Funding, planning models need developing

Growing infrastructure needs and a diminishing capacity to fund them is a major challenge for WA, according to key players who attended a recent Business News forum.

Perth needs to have a mature debate about its suburban sprawl or those living on the fringes could face a lower standard of living due to the higher cost of providing amenity and services, according to Marion Fulker.

The Committee for Perth chief executive told a recent Business News boardroom forum a lack of density was just one roadblock in efforts to provide suitable infrastructure across the city.

Pressure on budgets, both state and federal, and the absence of a state infrastructure strategy were creating additional headaches, the forum heard.

However, those at the luncheon forum agreed there were solutions, including the sale of existing assets and the use of value capture, where beneficiaries of infrastructure provision contribute partly to its cost.

Despite these challenges, the state government still has a sizeable infrastructure program in the four years ahead, worth $22.9 billion according to the recent budget.

That’s down about $700 million from the mid-year review, driven partly by lower costs and by lower demand projections at Water Corporation and Western Power.

Planning

Ms Fulker said the state needed a better and more integrated plan for land use and transport, and how they interacted.

Density was pivotal, she said, because the city could not continue to sprawl as it had, while better utilisation of existing infrastructure was another factor.

“If you had said in the 1955 when the Hepburn-Stephenson plan came out: ‘Let’s do Perth 150 kilometres long along the coast and the river, and let’s have some major freeways and we might put in a little bit of public transport’, no-one would’ve signed up for that, Ms Fulker said.

Some train stations on older train lines in areas of extremely low density had fewer than 1,000 passenger boardings per day, she said, while large capital spending was being poured into infrastructure on the city’s fringes. Current trends meant 60 per cent of the city’s population would eventually be living more than an hour from the city, Ms Fulker said, while the highest paying jobs would inevitably remain in the CBD.

“Then you have to say to people that not everyone can have the same quality of life,” she said.

“If that’s the way we want to live in the future, then we have to understand there are some trade-offs that have to be made as part of that.

“There are no silver bullets left.”

Committee for Economic Development of Australia WA president John Langoulant advocated an infrastructure planning process that could rigorously review the cost and benefits of projects.

“Long-term integrated infrastructure planning is also desirable with the aim of making much of the program as bipartisan as possible,” Mr Langoulant said.

 This was not intended to constrain decisions by the government of the day, he said, rather to ensure good planning and funding options were explored.

 “We understand that from time to time the political process can require changes in tack,” he said. “After all, we elect governments to exercise these preferences. But if there were long-term planning of infrastructure projects, the costs and benefits of governments making these decisions would be far more measurable.

 “And the incidence of new projects being contentious would be limited as a consequence of a more thorough and open planning process.”

A good example is the $1.6 billion Perth Stadium, with Mr Langoulant having been involved in its long-term planning as chair of the major stadia taskforce.

The committee released its report in 2007, with Kitchener Park and East Perth the preferred sites.

The executive director of public policy consultancy ACIL Allen Consulting, John Nicolaou, said other states had long-term infrastructure strategies, such as NSW, which had a 20-year program.

It additionally has an infrastructure statement included in the budget papers.

“(NSW) has been proactive in finding new ways of financing infrastructure,” Mr Nicolaou said.

Two thirds of the federal government’s Asset Recycling Fund money went to NSW, he said, while WA had not looked to Commonwealth financing of infrastructure to the same degree as other states.

Georgiou Group operations manager Peter Hopfmueller said a clear strategy would enable business to better plan investments.

That would flow on to better outcomes for the state, he said, as contractors would be able to buy new equipment or make technological upgrades that were better timed, resulting in more efficient project delivery.

“Longer-term planning would be really welcomed, certainly by the construction sector, so we know where we’re heading and can get the latest technology to build new infrastructure,” Mr Hopfmueller said.

Contracting

Since resources projects had begun to slow, he said, there were more contractors chasing work in the Perth market.

“Work is more competitive, which makes it very interesting for contractors,” Mr Hopfmueller said, adding that prices had come down as a result.

Another important issue for construction firms was open tenders, where multiple competitors would design projects before a winner was picked.

“All the contractors are investing funds to pay for designs,” Mr Hopfmueller said.

“As a general rule, we don’t mind doing that if the pool is down to three or four, but if you get groups of six and 10, you’ve got to say … is that a good investment of funds?”

Having an expression of interest process, where contractors first proved capabilities, would lead to better results, he said.

Ms Fulker said it was important to note that some bid teams had spent upwards of $1 million planning for the MAX light rail project, which the Barnett government cancelled.

Funding shortfalls

Mr Langoulant, a former under-treasurer, said although most of the infrastructure built in recent years was necessary, he remained concerned about the level of debt the state had racked up to finance it.

“At current low interest rates, the state’s projected debt levels were probably a manageable burden on the budget,” he said.

“But they severely limited future budget options and there was no room for complacency in reducing debt levels as current interest rates are by historic standards, stretching back centuries, very low.”

 “And just as it was mistakenly thought during the recent boom period that commodity prices would stay high, as certain as the sun is coming up tomorrow, interest rates will not stay at these current low levels.

 “The potential future interest burden on the budget, if we don’t reduce the debt level, is therefore going to be substantial.”

 He said another concern was the need to build the budget’s operating surplus. One of the government’s fiscal targets is to have an operating surplus that covered at least 50 per cent of infrastructure spend each year.

However, the government had failed to meet this target in recent years and that was why debt had grown rapidly.

 In fact, the current situation was the opposite, with about 75 per cent of the growth in debt being driven by the excess of operating spending over revenue.

 “Whichever party is elected in March (2017), they are going to face a whole term of government at least of building up the operating surplus so that debt can be brought down in a sustainable manner,” he said.

 “If we don’t, we’re going to leave an enormous debt burden to our kids.”

This meant the government would need to find alternatives to fund infrastructure spending in the years ahead.

Mr Nicolaou agreed that debt levels had been driven by growth in operational spending, not capital investment.

“You need two strategies – you need an infrastructure strategy and you need a budget repair strategy,” he said.

“The reality is the government can’t afford to fund big infrastructure projects anymore just through the normal course of borrowing. They need to look at other financing options and involving the private sector is critical to that.”

Avenues worth exploring included user-pays, public private partnerships and privatisation, he said.

In NSW, a fund was being set up to cordon off windfall tax revenues as the boom took off, an approach he said should have been used here.

Mr Langoulant was cautious about the purpose of PPPs as a funding mechanism for infrastructure projects as they frequently had the same impact as debt on the state’s balance sheet.

 Other than toll roads, many PPP projects have features of lease financing, he said.

 “The private sector often refers to PPPs as being an alternative to traditional public debt funding and thus a mechanism to accelerate new infrastructure projects without impacting the state’s balance sheet, but that is often not the case,” Mr Langoulant said.

 The key attraction in PPPs was not in protecting the state’s balance sheet, but rather achieving a better allocation of risks between the private and public sectors in delivering and operating infrastructure, thereby improving overall  service quality and maintenance, he said.

 That was particularly true of public buildings, which governments were not good at maintaining, he said.

Lendlease general manager engineering and services Greg Locke said there were about half a dozen PPPs in WA, usually smaller in size than those on the east coast.

“One of the other issues to look at is (if they do go into private financing) to make sure the private financing goes into a place they can get off their balance sheet,” he said.

“Transfer risk to the developer or the PPP proponent. That’s not been done that well over the years.”

He said a discussion had started about user-pays financing, with the Perth Freight Link funded by a toll on trucks.

To make it work, however, the government would need to think about lowering fuel excise, licence and registration costs and make sure that consumers were not significantly worse off.

Value capture

KPMG director deal advisory for real estate and construction, Brendan Arundell, said the state should target value capture to fund projects.

That would mean capturing part of the private benefit created for landowners and businesses near public infrastructure developments.

Mr Arundell said he was somewhat less worried about borrowing to pay for projects, warning that if solutions were not found to fund infrastructure, the state would be playing catch up for a long time.

Value capture was an opportunity to unlock business value to minimise funding gaps for projects, he said.

Two Australian examples of value capture were in Queensland – the Cross River tunnel and Sunshine Coast light rail.

The higher density that came with such initiatives was beneficial, Mr Arundell said, although it would require effort to get stakeholders around the table and in agreement.

“There’s a fear of dealing with local governments, say for a light rail, when you want to go and do density bonuses around some of the stations,” Mr Arundell told the forum.

Ms Fulker said the MAX light rail project required approval by seven local governments, none of which had the capacity to contribute significant funding.

Modelling for Murdoch train station suggested the best return the government could get from value capture would be around 20 per cent, Ms Fulker said, which was not a large amount for something potentially politically unpopular.

Mr Locke said the densities for value capture to work well would need to be quite high.

“One of the greatest examples of value capture is Hong Kong, the MTR (Mass Transit Railway) basically funds itself off the station developments,” he said. “We don’t have those sorts of densities here.”

A case in point would be the problematic public transport connection to Ellenbrook, which has insufficient population density to make such a project worthwhile for a private rail developer.

Ms Fulker took a similar view.

“The density we would require is just not Perth’s cup of tea, I mean just look at the South Perth debate at the moment,” she said. “Everywhere you start talking about making somewhere more dense, the community just goes hysterical.”

Mr Langoulant said value capture should be part of the discussion about funding, although the revenue stream usually came down the track from the upfront capital cost.

“Actually doing good, long-term planning, that’s the best solution,” he said.

“That’s why ‘instant coffee’ infrastructure provision is not the best way to add value.”

Mr Langoulant said privatisations needed to be more seriously put on the table, too, while Ms Fulker and Mr Nicolaou said hypothecation, where the funds were specified for particular projects, was a good way to build community support.

Projects

One of the largest capital spends planned in the coming four years is by Water Corporation, which is budgeting for about $3.2 billion in asset investments to June 2020.

Business News understands one option not in the budget, yet considered very likely in the longer term, is a third desalination plant.

In a separate interview with Business News, John Holland regional manager (WA) Fraser Ramsay said water projects would be a key focus for the company.

“WA is still a fairly dry state and how we maintain the security of water supply going forward with a growing population, I think that will drive some opportunities in the near to medium term,” he said.

Delivery options varied from dams and desalination plants to harvesting wastewater and reinjecting it into the ground.

Two wastewater plant contracts are on the menu already – the $195.6 million Woodman Point upgrade and the $19.2 million Beenyup facility upgrade.

Mr Ramsay said John Holland would tender for Woodman Point and hoped the Beenyup tender would be released later this year.

More broadly, Mr Ramsay said water represented a good opportunity for private investment involvement.

“It’s an expensive area in terms of operation, maintenance and development,” he said.

“At the moment in WA, it’s largely driven by government spending and funding.

“There are other models around the country whereby that type of infrastructure is provided by the private sector.”

Tecnicas Reunidas managing director (Australia) Noel Perez-Falcon said the Spanish-based company would be interested in water projects.

Tecnicas has 25 years remaining of a 30-year contract to run the Southern Seawater Desalination Plant at Binningup, which produces about a third of Perth’s water supply.

It is additionally building the technical ammonium nitrate project for Yara in the Pilbara.

Mr Perez-Falcon said the company would be seeking a third project, something to which it could bring a unique angle.

Further work in the water sector was one possibility, he said, while the company was targeting various options to involve third-party funding in projects.

“The market has changed, so the clients are asking the companies to be creative in the way they present the projects,” Mr Perez-Falcon said.

“Especially in these times, the government doesn’t have the resources they had before.”

A further contractor taking an interest in water is RCR Tomlinson, which bought the Water Corporation’s engineering and construction business for $10.4 million last August.

BGC Contracting chief executive Greg Heylen said it was also an area that this company had an interest in.

“We’re about to be bidding on quite a bit of Water Corp work,” he said.

Mr Heylen said BGC would additionally be bidding on Northlink stages two and three, although there would be a steep decline in the amount of work available in the medium term.

That meant there would likely be some consolidation in the industry, he said.

Contractor numbers

One notable trend in the most recent BNiQ contractor data is that employee numbers have reached a plateau after a period of decline.

Numbers are unchanged at six of the top 10 such companies.

Monadelphous, for example, had about 7,000 employees nationally at the end of 2013, a number that fell to 4,500 in its 2015 half-yearly report and has remained there since.

There was no change this year to its WA numbers, which are used for BNiQ ranking.

In the two-year period from June 2013, Southern Cross Electrical Engineering reduced national staff numbers from 1,200 to 700, where it has remained since.

WA numbers for Southern Cross were unchanged.

There was a similar story at Decmil Group and RCR Tomlinson, according to their annual reports.

However, the number of engineers employed continued to fall, with BNiQ finding the number employed has fallen nearly 30 per cent on last year.