The $22 billion infrastructure package announced in May is probably the greatest 'to do' list Australia has ever had. Work is already under way on many fronts, but there's a lot of number crunching to be done before that wish list becomes a reality.  
 
Story Tony Malkovic  
 
There probably won't be many spare cranes, bulldozers or tip trucks lying idle in Australia over the next few years. And the chances are that nearly all the nation's engineers, project managers and construction crews will be working flat chat.  
 
They won't just be building roads, laying railway tracks and rolling out broadband cable. In effect, they'll all be doing their bit to create jobs and help pull Australia out of the current economic quagmire.  
 
Chartered Accountants will also be rolling up their sleeves and pitching in.  
“The accounting profession will be at the heart of the success of this trend to delivering long-term infrastructure,” says Mark Birrell, head of Infrastructure Partnerships Australia.  
 
“In particular, projects should always be chosen on the basis of a rigorous benefit-cost analysis and clearly expressed business plans. That is the fundamental building block for a successful project.  
 
“In many cases, people with accounting skills are effectively the consortium directors who put together the bid and the financials behind a bid and many of them are the key advisers to government on the delivery of projects.”  
 
And in these hard times, thinking caps will be needed just as much as the hard hats.  
“The accounting profession needs to keep seeking new ways of efficiently buying infrastructure: better models of procurement and more effective systems for assessing the delivery and performance of infrastructure projects,” Birrell points out. “There'll be a heightened demand for those skills.”  
 
He says another area to keep an eye on is changes arising from the tax reform process that's under way. 
“The Henry tax review will be important for accountants to watch and influence in this area,” he points out. “That's because it is considering the overall costs of running transport systems, for example, or the overall regulatory burdens that are imposed on the delivery and operation of infrastructure.”  
 
Infrastructure Partnerships Australia is a peak national industry group established in 2005 to help address the country's infrastructure needs.  
 
Birrell says there's never been a time in Australia's history where infrastructure has featured so prominently in the national spotlight.  
“There is just an unprecedented dialogue going on about economic and social infrastructure,” he says.  
 
Establishing a unified approach to infrastructure is a key part of the Federal Government's national seamless economy agenda. Since coming to power, it established Infrastructure Australia (see accompanying story, Getting Things Going) to draw up a national list of infrastructure projects, as well as the Building Australia Fund to help bankroll projects. And in May, the Government committed $22 billion to infrastructure initiatives around the country as the centrepiece of its Budget (see Budgeting for the Future).  
 
So if you intend to plan and undertake an infrastructure project, there's probably never been a better time. State and Federal Governments are firmly focused on infrastructure as a means of kickstarting the economy, and there's a concerted push to implement a national framework for infrastructure projects.  
 
BEST OF TIMES - AND THE WORST 
But there's a hitch. A big one. Thanks to the global financial crisis, it's tough to get finance for big infrastructure projects.  
 
Due to the downturn, the private sector is having trouble raising money. State governments have been hit by falling revenues and are concerned about possible downgrades to their credit ratings and the Federal Government already has a deficit that will grow to $300 billion in coming years.  
 
So for the infrastructure sector, it's both the best of times - and the worst.  
“The demand for new infrastructure has never been higher, but the difficulties for financing it and delivering it are much greater than they've been for many years,” says Birrell.  
 
“Without doubt, the global financial crisis has placed a cap on the availability of both equity and debt which affects the delivery of larger projects across the nation.” 
 
To help address that dire situation, IPA published a research paper - Financing Infrastructure in the Global Financial Crisis.  
 
Basically, infrastructure proponents can't get the money they need to fund big projects. Typically, this might be a public private partnership (PPP) project of more than $1 billion, such as a toll road or a big rail project.  
 
“Simply put, the primary impediment to the development of privately financed infrastructure projects in the current market is a lack of available debt funding across the board, coupled with a much-reduced investment appetite by equity,” the research paper points out.  
 
“This is underpinned by the overall lack of liquidity in the financial market.  
“Inevitably, this situation leads to increased re-financing risk for existing and planned infrastructure projects and a severe lack of capital to finance new infrastructure projects.”  
 
The IPA paper provides several possible solutions - and a warning - to the Federal Government, along with a request for targeted assistance:  
 
“Without (Federal) Government assistance in the short term, much of Australia's most important and productive infrastructure may not be developed, risking the productivity and prosperity of future generations.”  
 
It says this assistance could be similar to that provided in other countries such as France, the UK and the US and could involve the Federal Government:  
> acting as a co-lender to nationally significant PPP projects  
> providing a debt guarantee to nationally significant PPP infrastructure projects to allow the private sector to raise sufficient debt to meet the financing gap  
> providing direct Commonwealth grants to fill the financing gap on appropriate PPP projects.  
 
“Simply put, a PPP project which requires in excess of approximately $800 million now requires an upfront subsidy payment or alternative support from the Commonwealth Government to proceed,” the research paper points out.  
 
But any such assistance would only be short-term.  
“The key to any proposed solution is to ensure that procurement of PPPs reverts to a pure financial model, once the global economy recovers and debt markets restore their capacities,” says the report.  
 
Birrell says the recent reforms involving infrastructure are welcome, particularly as they take a national perspective of infrastructure rather than the old state-based method of doling out money according to a formula based on the size of states.  
 
“The driver should be the approval of infrastructure projects that measurably improve GDP. That's the highest priority,” he says.  
 
SHIFT IN POLICY 
In its analysis of the Federal Budget handed down in May, Ernst & Young pointed out that the money allocated to infrastructure projects represented a shift in Australia's transport policy from road to rail.  
 
It also noted that the global financial crisis had shrunk the Building Australia Fund from $20 billion to around $13 billion, of which approximately $8.5 billion would be used to help fund the rail, road and port projects announced in the Budget.  
 
“As a result, a significant number of key projects failed to achieve funding, with only three projects receiving 66 per cent of the total allocation,” Ernst and Young pointed out. “How these remaining projects will be funded is uncertain.”  
 
Bill Banks is Ernst & Young's head of infrastructure for the Oceania region and a member of IPA's advisory board.  
 
He says the projects proposed for funding by Infrastructure Australia met very good criteria. The disappointing thing is why it wasn't asked to provide guidance on meeting the funding gap.  
 
“The good thing is that they are all good projects, they are nation-building projects and they tick lots of boxes,” he says. “The mystery is why haven't we gone that little bit further.”  
Another apparent cause for some head scratching involves the Federal Government's $8.5 billion infrastructure commitment.  
 
“It wasn't mentioned on Budget night, but the $8.5 billion that they're putting into Building Australia Fund, they're seeking to have that classified as an equity investment and therefore it's not included in the deficit,” says Banks. “Nobody's really picked up on that.”  
Ernst & Young has a large infrastructure advisory team that includes some 120 people nationally who advise clients across the entire transaction life cycle for major infrastructure projects.  
 
“As infrastructure projects become larger and more complex, we see an increasing need for government to understand the risk and accounting issues behind these projects,” Banks says.  
 
“Clearly, there's a lot of strategic advisory work required to ensure that government procures the right project and obtains the key project outcomes that it is seeking. Once the major projects are in the procurement phase, then there is a significant need for expert advice, on risk management, tax structuring and transaction advisory services as well.”  
 
Yet as the infrastructure sector gears up to get things moving, he says there's almost a state versus federal stand-off in relation to funding.  
 
“The states are keen to maintain their triple-A ratings for political purposes and therefore are reluctant to increase their borrowings if an alternative source of fund can be found which delivers value for money to them,” he says.  
 
So could superannuation funds be used to break the funding impasse, as highlighted in media reports earlier his year?  
 
Banks believes there's no reason why such funds couldn't be used in some cases. He says it could be a win-win situation - and is already happening overseas.  
 
“What we're seeing already is that Australian super funds are leading the way in funding major infrastructure projects overseas where we are already seeing Australian superannuation monies funding water and sewerage services in the UK and the delivery of transport infrastructure in France,” he says. “The challenge for us here in Australia is how we could best channel our superannuation money into funding much needed national building infrastructure here. The tenor of the projects tends to be 30-40 years, so that sits with the maturity profile of superannuation money very comfortably.”  
 
PricewaterhouseCoopers's Martin Locke has a banker's approach to funding infrastructure.  
Locke is a partner with the firm's project finance group and is also a member of IPA's advisory board. He was a career banker for 23 years before joining PwC and for the past 11 years he's worked on financing infrastructure projects, working on the government advisory side shaping projects and taking them to the bidding stage.  
 
MEGA PROJECTS  
Locke says there are many projects that can be readily financed in the current conditions.  
“The smaller deals are in the $300-500 million range - they might be prisons, they might be schools or smaller hospitals, those are still capable of being funded in the marketplace,” he says.  
 
“But as soon as we start thinking of the mega projects - those costing more than $1 billion - we have to put on our thinking cap in terms of what are the solutions we can use to try to deliver them.”  
 
An example of a mega project that probably already has Treasury staff reaching for their thinking caps is the national broadband network which is estimated to cost up to $43 billion. The Budget allocated $4.7 billon to the project.  
 
“If you then say you might be able to raise $1 billion to $1.5 billion from the private sector market, it does beg the question 'Where's the other $37 billion or so coming from?',” he says.  
 
“And clearly that money's coming from the Federal Government. There's just a real impossibility of raising all of that funding from the private sector.”  
But Locke can't see superannuation funds taking a massive immediate interest in infrastructure projects.  
 
“All I can say is that in all my interactions with superannuation funds that they are hesitant to be committing significant additional capital at this point in time,” he says.  
 
“Infrastructure PPPs tend to be quite complicated to assess from a risk profile perspective, they tend to be greenfield projects with construction and ramp-up risks. Superannuation funds prefer to invest in steady cash flows and be in infrastructure when it's actually completed. But getting involved at the outset as a bidding sponsor of a greenfields PPP is a bit difficult.  
 
“Even when I've spoken with some of the major investors just lately they've been saying to me: 'We've seen a glut of infrastructure assets coming onto the market at the moment from things like the Queensland Government asset sale process, disposal of Babcock and Brown assets and the re-structuring of Asciano'.  
“I see it as a long-term exercise to educate and resource up the super funds industry before it's going to be a more active investor in PPPs.”  
 
SWEET SPOT 
Roger Black, the national leader of Deloitte's infrastructure and project finance group, says he's a private public partnership evangelist.  
 
According to Black, the infrastructure sector is happy with all the current attention - but at the same time frustrated with funding issues and apparent slowness in getting projects to the procurement and delivery stages.  
 
“Within our organisation, our sweet spot is sitting alongside government officials and helping them deliver their infrastructure program or projects,” he says.  
 
“The frustration with it all is that progress can be very slow, and every now and then there'll be a setback.”  
He cites the recent case in South Australia (not involving Deloitte) where planning for a PPP involving a prison project was relatively close to getting final offers on the table.  
 
“But the South Australian Government for reasons that are relatively unclear decided that the project wouldn't proceed as a PPP. And it's currently unclear if the project will proceed at all, even under a traditional procurement.  
 
“So that's something that everybody involved would find extraordinarily frustrating.”  
Black says Victoria is the state clearly leading the way in terms of embracing PPPs.  
 
“They're way ahead, everybody understands the process. They've got a government that understands it from a political point of view, a bureaucracy that understands it and a private sector that understands.” he says.  
 
Much of the credit, he says, is due to Partnerships Victoria.  
“Their role is to facilitate the use of PPS in the delivery of infrastructure projects and they're seen by the various line agencies as their ally in the process,” he explains. “Whereas with some of the other State governments, there's not a consistent buy-in to the process within the bureaucracy and that means that at various points in the bureaucracy there might be white ants derailing and delaying the process.”  
 
Black believes there's a good case for superannuation funds to invest in infrastructure. The challenge is to work out when to become involved. He points out that super funds might not want to be involved in the early, riskier stages such as tendering.  
 
“That process is quite expensive,” he says. “To put it in perspective, with the tender for Queensland's airport link, or what's known as BrisConnections, each of the bidders incurred bid costs in excess of $30 million.  
 
“There are normally three bidders, so in any tender process there are normally two unsuccessful proponents.  
 
“For a super fund to be willing to step up and cover the financing for bid costs - I'm not sure they'd want to get involved in that - because that might be the slightly risky end of what they should be doing.  
 
“Construction is also a relatively risky period in a project's life. But once construction is complete, that's when I think it's really the time for super funds to invest in infrastructure.”  
 
 
BUDGETING FOR THE FUTURE 
In May, the Federal Government made infrastructure the centrepiece of its Budget, and committed $22 billion to its nation building initiatives.  
 
The Government estimates its infrastructure initiatives will help support some 15,000 jobs a year. It also estimates that the proposed National Broadband Network will support another 25,000 jobs a year.  
 
The initiatives announced in the Budget included:  
> a $4.7 billion contribution to partner with the private sector to build the $43 billion National Broadband Network  
> $4.6 billion for metro rail projects  
> $3.4 billion for roads > $389 million for ports and freight infrastructure  
> $4.5 billion for the Clean Energy Initiative (includes $1 billion of existing funding)  
> $2.6 billion in projects for universities and research from the Education Investment Fund  
> $3.2 billion for hospitals and health infrastructure from the Health and Hospitals Fund.