Billions of dollars in opportunities could be up for grabs from Australia’s looming infrastructure investment boom. Domini Stuart warns that directors need to start asking questions now if they want their companies to benefit.
For the first time in recent history it seems the infrastructure planets are aligned. “The Commonwealth government made some significant commitments to funding infrastructure in the latest Budget and it is also encouraging the states to divest assets to pay for new projects,” says David Larocca, partner and Oceania leader for infrastructure advisory at Ernst & Young. “At the same time, state governments have put funding new infrastructure at the front and centre of their policy plans.”
“There’s a definite change in approach now,” adds Brad Vann, a partner and advisor on the delivery of infrastructure projects at Clayton Utz. “As the states are looking to recycle their capital, the government is taking on a lot more heavy lifting in, for example, developing toll roads with the aim of generating revenue that can eventually be sold. Every new tollway has a ramp-up stage while drivers decide whether the benefits are worth the extra cost but, over a period of a few years, that settles down and you should end up with a reasonably reliable revenue base which increases every year.
“By selling this, the government can effectively recycle the equity from that project into the next one.”
Ports are also proving to be a significant source of funding. In New South Wales, the sale of Port Botany, Port Kembla and the Port of Newcastle has raised over $6.7 billion and both major political parties in Victoria have voiced their intention to sell the Port of Melbourne.
“In the past, state governments were concerned about losing the income from profitable assets like ports when they were privatised,” continues Vann.
“In order to counteract that loss, and provide an additional incentive, the federal government has agreed to pay them up to 15 per cent of the value of any proceeds realised on the privatisation of state-owned assets as long as the funds are invested in approved infrastructure projects.”
As a result of this alignment, Australia now has a significant pipeline of both asset sales and infrastructure projects.
“Most of the assets are already operational, particularly in the electricity and transport sectors, and we think there could be north of $40 billion in opportunities coming up for the private sector,” says Larocca.
“On the new projects side, we’re seeing about $15 billion of privately-financed greenfield projects coming to market.”
An eastern focus
Projects of various kinds are planned for every state and territory.
“At the federal level, for example, there’s a plan to develop the north of Australia, particularly the Northern Territory, where there are resources and irrigation opportunities,” says Andy Goodwin, CEO of SMEC, which provides consultancy services on major infrastructure projects around the world. “However, most of the activity, particularly in terms of transport, is focused on the eastern states. Several large road, rail and port projects are emerging along Australia’s east coast. In Queensland, there’s the $5 billion Brisbane Bus and Train Tunnel and the $1 billion Brisbane Port Redevelopment project. Victoria is planning the East-West Link cross-city road connection and key pipeline projects in New South Wales include the $2.5 billion second airport proposed for Badgerys Creek and the improvement of the M5 Transport Corridor.”
But it may yet be too early to break open the champagne.
“There is still some uncertainty at the federal level, including a Senate that’s an unknown quantity,” says Vann. “There’s also uncertainty at state level. Victoria, New South Wales and Queensland are all going to the polls inside the next year and, of course, any change in government could mean a change in infrastructure policy. In Victoria, for instance, it’s clear that the opposition favours getting rid of level crossings rather than building the East West Link.”
There may also be problems with attracting funding from the private sector. “Investors have wide-ranging concerns,” says Goodwin. “For example, developing infrastructure in over-populated cities is increasingly expensive and, in the past, inflated predicted returns on Public Private Partnerships have left some private partners insolvent. Investors are also very conscious of the fact that election-driven promises for infrastructure projects may take a while to materialise. If state governments need
to sell existing assets to generate capital there
will a question mark over the starting date. Obtaining the many necessary approvals can also add to delays.”
Independent consultant Anuja Rao FIEAust GAICD points out that both stakeholders and investors need to feel confident in the information presented to them; good, transparent reporting is vital. She is also concerned by the lack of clarity as to who will pay for the infrastructure over the medium and long term.
“At a strategic level, it can be difficult to strike a balance between local investment and foreign ownership,” she says. “In general, it’s much more difficult to raise capital locally than offshore. Incentives need to be attractive to local investors, who tend to be more conservative and smaller in scale. Institutional super funds have traditionally been a good source of capital and I think there’s a growing opportunity for aggregated or ‘crowd-like’ self-managed super funds.”
Whatever the source of capital, any gap between infrastructure and demand will affect the business model and return on investment.
“Large-scale investments often have program cost control issues and schedule delays – project overruns which have not been covered adequately in the business case,” says Rao.
“In particular, ancillary capital investments like water, electricity, IT, telecommunications and security are often under-modelled and not adequately covered by contingency. So the greater issue is having a skill set that embraces domain knowledge and project management skills.”
Transport may be the focus of attention, but other issues need to be factored into the equation. “It’s important to have an integrated roadmap of investments and programs that considers the impact of things like population growth, changes in demographics, education, health and the shift from a manufacturing to a service economy,” says Rao. “These drivers have the potential to influence other infrastructure projects as well as tie up resources.”
Larocca identifies another possible hurdle as lack of bandwidth in government.
“The transaction processes associated with both the selling of an asset and the procurement of a greenfield asset require specialised resources in government,” he says.
“There are only so many people with the appropriate skills and they can only do so many things at the same time.”
There could also be pressure on those responsible for running the bidding processes.
“Bidding is very expensive – you can’t expect to get much change out of $20 million on each tender and that’s a lot of money to put at risk,” adds Larocca. “But running the bidding process is another very specialised area with a relatively small network of people who have the requisite skills.”
Resourcing the actual delivery of infrastructure could be less problematic.
“The huge investment in resource facilities is tailing off and many of the people who have been working in that area are now available,” says Vann. “And, while all of that investment was occurring in the far north and west, many of the workers were from the east and living there on a temporary basis. I think we’ll see a massive reallocation of resources to the new infrastructure projects as these people move back home.”
A more planned and even delivery of infrastructure would allow resources to be used more effectively but, after working in the sector for 25 years, Vann is resigned to the fact that activity will flow in waves.
“The federal constitution effectively puts the responsibility for development of infrastructure on state governments, but most of the fundraising is done by the federal government,” he says.
“That creates an ongoing tension between the two as to how those responsible for the delivery of infrastructure will be able to fund it. As that is driven by political considerations and the policies of the party of the day, there will inevitably be periods of inactivity followed by periods when everything happens at once. That’s why Infrastructure Australia is so important. As a long-term planning vehicle with bipartisan support it should be able to smooth out some of the peaks and troughs.”
Directors must be prepared
There are major opportunities on the horizon for organisations of all sizes, but no board can afford to sit back and wait.
“Unprecedented international interest is generating fierce competition,” says Larocca. “Australia’s pipeline of asset sales and new infrastructure projects is, in itself, big enough to attract global attention and, at the same time, the home markets of many infrastructure investors and contractors are relatively quiet. Companies which have done nothing but invest in infrastructure in the UK or Europe, for example, have seen their markets halve in size. Naturally, they’re looking elsewhere and Australia is one of the places they’re looking to. The boards of organisations involved in construction, operation and lending as well as the downstream companies that feed off construction need to be very aware of this situation. It’s vital that they start getting ready now for the projects that are likely to come through.”
In virtually every case companies will need to form consortia and those partnerships need to be in place before the transactions reach the market. “Directors should be asking their management teams whether they’re well-positioned to take advantage of opportunities as they arise,” says Larocca. “They also need to be thinking about alliances in global terms. Where are the best people to help them differentiate their offering and how can they form strategic relationships outside of Australia?”
Anyone hoping to do government work should be working at building sound relationships with the right officials. “It’s important to monitor government websites for opportunities to tender – we do that every day,” says Vann. “But you really need an understanding of what’s likely to come up and of the regulatory regimes that will apply, so you can do all of the necessary thinking and planning before the tender is announced. If you see a project you’re interested in but have done none of the groundwork you’re very unlikely to succeed.”
Goodwin suggests that directors search their own high-level contacts to see where they can facilitate critical strategic partnerships.
“They should also be providing strategic direction and ensuring opportunities align with their organisational goals,” he says. “And it’s very important for senior management to create an inspiring environment for the people who work there. Employees should be empowered to convert opportunities into new business in the most effective way.”
Already a member?
Login to view this content