Project Delivery Panel

Project Delivery Panel Project Delivery Panel

Chair: Panellists:

Brendan Lyon, Chief Executive, Infrastructure Partnerships Australia Roger Black, Project Director, Projects Queensland, Queensland Treasury and Trade; Rodd Staples, Project Director, North West Rail Link, Transport for NSW; Paul Goldsmith, Project Director, WestConnex, Sydney Motorways Project Office, Roads and Maritime Services; Ken Mathers, Chief Executive Officer, Linking Melbourne Authority

The need for closer collaboration and coordination between and across governments formed a central theme of the Project Delivery Panel at Partnerships 2013.

Brendan Lyon: This panel invites project directors who are investing more than $30 billion in current projects to talk about the opportunities that might exist for better coordination and national leadership. Can I ask each of you just to give a little summary of what it is you’re actually directing in terms of project investments?

Ken Mathers: The entire East West Link is 18 kilometres long, and runs across the top of Melbourne’s CBD, going from the end of the Eastern Freeway across to CityLink, and ultimately right across to the Western Ring Road.

This is a project that is going to respond to the ever-increasing traffic demand in Melbourne, and particularly the freight industry. The state government has made it clear that its highest priority is the eastern section, running from the end of the Eastern Freeway at Hoddle Street across to CityLink, and we are currently embarking upon the procurement of that stage.

Concurrent with that, we are doing the detailed planning for that part of the project, and also the adjoining section that runs down to the Port. The Linking Melbourne Authority, under the previous government, had undertaken the planning for the western part of the project, but this government has the eastern end as its highest priority.

The eastern end is a massive project, somewhere between $6 billion and $8 billion. It is 9.6 kilometres long overall, and that includes twin three-lane tunnels, each 4.4 kilometres long.

This project is going to be delivered and financed under an availability Public Private Partnership (PPP) model, and there will be significant contributions to the capital cost of the project by the Victorian Government, both during construction and at the end

continued on page 58

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Project Delivery Panel Project Delivery Panel

continued from page 56 of construction when the facility is opened. The state will be acquiring its own tolling system, and it will maintain the traffic and the revenue risk.

BL: Paul, do you want to draw out some of the things about the WestConnex program, and the points of difference that are going on between Melbourne and Sydney?

Paul Goldsmith: We put together a business case for government earlier this year, and we have had funding commitments from the Commonwealth Government ($1.5 billion) and the state government ($1.8 billion) for stage one of WestConnex.

The whole of WestConnex is a 33-kilometre program of works, which is due to be delivered over 10 years, and it has a total value of about $11.5 billion.

Stage one consists of two packages. The M4 widening is being fast-tracked, so we are letting that as a design and construct (D&C) contract. We have already submitted a planning application, and have started some industry engagement.

We are looking to develop a procurement plan by the end of the year to get that going. [Ed: Expressions of Interest were issued in late November.]

The rest of WestConnex, it’s important to realise, is based on a reference design. What that means is that we have a defined scope with a capital cost. We’ve defined a timetable, some tolling principles, and a funding and financing strategy that makes the project viable; but we’re open to developing procurement strategies for the rest of WestConnex over a period of time.

BL: Rodd, do you want to run us through your project and where it has come from?

Rodd Staples: The North West Rail Link is all about delivering a fundamentally different rail service into Sydney’s rail network to bring about a step change in the type and quality of the services offered across metropolitan Sydney. The focus for now is in north-west Sydney, where we are delivering a 38-kilometre railway with 13 stations, running from Rouse Hill through the employment areas of Norwest and Macquarie Park and into Chatswood, and connecting into the rest of the rail network.

This will be a fully automated rail system, so that’s something new for Australia. It will have platform screen doors, single deck trains – something Sydney doesn’t have at the moment – and levels of service and reliability that we are not accustomed to here in Sydney, or in Australia.

The project will ultimately drive major economic benefits for the north-west of Sydney. We’ve got a commitment to deliver that by the end of 2019. We’ve been working very hard over the last two and a half years to scope that project and get it underway.

BL: And the contract types you’re using?

RS: The total capital value is $8.3 billion. The land acquisition is done, the planning approvals are largely done, and we’ve got three major contracts to deliver. The first is a 15-kilometre tunnel under a D&C contract. We’ve also got a smaller surface project, a viaduct and some surface civil engineering at the western end, and that should be awarded by the end of this year. The big part of the project is a PPP. It will pick up and convert the existing 14-kilometre rail line between Epping and Chatswood, and it will basically create a new automated rail system, fit out the

58 futurebuilding Volume 4 Number 1 continued on page 60

TIME FOR BUSINESS TO RECONSIDER RAIL

An efficient and reliable rail freight network keeps Australia’s businesses moving and Australia’s economy strong, says Australian Rail Track Corporation CEO John Fullerton.

Fullerton said that an efficient rail system offers new opportunities for Australian business, and that the interstate rail network along the east coast, in particular, is well placed to meet Australia’s growing freight requirements.

‘Our manufacturers, farmers, mining and construction sectors, importers and exporters all need a reliable and cost-effective way of getting their goods where they are needed, when they are needed, every time,’ Mr Fullerton said.

Mr Fullerton said ARTC has recently finished a significant program of investment directly aimed at improving rail’s performance and helping meet Australia’s freight demand.

The company has completed a $3 billion, five-year upgrade of east coast freight rail lines; providing capacity for as many as three times more trains running on sections of the track between Melbourne and Brisbane.

Fullerton said east coast rail reliability is up 20 per cent this year, thanks to projects such as the new Southern Sydney Freight Line, ballast improvements, concrete re-sleepering, curve easing and the removal of several speed restrictions.

A 30-hour rail path is also now available between Melbourne and Brisbane, up to seven hours quicker than in 2005 and comparable to the time it takes for single driver trucks to complete the same journey.

‘Through ARTC’s strengthening of the spine of the entire east coast rail network, we’re helping get freight off trucks and onto safer, cleaner, greener freight rail services between Melbourne, Sydney and Brisbane,’ Fullerton said.

‘Every single new train that runs on the upgraded east coast rail corridor takes the equivalent of 110 trucks off highways and community roads, produces three times less carbon, and uses around three times less fuel.’

ARTC will also shortly be introducing a new freight timetable to take advantage of this new rail infrastructure, making rail a better freight alternative for business by leveraging reliability and capacity benefits.

‘This is particularly important along the east coast of Australia, where urban congestion ranks as a top issue for communities, businesses and commuters alike in what is an increasingly environmentally and socially constrained landscape,’ Mr Fullerton said.

‘It all points to rail being better for business, better for motorists, better for the environment and better for communities.’

AUSTRALIAN RAIL TRACK CORPORATION LTD.

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.

Project Delivery Panel

continued from page 58

Above: Rodd Staples stations, and build the transport interchanges across the whole region as a PPP with a 15-year operating concession beyond completion. That tender closes at the end of this year, and we are targeting an award in the second half of next year.

BL: Roger, do you want to give us a flavour of what you’re doing up in Queensland with motorways, but also with health and other areas?

Roger Black: Projects Queensland has essentially become the part of Queensland Treasury that deals with complex projects and complex procurements, and compiles business cases and preliminary assessments. It undertakes procurement where there is a high level of complexity and potential for using private finance, and projects range from the Toowoomba Second Range Crossing to the Queensland Schools PPP procurement, which is currently underway.

There is also some activity in the social housing space. One of the other topical things in Queensland at the moment is the issue of contestability, and Projects Queensland is involved in some of those opportunities.

BL: Given that you all have large projects to deliver, how often have you talked to compare how you are going?

PG: Quite often. We’ve had regular discussions with Rodd Staples and some of his people. I’ve been down to Melbourne on several occasions. I think the conversations are very frequent and very open. We’ve stolen a few good ideas from Ken Mathers, as well. BL: What’s the forum that helps you do that?

PG: For me it’s been mainly informal. The good thing is that we’ve been able to have some very open conversations, and people have been willing to share the bad experiences as well as the good, which is really useful.

KM: It’s been a very close relationship over the last 10 years between Victoria and Queensland, particularly with respect to the large PPP road projects. That’s mainly come about through a couple of us knowing each other really well, speaking at forums and developing that relationship.

In our former organisation, when we did the deal on EastLink in Melbourne, I rang up Dave Stewart (former Executive Director of Projects Queensland) who was working with Brisbane City Council at the time, and told him that we’d had a very successful outcome and asked would he like to hear about it, and he said, ‘Yeah, that would be fantastic.’

So we spoke to him and his council and his staff, and then they decided to largely adopt our model for the CLEM7 project, and that subsequently continued on with the Airport Link procurement.

As Paul said, we have been engaging with him a fair bit. It’s not only him coming down to see us, but it’s us coming to see him, as well, and also some of his Treasury colleagues.

And Rodd’s been down to see us, and I think these informal relationships are very good. We’re trying to pull together to develop our skills so that we match the skills and the capabilities of the private sector, because they go from one PPP project in one state to another state. They are always enhancing their skills, and it’s appropriate that we have dialogue so we are up to speed, too.

BL: We’ve got a new national government that wants to reform Infrastructure Australia and wants to harness best practice. Is there a role for a Federal Government to start to pull some of these things together, outside of the personal relationships that you have with each other within the small infrastructure community?

KM: My view is that when the Federal and state governments become too involved, it becomes overpowered by the bureaucracy. Personally, I like the informal relationships that we have. We all work within bureaucracies and we are all responsible to a department, and to a minister, and we have a lot of dialogue in Victoria with the Department of Treasury and Finance. It has to be that way to deliver these

Project Delivery Panel

massive projects. So we do all work very closely together, but I think this informal arrangement of sharing knowledge and experiences is a very good one. And I think that’s the way I’d like to keep it.

RS: Ken and Paul are right that there is a lot of conversation going on. We’ve been down to Victoria, we’ve been up to Queensland. Interestingly, it is coming the other way at the moment, because our project has been going for a while, so we are starting to do a bit of the sharing the other way.

But without overdoing it in terms of the framework, there is some opportunity to put a bit of structure and regularity around the sharing of experiences, just to make sure that something is happening. Strategic leadership, rather than getting down and putting too much mechanics into it, would deliver the most benefits – because there are times when you get caught in your own project and you do tend to forget, so just to get that regular reminder would be good. But I would share some of Ken’s reservation that it could turn into quite a bureaucratic process if we’re not careful. So it has to be executed really well.

BL: Roger, what do you think about the opportunities to perhaps sequence projects to learn from the opportunities, like you’re doing around public health, or that the other guys are learning on their big motorway, rail, and other projects?

RB: I think the ‘lessons learned’ exercise is really important. I’m with Ken; if we try to control it centrally it just becomes another process, and ultimately we are all bureaucrats delivering projects, and bureaucrats love process, and process becomes a means of ticking another box.

But we do need to have more structure around how lessons are shared. At various times, one state or another is ahead with the work they are doing. At the moment, we are probably ahead of everybody else around some of the contestability opportunities, so we need a means of sharing that with everybody so that there is a common understanding of where we are at.

This is not something new; around three years ago I was part of a review looking at how we deliver better-value infrastructure, and the need for a structured ‘lessons learned’ system was a theme that kept coming up.

And in respect to sequencing, to my mind, getting best value out of infrastructure really depends on getting a decent sequencing system in place.

BL: So what do you guys want out of Infrastructure Australia and out of the new Federal Government? What is it that would be useful?

PG: During the development of the WestConnex business case, we’ve had good engagement with

Left: Roger Black

Project Delivery Panel

the federal agencies, but I think we need to see that dialogue improve so that they understand what we are trying to achieve.

BL: So when you went to speak to the federal bureaucrats, did they speak the same language?

PG: It took some time to get on the same page about what the project objectives were, but we have made progress.

BL: Do you think the Federal Government’s commitment to the appointment of a dedicated funding, financing, project-advancing type function within Infrastructure Australia will give it a more useful, practical edge?

PG: I think so. It’s about getting people in the room talking, rather than about filling out forms and sending them in.

BL: What other things could the Government be doing to assist projects? We hear things like equity, we hear things like federal procurement and putting people down into state agencies and so on. Where does the efficiency get lost – where does it become more of a confusion?

RS: Mine’s quite straightforward at the moment, because it’s all state-funded. But I think there is a real dilemma that, with the Commonwealth putting money in, they will want to have some say and influence. There is a real risk that, in doing that, they don’t quite get what the state is trying to do with the project, and they can actually delay things. Putting people into the teams is a really good thing, but the quality of the people is really important, and they need to be people who are going to be constructive and influence the project in a positive way.

PG: Those points are correct. We are looking for more collaboration and a deeper understanding of the projects, rather than an oversight and policing role.

KM: The Commonwealth hasn’t been involved in our three road projects in Victoria to date, but they have been significantly involved in the Regional Rail Link Authority, and Lyn O’Connell (Deputy Secretary, Department of Infrastructure and Regional Development) has been involved in the Board. Lyn has participated in Board meetings and monitored the development of that project, and observed how the Commonwealth funds are being spent. We would expect that if the Commonwealth comes forward with $1.5 billion for the East West Link project, then they would have a representative on the steering committee within government to overview how the project is going – and I’d welcome it.

BL: One of the things that’s quite different about this period of procurement, compared to the last decade or so, is that the frameworks are being adjusted in a way we haven’t seen since 2000, when Victoria brought out its Partnerships Victoria framework. How do you incentivise your public sector to be able to put forward these different options, to take risks on procurements like contracting out clinical health – either within a capital structure, like we’re doing in New South Wales, or outside, like in Queensland? How do you entrench that into the approach of procuring agencies and bodies?

KM: It’s a fundamental element of our business case. We know that this project is not going to be one that is successful as a toll road until the entire project is delivered. And it’s such a costly project, it’s probably up around $12 billion to $15 billion overall. Naturally, a project of that scale has to be delivered in stages. So it’s not until we get all three stages linked and operating that it will become a viable toll road, and that’s why it’s appropriate that the state government at this stage holds the traffic and revenue risk. That was a fundamental recommendation of the business case to the state government, and Treasury also played a very key role in the development of that business case, so we’ve got to get the fundamentals right.

PG: Procurement methodology evolves on each of these big projects. Each of the PPPs have been quite different when there has been a period of time between them. In terms of incentivising the public sector, it’s about looking at lessons learned in other jurisdictions and also overseas, and then looking at the risks on your particular project and building a procurement process that works, with industry engagement to inform that, too.

BL: What makes you, as a public sector project director, say, ‘We’re going to try something different; it could blow up, but it could work’?

PG: With these major projects, you have to try something different every time, because they are so different. Things change over time: the scope changes, they’re in different locations, they’re not the same.

RS: It’s easy to look at a project and adopt the business-as-usual approach. But when you go down that path, you need to look at the downside, as well. You often forget that. You might think it’s a safe approach and that everyone will understand that, but

Project Delivery Panel

there is significant downside to try and do that in any particular project environment. You’ve really got to weigh that up against a new opportunity, and have a crack at doing that.

On the North West Rail Link, one of the things that helped was the engagement process with industry. They really helped give us some confidence about some of the directions and decisions we wanted to take. We had enough feedback from industry so that when we were talking to government about the best direction to take, it wasn’t just coming from the bureaucracy, it was actually coming from ourselves and the industry, as a collective view, and that was an important part of giving them confidence to make those strategic decisions.

BL: Do you think some of the independent prioritisation functions that you’ve seen come out of Infrastructure NSW or Infrastructure Queensland have led to better procurement and better projects?

PG: It’s led to better prioritisation of projects. Looking at WestConnex, we’ve spent a long time trying to do things like the M4 East and the M5 duplication as stand-alone projects, and a different approach looking at the whole of Sydney’s motorway needs has resulted in a successful prioritisation and recasting of those projects.

BL: How is the skills issue affecting your ability to scope up projects? Do we have the ability for endless project directors? If we’ve got a lot of similar projects coming through, how do we manage the ability to define the projects, to put them out to market and to run them well, given the size of the infrastructure pipeline that we are seeing?

KM: We can’t be too worried about what’s going on in the other states. Not that we’re in competition, but we work for a government, and they’ve got an agenda, and we’ve got to try and deliver on that agenda. I have a strong view that we create the opportunities for the private sector. If we can get that opportunity there, then it’s up to them to respond. When we went to the marketplace with our EOI invitation in late July 2013, the response was fantastic. We were absolutely delighted. We know that those organisations are so positive, and it’s up to them to make the decision about whether or not they are going to participate in the opportunity that we provide. So I don’t have a worry about the skills and resources; I know the private sector can respond to this.

RB: One of the critical drivers of a deep skills base is a consistent and predictable pipeline of projects. A consistent pipeline allows organisations to build their skills and capacity with confidence, in the knowledge that those skills will be used going forward. The biggest risk to the skills base is a pipeline that is inconsistent, and that balloons and then shrinks and balloons and shrinks – essentially a boom and bust cycle. Because every time infrastructure activity shrinks, organisations have to decide whether or not they retain staff; and if they don’t, those staff members either head interstate or overseas, or do other things, like running a cake shop, and it’s really hard to get them to come back. So a consistent pipeline really works to the benefit of everyone – the government and the private sector.

BL: Rodd, within New South Wales we are probably seeing a degree of competition, even within transport agencies, for the skills to deliver the very large projects that you and your other colleagues are delivering. Are you confident that you’re going to have the skill that you need to deliver these projects, and the ones that follow on the public sector side? The private sector is obviously responding actively, but there is a lot that’s coming into the market. How are you dealing with it in terms of the North West Rail Link?

RS: With a project like North West Rail Link, we cannot afford not to have those skills, especially as we move from what’s been a fairly substantial two to three years of planning and procurement into delivery. We’ve got a significant shift in the type of

Below: Paul Goldsmith (left) and Ken Mathers

Project Delivery Panel

skills that we need, and there’s a lot of work going on at this stage to draw in those skills. While a lot of work will be done by our private contractors, we’ve got to retain a degree of skill on our side. For example, some of the people that have worked [on the North West Rail Link] in the last two years are going to move on to some other projects around the agency.

BL: Paul, you’re trying to poach some of Rodd’s staff, I assume?

PG: Well, we’re following in his wake. So in the WestConnex Delivery Authority, there is going to be an expansion of the project team, and we will get some help from the private sector in that, but I think we’ll be looking to some of Rodd’s strategies and will see if there are some people who have had that experience at the early stages who could now be appropriate on our team, too.

BL: In closing, I might ask each of you to imagine that you’re talking to Infrastructure Australia. As the agency is reformed, what is it that you want to see most to make your own job of getting things done easier?

RB: I’d like to see Infrastructure Australia play the role of a coordinator that encourages collaboration, the sharing of skills, and the sharing of experiences. And I’d also like to see them allocating large amounts of money to infrastructure. That would be a bit of a dream.

RS: The earlier point we made about better collaboration across projects in terms of ‘lessons learned’ – I think there is a role in that. Another thing that would help us, particularly at a project level, is for a better understanding of where industry is at broadly, and what the pressures are, so that when we are making decisions in these project phases, we’ve actually got a better context of what is actually happening, and we can make some changes in the way we are looking at things. So better knowledge of that interface between government overall, in terms of projects and industry, would be really helpful.

PG: Better two-way dialogue is needed, especially so that Infrastructure Australia has a more thorough and better understanding of the projects and what we are trying to achieve with the projects.

KM: They should accept that state governments are pretty well-versed and knowledgeable about prioritising their own projects, and should just come along and give us a big basket of money. And keep Victoria number one [laughs].

Roger Black, Project Director, Projects Queensland, Queensland Treasury and Trade

Roger Black is a Project Director at Projects Queensland, and also a member of Infrastructure Queensland, the body established by the Deputy Premier to advise on issues relating to infrastructure in Queensland.

Roger has been active in the financial and commercial advisory services sector for many years, and he has worked with a wide variety of clients in both the public and private sectors. Those clients have been in Southern Africa, the United Kingdom, the United States and Australia, where he has been active in the corporate finance sector for the past 12 years.

Roger’s transaction advisory experience includes a strong focus on infrastructure project analysis, business case development, project procurement and procurement options analysis (including PPP and PFI, alliance and traditional procurement options), project and corporate finance, financial modelling, and the development, evaluation and delivery of social and economic infrastructure projects. Roger has been an active supporter and promoter of IPA.

Paul Goldsmith, Project Director, WestConnex, Sydney Motorways Project Office, Roads and Maritime Services

Since October 2012, Paul has led the Sydney Motorways Project Office, with responsibility for delivering the business case for WestConnex, Australia’s largest transport infrastructure and urban renewal project.

Paul has extensive experience in the development and delivery of Public Private Partnerships, having held the position of General Manager, Motorway Projects with Roads and Maritime Services for the past six years, successfully negotiating PPP upgrade agreements with the private sector partners for both the M2 Upgrade and M5 West widening projects.

Prior to this, Paul spent six years as senior project manager for the procurement and delivery phase of the Cross City Tunnel. His early career was spent on road and rail infrastructure projects

Project Delivery Panel

in the United Kingdom, including a significant period working with London Underground Limited.

Paul is a chartered civil engineer with nearly 30 years’ experience in the development, procurement and delivery of urban infrastructure projects in Australia and the United Kingdom.

Ken Mathers, Chief Executive Officer, Linking Melbourne Authority

A civil engineer, Ken has had a long career in Victorian road infrastructure planning and delivery since commencing with the Country Roads Board in the 1960s. Working with VicRoads involved project management of some of Victoria’s largest road projects, including the Melton Bypass, Hume Freeway duplication, the Western Ring Road, upgrading the Monash Freeway, and pre-construction planning for CityLink.

Ken joined Melbourne CityLink Authority in 1995 as Director, Engineering and Operations for its function of facilitating CityLink. He participated in the bid evaluation and the oversight of project development until completion in 2000.

After working as a private consultant, Ken returned to government in 2003 as Chief Executive Officer of Southern and Eastern Integrated Transport Authority (SEITA), the state government agency responsible for the facilitation of EastLink – then Australia’s largest PPP road infrastructure project.

LMA has since been planning and procuring the 27-kilometre Peninsula Link, the first availability PPP road project in Australia. Delivered by Southern Way and their design and construct contractor, Abigroup, the project was opened to traffic in January 2013.

In 2012, LMA assisted the Department of Transport with the development of the business case for East West Link, and has now commenced the statutory planning process for the eastern section from the Eastern Freeway to CityLink, and the extension to the Port of Melbourne. LMA is now commencing the procurement phase.

Ken has had extensive past involvement with Engineers Australia. He has been a Board member of City North Infrastructure and is currently a Vice President of Roads Australia. He is also a member of the Regional Rail Link Authority Advisory Board.

In 2012, Ken was awarded Roads Australia’s John Shaw Medal for his contribution to road planning and development in Australia.

Rodd Staples, Project Director, North West Rail Link, Transport for NSW

Rodd Staples heads the project team that will deliver the biggest addition to the Sydney public transport network since the Sydney Harbour Bridge was built almost a century ago.

As an engineer growing up in Sydney’s south, Rodd has worked in the fields of transport and infrastructure planning for nearly two decades – across Australia and in both the public and private sectors.

His qualifications in engineering and finance provide the strong foundations required to deliver a project of the scale of the North West Rail Link – a 23-kilometre extension to Sydney’s rail network and the biggest rail tunnelling project ever undertaken in Australia.

Rodd is a former Deputy Director-General at the Department of Transport, overseeing the New South Wales Government’s transport capital works projects.

HOW CAPITAL RECYCLING CAN EASE RATINGS PRESSURES

• Recycling capital, that is, selling, leasing or refinancing public sector assets and using the proceeds to fund new infrastructure investment, is an increasingly attractive option for Australian state governments. • With current strong investor appetite, these sales can release considerable value. This can help to alleviate downward pressure on states’ credit ratings, as well as sow the seeds for a self-sustaining state infrastructure funding model. • ANZ has identified a pipeline of around $120 billion of upcoming potential public sector asset sales. We estimate that around $50 billion of these proceeds would be sufficient to trigger an improvement in states’ credit ratings, leaving at least an additional $70 billion on states’ balance sheets to fund new infrastructure projects.

Australian state governments face the significant challenge of addressing an infrastructure deficit against a backdrop of weaker finances, rising debt and a desire to protect and/or improve their credit ratings. Reflecting these pressures, public sector infrastructure asset sales look increasingly sensible.

Public sector asset sales by state governments have, however, historically been politically tricky. The defeat of the Queensland Labor Government in 2012 is the most recent example of where public asset sales played a role in the government’s election loss.

Public opinion of asset sales could potentially be lifted by a new approach, namely a transparent model of capital recycling, whereby a portion of the proceeds is allocated to ‘infrastructure funds’.

This is currently being tested, with some apparent success, in New South Wales. Such a self-sustaining model of infrastructure funding could be expected to lift economic growth and deliver significant community benefits.

Australian States are capital constrained

Australian states are rated highly. Most Australian states are rated AAA by Standard & Poor’s and three of the seven rated by Moody’s are the equivalent Aaa. The most poorly rated is AA grade (Figure 1). Nevertheless, all ratings changes since 2009 have been downgrades or negative changes to the outlook.

This has been due to rising debt burdens and/or a structural weakening in states’ revenue bases that have not been met with sufficient fiscal redress. The average gross debt burden of Australian states has more than doubled since 2006 and is forecast to increase to nearly 100 per cent of adjusted operating receipts in 2015 (Figure 2).

The rise in debt has been driven by a combination of higher capital investment (including earlier large infrastructure initiatives) and recurrent operating deficits, which have been negatively affected by one or more of a combination of global economic troubles, Commonwealth fiscal tightening and weakness in taxable consumption and transactions.

Moreover, states’ balance sheets face numerous long-term challenges. These include a weakening revenue base and higher government expenditures from an ageing population but, also, more importantly in the shorter-term, the overreliance on revenues from a structurally weak GST. These factors will put further upward pressure on state debt metrics and potentially constrain capital investment over the medium term. This has potential credit ratings consequences.

Against a backdrop of higher relative funding costs (i.e. wider spreads to Commonwealth government bonds) and short and long-term challenges to revenue bases, it is no surprise that state governments are focused on repairing their balance sheets and preserving (or improving) their credit ratings. Indeed, in 2012, New South Wales went so far as to put in place legislation specifically targeted at maintaining its AAA rating.

Sowing the seeds for future infrastructre spending

Against this backdrop, alternative methods of funding Australia’s perceived infrastructure shortfall must be explored. At present, many state governments appear focused on generating greater participation from the Commonwealth government and the private sector to fund infrastructure investment. These alternative funding sources, however, are not necessarily readily available.

The Commonwealth Government, facing its own fiscal challenges, set aside just $3.1 billion for infrastructure spending over the next five years in the 2013-14 budget. The private sector, meanwhile, while a potentially rich source of funds, requires a new funding paradigm and regulatory regime to encourage greater participation.

Recycling capital – that is, selling assets that could be better managed by the private sector and using the proceeds to fund other infrastructure – seems an increasingly attractive option for state governments. Asset sales will improve state balance sheets if they assist the government to pay down some of its debt and improve budget positions and if the benefits of doing so exceed the dividends foregone and the tax implications of holding the assets.

Figure 1. State and territory credit ratings

State or territory Standard & Poor's rating

Standard & Poor's outlook Moody's rating Moody's outlook

New South Wales

Victoria

Queensland

Western Australia

South Australia AAA

AAA

AA+

AA+

AA Negative Aaa Stable

Stable Aaa Stable

Stable Aa1 Negative

Stable Aaa Negative

Stable Aa1 Stable

Tasmania

Australian Capital Territory AA+

AAA Stable Aa1 Stable

Stable Not rated

Northern Territory

Not rated Sources: Standard & Poor’s and Moody’s

Aa1 Negative

Figure 2. Average State gross debt and interest payments

120

forecasts 6

% of adjusted operating cash revenue 100

80

60

40

20 5

4

3

2

1 % of adjusted operating cash revenue

0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Gross debt, lhs Sources: state budget papers

Gross interest paid, rhs 0

After retiring some debt, the proceeds of asset sales could be used to seed infrastructure funds. Infrastructure projects could be approved by state governments but managed by independent infrastructure bodies against preset guidelines.

The institutional structure developed in New South Wales, whereby Infrastructure NSW is the state’s infrastructure planning body and Restart NSW (seeded by asset sales) contributes capital towards infrastructure projects indicates this proposition is gaining traction. The 2013-14 New South Wales Budget confirmed that the $4.3 billion net proceeds from the leases of Port Botany and Port Kembla will be allocated to Restart New South Wales, and specifically the WestConnex toll road (A$1.8 billion), Pacific Highway upgrade (A$400 million) and Princes Highway (A$170 million).

If new ‘user-pays’ or economic infrastructure assets are initially consolidated/financed on the states’ balance sheets to address risk-transfer issues, these assets could subsequently be considered for disposal once they become operational (post ramp-up) and can ultimately sit off the state’s balance sheet. Indeed, this model has been adopted by the New South Wales Government as it manages the debt implications of the WestConnex project.

In practice, recycling capital is not a longterm self-sustaining model of infrastructure funding. State funds raised through asset sales would gradually be eroded over time. With states typically investing in infrastructure to achieve social/welfare objectives (e.g. hospitals, urban transport), the capital realised from recycling assets would be less than new project construction costs. New infrastructure spending would still weigh on states’ balance sheets. The proceeds of sufficient asset sales, however, could provide a significant buffer on balance sheets such that new infrastructure spending does not add to debt before states find ways to better balance their ongoing operational revenue and expenditure.

Indeed, while not a mechanism for making states debt-free, recycling capital would still significantly improve states’ balance sheets and could contribute to an improvement in state government credit ratings and/or ratings outlooks. If successful, recycling capital could stimulate economic growth by increasing infrastructure spending and lifting productivity growth.

Moreover, investor appetite for such privatised Australian infrastructure assets is strong. This was highlighted when the New South Wales Government’s 99-year leases of Port Botany and Port Kembla raised $5.1 billion, at a 25x EBITDA multiple. Of course, not all assets would realise such a good outcome, but this strong result has encouraged the New South Wales Government to also plan for the long-term lease of the Port of Newcastle.

Community concerns that asset sales will lead to higher prices and poorer service levels from the assets being sold are often misplaced. Each potential asset sale needs to be assessed on its merits. But, effective regulatory regimes that cover both pricing and community benefits (e.g. service quality, environmental concerns) can usually be developed and enforced. This would see consumers benefit from the efficiency gains and, in many cases, an improvement in service provision from transferring the asset to private ownership and/or operation. Strong appetite by local superannuation funds for these infrastructure assets, meanwhile, provides an opportunity to return the direct benefits of ownership to a broad section of the Australian community.

The value of asset sales that could lift State government credit ratings

Infrastructure Australia has identified $220 billion of economic infrastructure assets that it considers might be suitable for sale from the public to the private sector to contribute to funding for the development of new infrastructure. These assets were identified, among other factors, as having the potential to apply a user-pays framework or already having a non-government earnings stream with the potential to cover operating costs. Identified assets also have limited or defined public policy benefits, which can be obtained by way of regulation, sales conditions or community service obligations. In some cases, however, these assets do require further regulatory changes (e.g. to ensure competitive markets) before they are suitable for transfer to the private sector.

This full pipeline of potential asset sales identified by Infrastructure Australia, however, would be highly unlikely to proceed quickly. Political and community concerns as well as the required regulatory reform

Figure 4. potential pipeline of State government asset sales

State Asset Class Asset Timing Value (AUD bn) NSW Bulk Ports Port of Newcastle 2015-17 1.0 QLD Bulk Ports Gladstone Port 2015-17 3.1 QLD Bulk Ports North Queensland Bulk Port 2018 2.5 QLD Bulk Ports Port of Townsville 2015-17 0.6 VIC Capital City Port Port of Melbourne 2015-17 5.0 NSW Electricity Distribution Ausgrid 2015-17 15.5 NSW Electricity Distribution Endeavour 2015-17 6.2 NSW Electricity Distribution Essential 2015-17 7.5 QLD Electricity Distribution Energex 2018 12.2 QLD Electricity Distribution Ergon 2018 10.7 QLD Electricity Generation CS Energy 2015-17 1.2 QLD Electricity Generation Stanwell 2015-17 2.0 NSW Electricity Transmission Transgrid 2015-17 6.8 QLD Electricity Transmission Powerlink 2018 7.7 QLD Water Bulk Sunwater 2015-17 1.1 QLD Water Bulk Linkwater 2018 1.7 QLD Water Bulk Tugan Desalination Plant 2018 0.7 NSW Water Bulk Gosford City Council 2018 0.6 NSW Water Bulk State Water 2018 0.8 VIC Water Bulk Melbourne Water 2018 8.0 WA Water Bulk Water Corporation 2015-17 12.0 SA Water Bulk SA Water Corporation 2018 12.8 NSW Water Retailer Hunter Corporation 2018 2.5 Total 122.2 Source: ANZ in some markets will remain barriers. Our analysis (Figure 3) reveals that sales of around $50 billion could be sufficient to lift the absolute rating and/or improve the ratings outlook for Australian state governments.

A likely pipeline

In practise, some states are more likely to prioritise debt retirement over funding new infrastructure. To generate enough funds to both lift credit ratings and successfully recycle capital for new investment, sales would need to rise well above $50 billion. ANZ considers this to be achievable, and indeed has identified a pipeline of around $120 billion of infrastructure assets that could potentially come to market over the next few years (Figure 4). The electricity sector provides the highest value of assets, followed by water and then ports. We note, however, that, partly due to the perceived need of state governments to seek a political mandate to proceed, these sales are unlikely to commence until at least 2015. These asset sales would potentially generate an additional $70 billion on states’ balance sheets to fund infrastructure projects. This is predicated on the assumption that reducing the states’ combined debt by approximately $50 billion would deliver a sustainable capital leverage profile of a triple-A semi-sovereign borrower. Combined with private equity and debt capital, the states could help to fund infrastructure assets worth significantly more than the original $70 billion in capital proceeds. 1. Mike Baird, NSW Treasurer, Australian Financial Review, 12 April 2013 Figure 3. Asset sales to achieve lower S&P anchor score 2. Debt burdens play an important role in credit ratings, but are not an absolute measure of creditworthiness. The impact S&P of other factors (eg. economic growth potential, institutional rating factors) means that the ratings ‘anchor’ score for each state is not uniform.

Contact:

David Byrne Global Head of Utilities & Infrastructure +61 3 8655 755

Sources: State budget papers and ANZ

S&P outlook

Gross debt / Adj receipts (%) Asset sales to meet S&P anchor 2013 2016 Debt target* $bn NSW AAA Negative 85.7 95.0 80 15.4 VIC AAA Stable 91.1 93.3 na na QLD AA+ Stable 139.2 138.9 100 22.8 WA AA+ Stable 78.8 86.9 70 8.1 SA AA Stable 69.4 84.3 60 4.4 Total 50.6 *Level that may trigger an improvement in S&Ps ratings (based on ANZ analysis)