Government spending still dominates infrastructure provision in WA but private projects just keep on growing.
THE state government has budgeted to invest $7.6 billion on capital works projects in 2010-11, the largest annual spend ever.
Added to that will be federal government spending on selected infrastructure projects, ranging across roads, ports, railways and telecommunications.
This is great news for contractors looking to boost their order book, but the added bonus in Western Australia is the growing amount of private infrastructure spending, mostly tied to resources projects.
Chevron’s Gorgon gas project, for instance, has awarded about $3.5 billion in civil engineering contracts since June 2009, with Leighton Holdings the biggest winner by far (see page 16).
The iron ore sector is another big driver of infrastructure spending.
Companies such as BHP Billiton, Rio Tinto and Fortescue Metals Group are best known as miners but they are also the largest investors in railways and ports in the state.
The growth in private infrastructure spending is one contributor to an overall increase in expected engineering construction activity in WA.
Consulting group BIS Shrapnel has forecast engineering construction in the state will reach a record $26.6 billion (in constant 2008-09 prices) in 2010-11. It will hold around that level for two years before surging to $31 billion in 2013-14 and 2014-15.
“The timing of that growth might come through a little bit faster if we can solve some of the resources constraints,” BIS Shrapnel’s senior manager infrastructure and mining Adrian Hart told WA Business News.
To put this in perspective, BIS Shrapnel said the annual engineering construction work done now in WA is six times the level of the early 2000s.
“If you look at WA, it has exploded over the past five years,” Mr Hart said.
The WA spend has also grown to be one-third of the national total.
Large resources projects, particularly in the oil and gas sector, are the main contributor to this outcome.
BIS Shrapnel has also noted rapid growth in infrastructure spending, particularly for water and electricity supply.
The former has been driven by desalination plants being built by the state-owned Water Corporation and the China-backed Sino Iron project in the Pilbara.
Electricity infrastructure, once again, combines public investment in transmission and distribution assets with private investment in new power stations.
Rio Tinto, for instance, last year completed a $503 million gas-fired power station at Dampier.
Looking ahead, BIS Shrapnel expects port infrastructure will be one of the largest growth sectors, driven by integrated iron ore developments.
Spending on ports is expected to more than double, to an annual average of $2.2 billion over the next five years.
This forecast factors in expanded capacity at Port Hedland, Cape Lambert and Dampier, and the commencement of port projects at Oakajee and Anketell Point (see page 20).
BIS Shrapnel forecasts spending on railways will also rise, albeit modestly, to an annual average of $1.4 billion over the next five years, with most tied to iron ore projects in the Pilbara and Mid West.
Electricity infrastructure (up slightly to $2 billion per year), roads, highways and sub-divisions (down slightly to $1.9 billion) and water (up strongly to $750 million per year) are other large contributors to the total.
State spending limits
The forecast rise in private infrastructure spending contrasts with an expected decline in public sector spending.
The state government’s capital works program will drop from the record $7.6 billion in 2010-11 to $5.7 billion in 2013-14, according to the forward estimates in the Mid-Year Financial Projections statement.
The problem for the state government – which, like any government, would prefer to spend more on infrastructure – is that its net debt is projected to rise over the same period from $14 billion to just under $20 billion.
That puts pressure on Treasurer Christian Porter to cap spending to ensure there is not an unsustainable blowout in debt.
An added challenge facing the Barnett government is that 25 per cent of mining royalties – one of the state’s major sources of revenue – are earmarked for the Royalties for Regions program.
Spending under Royalties for Regions is expected to reach $993 million this financial year, rising to about $1.1 billion per annum over the next three years.
Historically that money would have gone into consolidated revenue, to be used where the government saw fit.
It now goes towards a wide range of regional projects, with the largest being the Pilbara Cities program, which aims to upgrade community facilities in Karratha, Port Hedland and Newman to make them more liveable and able to support larger populations.
Royalties for Regions also supports the expansion of the Ord River irrigation area, currently under way, an exploration incentive scheme, and upgrades at regional airports and regional hospitals.
Interestingly, Royalties for Regions has been used to support projects right across the state, including sporting facilities in Mandurah and a new hospital in Busselton.
It had originally been anticipated that the funds would only be spent in the more remote parts of the state.
Federal funds needed
Another major constraint facing the state government is its reliance on funding decisions made in Canberra, at two levels.
First is the system of joint funding of major projects.
Under the Infrastructure Australia program, the WA government has successfully applied to Canberra for extra funding for several major projects.
For instance, the $656 million Perth City Link project, which will link the CBD and Northbridge, is to be jointly funded by the state and federal governments, along with the City of Perth.
The $415 million Ord River development is also jointly funded, with the WA government providing $220 million to upgrade agricultural infrastructure and Canberra funding upgrades of social and community infrastructure.
The $488 million upgrade of WA’s grain freight network is to be funded not just by the state and federal governments but also by the private sector.
Major road projects, including the planned upgrades around Perth Airport, the widening of part of Great Eastern Highway, and the upgrade of the interchange between the Great Eastern and Roe highways, have all attracted federal funding.
Problems arise when Canberra’s priorities are at odds with the state government. A second major constraint is WA’s falling share of per capita GST grants.
“Latest projections indicate WA’s population share of the GST will fall from 72 per cent in 2011‑12 to just 41 per cent by 2014‑15,” Mr Porter said earlier this month.
Premier Colin Barnett accepts that WA has the capacity to support other weaker states but wants a floor put under WA’s per capita GST grants at 75 per cent.
WA’s declining share of GST can be illustrated another way – the state will receive just 4.9 per cent of the national GST pool in 2013‑14, significantly below the state’s 10.5 per cent share of the national population.
“If WA were to receive its population share of GST grants in 2013‑14, the GST revenue flowing to our state in that year would be more than $3 billion higher,” Mr Porter said.
Despite these constraints, the state government used the mid-year financial review to add $1.7 billion to its four-year capital works program, specifically for the new children’s hospital, a desalination plant in the Pilbara, and social housing and land development.
“The government is serious about providing the necessary social and economic infrastructure to support our growing economy and population, and the mid‑year review demonstrates we are achieving this in an affordable and sustainable manner,” Mr Porter said.
PPPs used more
Faced with financial constraints, and seeking better service delivery, governments in most other states have embraced the use of public private partnerships to deliver infrastructure.
In other states, PPPs have been used for everything from toll roads and desalination plants to schools and hospitals.
Former WA treasurer (and now transport minster) Troy Buswell was an enthusiastic advocate of PPPs, and his support is one reason several PPP deals have progressed in WA.
Last month, the state selected Helena Water, comprising the Royal Bank of Scotland, Acciona Agua, United Utilities, and Brookfield Multiplex to fund, build and operate the $300 million Mundaring water treatment project.
The government will also shortly select a private consortium to fund, build and operate multi-storey car parks at the QEII medical centre.
For several other projects, the state is employing private sector expertise without opting for fully-fledged PPPs.
For instance, it plans to appoint a private consortium to build and run the new Midland hospital, but funding and ownership will remain with the state.
The state’s reticence around PPPs was illustrated last year when it changed tack on the new children’s hospital.
Originally this was to be a fully-fledged PPP but the government chose to fund the $1.17 billion project itself after getting a royalties windfall.
Future priorities
Mr Barnett signalled his top six infrastructure priorities last month when he delivered the government’s agenda for the year ahead.
First on his list was planning for an onshore gas-processing precinct at James Price Point north of Broome.
The government is working with industry, led by project proponent Woodside Petroleum, on this development, which is crucial to unlocking the giant gas fields off the Kimberley coast.
Second on the list was the plan for a new port at Oakajee with integrated rail infrastructure linking to proposed iron ore mines.
This project has been one of Mr Barnett’s top priorities since he came to office, but there are still question marks over its viability.
The state government recently granted project proponent Oakajee Port & Rail an extension of time to complete its plans.
Mr Barnett also highlighted the Ord Irrigation expansion project in the Kimberley, which is under way.
Like Oakajee, this was one of the premier’s top priorities when he came to office, and has progressed with state and federal funding.
The fourth project he listed was somewhat surprising – the construction of a gas pipeline from Bunbury to Albany.
This project gained some attention during the last state election but little has been heard of it since then.
“A study on gas demand, the potential for a gas fired power station, infrastructure and operating costs, and the pipeline corridor will be completed in the next few months,” Mr Barnett said.
“There will be funding in this year’s budget to establish the land corridor for the pipeline.”
Mr Barnett’s fifth project was Perdaman Chemical’s plans for a coal to urea project at Collie.
Last, but not least, was the issue of Perth’s next major sporting stadium.
“One of the major decisions before the Liberal-National government this year is the location, cost, timing and capacity of a new stadium in Perth,” Mr Barnett said.
“The government intends to make an announcement on the stadium by mid-year and there will be money in the forthcoming budget for planning and design work.
