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Standing Committee on Infrastructure and Communications - 31/10/2014 - Infrastructure planning and procurement

GRAHAM, Mr Andy, Policy Manager, Civil Contractors Federation (WA Branch)

MILLER, Mr Jeff, Chief Executive Officer, Civil Contractors Federation (WA Branch)

Committee met at 13:35.

Evidence was taken via teleconference—

CHAIR ( Mrs Prentice ): I declare the 12th and final public hearing open for the inquiry into infrastructure planning and procurement. I welcome representatives from the Civil Contractors Federation, Western Australia. I thank them for offering to provide evidence today. The committee particularly appreciates you being prepared to give evidence by telephone. Although the committee does not require you to give evidence under oath, I should advise you that this hearing is a legal proceeding of the parliament and therefore has a same standing as proceedings of the House. I invite you to make a brief opening statement, if you wish, before we proceed to discussion.

Mr Miller : Thank you for the opportunity to address the committee. The Civil Contractors Federation is a national organisation representing the civil construction industry. Our membership comprises over 1,500 civil contracting companies of all sizes—large international companies right through to small, family-owned businesses—as well as a similarly diverse range of suppliers to our industry. As outlined in our submission to this inquiry, CCF in Western Australia believes that infrastructure, planning and provision is fundamentally a job for the states and territories. Due to the Commonwealth's greater revenue raising power, its contribution to infrastructure funding is obviously vital. However, we should leave project selections, in our mind, to the states, which are best placed to make these decisions. The National Commission of Audit's report compellingly supports this argument.

The current situation for some infrastructure project selection is a two-stage process with approvals at both state and federal level, which creates a double up that may lead to inefficient, wasteful procurement and ultimately delivery. Our submission highlights one possible consequence, that of projects being aggregated into larger and larger packages. As the Productivity Commission recently pointed out, packaging projects into smaller components may well reduce risk and, in fact, promote competition. We accept that there will always be examples of nationally significant infrastructure that requires federal intervention. It is possible to make an argument that any major project is nationally significant, but we believe the definition should be applied as narrowly as possible to include only projects that directly involve one or more state or territories. For example, major transport infrastructure links.

It is undeniable that long-term infrastructure planning by the states has historically been less an adequate and the Commonwealth has, in a sense, been forced to fill this vacuum. Thanks to the leadership role shown by Canberra, the states are now improving in this area, although in the case of Western Australia we think there is a long way to go. CCFWA continues to advocate to the state government for the need to improve its planning and coordination processes and break free from the electoral cycle, particularly in transport infrastructure. The Commonwealth government can continue to play a key leadership role here by encouraging best practice in planning, funding and delivery and by making its funding conditional on states employing transparent, evidence-based planning and procurement processes that include rigorous cost-benefit analyses. In that regard, we wholeheartedly endorsed the Productivity Commission's view that all such analyses for public projects should be made publicly available.

Finally, the committee has shown interest in the inverted bid financing model proposed by the superannuation industry. While financing is not our area of expertise, we believe this model is worth close consideration as it opens up the possibility of much greater competition for construction contracts than the current PPP models. We believe greater competition leads to more innovation, higher quality and better value for money in almost every circumstance.

Mr VAN MANEN: Thank you, Mr Miller, for those opening comments. I have to say at the outset I agree with much of what you had to say. It is a perennial frustration for me to see the lack of long-term planning for infrastructure and the resultant bottlenecks that become a quick fix. You have to question whether those quick fixes are actually the most efficient way to solve the problem.

I am interested that in your submission you refer to the need to reduce Commonwealth/state duplication and red tape. Could you maybe expand for us on what you see as the optimal division between those roles and how, in your experience, that maybe could be achieved? Obviously we already have a body like Infrastructure Australia in existence and they have some skills and capabilities which are significantly underutilised. I know that the state governments now put projects up to Infrastructure Australia for assessment, but could you comment or give us an insight into how you think that system could be improved?

Mr Miller : Ideally the system could be improved by much longer forward planning—beyond the electorate cycle or forward estimates—by state and territory governments. Recognising—as I pointed out in my opening remarks—the superior revenue-raising power of the Commonwealth, the federal government's role is therefore one of providing that funding and allowing the principle of subsidiarity to kick in; that is, the government closest to the people should make those decisions. That funding, instead of being tagged to a particular project or projects, is able to be handed over on some other, untied basis. That sets up the optics for potentially the right decision making. It is important that all of those things are in place. We need long-term, ideally even bipartisan, agreement on major infrastructure milestones so that we create an environment in which the Commonwealth can play that role.

To your point about Infrastructure Australia and, indeed, other Commonwealth agencies: there is certainly a role to make sure there are checks and transparency. Having a layer that performs that role is vital but when that layer starts to perform the role of picking and choosing projects—what we like to call 'ribbon-cutting opportunities'—and that begins to take precedence, that is when we begin to get the distortions we are currently getting.

Mr VAN MANEN: You made the comment in your opening remarks that historically the states have been quite poor at longer term strategic infrastructure planning. I would have to say that I thoroughly agree with you on that. What can we do to improve the capabilities of the states to plan over a much longer time frame and get them to consider projects in that space and, as you rightly suggest, on a bipartisan basis?

Mr Miller : One of the challenges with the three-year electoral cycle federally, combined with the four-year state and territory cycle, is that everything gets out of sync very quickly. Politically, governments and oppositions are at different stages of the electoral cycle. My view on how to best overcome that is for the Commonwealth to have the courage to reward good behaviour: those states and territories that are able to put forward longer term plans ought to be rewarded for that. Those states that do not ought to pay some sort of penalty for not being able to get that planning underway.

Mr Graham : I would just like to add that, looking to the state government agencies and departments, we see a lot of good forward planning going on at the department and agency level, but what is needed is for it to be pulled together in a coordinated plan.

CHAIR: You mentioned the Productivity Commission. We do not want to duplicate anything that they are doing. But, if you had a magic wand, which of their recommendations would you identify as being needed the most?

Mr Miller : In the testimony they gave to this inquiry, it was quite elegantly stated that we need to—and I do not want to try to repeat their words verbatim—stand back and recognise that infrastructure delivery is highly complex and that we need a planned and transparent approach to it, getting the key cycles right. Unfortunately, at the moment, one of the things is that the announcement comes first and the activity follows that. The sequencing of the key steps—

CHAIR: I think there was an ABC show about that recently called Utopia!

Mr Miller : Indeed! I think that idea of the announcement then creating even artificial time pressures is so unhelpful. Our interest is the contracting industry, which sits at the other end, trying to make sense of what is coming out. The contracting industry rises and falls largely on sentiment. It tools up when it believes there is work to be done and, when there is not work there, that capacity is then shed and it is very difficult to build it back up again. The contracting industry responds to the signals of government very directly. If we can get some orderly, longer term, bipartisan planning that is sensibly and logically laid out, I think in the end—to go back to your question about waving a magic wand—that would be the thing that I would ask for.

Mr VAN MANEN: Do you think, if we achieved that and were able to take out some of that peaks and troughs of activities in the contracting sector with respect to infrastructure projects, that would improve the cost-benefit outcomes of infrastructure projects because the work would be more consistent and better planned for?

Mr Miller : I think there are a couple of parts to that question. It is a very good question. It is one that contractors, from their vantage point, often ask us. They ask, 'Why don't governments at all levels adopt a counter-cyclical approach to private clients so that when the private sector is in a downturn the government then enters the market and not only act as a form of stimulus but also buys its infrastructure at a time when it is not paying a premium for it?' To go to your point about cost benefit, it is quite logical to assume in that environment where government at all levels becomes a strategic buyer of services at the right time it is likely to see better value for money. That is playing out in my home state of Western Australia at the moment. I daresay, Mrs Prentice and Mr van Manen, it is in your areas as well. There is a slowdown in mining and resource construction and so we are seeing excellent value for money for governments. However, both the Queensland and Western Australian governments are under their own budget pressures and now cannot enjoy the benefit of that part of the cycle.

CHAIR: The other aspect that I am interested in, which you note in your report, is the proposal by Industry Super Australia with the inverted bid option. How would you see that model in reality? We heard from Industry Super, but they are a finance company. From your point of view, as construction, how would you see that working and applying?

Mr Miller : It is probably best to answer that question by talking about the current reality. The way most PPPs work at the moment, three or four consortiums only within this country are able to bid. In some cases those bidders are even related, are commonly held companies.

CHAIR: We noticed that on Legacy Way in Brisbane.

Mr Miller : We are taking a step back from that—and this is where we picked up on Industry Super's comments. If in arranging the finance we are able to lock in the long-term finance first and essentially decouple the construction aspects, then you can still enjoy the finance for the project and ensure the ongoing funding is locked in, and at the same time potentially open up a greater field of contractors to be able to compete for the work.

Mr Graham : Industry Super makes the point, and everyone makes the point, that the inverted bid model will necessarily involve more risk to government. PPPs are quite a risk free environment. As the Productivity Commission pointed out, there is nothing wrong with governments taking on a bit more risk and becoming less risk averse.

CHAIR: But it is the taxpayers' money. We have also heard the concept that not including design as part of the bid and being less prescriptive would open it up to better innovation. People say it is more expensive to put in a bid when we are very prescriptive and they have to address every issue. Or do you think it is better, as a government, to make clear what we want?

Mr Miller : It is really a project-by-project argument, and there is elegance in both at times. If there is something that is relatively straightforward and it really does not need a lot of innovation or design, what is called a hard-dollar contract is probably the best way to deliver that. Obviously if projects are increasingly bundled up and therefore made complex simply by their size, then you end up in a situation where they become more difficult to manage by definition and then I think more difficult to innovate as well. Partly what is needed here is defining what is the ideal project size to begin with. One of the curious points about alliance contracts that is underway at the moment is the fact that when an alliance is put together one of the first things the winning consortium will do is break that contract back down into bite-size chunks. That begs the question: would that have been a better starting point for the government, and if the government had done the extra work to devolve the project into those bite-size chunks, and to if necessary hire in some design expertise itself and then let contracts at that level, would it have gained greater value for money? The difficulty with all of these arguments, and the Productivity Commission pointed this out as well, is that you never ever get to really know the answer to this because you never get to do an identical project again in identical circumstances a different way. I take the view of the Productivity Commission—we can only look forward; we cannot really look back. The art of procurement is deciding which package size, which level of complexity, is right to be able to carve out particular parts of a project that require innovation but not wrap them up with parts of a project that are so basic and straightforward that they could be delivered under a construct-only contract.

CHAIR: That turns Infrastructure Australia into a project manager.

Mr Miller : That is right. If you go back to the history of where alliance contracting started, you see that it often came about because at the time of bidding the project there was unknown technical risk or environmental risk or political/community risk that simply could not be sensibly priced. You would enter an alliance contract essentially on a cost-plus, share-the-gain share-the-pain kind of model. We suspect that perhaps that model is being overused, because from a government agencies' and departments' point of view, as we like to say there is 'one throat to choke'. Perhaps because infrastructure dollars can spread further in this environment, it is time to have a sensible and in fact independent look at the suite of projects that need delivering, to have rigorous cost-benefit analysis applied but then also have a layer that says, 'Could this sensibly be delivered in different ways than just in one big chunk?'

CHAIR: If we were doing that, that really would not be a federal government role; it would be more the states?

Mr Miller : We believe it is a state government role in terms of what infrastructure is required, when it is required and how it dovetails into other parts of the existing infrastructure network. However, the role of being able to check that there is value for money for taxpayers and an oversight role is most certainly, as we said in our opening remarks, the purview of the Commonwealth.

CHAIR: With the alliance contracting, you would have the state government at the table, not the federal government, wouldn't you?

Mr Graham : Certainly it would be the state government. We believe Infrastructure Australia should be more of a centre of excellence to drive the states to do better. It should not be publishing priority lists of projects. It has a very important job.

Mr VAN MANEN: How do local councils fit into your model? There are some very significant, albeit smaller-cost infrastructure projects that are regularly carried out by our councils. The value for money of those at various times can be quite questionable, as I suspect that the skills at local government level are less than those at a state or federal government level. Do you have any comment on that aspect of infrastructure?

Mr Graham : This again ties into sovereignty and subsidiarity. The current situation, where the Commonwealth government is approving $2 million intersection upgrades as part of its grants, causes a lot of duplication with local, state and federal all being involved. Again, we would think the Commonwealth government should be providing the funding, but the local and state governments should be making a decision on which particular upgrades happen and in which order.

Mr TEHAN: With respect to some of your earlier comments, I am aware of a local civil contractor in my area who conducted a project up in the Gulf direct with the local council. They sidelined the state main roads department and, for the same dollar value, achieved significantly more in the scope of the project than was originally budgeted for. I think that is a very salient point with respect to what we have been discussing. If you cut some of the people out of the process and streamline it and simplify it, you are going to get better outcomes and much more value for money as a result.

Mr Miller : We are seeing some of that already playing out. In fact, our state Treasurer recently announced that contract dollars were stretching further, and the large Gateway alliance that is underway at the moment is both ahead of budget and ahead of time, and other works are able to be completed that were not anticipated. There is a positive side to that, and that is that there is no doubt that infrastructure dollars are stretching further. The downside to it is that, if alliances get this additional work rather than the additional work going out to tender, the alliances end up having this aggregating effect and we believe can even distort markets, and the mid-tier contractors can tend to miss out. There is certainly better value for money to be had, and that is even happening within the alliance framework. The cautionary tale is to have world's best procurement practice underway so that you can take full advantage of that market at the time and be responsive to it.

Mr Graham : Mr van Manen, that example you gave of the local government was a really good example of what the National Commission of Audit was talking about in its principle of 'subsidiarity'—that service delivery should, as far as practical, be devolved to the level of government closest to the people receiving the services. The level of government, whether state or local, that is closest to those people will have the best idea of how to do the job.

Mr VAN MANEN: I agree with that 100 per cent. I have said that publicly and elsewhere as well.

CHAIR: And it gives more opportunities to local companies, as well.

Mr VAN MANEN: I would like to go back to your earlier comment that if you are finding cost savings in a project within the alliance, you do not automatically give that work to the alliance because they have generated the cost savings. Rather, that additional work should be put out to tender to see whether even more savings can be achieved or to ensure that additional work is being done in a cost effective manner.

Mr Miller : In fairness, I think that Main Roads WA have a history of doing precisely what you have described—that is, putting it out to tender—but there are instances where, perhaps, that is not as transparent to industry. It does beg the question of whether the overall alliance environment in the current climate is the right vehicle to deliver best value for money, best innovation and the other outcomes government requires beside the delivery of quality infrastructure.

Mr VAN MANEN: Is part of the issue with the alliance arrangement that it is simpler for government to deal with one alliance group than to deal with smaller individual components required to complete the project?

Mr Miller : Absolutely and, as I said earlier, with government agencies and departments necessarily being downsized because of recurrent funding pressures, it is probably automatically easier for them to deal with one party rather than four or five. Our contention, however, is that if a little bit more of the planning is done—and that can be outsourced to the private sector—it opens up a wider array of procurement options.

CHAIR: Mr Miller and Mr Graham, thank you for participating in our public hearing today. If you wish to contribute any further information or to elaborate further on the responses you gave today, we would appreciate that.