25 minute read
Chairman’s Panel
Chairman’s Panel
Chair: Panellists:
The Hon Mark Birrell, Chairman, Infrastructure Partnerships Australia Swati Dave, Executive General Manager, Specialised Finance at National Australia Bank; Phil Garling, Non-Executive Director of Networks NSW; Lindsay Maxsted, Chairman of Transurban; James Stewart OBE, Chairman, Global Infrastructure at KPMG; Dr Kerry Schott, Infrastructure Australia board member, Chairman of the Moorebank Intermodal, NBN Co. board member.
The Chairman’s Panel at Partnerships 2013 brings into sharp focus the need for all governments to be innovative and brave in pursuing politically complex reforms to help Australia solve its infrastructure backlog.
Mark Birrell: A new Federal Government gives us fresh opportunities. What should be the ambition for the new Government, and what should it be focusing on?
Swati Dave: Having a Prime Minister who says he wants to be the ‘infrastructure Prime Minister’ is a really good message to the market, and it indicates a likelihood of momentum, which is great. I also think we’re seeing the priorities emerge through reform of Infrastructure Australia, and if they can deliver those and provide the market with a prioritised pipeline that’s agreed between the Federal and state governments, it creates certainty and clarity, which will be really useful for the private sector to start aligning behind this opportunity.
Phil Garling: Well, I think we can do a lot worse than just adopt the Paul Howes manifesto. Paul is the National Secretary of the Australian Workers’ Union, and, importantly, a director of Australian Super. In a recent Australian Financial Review article, he removed the ideological barrier to privatisation by saying it’s actually in the workers’ interests not to be sitting in traffic jams, and being able to access health care, and having access to all the other infrastructure you’d expect in a First World country.
The debate now seems to be about recycling capital. In my view, it’s appropriate for governments to take the up-front risk on development of projects, and then sell them to long-term owners – institutions that have an appetite for that type of investment.
Lindsay Maxsted: I think the stars are aligned. It’s the right time to be focused on infrastructure, and it’s important that the Federal Government doesn’t try and reinvent the wheel. I don’t think they will; I think they are well prepared and, for me, the emphasis now should be moving away from the asset side of the balance sheet, in terms of what projects should
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Above: James Stewart OBE be undertaken, to the liability or equity side. In other words, how are the preferred projects funded? What’s the role between government and the private sector? How do you determine which of the projects needs full government backing, which projects warrant full private sector backing, and what’s in between? I think that’s what’s most exciting at the moment – people are starting to talk about these issues meaningfully, probably for the first time.
James Stewart OBE: When I was here [the Partnerships Conference] last year, everyone was rather depressed and downbeat. This year, the whole atmosphere is completely different, and there are a significant number of mega-projects that need to be delivered. I think that the job of the Federal Government is to provide some sense of coordination.
One of the issues going forward is going to be capacity, and that’s a nice problem to have. By this, I mean capacity on the public sector side to deliver all of these projects, and capacity on the private sector side to respond.
One of the big changes is that suddenly the international developers are coming to bid for these projects, so coordinating the program as a whole and making it an attractive proposition for both domestic and international developers is going to be a priority for the Federal Government.
Dr Kerry Schott: To pick up Lindsay’s point, governments are going to have to get much more efficient with expenditure to be able to free up some money for all of these things. While the private sector is going to be very important, the public sector is going to need to chip in on some of these projects, as we’ve seen.
MB: A Commission of Audit is one of the other plans that the new Australian Government needs to implement to get a sense of its financial position. Kerry, you were involved heavily in the New South Wales Commission of Audit – what observations would you make?
KS: The states would probably ask that the Commonwealth look at its expenditures, particularly in the areas of education and health, and make sure that the roles and responsibilities and accountability for different layers of government are well laid out. I can tell you that in those two big spending areas, they are not. I sense that there’s an enormous amount of saving to be made at the Commonwealth level.
Across the jurisdictions, if they just have a good look at trying to get more efficient in those two areas, then we can better spend that money on other things.
MB: James, you’ve obviously been watching both the British and American markets intensely, the way that they’ve looked at their taxation base and their funding base. Have you got some thoughts?
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JS: There isn’t enough money around to pay for these projects from the public purse, so countries all around the world are looking at alternative mechanisms.
For example, in the United Kingdom at the moment, everyone is taking a very hard look at the roads – there are pretty much no toll roads in the United Kingdom. There is a lot of revenue coming from roads, which comes from fuel duty and vehicle license duty, but that is not hypothecated to transport – it just goes into the national coffers. One of the problems facing the British Government is that fuel duty is only going to go in one direction, and at some point it is genuinely going to fall off a cliff.
National road pricing will come in in the United Kingdom at some point in the future, and at some point beyond that they will privatise the trunk road network.
One observation I would make about Australia is that, as you continue to build more toll roads, national road pricing becomes messier to implement because of what was there before. But generally, we’re going to see more user charging across all of the infrastructure sectors.
MB: A congestion tax has worked in London. Can you see that morphing into England-wide or Britain-wide transport pricing?
JS: Congestion charging is a very tough political sell. It was done in London with a very strong mayor, it failed in Manchester recently, and, interestingly, it hasn’t really rolled out anywhere else in the world. I think that national road pricing, if sold on the back of replacing fuel duty – which in effect is a pay-as-yougo-tax anyway – would be possible.
One of the interesting things in the United Kingdom is that politicians are very wary of saying that they want to introduce national road pricing or some kind of road pricing, and then have to wait two or three years to implement it while they put everything in place. One of the things that is likely to happen is that they will make some structural changes to the way the highway agencies and road agencies operate, such that when they make that difficult political decision, they can implement it very quickly.
MB: Lindsay, Transurban’s Chief Executive, Scott Charlton, has previously called for a more full debate on road pricing. Where do you think it’ll head?
LM: User-pays has to be an integral part of how we move through this backlog of infrastructure projects. Everyone’s saying the funding cannot possibly all come from the Government’s balance sheet.
If user-pays is to work, it will only be on highly utilised assets. Congested roads in our largest cities fall within that category of assets; that’s certainly Transurban’s view. We need to get there. We understand the political limitations and that you have to educate the public along the way. There have been many cases in which politicians have tried to toll roads that were once free to use. The experience in the United Kingdom and elsewhere around the world is that this does not work; rather, the public has to see that there is value for money in what’s being delivered
Left: James Stewart OBE and Dr Kerry Schott.
Chairman’s Panel
in terms of new infrastructure or other community benefits. Transurban is on the record as having said that eventually we’ll run out of space for existing roads, that we can’t keep building them under the current model, and that a comprehensive user-pays road pricing model is the natural spot to finish.
MB: Currently, we’ve got a number of states that have no toll roads at all – a bit like the English experience. Can you see that changing?
LM: Yes; for heavily utilised roadways, the question that needs to be asked of the public isn’t whether you’d like to pay a toll or not, but rather, would you like this road and all the benefits it brings, or not? That’s a different question, and you are likely to receive a different answer, together with a greater propensity to accept tolling.
MB: I’d like to move to the topic of recycling capital and using the proceeds of infrastructure sales, brownfield assets, to invest in greenfield assets. Swati, the sales of Port Botany and Port Kembla have been well demonstrated; how do you see the availability of capital for future privatisations?
SD: We think there’s a pretty active market that’s really hungry for these assets, and there’s a huge opportunity for us here. We all agree that there’s an infrastructure deficit, we all agree that the governments are now much more coordinated, so the creation of a pipeline that’s clear and consistent is something that will attract more equity and debt into the market.
There is a lot of pent-up demand, and we’re seeing that when we’re looking at all the bids that are lining up for these assets. The market is actually pretty competitive, so if I were the Government, I’d see this as the ideal time to bring these kinds of assets to the market, because there is so much appetite.
PG: The Infrastructure Australia report, released last year, identified $219 billion of capital tied up in what they called lazy, brownfield, government-owned assets. Monetising that makes sense, particularly when you look at the investment profile of super funds, with $1.7 trillion out there. What those institutional investors are looking for in terms of total return is about 350 basis points above bonds – ideally half of that coming from capital growth, and half coming from yield, and total return on a portfolio basis never going below eight per cent in any year. That defines what infrastructure is – it’s not start-up telecommunications, it’s not power generation with merchant power risk, and we’ve discovered in recent years is that it’s probably not greenfield toll roads, either.
The money is there to do it. Look at Australian Super, there’s a $65 billion fund, and they’ve got 10 per cent allocated to infrastructure. Their target is 14 per cent, so that’s a lazy $2.6 billion looking for a home. I’m sure that’s replicated through the whole $1.7 trillion sector, to a degree. There are still funds that don’t have any exposure to infrastructure, because they haven’t been able to get set. So you’ve got increasing allocation, plus people who don’t have any allocation wanting to make a new allocation, and I’d suggest that a strategic asset allocation for most of these funds for infrastructure might average around 10 per cent. At the moment, it’s probably at six per cent.
What will happen with that money, if a home isn’t found for it in Australia, is that it will go offshore, and that’s already happened. Australian super funds
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own the whole of the UK water business. They didn’t go overseas because it’s the mother country – they went over there because there were no opportunities to invest that money in Australia. That money comes in every day. The only thing that’s going to stop that is substantial unemployment.
LM: I agree that a substantial appetite exists for investment in brownfield, established assets that governments might own today. But, equally, there’s another class of private sector investment that’s more than happy to be involved with government and look to see what can be done in more greenfield operations, or assets that governments and communities would like established. I think that’s equally exciting. There’s plenty of interest if we can generate the right sort of vehicles into which the private developers and investors can invest.
MB: Kerry, is the pipeline long enough for the privatisations? Do you think there’s an observable trail of likely project transactions?
KS: To get it longer, we probably need some microeconomic reform. The reason that the water industry in Australia hasn’t been sold and can’t be privatised is that the regulatory regime is such that anybody putting any money into it would have no confidence that the pricing was going to continue in an orderly manner.
The water utilities are regulated behind the state regulators. There’s an enormous amount of political interference in the sense of politicians not wanting prices to go up at all, certainly before elections, so you don’t get your pricing set in a commercial manner. Infrastructure Partnerships Australia’s Water Taskforce has been suggesting that we probably should have a national regulator for water, and if you had somebody doing that, like the Australian Competition and Consumer Commission or a regulator in which the private sector has confidence, it would open up the possibility of selling water utilities. But you can’t do it currently, and we’ve got quite a lot of assets in that category.
JS: One of the things I was reflecting on the other day is that the privatisations in the United Kingdom, which were around 20 years ago now, were sold in the public markets, and retail and institutional investors took a share in public companies. What has subsequently happened is those public companies have been taken over or bought by institutional investors, by private equity. One of the interesting dynamics for the British Government now is that it’s not dealing with the broad range of investors who are really very passive; it is dealing with very active, influential shareholders, and that has completely changed the relationship, and, to be honest, made the relationship more difficult for the Government.
The other point I would make is that privatisation is about recycling capital, but it’s also about taking future investment off the balance sheet of government, and that’s probably a bigger driver, in my view.
Certainly, those utilities that have had independent regulation have been able to attract capital at a very low cost because of the Regulated Asset Base (RAB) model, and that has meant that in the United Kingdom, an enormous amount of investment has been funded by institutions and by the corporate bond market, at a very low cost of capital.
Take water, for example: I think the figure is £80 billion over the last 20 years, funded
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Above: Lindsay Maxsted off the Government’s balance sheet by mainly institutional debt.
MB: Tell us about what’s happening with Royal Mail in the United Kingdom.
JS: It has just been privatised, after about 20 years of trying. The pension fund was the biggest problem, and it’s gone down an absolute storm. It’s been sold into the market and I think it’s trading at 40 to 50 per cent over the strike price. So it’s been a great success so far. Royal Mail is a great example of everyone focusing on the initial sale price, the initial raising of capital, but the reality is that what matters is what happens in the 20 years after privatisation – you get genuine operational efficiency and cheap consumer bills, and all the rest of it.
MB: Let’s move to finance. There’ve been two different models proposed for financing the two large road projects in Sydney and Melbourne. These are of a scale not before seen in Australia; they’ll certainly be the largest urban projects in the nation when they’re both going, and the seed funding that’s been committed by the Federal Government will mean that those projects will proceed. What do the different models mean, what are the different forms of private finance, and what’s the story that they’re telling us about the way Public Private Partnerships (PPPs) will be done in the future?
SD: I think that there are two aspects to it. From a funding point of view, we’re getting to something that’s a bit more sustainable as a model. In the private sector, we have the same challenge around what is a sustainable financing model.
A lot of the transactions that we are making have tended to be short-term, because it is difficult for banks to provide long-term financing. I think we do need to consider what happens after the transaction or the project has been initially financed by the banks, and what level you’ve got to get to next. There’s scope for development on the banking side in terms of taking these deals to broader markets. Whether it’s the corporate bond markets or offshore markets, there’s quite a bit of evolution that needs to happen.
MB: Do you think all state governments have a sense of how innovative they have to be?
SD: We’re seeing New South Wales and Victoria lead the way, and that innovation is welcomed by the private sector, but it also needs to be matched by the private sector. I don’t think it’s innovation for innovation’s sake; it’s innovation for the purpose of creating more sustainable financing models. I’m very optimistic that, when the challenge is there, when the pipeline is there, when something needs to be solved, we will actually get to a solution.
LM: If I can just comment on the differences between New South Wales and Victoria – New South Wales does have its unsolicited proposals regime, which has become fundamentally important. Victoria is doing a good job in terms of its road infrastructure considerations, but it’s quite clear to me that there’s more scope in New South Wales to achieve better outcomes through some of the more innovative financing, and through more innovative planning for projects, than perhaps would otherwise be possible under strict tender and related probity regimes.
MB: So has your experience with the M1–M2 proposal been positive?
LM: Yes, it has. It has worked really well, and I hope not just for Transurban, but also for the New South Wales Government. We were able to formulate a proposal, to work with government, to hear from the Premier in terms of what might or might not work, and to adjust our sights accordingly. To be able to come up with a commercial project that still has a way to go, but that is heading in the right direction, is pleasing. It is a project that we have been able to bring to Sydney, and which, if funded solely off the balance sheet of the New South Wales and/or Federal Governments, would most likely not have happened.
MB: The business community draws some strength from the fact that the unsolicited proposals are being well handled in this state. It’s a very difficult thing for governments to deal with, because some
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find it hard to cope with that relationship of a single proposal coming forward and being properly aired. It’s a very good step, and not an easy one. James, do you have comments?
JS: If you look globally, at the moment, governments are forced to intervene in a massive way in financing markets. In Brazil and India, basically all the money is lent by government-owned banks – BNDES in Brazil, and state-owned banks in India. In Europe – the European Investment Bank – multilateral lending has gone up dramatically. In the United Kingdom, the Government announced a £40 billion guarantee facility to support all infrastructure projects, which applies to both publicly funded and privately operated infrastructure. Now, the reason behind the United Kingdom guarantee is not necessarily a worry about capacity; it’s that the Government wants these deals to happen quickly, and is worried that negotiations around finance will take forever, and slow down the pace of these deals.
Part of this is about making things simpler. Something like the WestConnex structure – where government is funding the initial stages of the project, and then when it becomes operational you look to raise the finance – will be a much more efficient way of raising the money, because the fact is, financiers like operational assets and find greenfield assets much more difficult.
MB: The final area I want to move onto is the simple one of taxation reform. I’m interested in any observations about Goods and Services Tax (GST) changes, and thoughts about what should be on the agenda – what should we, as a peak body, be trying to encourage community debate about?
KS: There’s little doubt that the scope of the GST needs to be wider, and things that have been exempt need to be brought within it. That’s difficult politically, but the GST revenues are really in significant decline. The other thing that’s really worth looking at is what [New South Wales Treasurer] Mike Baird’s been pushing: taxes that are currently paid to the state government, which, when an asset is privatised, are instead paid to the Commonwealth, leading the state to lose its revenue source. That does make privatising some assets very difficult from a financial point of view for the states.
MB: Certainly if the electricity privatisations are received fully in New South Wales, Queensland, and Western Australia, it’d be very valuable to address that.
KS: The Networks NSW dividend flow would be quite considerable.
LM: It is essential in the first term of this Government that there’s a comprehensive review of the taxation system. The Henry Tax Review in 2010 failed, in my view, because it did not cover a series of issues that needed to be addressed: principally, GST.
Left: Dr Kerry Schott at Partnerships
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There’s plenty of scope for a full-scale review, and GST has to be included – noting that I am not in any way suggesting that the Government can or should reverse its promise of no changes to the GST in its first term. The point is a simple one: there should be a comprehensive review.
Ultimately, this debate is like the user-pays argument – if you’re eventually going to change the GST, the public has to have a positive view of what they’re receiving in return.
MB: James, can we get some observations from you and your international perspective on taxation reform, and what you’re seeing?
JS: The point I’d make is that as federal money perhaps dries up for certain projects, states have to fund them in their own right. States will look to receive some benefit from the wider national economic benefits. A state-funded project will benefit the national tax coffers, and the question you then ask is: at what point do the national tax coffers start to give something back to the state?
There’s been a very interesting deal in the United Kingdom just in the last six months: the City of Manchester has done a deal with the Ministry of Finance, the Treasury in London, whereby when Manchester invests a local pound in infrastructure, the Treasury, over time, will make payments to Manchester to reflect the national tax that is generated from that infrastructure investment, and there is a negotiated formula that deals with that.
So it’s quite an interesting principle, and, as cities become more self-sufficient for more projects, this issue will begin to raise its head.
Swati Dave, Executive General Manager of Specialised Finance, Products & Markets at NAB
Swati is the Executive General Manager of Specialised Finance, Product & Markets at National Australia Bank. She leads a specialist team with responsibility for providing advice and financing solutions across the infrastructure, energy and utilities, and resources sectors in Australia, the United Kingdom, Hong Kong and Singapore.
Swati has over 25 years’ banking and finance experience encompassing retail banking, corporate and institutional banking, project and infrastructure finance, project advisory, private capital, strategy and business development.
Prior to joining NAB Capital in 2005, Swati held a number of senior roles at Deutsche Bank, AMP Henderson Global Investors, Bankers Trust and Westpac.
Swati holds a Bachelor of Commerce degree from the University of Newcastle and is a graduate of the Australian Institute of Company Directors.
Swati is a director of Australian Hearing and the Chair of its Audit and Risk Committee.
James Stewart OBE, Chairman, Global Infrastructure, KPMG
James joined KPMG in May 2011. He is Chairman of KPMG’s Global Infrastructure practice. Prior to joining KPMG, James was based in the Treasury as the CEO of Infrastructure UK, and was previously CEO of Partnerships UK for 10 years. Before that, James spent 14 years at Hambros and Société Generale.
James has been involved in the infrastructure and PPP markets for over 20 years, and now spends his time advising governments and private sector companies around the world.
Dr Kerry Schott, Director, NBN Co., Chairman, Moorebank Intermodal Company, Infrastructure Australia Board Member
Kerry Schott is Chairman of the Moorebank Intermodal Company Ltd, a Director of NBN Co., a Director of the TCorp Board in New South Wales, a member of the Infrastructure Australia Board, patron and board member of Infrastructure Partnerships Australia, and a member of the Whitlam Institute Board.
Kerry is the Project Director for the New South Wales Treasury, managing the current sales of the government-owned electricity generating plants. Kerry was previously the Project Director of the successful sale and lease of the Sydney Desalination Plant. She completed her role as CEO of the Commission of Audit for the New South Wales Government early in 2012. Previously, Kerry was Managing Director and CEO of Sydney Water from 2006 to 2011.
Kerry spent 15 years as an investment banker, including as Managing Director of Deutsche Bank and Executive Vice President of Bankers Trust Australia. During this time, she specialised in privatisation, restructuring, and infrastructure provision.
Kerry holds a doctorate from Oxford University (Nuffield College), a Master of Arts from the University of British Columbia, Vancouver, and a Bachelor of Arts (first-class honours) from the University of New England.
Lindsay Maxsted, Chairman, Transurban Group
Lindsay is Chairman of Transurban Group, Chairman of Westpac Banking Corporation, Director of BHP Billiton Limited and BHP Billiton plc, and Managing Director of Align Capital Pty Ltd. He is also a director of Baker IDI Heart and Diabetes Institute, a member of the Advisory Board of Coolmore Australia, and a fellow of the Australian Institute of Company Directors.
Lindsay was formerly a partner at KPMG and was the CEO of that firm from 1 January 2001 to 31 December 2007.
His principal area of practice prior to his becoming CEO was in the corporate recovery field, managing a number of Australia’s largest insolvency/workout/turnaround engagements, including Linter Textiles (companies associated with Abraham Goldberg), Bell Publishing Group, Bond Brewing, McEwans Hardware, and Brashs.
He is also a former director and chairman of the Victorian Public Transport Corporation.
Chairman’s Panel
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A NEW PARADIGM FOR ENGINEERING EDUCATION?
Innovation is at the heart of great engineering, and the role of design in this process cannot be understated. Why, then, is engineering education in Australia currently aligned more to science than design? With the more traditional manufacturing currently in decline and a cooling of the demand in the mining sector, how will industry respond? Are our engineering graduates ready for the challenge of a digital revolution in manufacturing?
Perhaps not. Which is why Professor Guy Littlefair, Head of Engineering in the Faculty of Science, Engineering and Built Environment, is tackling these questions head-on. His response: ‘[to produce] a new generation of engineering graduates adept at creativity-led, innovative thinking and design acumen’.
This, in part, is a catalyst in his vision to redefine engineering education.
Deakin University’s forthcoming Centre for Advanced Design in Engineering Training (CADET) will provide some of the best design-focused engineering facilities in the Australian university sector.
Pulling together the best elements of engineering and design under one roof, CADET will offer programs based on a new curriculum focused on design-based learning. Students will work collaboratively on industry-based projects from the beginning of their studies, using integrated studio-based learning environments, purpose-built laboratories and workshops to access the very latest simulation and visualisation systems.
With an equipment investment exceeding $6 million, CADET will house virtual and real prototyping facilities, allowing creative design solutions to be developed almost seamlessly from imagination to reality to manufacture in a single journey – be it new wind turbines, medical devices, sustainable infrastructure, alternative vehicles or robotic aids.
Research will also flourish in the technology-enhanced environments and provide a pathway for qualified engineers to apply their expertise to design-based industrial projects. This interaction with industry is a prominent feature of the whole philosophy, from project selection to the revolutionised approach to learning and the stimulation of longer-term research activities.
CADET is also about engaging with secondary school students in order to demonstrate that engineering is much less about the hard hats, steel-capped boots and dirty hands of the past, and much more about creativity and problem solving that will define the future.
Offering a diverse range of opportunities to engage students from Year 8 through to PhD level, CADET has vision and purpose in shaping where engineering education has to head. Specifically designed to tackle some of the key issues at the heart of the engineering community in Australia, CADET will enable students to ‘imagineer the ultimate solution’ and produce graduate engineers who are as visionary and forwardthinking as CADET is itself.
www.deakin.edu.au/engineering/cadet CADET is a partnership between Deakin University and the Australian Government.
