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