In this article I discuss the demand for infrastructure in Australia over the next decade and the procurement methodologies which might be deployed to satisfy this demand.
There is considerable appetite within Australia for investment in infrastructure. The Australian Prime Minister wants to be known as 'the infrastructure prime minister', and a recent PwC CEO survey found 83% of Australia's CEOs said the government should make infrastructure improvement its number one priority.
In the June 2014 quarter a total of 976 infrastructure projects were definite or planned, with a combined value of $875.4 billion. Until recently, infrastructure projects have been driven by the resources sector. This trend is declining. It is anticipated that, over the next few years, the overall investment base will broaden, driven in part by a swag of recently announced state-based transport projects including the $8 billion Melbourne Rail Link.
Although it is widely agreed that there is a significant shortfall between the infrastructure Australia will need and the infrastructure currently available the estimates of the this deficit vary widely. As Infrastructure Australia puts it:
There are various estimates of the infrastructure deficit in Australia, but one thing is consistently concluded: the gap is very large.
The following estimates give an indication of the magnitude of the deficit.
- Infrastructure Australia has estimated it at $300 billion.
- The ANZ Bank has identified more than $220 billion worth of Australian infrastructure assets for investment in the period to 2020, with around $175 billion of opportunities over the next five years.
- Infrastructure Partnerships Australia, a corporate lobby group, and Citibank have stated that Australia's infrastructure deficit is about $700 billion. Private sector financing of $360 billion is expected to be necessary to bridge this gap.
Asset recycling is widely identified as one means of bridging the gap between the infrastructure we need and what we are willing to pay for. Asset recycling is the sale, by government, of infrastructure assets and using the proceeds of those sales to fund new infrastructure. The Federal Government has recently introduced asset recycling legislation, which provides for an incentive payment of 15% to State and Territory Governments if all the asset sale price of sold assets is committed to infrastructure projects. A 2012 Infrastructure Australia report identified up to $219 billion in assets which could be privatized to fund new infrastructure projects, however it has been suggested that any funds realised through this method should be prioritised to infrastructure for which private financing is not viable. The Productivity Commission cautions that the selection of projects must be made on a stringent cost-benefit analysis.
With such a significant need for infrastructure, coupled with pressure on the ability of government to fund that infrastructure the importance of efficient procurement methodologies which maximize value cannot be overstated.
Traditional methodologies, such as design and construct or EPC will continue to be used but there is a real desire to secure increased value from the procurement process than these traditional methodologies have delivered.
PPP contracts and alliance contracts are not new methodologies. However the judicious use of these methodologies may well be an important part of the mix of methodologies which it will be necessary to deploy to meet the deficit.
PPP contracts have enjoyed a good deal of popularity in Australia. The model did come under some pressure in 2008 and in the subsequent years in the context of the difficult economic and financial circumstances which prevailed. This was particularly so in relation to economic infrastructure vulnerable to unpredictable or uncertain demand. The model evolved in response to these circumstances and continues to be widely used for a variety of economic and social infrastructure. Some in government expect that the PPP model will be relied upon to deliver between 15 and 25 percent of the needed infrastructure.
The alliance model, with its focus on collaboration and risk sharing, enjoyed considerable popularity for many years. Many believed that the model delivered good value in respect of many projects. The model has fallen out of popularity in more recent years. This reduction in popularity was contributed to by a degree of reservation amongst public auditors and a study published in 2009. Notwithstanding the reduced reliance on the alliance model there remains an expectation that it will be relied upon to deliver between 15 and 25 percent of the needed infrastructure.
The judicious use of these, and other methodologies, will be an essential component of meeting the future infrastructure need in Australia. The demands of contractors, the need to maintain the motivation of contractors to participate in the market and the need to secure the best value for money will see that this is the case.