Market Insights Why execution is everything in modern Australian infrastructure projects By Michael Thorpe Commonwealth Bank, Managing Director, Global Head of Infrastructure and Utilities In partnership with
2 Given Australia s infrastructure backlog, it s such a welcome sight to now have large volumes of new developments underway from big projects in the planning stages to those already with cranes at work and concrete being poured. However, delivering this pipeline of projects, both in number and size, in a relatively short time frame, comes with challenges. Australia currently has a limited supply of contractors with the requisite capabilities and appetite to undertake large scale infrastructure projects not to mention a shortage of the skilled workers necessary to execute on these plans. Politicians, the public and investors also rightly have a low tolerance for delays and cost over-runs. The only way around this is through robust project analysis and execution from concept stage right the way through bid, design, construction and operation. Assumptions must be rigorously challenged and the right skills mix engaged at all stages of project development and implementation to ensure the optimal outcome for the public. Modern infrastructure delivery needs to take account of a fresh and dynamic set of requirements, meeting a new and more demanding matrix of demographic and technological trends, financing models and stakeholder expectations. Getting these right will ensure Australia has the infrastructure it deserves to help unlock the full productive capacity of the economy. Infrastructure by definition is long-term in nature. Project concept planning and needs analysis therefore must consider the potential impacts of both future technology and social change. Roads demonstrate this need well. Unlike in the past, when planning for new arteries, we now need more extensive analysis on the development of autonomous vehicles and the impact they might have on traffic patterns, volumes and road usage. However, the analysis cannot only cover how an asset is potentially used, but why an asset is used. For example, the increasing uptake of online shopping leads to increased courier and in future drone delivery; changing work habits may also have an impact upon
3 the public s need and use of road networks. Both factors must be included in the broader analysis of the project which, in turn, may lead to a change in design of the project or a decision not to proceed with it at all. Today s infrastructure programs increasingly focus more on the service to be delivered to the public, and their environmental and place-making impact, rather than simply working out how to deliver a physical asset. This is exemplified in projects like the Melbourne Metro or Brisbane s Cross River Rail. It s no longer just the cost of a tunnel s carrying capacity or the network benefit of a train line that is assessed to determine the project s public value, but the broader environmental impacts that must be considered. In short, project assessments now look at the impact on quality of life for citizens and what it brings in aggregate to a city and broader areas. Infrastructure planning now needs to be fully engaged and integrated with the broader urban planning process to ensure access to employment, appropriate property development, education, health and recreation. Retail considerations must also be incorporated into the infrastructure analysis. Considering all of these facets cohesively ensures that the best, most flexible, long term outcome for the public is attained. This new dynamic is reflected in bid requirements from governments, and engages a different type of market participant in the process. As a result, we re now seeing bidding parties bringing together consortiums that are not just about digging or building, but about sustainable, social and environmental outcomes as well. The additional complexity of such an approach makes it essential that execution is optimised, to ensure attention to detail is maintained, and that the project is a success. It also places additional pressures on government bodies as it relates to awarding winning consortia during competitive tendering processes. At present, there is no shortage of capital available for the development of infrastructure, leading to competition on equity returns, which in turn reduces margins for error during the bid, construction and operation phases of projects (if investors want to secure appropriate returns).
4 A knock on effect of this competition has been a broadening of the definition of infrastructure to include any businesses which produce long term, stable cash flows, such as telecommunication towers, meter boxes, and state land titles offices. Given the fine returns and new asset classes, it is once again of paramount importance that execution is conducted rigorously and appropriately to ensure the right balance between the needs of the bidding parties and those of the public, ultimately resulting in a great piece of infrastructure. Participants in infrastructure developments today must grasp the importance of efficient and high-quality execution practices. From the concept, scope and bidding stages through the construction and operational phases of the asset s life, procurement time lines need to match the capacity to build to ensure the final outcome will actually be of benefit to the economy. It is easy to forget that notional productivity gains can quickly be lost through the poor planning or execution of any stage of the project. Passing the resulting asset to the next generation often with a burden attached must also be considered. What I mean by this is, if an asset has not been fully funded from day one or if we re making assumptions about sources of repayment that may not come to fruition, then the asset needs to be providing utility over and above its cost. The realisation of that utility inextricably linked to the quality of the planning and execution underlines the importance of expertise and a deep understanding of the contemporary needs of infrastructure development at this important point in Australia s nation-building history.
5 About the author. and water utilities, hospitals, schools, prisons, roads, railways and ports. Michael has nearly two decades of experience in senior banking roles. He was previously the Commonwealth Bank s Managing Director, Project Finance, covering client asset acquisitions in the infrastructure, utilities and natural resources sectors. In this role, Michael significantly extended the bank s global reach into Europe and North America. He was also the Head of Oil and Gas, where he focused on both upstream and downstream operations, as well as domestic and international liquefied natural gas projects. Michael Thorpe Commonwealth Bank of Australia Managing Director, Global Head of Infrastructure & Utilities Michael Thorpe is the Managing Director, Global Head of Infrastructure and Utilities, for the Commonwealth Bank. He is responsible for strategic advice, client relationships and financing across the utilities sector globally. This includes operations in Australia, Asia, Europe, the United Kingdom and the United States. In addition, Michael has held various executive and analyst roles in project finance at Lloyds Banking Group, Bank of Scotland and Westpac. He has worked in Sydney, Perth, Brisbane and London. Michael s background as a professional geologist gives him a unique perspective into both the scientific and financial dimensions of infrastructure and utilities markets. His industry leadership has been recognised with his appointment as Chair of the Asia Pacific Loan Market Association Project Finance Committee. Michael received a Bachelor of Science (Honours) from the University of Western Australia and a Graduate Diploma in Business from Curtin University. michael.thorpe@cba.com.au Infrastructure and Utilities is a major part of the Institutional Banking and Markets division of the Commonwealth Bank, which administers financial and risk management services for major corporate and government clients. The team directed by Michael creates sophisticated solutions for businesses seeking growth in a rapidly evolving environment. This includes customised funding arrangements and global markets derivatives products to suit projects across a range of assets, as well as comprehensive transactional banking options. Michael s deep expertise supports vital national infrastructure such as energy