Construction leads charge in boom

12/03/2008 - 22:00

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The state government has a record capital works budget, but does it have the right priorities and can it deliver?

Construction leads charge in boom

Western Australia is often described as being in the midst of a resources boom, but in many ways the driver of economic activity and jobs growth is the state’s construction boom.

The construction of office towers and apartments in the city, railways and ports in the Pilbara, houses and shopping centres in the suburbs, and mineral processing plants across the state are all fuelling this boom.

The state government is adding to the surge in construction activity through its capital works budget, which is expected to reach a record $25.1 billion over the four years to 2010-11.

Four landmark policy announcements last month are set to extend the boom.

In the space of one week, Premier Alan Carpenter committed the government to building a $1.1 billion sports stadium in Subiaco, a $506 million museum in East Perth, the $300 million foreshore development near the city, and preliminary works on the Northbridge Link project.

Major construction activity on these projects will not start until 2011 or 2012, which means their cost is largely over and above the government’s existing $25.1 billion capital works budget.

The government’s biggest infrastructure project – the planned Fiona Stanley Hospital at Murdoch – will also be built next decade, which means its cost is also largely over and above the current capital works budget.

While infrastructure is traditionally considered a government responsibility, the private sector has also been a big investor, particularly in the Pilbara.

Mining companies Rio Tinto, BHP Billiton and Fortescue Metals Group have either spent, or committed to spend, more than $10 billion building new ports, railway lines and associated infrastructure in the Pilbara.

This far outweighs the amount they have spent on their actual iron ore mines.

The surge in infrastructure construction has created numerous business opportunities, and also major challenges for the state.

“The demand for infrastructure of all kinds is growing much faster than anyone anticipated,” ACIL Tasman director and economic consultant Ian Satchwell said.

He agrees that the state needs to invest in infrastructure and, “within reason”, can afford it.

However he points to Treasury projections of the state’s rising debt to suggest WA will, in future, have to make hard choices about which projects proceed.

The state government is seeking to improve its infrastructure planning by formulating a state infrastructure strategy, which has been under development for more than two years.

The government is tight-lipped about the strategy, and the business community is hopeful that it amounts to more than a shopping list of big projects.

The Chamber of Commerce and Industry WA is keen for there to be greater transparency in infrastructure planning.

“CCI strongly recommends that the next phase of the state infrastructure strategy should be to involve a group from the private sector working with Treasury officers in developing an infrastructure project list for a 10- year rolling period,” it said in its submission to government.

Master Builders Association of WA director Michael McLean said the government’s capital works program was welcomed by his members, “but they are finding it extremely difficult to accommodate within their other workloads”.

“A number of builders won’t have the capacity to tender or carry out the work, which means competition will be reduced.” The shortage of skilled labour means projects may take longer to complete.

Mr McLean told WA Business News the skills shortage extended to project managers and building superintendents in government agencies, which raised concerns about the quality of documentation and supervision.

The government has established the Office of Strategic Projects to help it tackle these issues.

With a four-year budget of $18 million, the office will be responsible for up to a dozen projects with a high level of complexity or value.

Mr McLean said it was too early to judge the impact of the newly established office.

He emphasised that maintaining industrial relations stability was critical if the government wanted its projects delivered on time and on budget.

He also called for policy changes to make it easier to bring migrant workers into Australia.

That’s where there needs to be some really lateral thinking,” Mr McLean said.

The private sector has played a limited role in infrastructure provision in WA compared with other states.

In WA, the private sector’s role is mainly limited to being a contractor to government agencies, albeit under a variety of contracting models designed to share risk.

One sector where the private sector has been given a lead role is power generation.

Deregulation has allowed groups such as Alinta, Griffin Group and NewGen Power to make inroads against incumbent government-owned operator Verve Energy.

In other states, particularly Victoria and New South Wales, the private sector has been given a lead role in the construction and operation of a wide range of economic and social infrastructure, ranging from toll roads to hospitals, schools and prisons.

Public-private partnerships (PPP) are seen as an effective means of harnessing private sector efficiency and transferring risk away from the taxpayer.

A key aspect of PPPs is that one consortium is responsible for the funding, design, construction and operation of the relevant infrastructure – considered crucial to gaining the optimal outcome.

The WA government has adopted this model for just one project, the $195 million District Court complex currently under construction in the city.

The Western Liberty consortium, led by banking group ABN Amro and construction firm Multiplex, will be responsible for running the complex for the next 25 years.

The only other PPP of note in WA was in the local government sector.

Mindarie Regional Council, which handles waste management for City of Perth and six suburban councils, has negotiated a partnership with the BioVision 2020 consortium, led by Macquarie Bank, to build an $80 million waste facility.

The Pilbara mining industry is one area where the private sector has taken responsibility for its own infrastructure provision.

This has allowed the likes of Rio Tinto and BHP Billiton to pursue expansion at their chosen speed, in contrast to the east coast where coal exporters are reliant on third-party infrastructure providers.

Rio and its joint venture partners are currently spending $1.1 billion expanding the capacity of the Cape Lambert port, near Karratha, to a capacity of 80 million tonnes.

Rio is also planning to build new railways to its Mesa A and Brockman 4 mines.

In total, the company is currently spending about $1.73 billion on Pilbara infrastructure.

BHP’s latest iron ore expansion involves the duplication of its railway track between the Yandi mine and Port Hedland and expansion of the inner harbour at Port Hedland.

Another big investor is FMG.

Its Pilbara Iron and Infrastructure project has a total budget of $2.76 billion with the bulk of this being spent on new harbour facilities at Port Hedland and a rail link to its new mining operations.

Private sector money is also expected to fund the planned development of infrastructure for the emerging Mid West iron ore industry.

This will include a new port at Oakajee, north of Geraldton, at an estimated cost of $1.5 billion, and rail links to proposed iron ore mines in the hinterland, at a likely cost of $1 billion.

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