, the opportunities, but also the risks associated with our pipeline. I’ll then look at some of the key issues for labour markets that are relevant, and lastly I’d like to talk about what might be done to generate more community support for economic growth from the Australian community, which often doesn’t see the benefits of these major investment projects that are so important to its long-term economic future. The Federal Government and the Reserve Bank regularly assert that Australia’s economic wellbeing is assured by the $500-billion plus pipeline of planned resource projects, about half of which are commenced or committed. 82

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There is no doubt that Australia will remain, for some time, an economy highly dependent on capital investment by business for its GDP growth. Business investment is expected to grow by 12.5 per cent in the current year, and by eight per cent next financial year. This will lift our investment to GDP ratio to about 30 per cent, which is not quite as high as China at 40 per cent, but is nevertheless significantly ahead of most countries in the Organisation for Economic Co-operation and Development (OECD), who tend to average 20 per cent or less. It’s worth pointing out that when the government talks about the $500 billion pipeline, it’s only measuring the resource industry, so we have to add the potential infrastructure pipeline, as well. There is no doubt that if we are able to deliver this pipeline, or a substantial portion of it, we will realise huge dividends: new economic infrastructure, of course, job creation, skills development and regional development, along with the future tax flows that will fund social infrastructure and improved social dividends. But will the pipeline be delivered?

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Graham Bradley AM

Many of you will be aware of the landmark study released in May 2012 by the Business Council of Australia, entitled ‘Pipeline or Pipedream?’ This study analysed some $900 billion worth of proposed investments across the entire Australian economy, about half of which were then commenced or committed, but half of which were not. Our approach was to use the Deloitte Access Economics Investment Monitor to measure all major capital projects activity – public and private, current and prospective – and include major urban infrastructure; in other words, the full pipeline. The study drew on the most up-to-date research available in Australia and around the world to assess Australia’s performance in delivering major projects in comparison, and what we concluded was that major project delivery is definitely the main game for our economy in the next few years. If realised, it will underpin a highly productive economy for the future and material improvements in living standards. It will create higher-paying employment opportunities, both directly and indirectly, in our capital cities and regional communities. And the income generated will create higher demand for goods and services throughout the economy. It will also boost government revenues, allowing more investment in social infrastructure and better services.

But what the research also established, and what our government leaders are less inclined to acknowledge or explain, is that successful delivery of the prospective pipeline is far from assured, not only because the uncommitted projects are at risk of a major downturn in commodity prices and demand, but also because we have become too expensive. Our analysis of the Australian capital projects in the resource sector uncovered a 40 per cent cost premium compared to similar projects in the United States. In drawing this conclusion, Independent Project Analysis Group, our consultants on this project, drew on a database of 12,000 completed projects – the largest such database that we know of around the world – which included 28 large iron ore projects and coal projects, and it was found that we were 38 per cent higher in cost. It also included 28 large processing plant projects, where we were 50 per cent higher in cost. In offshore oil and gas developments, we were 200 per cent more costly for the platform and pipeline components. These conclusions should be of major concern to all Australians. Some commentators have questioned our choice of the United States Gulf Coast as the benchmark used in this study, so it is worth me explaining that the United States Gulf Coast is commonly used by investors and cost

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Graham Bradley AM

estimators around the world to assess resource and industrial project performance because of its market size, and the depth of project management and delivery capabilities that exist in that region. The comparison provided a useful indicator of some of the relative performance of project activity, which is similar to our national pipeline. It is also relevant to compare ourselves to this particular region because, in the case of oil and gas projects, which make up the largest part of our resource pipeline, we are going to be competing directly with them in the decades ahead. On public infrastructure to be delivered, the project data was sorely lacking, pointing to a need for far more to be done in Australia to evaluate infrastructure project delivery performance, so that we can benchmark ourselves against competitors around the world more accurately. Based on what data was available, the Turner and Townsend Construction Cost Survey indicated that, in Australia, hospital projects were some 60 per cent higher in cost, airports were 90 per cent higher in cost, and shopping centres 40 per cent higher in cost than their counterparts in the United States. The high Australian dollar partly explains these findings, but we also have a pressing need to lift our project cost and productivity performance if we are going to remain internationally competitive. We can’t simply rely on a depreciation of our currency. Our study also drew on ABS data on the cost of infrastructure delivery, which showed that from 2000 to 2010, costs rose at twice CPI, with labour costs rising faster than materials, plant hire, or other project input costs in Australia. Now, just a few months since the study was launched, our concerns are being reflected on an almost day-by-day basis, with announcements by companies planning major projects. We found the capacity constraints were making it difficult to source the skilled labour needed to deliver the large and simultaneously undertaken projects across our economy. We found a host of factors that detract from the cost efficiency of delivery of projects, in particular cumbersome, time-consuming and expensive approval processes and low workplace productivity. We found low levels of community and government support for many of these projects, and closely connected to that, we are not using our current opportunities to envisage and plan for what will come 84

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next. These issues are of enormous significance. They require a concerted effort by all levels of government and by the business community to ensure that Australians can see the benefits of the projects that will drive our future economic wellbeing, and also drive governments to support the necessary economic reforms, and politicians to find the courage to act on those reforms. Now let me turn to the labour issues; firstly, labour capacity constraints. The problem, and this has been much talked about, is most acute in regional locations, but it also affects projects in our major cities, which are competing for the same limited pool of specialised skills. For project owners, people with experience in managing and delivering major projects are highly valued, but are not readily available. Factors causing the most concern include low labour mobility. We know that it’s difficult and expensive to attract people to the places where we need them, and that there’s a high cost to do so on a fly-in fly-out basis. The inadequacy of skills training and retraining in Australia is another issue. We’re struggling to keep up with the skills required for new investment projects. Lastly, we have unhelpful immigration policies. While some flexibility has been built into the migration schemes, businesses continue to face barriers in sourcing the workers that they need to deliver projects with the least cost and delay. Existing requirements to comply with the Enterprise Migration Schemes for qualifying projects should not be made more onerous than they currently are. In our study, the BCA put forward a detailed set of reform recommendations to address labour and skills shortages. The starting point should be a comprehensive analysis of the skilled workforce needed to deliver our investment pipeline in its entirety, so that we have a better understanding of the likely sequence of these projects across the next five and 10 years. This has actually not been done in any systematic way, and as a consequence, we are largely flying blind in our understanding of what the total skills need for our country will be. Unless the supply of skilled labour is increased, there will be more and more competition for the same limited pool of workers, which has far-reaching consequences – particularly on costs during the construction phase.

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Graham Bradley AM

Now, I would like to address labour productivity. The recent McKinsey Global Institute report on Australia’s productivity outlook reconfirmed and quantified the cost of our low capital productivity. It highlighted that low capital productivity was a major drag on national GDP growth in recent years, and estimated that from 2005 to 2011, it cost us approximately $43 billion in lost value. That’s equal to the total cost of the National Broadband Network, wasted. Capital productivity is depressed by the combined effects of low labour productivity, high labour costs, and inefficiencies caused by the costs of delay and uncertainty associated with project approvals. Only one-quarter of that $43 billion could be attributed to yield depletion, by which McKinsey meant that lower-yielding resource projects were coming onstream to replace higher-yielding projects. The BCA’s pipeline document also brought into sharp focus the need to better understand what’s driving our high project costs. Ultimately, our concern resulted – along with the advocacy by Victorian Premier Ted Baillieu – in the announcement of the wide-ranging inquiry into costs and productivity in the construction industry by the Council of Australian Governments (COAG). The BCA has, however, convened a special taskforce of its member CEOs to prepare a major submission to COAG on what’s driving these high costs and the underwhelming productivity performance that we are achieving. Clearly, the current situation is unsustainable. Something’s going to give. If we don’t adjust our policy settings – and fast – what will give will be the delay, deferral, and cancellation of projects, and the loss of future economic benefit. If we want to stay competitive in a vastly more competitive world, if we want to keep wages growing, then we have to lift our productivity performance. It’s a given. Let me talk about the important issue of workplace relations. We know that workplace relations is only one piece of the productivity puzzle, but it is one that we must address. Working days lost due to industrial disputes hit an eight-year high in 2011. The full impact of Australia’s deteriorating productivity performance over the last decade has been masked by our high terms of trade. But those days are over, and Australia is now going to be part of a different and more competitive global economic landscape.

The question for a workplace relations system is whether it will support the creation of more productive, successful, and rewarding workplaces that can thrive in a competitive global environment. We don’t believe that the Workplace Act Review Panel was even close to coming to grips with this central question. The Review Panel recommended some incremental improvements, but even if these were adopted, the system would remain overly complex and would not support businesses and their workers to adapt quickly to the competitive environment. For example, the Panel hasn’t provided businesses with greater capacity to make decisions about the use of contractors and labour hire firms to manage peaks and troughs in their needs for specialist skills. On greenfield projects, while the Panel has recommended that good faith bargaining is a requirement in the development of greenfield site agreements, it hasn’t provided the option for employers to have an employer-only agreement, which used to be available if negotiations took too long. We are also concerned that the Panel has proposed that the FWA Tribunal will have powers to arbitrate on deadlocked negotiations. This will inhibit timely agreement. Also unhelpfully, the Panel has recommended that greenfield site employers are required to advise all unions with possible coverage of the site, and this flies in the face of concerns already raised by project promoters about the excessive time it takes now to negotiate and settle site agreements. In short, the Review Panel’s recommendations do little to address the core concern of companies trying to put workplace agreements in place for major infrastructure projects. What ultimately matters, of course, is how the Federal Government responds to the Panel’s report, and what the government chooses to do in response to the damaging industrial relations events and actions that we’ve seen in the streets of Melbourne. It could not be clearer that we need to have a strong umpire in the building and construction industry, and the BCA fully supports Premier Baillieu’s call for the Australian Building and Construction Commissioner (ABCC) to be reinstated. If the operation of our workplace relations laws does not prevent illegal union action, if it limits the ability of businesses to innovate and adapt swiftly, if Volume 3 Number 2

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Graham Bradley AM

We are in a vicious circle, where governments don’t explain, plan for, or prepare for growth, and we continue to play catch-up it discourages managers from exploring new ways of working in collaboration with their workforce, then the system is not operating in everyone’s – or anyone’s – best interests. I would like to talk about the issue of promoting our growth story to the wider community. Our fundamental belief at the BCA is that enduring prosperity and rising living standards require a strong and growing economy. And our sense is that some parts of the Australian community’s experience with economic growth gives them cause to be suspicious of it. This is creating an environment where necessary reform is difficult, and vital projects are delayed. So we are in a vicious circle, where governments don’t explain, plan for, or prepare for growth, and we continue to play catch-up. We also then incur the understandable community backlash against policies needed to foster economic growth. But delivery of cost-effective economic and social infrastructure is essential to support future economic growth, and will be needed to maintain full employment once our terms of trade and commodity prices begin to wane. Improved infrastructure in our cities and regions is also vital to demonstrate to the community the continued benefits of economic and population growth. The most recent Intergenerational Report projects that the populations of Sydney and Melbourne will grow to around seven million people each by 2050 – and some of us feel that’s an undershoot – Brisbane to four million, and Perth to more than two million. This should be seen as a great opportunity for significant urban renewal, provided we make the right investments. Infrastructure investment decisions need to be made in accordance with long-term infrastructure plans that set sound priorities based on fair dinkum, and openly available, cost-benefit analysis. Some parts of Australia do this well, but 86

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many do not. Integrated planning within and across governments must be vastly improved. We need infrastructure and growth strategies for our cities that establish a realistic and achievable pipeline of infrastructure projects and land use policies that will cater properly for current and future growth. While government funding for infrastructure has been relatively strong in recent years, partly in response to the global financial crisis, it now looks like it will have to fall. Clearly, we will need to have a serious debate on how to fund and finance infrastructure in Australia. So the Business Council, amongst others, keenly awaits the government’s comprehensive response to the report of the Infrastructure Finance Working Group, released last June. It would be a shame if the government’s response to this important Working Group report were to be piecemeal rather than comprehensive. We have a greater sense of urgency on this issue. The bottom line is that we could – and should – develop a new Australia-wide pipeline of public infrastructure projects, ready to roll as the resource projects are progressively completed, or, dare I say it, deferred. The current project pipeline won’t come to a shuddering halt, but that doesn’t mean we shouldn’t be thinking very seriously about what’s going to support the economy beyond the commodity boom. Our dollar may not be coming down so strongly yet, but the commodity prices are coming down fast. We can continue to make use of the skills that we have acquired through the big resource projects to sustain and strengthen the economy, but we need to plan for it now. We need to have the right set of infrastructure projects ready to go. But what are they? Well, they should be the projects that will have the highest positive return on the capital invested; that will have the biggest possible impact on Australia’s economic competitiveness and productivity moving forward, and on people’s lives. They should not be politically chosen projects based on untested costbenefit analysis, or none at all. Initiatives such as the Melbourne Metropolitan Plan, and the New South Wales Government’s draft transport infrastructure master plan, are important steps in the right direction towards what we should hope would be fully planned, committed, and funded projects in the pipeline – that’s what we need.

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Graham Bradley AM

What we will be looking for going forward are clear priorities, rigorous and transparent cost-benefit analysis, and effective funding plans, including strategies to attract private sector support. Surely the lesson that we should have learned as a nation from our response to the GFC in 2008 is the value of having a well-defined and costed set of attractive infrastructure projects, as it were, on the shelf, which can be accelerated, and which will leave a meaningful and enduring legacy for future generations. Governments concerned with budget surpluses need to decide whether it is in the best long-term interests of the country to redistribute tax revenues to households, or to invest in growing Australia’s productive capacity. The answer is pretty obvious here in Australia, as it is, of course, in the United States and in Europe. If those economies are going to throw off the shackles of growing debt and slowing economic growth, governments can and should prioritise investment in infrastructure projects, the way we do it in the private sector. When governments are under pressure to balance budgets, the money they spend on infrastructure has to be spent wisely. This is the only way to attract much-needed private sector co-investment in those projects. To secure the current pipeline and plan for the next phase of growth, governments need to take the community along with them. The community has to be reassured that the public infrastructure decisions, and their money, are being spent wisely. This brings me to a Business Council publication that we hope will contribute to the vexed issue of governments making good decisions about how they spend our infrastructure dollars. Over the course of many years, the Business Council has promoted the importance of using cost-benefit analysis to evaluate major public expenditure. We welcome the increasing use of cost-benefit analysis, notably by Infrastructure Australia and its counterparts around the country. But we remain concerned that decisions about regulation and spending programs involving large amounts of public money are being made by governments without proper, transparent analysis of costs, benefits and risks. This is not just an issue of how public money is spent; it creates a much broader problem, in our view.

When the community sees considerable funds going into projects where the benefits are unclear, they lose confidence in the broader decisionmaking processes of government. That undermines community support for economic reform, and the importance and value of growth for every Australian. So the Business Council asked Deloitte Access Economics to develop a back-to-basics document explaining exactly what cost-benefit analysis is all about. For almost everyone in this room, this will be cost-benefit analysis 101, but for many in government, in the public service, and many in the media, we hope it will be informative and lead them in the right direction. We hope that this simple tool will help the whole community envisage and plan the nation’s future in a different way. This is not just about infrastructure; it is about what comes next for our economy as the major resource project boom inevitably starts to wane. If we can use our current capital investment pipeline, and the economic options it will give us to create national growth and a vision for that growth that goes beyond the commodities boom, then we will have genuinely spread the benefits of that boom to the whole Australian economy.

GRAHAM BRADLEY AM

Deputy President, Business Council of Australia Graham Bradley is the Deputy President of the Business Council of Australia (BCA). He previously served a two-year term as President of the BCA until 2011, and has been an honorary member of the BCA and its board since 2009. Mr Bradley holds a number of senior positions, including as Chairman of Stockland and as Chairman of HSBC Australia. He was Managing Director of Perpetual Limited from 1995 to 2003, and prior to that he was a National Managing Partner of Blake Dawson, and a Partner of McKinsey and Company.

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COMPANY FOCUS

WHAT MAKES AN EFFECTIVE LEADER? DR MICHAL CARRINGTON, LA TROBE MBA DIRECTOR, LA TROBE BUSINESS SCHOOL

Effective leadership is a complex, evolving and sophisticated beast – what is it that makes a leader effective? According to research by Daniel Goleman, effective leaders assemble a collection of leadership capabilities and styles, and flexibly deploy these resources in response to the situation as it unfolds – the right combination at the right time1. Can this collection of resources and agility – those required for effective leadership – be learned? Research on managers and leadership tells us that the complex elements that make up the foundation of effective leadership are both inborn and developed2. Some foundational qualities for effective leadership, such as cognitive ability, selfmotivation and confidence, are suggested to be predetermined in early life through both genetic influences and environmental forces. Experiences of challenge, hardship and coaching later in life, however, play a critical role in the successful performance and lifelong development of leadership3. Organisations that facilitate intense, frequent and rigorous leadership development interventions4 are particularly successful in embedding the development of effective leadership resources in their pool of talented managers. This is a space that contemporary MBA programs can, and increasingly are, stepping into to provide intensive leadership development experiences and coaching. The development of general management skills and capabilities – such as accounting, finance and marketing capabilities – is the mainstay of MBA programs. The attainment of these functional capabilities alone, however, is not enough in contemporary MBA programs. Participants in MBA programs are seeking to cultivate their own leadership resources and agility beyond general management skills. This is not to discount the critical and continuing importance of these broad management capabilities to MBA Graduates and the organisations that they work for, but the gap is becoming increasingly apparent in an environment where firms often bemoan the lack of talent to effectively lead their organisation. In addition to this, in the wake of economic governance scandals such as Enron and in light of environmental and social sustainability issues, business and society at large are seeking leadership that is not only effective but also responsible.

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So, how can MBA programs work with organisations and managers to engender effective and responsible leadership? First, contemporary MBA programs can provide managers with tools of critical reflection to enable them to direct and manage their own ongoing leadership development. Reflection allows the individual to stand back and assess their experiences and prior actions, to uncover their own assumptions, orientations and shortcomings5. This process, however, doesn’t always come naturally, and MBA programs can intervene to provide tools and processes to facilitate this reflective learning. The use of reflective journals, for example, can enable managers to take real experiences from their workplace and use them to critically reflect on their own leadership shortcomings, and to track their ongoing leadership development throughout the MBA program6. Second, being selfaware enables managers to identify and work on developing their existing strengths. Research by Zenger, Folkman and Edinger (2011) shows that building and magnifying complementary strengths already possessed by the individual – such as strategic thinking and communication – rather than focusing on developing weaknesses, can be the difference between good leadership and outstanding leadership7. Tools such as 360-degree feedback can assist with this process. Third, we know that intensive experiences of hardship and personal challenge provide fertile environments for managers and leaders to experiment, self-reflect, and further direct their own leadership development8. MBA programs are in an ideal position to offer challenging and realistic experiences that allow individuals to experiment with leadership strengths and styles away from the observation of their workplace peers and managers. These types of realistic business simulations allow MBA participants to not only build their suite of leadership strengths, but to also practice agility so that, over time, choosing the right combination of leadership resources at the right time becomes second nature. Finally, being responsible in leadership starts with critical reflection on one’s own value frameworks, and develops into an awareness of the impact of leadership decisions on individuals, the environment and society. The tools of critical reflection assist managers to identify their own ethical assumptions. Weaving responsibility throughout MBA programs provides

opportunities for participants to grapple with the complexity of decision-making and the changing role of business in society. Responsible and agile leadership can be learned. Contemporary MBA programs need to assist participants to develop and assemble a collection of leadership capabilities, becoming chameleon-like leaders able to deploy the right leadership resources in anticipation of the situation as it arises. Only then can the complex beast that is effective leadership be successfully tamed. 1 Goleman, D. 2000. Leadership That Gets Results. Harvard Business Review. March-April 2000: 78-90. 2 Conger, J.A. 2004. Developing Leadership Capability: What’s inside the Black Box? Academy of Management Executive. 18(3): 136-139. 3 Ibid. 4 Ibid. 5 Gray, D.E. 2007. Facilitating Management Learning: Developing Critical Reflection Through Reflective Tools. Management Learning. 38: 495-517. 6 Ibid. 7 Zenger, J.H., Folkman, J.R., Edinger, S.K. 2011. Making Yourself Indispensible. Harvard Business Review. October 2011: 1-9. 8 Conger, J.A. 2004. Developing Leadership Capability: What’s inside the Black Box? Academy of Management Executive. 18(3): 136-139.

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relevant. responsible. respected. Tomorrow’s challenges need responsible leaders. As well as a new benchmark in business education. The new La Trobe MBA is internationally accredited†, five-star rated* and flexibly structured to suit your lifestyle. Its collaborative learning culture will develop your already impressive skills and accelerate your career.

For a new perspective on your career, register online now for our MBA Information Session on Wednesday 28 November. T: 1300 135 045 latrobe.edu.au/mba

CRICOS Provider 00115M

Based in a convenient Melbourne CBD location, this new generation course integrates knowledge and social responsibility with practical skills development, overseen by experts from around the world.

† The European Foundation for Management Development

* Awarded by the Graduate Management Association of Australia

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ENGAGE SUPPORT CREATE AWARD

reliably

It is through engagement that Rider Levett Bucknall, with the help of valued clients, shares and builds its expertise and resources to enhance the Built Environment. The firm’s vision-focused commitment to support is demonstrated in 2013 not just through Infrastructure Partnerships Australia’s Annual Oration and National Infrastructure Awards, but in a myriad of ways. It is through valued partnerships that Rider Levett Bucknall is able to extend both its own influence and that of our clients. Together, we achieve more.

A World Architecture Festival (WAF) sponsor, Rider Levett Bucknall provided estimating, cost planning and contract construction phase cost administration toward the design and construction of the Kurilpa Bridge in Brisbane, which was awarded the WAF ‘2011 World’s Best Transport Project’.

www.rlb.com OCEANIA

EMEA

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ASIA

AMERICAS

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Future Building 2013 V3 N2

Articles inside

Public Sector Reform Panel

Richard McIndoe

The Hon Anthony Albanese MP

Eminent Panel

The Hon Warren Truss MP

Foreword | by The Hon Mark Birrell, Chairman, IPA

Scott Charlton

Jim Miller

Sir Rod Eddington AO