14 minute read
Lance Hockridge | Chief Executive and Managing Director, Aurizon
Lance Hockridge
Optimism around the new national government must be backed by a strong reform agenda if Australia is to solve its productivity and infrastructure challenges, says Aurizon Chief Executive and Managing Director, Lance Hockridge.
With a new government in place, I certainly do detect a small spring in the step of the business community.
I’m known as being more bullish than a number of my colleagues, particularly in our space, and especially in the resource space.
But it seems that, on the back of all of that, many predictions of the end of the world as we know it are already being proven to be somewhat bearish.
My challenge, therefore, to business and to government, is not to withdraw from this opportunity that we have in front of us, but to create a new start and create the kind of momentum that is needed for change in the infrastructure space.
We’ve all got a role to play on what is a relatively long road around reform and restructure.
The Abbott Government is certainly clearly starting to blast away at the policy void – and that’s a good thing.
The renewal of federalism is a genuine prospect in which states get on with business, without the dead hand of Canberra impacting on everything that they do and need to do.
The streamlining of environmental approvals, as witnessed between the Queensland and Commonwealth Governments’ Memorandum of Understanding (MOU), makes great sense. Similar moves, of course, have been made in New South Wales.
We don’t want to lower the bar around environmental standards, but I believe that we certainly can be faster, we can eliminate duplication, and we can cut the costs of business in this area.
The Coalition Government, I believe, also ought to be well supported for its policy of accelerating the completion of free trade agreements with key countries in our region.
This will be particularly important for the agricultural sector – and it will help Australia realise the genuine prospect of our agricultural sector becoming the ‘food bowl’ of Asia.
The flow-on benefits, as we all know, to regional and rural Australia – indeed to the overall Australian economy – would be substantial.
In economic terms, notwithstanding my optimism, I don’t believe that the prevailing headwinds that we’ve all been experiencing are going to dissipate
Lance Hockridge
any time soon. There’s still going to be a fair degree of pain for our economy, and particular sections of our economy, for some time.
However, recent discussions with economists, policy advisers and other well-placed people, certainly have renewed my confidence in Australia generally, and in the Australian resources story.
The growth story for coal – including thermal coal – in my view, is intact. Likewise for iron ore.
The growth rates in terms of percentages may well be slowing, but the absolute numbers that underlie those numbers continue to grow, they continue to be strong, and they continue to be sustained.
Indeed, as is so often the case, the complexity of the story is lost in some of those headline numbers.
For example, in the last financial year, the north Asian countries of Japan, South Korea and Taiwan accounted for 40 per cent of metallurgical coal exports and 70 per cent of thermal coal exports.
So, as important as China and India are, it is still our north Asian colleagues that are most influential.
The growth curve, though, for a place like India is driven inexorably by people moving to urban settings and enjoying a small slice of the kind of lifestyle that today we take for granted.
Lifting millions of people out of poverty is about light and power. Coal is – and will remain – the lowest-cost option. By 2030, coal will still be used for up to 40 per cent of the globe’s electricity, while acknowledging the growth nonetheless in that period in gas, in nuclear, and in renewables.
If we think about China, the steel intensity continues to grow. Many of you won’t be aware that in August 2013, for the first time, China produced more crude steel than the rest of the world put together.
Our company, Aurizon, is 70 per cent leveraged to the Australian resources sector, and that bodes well for our future.
There will be no change to our core strategy, no rewriting of mid-term transformation and long-term growth projects.
We transport about 60 per cent of the coal that is ultimately exported from Australia. Longer-term prospects remain for us in the Pilbara and in the Galilee, for example.
We know that these are not projects for the next five minutes; nonetheless, this kind of national investment in critical infrastructure, underpinning best-in-class networks, for world-class reserves, remains a sound strategy for our company and for our nation.
I’m optimistic about growth prospects, and also reassured that, collectively, we are making a start – or a restart – on reform.
We are now seeing unprecedented restructuring at the company and macro levels, given the challenges that we’ve all experienced in the context of a slowing global economy.
It has forced a rethink, a recalibration. Frankly, it’s positive and it’s overdue.
Australian companies are diversifying with unfolding opportunities in the Asian century and are moving, notwithstanding the importance of resources, beyond the quarry, to education, training and services.
We’re rediscovering the capital and cost discipline that faded through those sky-high resource price days. And this, of course, brings us to the critically important piece about productivity.
We need to reclaim our place in terms of global competiveness. Companies big and small must keep doing the hard yards of reform, reducing costs, and improving efficiency.
We simply cannot duck the responsibility.
In that context, overdue government reforms – as discussed within the sector, in regulation, in taxation, and in labour markets – must create a platform for sustained long-term productivity improvements.
Investors, as is the case with our company and many others, have a 10- or 20-year horizon, and they have to be certain about the policy settings for a country and a company such as ours.
It’s inconceivable that over the last few years, since Initial Public Offering (IPO), so often the phrases ‘sovereign risk’ and ‘Australia’ have been associated in the many discussions that I’ve had with investors.
We need a business environment in which duplication and bureaucracy give way to simplicity and pragmatism, where grandiose gold-plated solutions are replaced with cost-effective, fit-forpurpose infrastructure.
Policy that creates a level playing field doesn’t pick winners, and rewards the most efficient outcome, so that the pipeline of projects – Australia’s infrastructure deficit – can roll beyond talk phase into execution phase.
Projects that stack up strategically, commercially, and with productivity dividends must get to the top of the queue.
Lance Hockridge
Aurizon’s recent journey gives a glimpse of the larger opportunity in rail, and elsewhere, in an environment where we have to carve out new approaches to infrastructure investment.
The privatisation in 2010 liberated much-needed funds for the Queensland Government, which of course had lost its AAA rating in the global financial crisis (GFC).
The current state government has further benefited by selling down the large part of the remaining shareholding in our company at a premium. No longer, then, is government lumbered with capital commitments underwritten by taxpayers for coal railways in Queensland, or iron ore haulage in Western Australia, or the many other things that we do with a substantial capital budget.
The investment, though, far from stopping, has been accelerated.
We are midway through a $2 billion investment program in the central Queensland coal network – a program that will see an additional 70 million tonnes of capacity added to that network by 2015.
This leverages the existing infrastructure assets, building on the inherent scale and efficiency of that asset.
Privatisation has also been mighty liberating, of course, for the company. We can now squarely focus on customer value and shareholder value, with employees much better engaged around those kinds of priorities.
Transformation has shifted up a gear with a relentless drive on cost efficiency, as well as capital discipline.
We’ve shed many legacies from the 150 years of government ownership, big bureaucracy, and, frankly, trainloads of archaic rules that governed us.
Nonetheless, we must continue to be leaner, meaner and faster. We’ve made, since privatisation through to June 2013, some 1600 redundancies across our organisation, or 15 per cent of the labour force, while actually carrying more product for our customers.
In July, we announced a further $230 million in cost and efficiency savings to be put in place by 2015.
Of course, we are not alone; other rail and port entities have been born out of similar privatisation processes, and have embarked on similar journeys.
It’s a reminder, then, that the net result will be an increasingly competitive and dynamic market for freight and port services, driven by customer demand, funded privately, and with an appetite for growth.
We need more of this. And we need to work harder at squeezing more tonnes down existing supply chains, sweating assets, streamlining and integrating – particularly around port and rail interfaces, in our case.
So in that context, what could be on the agenda for our new government, and for industry more generally in this rail space?
Here are just a few ideas.
The Moorebank Intermodal Terminal has the potential to be a gateway for future land transport productivity. Road, rail and shipping would work seamlessly between an efficient, scalable inland hub of one of the nation’s biggest container ports.
I know that this is a work in progress, but some are still clinging to a government-led proposal when the private sector is ready, willing and able, and is several years ahead.
Without hesitation, government should not have significant equity, commercial involvement or management rights at Moorebank. This is simply not required.
The government mandate, in my view, should be one of facilitation, to nurture a long-term strategic solution with the requisite environmental, regulatory and planning approvals.
Let the private sector do the heavy lifting in terms of the funding, the development and the delivery.
Qube and Aurizon in the SIMTA consortium are standing ready to provide a genuine common-user facility at no taxpayer cost, and should be allowed to get on with the delivery of the project without any further delay.
Acacia Ridge in Brisbane has been operating like this for many years.
I also see talk of the privatisation or part-privatisation of the Australian Rail Track Corporation. The discussion is a good thing, but let’s also get the structure and the economics right.
Let’s ensure that the assessment considers its disparate parts, relationships to markets, and respective commercial values of assets.
Certainly the Hunter Valley Coal System is abundantly different to the intermodal network traversing the country. Let’s understand how we effectively recycle the capital into long-term strategic infrastructure in the same broad class.
Lance Hockridge
Some, of course, will say that the sky will fall, investment will evaporate and we’ll all be ruined. The same arguments, after all, were peddled in Queensland three years ago when Aurizon was floated, and yet I stick by the mantra that I set at that time – it was the right decision, at the right time, for the right reasons.
There are some things that simply should not be run by government, nor are they deserving of taxpayers’ funds that are better spent in the community.
While some sections of the community are yet to be convinced on privatisation, the recent port sales here in New South Wales demonstrate that there is plenty of appetite in the investment world.
The deliberate action by the New South Wales Government to recycle those funds into new, higherpriority infrastructure is a worthy precedent.
We need to do more to educate and inform on the merits of privatising assets that are not part of government’s social pact with the community.
Again, the sale or part-sale of ARTC would be the logical foundation for broader consideration of private sector involvement; for example, in the Inland Freight Rail Project. Here we could recycle capital and look at new funding approaches unwritten by that kind of long-term view of commerciality.
We know we have to solve the bottleneck that is the east coast rail route between Melbourne, Brisbane and Sydney – a corridor that struggles from a rail point of view with a mere 15 per cent market share. Notwithstanding work that’s been done in recent years, this route remains beset by legacy issues of alignment, track structure and technology, as well as urban congestion and the competing demand of passenger priorities.
We must continue to deal pragmatically with these, while seeking longer-term, sustainable solutions. That’s why at Aurizon we were so interested in the Federal and state governments’ commitment to examine the progress of a freight bypass to the Port of Brisbane as part of that Inland Freight Rail Proposal.
It’s a clever play on multiple dimensions, not only on efficient general freight movements. If delivered, the proposal would generate productivity gains through direct, faster and more reliable access for rail freight to and from the port. It would also open up a suite of opportunities for rural goods and agribusiness, both in Queensland and in New South Wales. This is how we can achieve infrastructureenabling shifts in economic activity and value creation, where we tap into that next wave of investment as Asia’s ‘food bowl’.
The role of rail here is to reinvigorate those ageing supply chains, particularly those that service our agriculture industry. We also need to consider how we make them competitive and commercially valuable, and how we work with major customers in these supply chains, including the global grain players that have turned their attention and their interest to this part of the world.
Let’s be clear: there is no silver bullet for the ailing regional freight networks across Australia, many of which have been with us since Federation and indeed before. Some are clearly past their use-by date, and are better served, in all honesty, by road servicing into rail hubs.
Rail can never be everything to everyone. That’s a mistake that government has too often made with railways in Australia over the generations, and invariably it’s a notion only supported by government subsidies.
But there are opportunities if we’re clever, selective and commercially savvy. The long-run business case must stack up.
As we’ve heard, the private sector and the investment community will be interested and
Lance Hockridge
involved when the numbers work, when the customer is there and when the demand is clear.
No-one underestimates the size of the transport task over the next 20 or 30 – or indeed 50 – years, and the need for us to get beyond bandaid solutions. We know that rail can do the heavy lifting when we can get our act together.
In some areas, such as the Pilbara, the Hunter and Central Queensland, we already have world-class assets with high levels of efficiency. The challenge is to translate these pockets of excellence into the broader freight arena.
There are indeed plenty of levers available to get us to the place where we all know we should and must be in lifting productivity, pushing down costs, increasing efficiency, getting rid of the red tape, driving new investment approaches and resurrecting sound policy settings.
We need to change up gears on the pace and substance of reform, especially for all of us in the infrastructure space.
Now it’s about getting on with the job, understanding with clarity what’s required, and having the execution capability to make it happen.
World-class productivity and business performance will deliver untold benefits to our customers, to the economy, and to our future standard of living.
That is the opportunity that is before us.
Lance Hockridge became Managing Director and CEO of Aurizon in July 2010 to lead the company through what would be the largest IPO in Australia in a decade. He has guided the transition to private ownership and Aurizon’s listing as a top 50 ASX company after 145 years as a governmentowned and -operated railway. Lance has more than 30 years’ experience in the transportation and heavy industrial sectors in Australia and the United States with BHP and BlueScope Steel.
At BHP Billiton Limited, Lance was a member of the leadership team that led BlueScope Steel’s successful de-merger from BHP and subsequent listing on the ASX. In 2005, Lance was appointed President of BlueScope Steel’s North American operations, where he led a major turnaround in safety, production and financial performance.
From 2007 until 2010, Lance was Chief Executive Officer of QR Limited, which was split to form Aurizon and the passenger-focused Queensland Rail that has remained in government ownership. Lance is leading a major transformation program at Aurizon, aimed at delivering world-class safety, customer service excellence and superior commercial capability.
