Infrastructure procurement is a key element in the development of Australia’s cities and regions. Without effective procurement processes, the provision of infrastructure is less likely to meet the economic, social and environmental needs of the Australian people, or provide for the successful integration of the nation’s cities and regions. This chapter will look at the need to:
refine procurement methods;
develop procurement skills;
engage with Tier 2 and 3 businesses;
refine appraisal methods; and
pursue financing and funding innovation.
Refining procurement methods
The Australasian Railway Association (ARA) observed that ‘the procurement process in Australia had been criticised as costly and time consuming’, and that ‘tendering costs in Australia are estimated to be around 1-2% of a project’s total cost, which are high compared with world benchmarks of 0.5%’. The ARA believed ‘that significant benefits could be realised if improvements were made to current Australian commonwealth and state government procurement practices’, and suggested that:
There is opportunity for government to implement a more simplified and transparent tendering process with improved risk mitigation practices and contracting arrangements. Harmonisation of standards, having a clear and smooth pipeline of projects, improved feedback sessions and better infrastructure planning would facilitate improved investment and innovation; reducing tendering costs and whole of life projects costs for both the contractor and the procurer.
Mr Tim Williams, Chief Executive Officer of the Committee for Sydney, also highlighted the need for rethinking the infrastructure procurement process—particularly appraisal processes—if we are to create better cities. He observed that ‘there are some very bad infrastructure appraisal practices out there’, and that ‘bad cities result from the wrong processes that we are implementing’. He stated:
We think you can’t get great sustainable cities without improvements to governance but also improvements to infrastructure appraisal. We literally think some of the un-evidenced ways in which, frankly, some of the infrastructure appraisal process is undertaken—poorly evidenced cases are put forward to the feds—have been for federal funding, some of them not even requiring, for example, assumptions around induced demand to be made on the road programs which actually do change the business case ratio significantly.
Mr Adam Beck, Executive Director of the Smart Cities Council Australia New Zealand, believed that Australia was ‘at a really early stage of our maturity in terms of smart cities and smart infrastructure’, and that ‘the opportunities that come with aggregating demand, streamlining procurement and, indeed, piloting new financing models and benchmarking the results of that program are critically important’ . He suggested that ‘the federal government has a fundamental role in helping steer that in a way that it can supercharge prosperity for the nation’.
Procuring for innovation
A key element of refining the procurement process was procuring for innovation. Mr Jeff Sharpe, General Manager, Technology and Innovation, for the Downer Group, argued for a whole-of-life approach to infrastructure procurement—that infrastructure procurement should be looking at ‘what’s the best value for whole of life’, rather than the lowest cost design and construct bid. He noted that ‘traditional contracts don’t really allow for that, and we would love to help drive more of the thinking into how we best create value for taxpayers and best use those funds to build better cities’.
Ms Megan Motto, Chief Executive Officer of Consult Australia, urged ‘a much more flexible system of procurement that allows for better collaboration and is better for the whole-of-project outcomes or whole-of-precinct outcomes’, stating that ‘we are not seeing the true collaboration that will then provide that innovation’. She identified management of risk as a factor undermining innovation, stating that ‘we have governments that shift risk down the supply chain to the lowest common denominator and then we wonder why we're not getting innovative solutions’. She also advocated stronger community engagement:
We need to stop telling the community how we’re designing their built environment and we need to start engaging with them in how we are building their built environment. We need to include the community. We need to consult much more strongly with the community and bring them on the journey with us so that we can change the landscape of our cities with their not just appreciation but absolute approval and support.
She also urged a shift from short-term thinking to long-term thinking in infrastructure procurement:
When we design our cities, we’re not designing a building that’s going to be an asset cost. We heard about the split incentive issue that exists in the residential sector, for example, where the builder of the asset is building to sell. So there is no long-term incentive to make that building more sustainable because they’re going to sell it and that will become someone else’s problem. Similarly, our state governments and our local governments can be short term in their approach. We seek to rush towards a solution as opposed to really defining what the problem is, identifying multiple solutions, doing scenario testing and looking at the different ways that we can deliver the built environment in a better form.
In its submission, Consult Australia outlined a number of concrete proposals for improving infrastructure procurement, including:
Improving risk allocation
Creating a procurement centre of excellence.
Consult Australia noted that:
At a time when public finances are stretched, better procurement offers government the chance to build more for less, achieving better project outcomes with fewer delays. It also makes government agencies a more desirable client for industry to do business with, which in turn will lead to more firms competing to provide their services to government.
It observed that ‘project briefs are frequently unclear or inadequately thought out’ and that ‘this creates risks for industry partners, who aren’t sure what the client wants, and they respond by either pricing that risk into their bid or deciding not to bid for the project, thereby reducing competition’.
With regard to risk allocation, Consult Australia stated:
The practice of offloading risk according to bargaining power rather than the appropriateness and/or capacity of individual parties to manage that risk (this includes the practice in some states of contracting out of proportionate liability obligations), automatically means that risks won’t be properly managed. It also means that professional indemnity insurance may not respond to claims made. It is important that the laws across Australia be harmonised regarding contracting out of proportionate liability and the practice of contracting out be prohibited in each jurisdiction.
While firms may respond to this practice by taking a commercial risk, many enter into contracts unaware of the insurance implications of doing so, while other firms respond either by pricing that risk into their bid, or deciding not to bid for work.
All of the private sector responses to this issue point to projects costing more, having delays, and less desirable project outcomes being realised.
Consult Australia found that ‘the cost of bidding for work can be prohibitive, and represents a major inefficiency in the development of infrastructure’, and that ‘there are two major drivers behind unnecessarily high bid costs’:
Firstly, firms are often put in a situation of being shortlisted for a project when only one bidder has a realistic chance of success. Being “strung along” adds to the cost of bidding, when a quick “no” would be preferable. Secondly, in the course of bidding, firms are required to demonstrate a wide range of competencies through compliance checks. When the final bid is submitted, these checks regularly comprise a substantial proportion of their bid documents, when compared to their proposal as to how they actually plan to go about the work.
This was a problem also identified by the Downer Group who told the Committee:
Those costs are built into prices, too. The government is paying, ultimately, for the losing tender’s work. Sometimes at Downer we will spend up to $15 million or $20 million on a proposal that is not accepted. Then we have to write off that money. That is painful to our shareholders and disappointing to staff. It doesn’t drive innovation. It drives conservatism.
In addition, Consult Australia recommended other improvements to procurement practices, including:
Government commitment to being a ‘model client,’ in line with its commitment to be a model litigant.
Government investment in the skills of its procurement professionals. We have previously suggested the establishment of a Centre for Procurement Excellence to develop public sector procurement skills. A Commissioning Academy exists in the UK for exactly this purpose.
The right mix of skills exists on procurement teams.
Early engagement and collaboration with industry, so that government can understand what’s possible, and where risks lie. This includes developing better, verified briefs and reallocating resources to the front end of a project.
The willingness of government agencies to explain why they are following a particular procurement practice. This allows for service providers to better understand the needs of their client, and increases empathy. It also forces clients to examine whether a particular practice is really necessary, given that it may cost them more.
The accountability of agency heads for the procurement performance of their agency, and performance management of contract managers reluctant to try newer and better ways of doing things.
Streamlined compliance processes, for example through a central register of competencies, to reduce bid costs.
Develop and apply limited liability guidelines to provide industry with certainty.
The awareness of governments of the implications of onerous risk allocation/shifting, and the costs involved in developing contractual agreements for every project, resulting in protracted contract negotiation. Governments should adopt a standard form agreement to reduce cost and increase efficiency in the procurement process. Consult Australia recommends that Australian Standard AS4122-2010 be the standard form adopted across all government procurement for the engagement of consultants.
Another key element of procurement is data management. Increasingly, the construction and management of infrastructure is related to data. Mr Michael Comninos, Chair of the Smart Cities Committee for the Internet of Things Alliance Australia observed that ‘one of the risks is having vendor lockout’. He stated:
One of the big risks is having uninformed procurement processes where the client isn’t clear what they want. The vendor is trying to minimise risk by protecting data as intellectual property, which then makes it harder to have interoperability and provide enhancements to some of these products.
His colleague Mr Frank Zeichner, Chief Executive Officer of the Internet of Things Alliance Australia, argued that ‘data ought to be able to be shared’. He noted that currently ‘that data is locked not just within the department but often within the companies who deliver those services to whom they have been outsourced by’. He observed that ‘in fact, a lot of those sensors that are built, when you are building projects, then get ripped out because they are only there for the contractual purposes of the contract. Stupid!’ he stated:
Sensing in an Internet world means you use the data for many, many purposes so that then the value really increases. It could be for the city. It could be for the water. It could be for the local business innovator—whatever. That sort of sharing capability, the city has a role in creating it. No, you are not owning the data. Maybe there are other models. But certainly in facilitating and managing, the federal government should also be a part of sharing their data.
In its submission, buildingSMART Australia urged the adoption of Building Information Modelling (BIM) as a standard for infrastructure procurement. It noted that the Government of the United Kingdom had ‘announced that BIM is now a minimum required by government from 2016’, and that ‘other overseas jurisdictions that already require the use of BIM for government building procurements include the United States, Norway, Finland and Denmark’. China, South Korea and Singapore had also ‘taken steps to achieve BIM implementation through a planned approach’, with the Singaporean Government ‘offering incentives to those willing to be the early pathfinders towards a goal of increased industry adoption, and ultimately full BIM submissions’. The UK was ‘expecting to achieve a 20% reduction in procurement costs for government buildings compared with traditional practice through the introduction of its requirement for full 3D collaborative BIM to be used on government building procurements’.
The Australasian Railway Association (ARA) urged coordination of procurement of rollingstock, stating:
Australian passenger rail networks require the continued purchase of rollingstock to replace their ageing fleets and accommodate growing and forecast patronage numbers. Rollingstock procurement tends to be volatile, high profile, complex and influenced by political and operating considerations. Procurement challenges are seeing the cost to deliver rollingstock increase year-on-year, a cost incurred by governments.
The ARA noted that ‘there is currently no national collaboration to achieve economies of scale’ and that ‘this lack of cohesion has resulted in procurement inefficiencies, creating a sporadic investment cycle and a “lumpy” flow of orders which hinders the growth of Australia’s rail manufacturing sector and ultimately increases the cost to government’. The ARA estimated that ‘approximately $15.5 billion in economic activity could be maintained should coordinated planning result in the demand for rollingstock being smoothed’. It stated that the ‘harmonisation of rollingstock standards and procurement is a priority that will benefit industry and governments’. The ARA concluded:
Given the significant amount of rail infrastructure development and rollingstock procurement forecast for the next 30 years, failure to implement better procurement practices could mean a considerable portion of domestic economic activity lost not to mention the risk to local jobs, skills, capability, rail infrastructure efficiencies. It’s vital that the procurement process does not create unnecessary, adverse effects when planning the project that would impact the whole life performance of the asset. Significant cost savings are available if the procurement process is streamlined, simplified and transparent.
Developing procurement skills
The Committee heard that improved procurement skills would increase innovative solutions and promote value for money. Consult Australia found that ‘that public sector clients weren’t always open to innovative ideas when proposing solutions to projects, despite the possibility of that innovative idea saving money, or driving the existing funding to allow for a better project outcome’. It noted that ‘while probity concerns are a major impediment to innovation’, other inhibiting factors included ‘a lack of understanding around the budget impact, or risk transfer pushing designers to over-engineer their design’. Consult Australia observed that ‘better procurement can drive greater innovation, which in turn will save money and lead to better project outcomes’.
Consult Australia recommended ‘establishing an independent Procurement Centre of Excellence to develop and implement best practice procurement and deliver value for money’, observing that ‘to buy wisely you need wise buyers’. The Centre ‘would be tasked with building a stronger relationship between government and business and supporting best practice procurement in Australia at all levels of government’; and would:
be established as independent of government;
build stronger linkages between government and with industry sectors;
provide transparent expert advice to all levels of government; and
develop guidelines, build capability and improve standards.
The need to develop procurement skills was also identified by Ms Pru Sanderson, Regional City Executive for Roads Australia, who knew ‘how hard it is to be a good client, a procurer of services. It is a skill set very much of its own.’ She observed that ‘a lot of technical specialists don’t want to be the client. They want to design and do the stuff. They don’t want to be the person in charge of the contract.’ She argued for procurement being recognised as a ‘a separate skill set of its own’. She stated:
There’s a skilling up, rather than you happening to find yourself as a client by osmosis. You can't turn around and say, ‘Let’s get the best people,’ as this conversation is recognising, without having a very educated client who not only understands talent when they see it but also knows what procurement and contractual basis would be best to achieve that.
The importance of the ‘educated client’ was emphasised by Mr Peter Hill, Honorary Secretary of the Town and Country Planning Association, and Ms Gerry McLoughlin, Secretary of the Inner Melbourne Planning Alliance, both with extensive experience in planning and procurement.
Engaging with Tier 2 and 3 businesses directly
Getting governments to engage with small and medium enterprises in procurement was another issue raised during the inquiry. Dr Chris Hale observed that ‘the Australian planning, infrastructure and transport sectors involve substantive and real barriers that limit the ability of legitimate small and medium enterprises (SMEs) to win government business’. He suggested that ‘over-reliance on large or multinational firms comprises a real limitation to innovation, and intellectual and technical diversity, as well as economic development (given the foundational role of SMEs in the Australian economy)’. He urged that the Australian Government should ‘ actively review the outcomes of recent work allocations to firms of different scale and ownership type’, and that ‘if an over-concentration of particular companies or company types is identified, then active steps must be taken to alter these outcomes and remedy any processes that contributed to them’. He argued:
Beyond prime contractor roles, it should not be considered legitimate, desirable or workable that federal (or other levels of government) would actively exclude SMEs from winning government contracts due to artificial procurement hurdles that are not related to skill or capability. Indeed, these practices are legally dubious where they exist—and the federal government should move in a timely manner to address any such concerns. The federal government may wish to consider inviting Australian Competition and Consumer Commission (ACCC) or some other relevant independent organisation to review procurement practices and outcomes with regard to SME involvement, or over-concentration of work allocations—across federal, state and local procurement within the urban infrastructure advisory and planning sectors.
Allowing access to infrastructure contracts was particularly important in regional centres. Mrs Kylie Warne, Chair of the Barwon Regional Partnership, thought that ‘all levels of government should be supporting businesses in rural and regional areas’ and suggested that ‘in terms of the decentralisation of government procurement and actually giving a way in for rural and regional-based private companies, small businesses and even start-ups, there could be different policy approaches’. Mrs Warne believed that ‘the whole return-on-investment model could be recast to really look at how we can actually have a downstream effect, more deeply than what we currently have’. She suggested that ‘both state and federal government procurement could really recast what is considered to be return on investment, because I think at the moment it's very much cost driven’; and that ‘the private sector has a role to play in that in terms of having accountabilities, in terms of reporting accountabilities to demonstrate that they are actually working in partnership with government to bring about those consequences that are maybe not quite traditional’.
Mr Bill Mithen, Chair of the G21 Geelong Region Alliance, also highlighted the capacity of procurement practices to target disadvantage, citing ‘a project called GROW, which is the Geelong Region Opportunities for Work, to look at entrenched disadvantage and, if the city prospered and the region prospered, ways that everyone could prosper’. He observed that ‘one of the ways to do that is around procurement, social procurement’, and cited findings that within the overall context of government procurement ‘that just a small shift of seven per cent of procurement activity would lead to a billion dollars of economic activity in the local economy. It would create 2½ thousand jobs, and our goal would be to have 500 of those 2½ thousand jobs in disadvantaged areas’. Mr Mithen stated:
Through the GROW project, the Give Where You Live Foundation has worked actively in implementing this project and now has a compact with 70 organisations, whereby they have signed that compact and are starting to look at shifts in how they can procure goods and services and employ people from disadvantaged areas.
Mr Craig Rowley, Chief Executive Officer of LeadWest, highlighted the value of linking the Victorian Industry Particpiation Policy with procurement:
Recently the Victorian government has made announcements about what was called the Outer Suburban Arterial Roads Program; it’s now called, I think, the western roads project. Projects like the level crossing removals, the Melbourne Metro and the Ballarat line upgrade are being delivered. I was recently chair of the Ravenhall Prison Project community liaison group. All of these projects have taken from the Victorian Industry Participation Policy, and then we’ve met with bidders, constructors and so forth to make them see the wisdom in interpreting that policy where ‘local’ really means local. As you can understand, the policy is that ‘local’ means anything in Australia or New Zealand, but we are particularly eager for these entities to employ local young people in apprenticeships and traineeships, as well as people who are dealing with disadvantage—people from culturally and linguistically diverse backgrounds, people with disabilities and people who have been on unemployment for a longer time—to provide the opportunity for them, through this social procurement measure, to change their lives and be able to participate more fully.
Refining appraisal methods
The need to refine infrastructure appraisal methods was stressed in the evidence presented to the Committee. In particular, the role of cost-benefit analysis was subjected to scrutiny. Ms Megan Motto, Chief Executive Officer of Consult Australia, noted that currently ‘cost-benefit analysis on projects tends to be very defined around the direct economic impacts’, and that there was not ‘particularly well-defined methodologies for assessing some of those broader implications’ of projects, such as technology, employment, sustainability and liveability’. In its submission, Consult Australia stated:
Critical in assessing the merits of public investment in infrastructure and the development of cities is the application of broad cost-benefit-analysis. Increasingly infrastructure projects are assessed individually, over relatively short time-frames and viewed as ‘ready to proceed’ only where utilisation is close to capacity.
The benefits of a longer-term view of infrastructure investment, and governments’ vital role in facilitating those longer-term benefits as part of a vision for our cities and regions, needs to be re-established. Governments need to consider less easily quantified benefits that come with some forms of infrastructure investment.
Consult Australia argued that ‘where appropriate, cost-benefit-analysis should be conducted across multiple projects, and have regard to wider economic benefits that come through agglomeration, jobs growth, and the delivery of more sustainable and liveable communities’. It cited the successful application of this approach internationally, ‘for example in London through the delivery of the Crossrail project, and which has resulted in significant new private sector investment’.
Consult Australia believed that ‘one of the major challenges in infrastructure delivery is the shortage of investment-ready projects developed through robust integrated strategic planning, community engagement and participation, environmental impact analysis and business case development’. It stated:
Too often the early design of projects is rushed to market, developed reactively against pre-made decisions only when funds are made available for construction. Consequent compromises in design, or poor overall business case development lead to information asymmetries in decisions to proceed, and/or a failure to achieve social licence to operate, and in some cases project cancellation and a perception of increased sovereign risk with potential investors.
It argued that ‘infrastructure decisions should reflect long-term infrastructure planning’, citing Infrastructure Australia’s 15-year Infrastructure Plan ‘that is evidence based and free of politicisation’. It advocated funding ‘to support feasibility studies, community engagement and public participation, business case development, cost-benefit-analysis (including assessments of wider economic benefits) and environmental impact analysis’. It suggested that ‘without this investment in the long-term infrastructure pipeline, at the earliest stages of project conception and development, the ability for governments to identify investment ready projects when funds become available is significantly diminished’. Consult Australia recommended:
… a dedicated innovation fund, separated from pre-determined infrastructure projects, to support the development of new investment-ready infrastructure through: feasibility studies, community engagement and public participation, business case development, cost-benefit-analysis (including assessments of wider economic benefits) and environmental impact analysis.
It concluded that ‘a deep pipe-line of projects ready for investment and construction as soon as the funds are available will deliver a powerful economic tool in the event of a more significant economic downturn’.
The Committee for Sydney argued that the current approach to infrastructure appraisal was:
… modally siloed and gives too much weight in the selection criteria to claimed travel time reductions for transport users which have little empirical basis, while giving too little weight to the evidenced impact on land uses, values and densities brought about by transport investment.
It noted that ‘rail projects, for example, bring a value uplift to homes near stations and enable higher density development—but neither outcome is properly accounted for in our appraisal process’. It stated:
The traditional ‘welfare benefits’ metrics on which transport Cost Benefit Analysis is based simply don’t provide an adequate guide to which mode we should be selecting and what the priorities should be for our city. City shaping infrastructure projects need to be assessed against wider criteria than just the traditional cost-benefit analysis and requires a change from the traditional and modally siloed approach from our transport agencies.
The Committee for Sydney sought an infrastructure appraisal process that would assess projects ‘from the perspective of what they will do to meet cities’ economic, social and environmental needs’:
It should be based on integrated land use and transport strategies for cities and appraise projects in terms of how they will contribute to meeting the key objectives of the city strategy; how, for example, they improve or increase its productivity, liveability, inclusivity, housing delivery and other strategic city shaping aims.
Another concern about traditional cost-benefit analysis was its inherent bias in favour of metropolitan centres at the expense of regions. Professor Sue Holliday stated:
On the whole, regional centres do not have the information required, the population required, nor the arguments to make that meet Treasury requirements and can compete with cost/benefit ratios in the major cities and their regions. The methodology is stacked against them. It is critical that regional centres compete against other regional centres in this resource ‘game’ so that they have as level a playing field as possible to make their case.
The importance of factoring in wider benefits was highlighted by the National Heart Foundation. It cited Queensland Government evidence showing that cycling links have ‘have very high cost-benefit ratios once health benefits/disbenefits are included in evaluations’. Professor Anna Timperio, representing the National Heart Foundation, observed that ‘there are air pollution related costs and benefits, there are health related benefits, there are physical activity related benefits and there are quality-of-life benefits that need to be costed as well’, but that these benefits were not necessarily being considered in cost-benefit analysis, despite being ‘quite critical and obviously very pertinent to livability’.
Mr Stephen Hodge, Government Relations Manager for the Australian Cycling Promotion Foundation Ltd, noted that ‘in the area of transport, the cost-benefits have been done on travel time savings—the level of service—but that clearly doesn’t help the modes that you might want to look at from a policy perspective for all the other benefits and for decongestion’ He observed that in the past we have not looked at decongestion as a positive benefit, or ‘the fact that you’re lowering the health budget when you get more people physically active’. Things were, however, starting to change:
We started looking at the cost analysis framework for roads, which was the National guidelines for transport system management up until 2016. It went through a review. We started commenting on papers in 2012. In 2014 a huge revision paper came out, which looked at inputting things like parameter values for active travel—benefits you get out of active travel and walking and so on. It’s taken years and years to get there. Even now—it’s now called ATAP, the Australian Transport Assessment and Planning program—we’re going through a process where a couple of chapters come out each month and they’re reviewed publicly. They will go into a new framework which will, for the very first time, start to allow like-for-like decisions to be made on an objective basis. There are decongestion indices in there and parameters. So they’re starting, but we should’ve been able to do this years ago. We are getting to the point now where, for some of the big decisions that are made around transport, for instance—because that has such a reach down into everything that we do in our cities and our communities—we’re now going to be able to start to actually see some real differences in outcomes for a whole lot more meaningful reasons than we could before just for roads.
Mr Jonathan Cartledge, Chair of the Cities Task Group at ASBEC, believed that ‘this is really a space where there’s such a great, easy opportunity for federal leadership, through the statement of expectations to Infrastructure Australia, to deliver some guidelines in this area’. He suggested that ‘there’s a great opportunity here for IA to build capability across the state and territory agencies through national guidelines that make for better decisions’. Research by ASBEC identified a number of flaws in business case development for infrastructure projects, including the setting of the discount rate at seven per cent, despite interest rates being low for a number of years, and a lack of methodology for measuring externalities such as jobs growth, environmental benefits of social benefits. Mr Cartledge concluded:
So some of these flaws in the methodology of business case development have real impacts on the number that is delivered at the end and the fact that that number is the overwhelming decision maker—that ratio of the cost-benefit analysis is the overwhelming decision maker—for whether or not a project proceeds, rather than the fuller business case that sits behind it. It is also that that number is the sole criterion often by which the public actually evaluates the method or the benefits of the particular piece of infrastructure. So our recommendations try to overcome some of those factors and provide some new opportunities, particularly for Infrastructure Australia to take a lead role in national consistency in business case development best practice around Australia.
The Green Building Council of Australia (GBCA) identified other means for promoting wider benefits relating to infrastructure investment, including City Deals and the use of development authorities/corporations to promote integrated planning and procurement. The GBCA welcomed City Deals as ‘an important breakthrough in helping deliver integrated strategic planning and coordination across levels of government. In bringing the strategic vision that underpins city deals to reality, effective governance will be critical.’ It recommended that ‘the Australian Government incentivise the creation of independent development corporations to support the delivery of city deals across Australia’, stating:
The establishment of statutorily independent development corporations to guide development, manage procurement, engage effectively with the community and industry will be beneficial in delivering what are likely to be major, complex infrastructure and urban renewal projects. The success of agencies like the Fisherman’s Bend Taskforce, the Barangaroo Delivery Authority and the Sydney Olympic Park Authority are powerful models to consider as mechanisms to drive effective city and economic development and renewal. The creation of the Townsville Development Corporation as part of the Townsville City Deal is a good example of this governance being implemented in the first of the Government’s city deals.
The Committee witnessed first hand the building and precinct scale innovation encapsulated in Sydney’s Barangaroo development, which is regarded as a model of urban development. As Ms Romilly Madew, Chief Executive Officer of the GBCA, explained, this outcome was very much the result of a carefully considered and clear procurement process:
Barangaroo Delivery Authority outlined some clear guidelines and principles for central Barangaroo. The bidders had to respond to that. Lendlease obviously did, and met the requirements, but also the innovation that has come out of Barangaroo is clear. You saw that yesterday—they have led the industry. The industry has learned so many lessons from Barangaroo. The Barangaroo delivery was very clear: ‘You need to meet this, this, this and this.’ But other things have come out of Barangaroo that I do not think anyone expected. One of them was the Barangaroo Skills Exchange, the indigenous skills exchange. I don’t know whether you saw the indigenous skills exchange that was created. People were trained on-site. The resilience and adaptation framework they developed no-one had seen before. They put that on line, which the industry has learned from. The sustainability innovation no-one expected, and we have all learned from that. That all came out of the Barangaroo Delivery Authority initially outlining: ‘These are the targets you need to meet’.
Another example of successful and far-sighted procurement cited in the evidence was that of the Waratah Trains. Mr Jeff Sharp, Group Manager, Technology and Innovation for the Downer Group, explained:
I have used the same example twice. It is not our only one, but it is a really good one and it is local here. It is the trains in Sydney, the Waratah trains that were built 10 years ago. When we signed that contract with the New South Wales government it included a 30-year maintenance contract. We are actually paid based on the availability of trains. I wasn’t involved back then, but the people who designed those trains put all those sensors on the trains. ‘Internet of things’ is a buzz phrase we hear today, but it has been around for a long time. They weren’t all connected, but the sensors are there. We collect something like two terabytes of data a day off each train, and they are 10 years old. That’s the sort of foresight, rather than the cheapest train and not putting those sensors on. To actually have that data is really valuable.
Another concern raised about procurement, however, was that ‘few government regulators stipulate that the impacts of global warming be included in either the environmental impact statements or cost benefit analyses that are required by law at the time of seeking government approval’. Similarly, in its submission, the Organisation Sunshine Coast Association of Residents (OSCAR) identified a lack of connection between planning and procurement regimes and the anticipated impacts of climate change, particularly development in river catchments and on floodplains. It urged ‘a holistic consideration of the river catchments and floodplain management’ given ‘the dynamic interconnectedness of our natural environment and our communities’ vulnerable locations’.
The need for a long-term perspective in infrastructure procurement was also emphasised in the evidence presented to the Committee. This had implications not only for planning, but for the procurement process itself. Transport expert Dr Philip Laird urged governments to ‘take a long-term view of investments—longer than perhaps they have in the past’, suggesting that ‘we should, perhaps, be looking out for at least 50 years’. He also questioned the use of a seven per cent discount rate in evaluating the cost-benefit ratio, indicating that ‘four per cent would be more realistic’. He noted that by reshaping ‘those two parameters—discount rates and horizon—you get different results’. He cited the example of the Maldon-Dombarton rail link: ‘As a study for the Illawarra business council showed, at four per cent it’s looking much better than a seven per cent discount rate’.
The SMART Infrastructure Facility at the University of Wollongong made an identical point about the same railway line—known as the South-West Illawarra Rail Link (SWIRL). It stated:
In SMART’S view, there are substantial net economic benefits that would accrue, in particular to the Illawarra and southwest Sydney regions, from completing the $1.7 billion SWIRL. We have estimated a benefit-cost ratio [BCR] for a passenger-freight SWIRL to be between 1.02 and 1.24, with our central estimate at the standard 7% discount rate being 1.13. At a 4% discount rate, which is the standard lower-bound estimate but in our view a more appropriate measure in the post-GFC world, our BCR central estimate is 1.56.
The SMART Infrastructure Facility estimated the economic impact on the Illawarra region of completing the SWIRL:
Our detailed economic modelling indicates the benefit to the Illawarra region would be $2.6 billion [in NPV terms at the standard 7%] and over 1,100 additional jobs per year on average [in FTE terms]. This indicates the return to the Illawarra would be $1.84 for each $1 invested in the SWIRL.
Mr Brendan Nelson, President of the Planning Institute of Australia, questioned whether ‘the Sydney Harbour Bridge would meet a BCR now that would allow it to be built under the current approaches’, observing that as a piece of infrastructure it had ‘stood the test time for the best part of a century’. He argued that ‘the lens that we need to apply to infrastructure investment needs to be far broader than simply ticking the economic benefits in a very shortened period’.
Ms Romilly Madew, Chief Executive Officer of the Green Building Council of Australia, made the point that ‘cities function over generations and as systems’, and that procurement practices needed to account for this. She noted that ‘costs will not always be evident at point in time decisions about how we develop our cities or in the cost-benefit analysis of individual projects’. She expressed frustration at the fact that while ‘we try to overcome the greatest challenges and grapple with the significant policy issues’, we are ‘at the same time making them worse by repeating the same mistakes that gave rise to these problems in the first place’.
Ms Julianna Walton, Convenor of Action for Public Transport NSW, emphasised the benefits of forward thinking, observing that putting in infrastructure changes land use. She stated:
It’s complete nonsense to keep opposing these projects on the basis that the people aren’t there. I’m not talking about putting a train line along the Birdsville Track, where there isn’t anybody and no-one planned, but it’s just, frankly, silly. We’ve had no end of carping about the Leppington line—‘Oh, it’s in a field, so why would you build that?’ or, ‘It’s a waste of money,’ and so on. Meanwhile, coming up the tracks are I'm not sure how many thousands of people, but it’s a lot.
Professor Sue Holliday emphasised the perils of a lack of long-term planning, highlighting infrastructure projects where ‘from the time they were planned, the growth has far exceeded the capacity originally identified as being needed’:
So the Eastern suburbs rail line for example is almost 150% over the target capacity of the original projections. The Chatswood to Epping line is approximately 250% over the original predicted capacity! As many drivers from the North West know, the M2 takes almost 130% more vehicles per day than originally planned.
She noted that ‘these infrastructures are failing us not because they are not good enough, but because they have not been created to accommodate the next growth phase of the city’. This indicated ‘that most of these big pieces of infrastructure are funded for a shorter horizon than the 30–50 year time frame we now need’. Professor Holliday concluded that ‘while the financial imperatives are clear (only spend what is absolutely necessary) the opportunity cost of failing to invest for the 30–50 year horizon is enormous’.
Financing and funding innovation
Innovation in financing and funding for infrastructure was seen as a key element in the planning and development of cities. Budgetary constraints combined with a high level of demand for new and upgraded infrastructure meant that finding new ways of financing infrastructure is essential. Consult Australia observed that ‘overcoming institutional resistance to more innovative policy solutions will be critical to delivering new financing mechanisms’. While noting that ‘not every tool available to governments will be appropriate for every project’, Consult Australia endorsed ensuring ‘all options are available so they can be used where appropriate’.
An essential innovation was value capture—using the uplift in property value associated with the provision of infrastructure to help pay for that infrastructure. Associate Professor Hussein Dia, from the Department of Civil and Construction Engineering at the Swinburne University of Technology, argued that ‘the option of value capture to complement public funding should be examined to generate sustainable funding streams’. He observed that ‘besides being a politically appealing option, this funding model also reinforces the link between land use and transport’. Mr Adam Beck, Executive Director of the Smart Cities Council Australia New Zealand, stressed the urgency of pursuing innovation:
We don’t have the luxury of two decades to work out how to build better cities, how to build more sustainable cities, to work out what value capture means. We are really on the clock, and Australia needs to embrace and move beyond individual pilots. Whilst they’re fantastic, we need to really supercharge and accelerate and move from lab and piloting to scale and replication very quickly, because we’re a rapidly urbanising nation.
Mr Beck saw opportunities in programs such as City Deals and the Smart Cities Plan but emphasised the slow pace of innovation. He told the Committee:
We’re starting to join up some of those things. Just the theory of Smart Cities alone is a good one, that all three tiers of government would work together and align resources. It’s very novel, but I was at a conference this morning in Brisbane—Urbanity 2017—and I’ve just come out of a panel on City Deals. A question was raised to the panel. We currently have three City Deals in Australia—Townsville, Launceston and Western Sydney—and the Prime Minister wants one in each capital city, in the near term. But the comment came that we don’t have the capacity to do that. We don’t have capacity to get one in every city because the Department of the Prime Minister and Cabinet don’t have enough resources.
He also stressed the need to move quickly on issues surrounding capacity building and innovative financing for sustainable urban development—particularly value capture:
Our Prime Minister announced that we have an energy crisis. He announced that, publicly, last December. We have a housing affordability crisis. We have a climate crisis. We have our back up against the wall now and we don’t have the luxury of time to explore and finally understand that value capture is great and we might try and pilot it here and there.
In its own research, Consult Australia had ‘identified numerous opportunities and lessons that can be learned from overseas experience in successfully implementing value capture mechanisms’; and urged the Australian Government to ‘continue its consideration of opportunities to incentivise value capture mechanisms as an element of infrastructure financing to deliver new infrastructure and urban regeneration’. It believed that the main barriers to the implementation of value capture were ‘institutional resistance, and/or a lack of awareness of potential benefits’.
The University of Melbourne stated that ‘decades of academic research justify financing future transit projects through value uplift associated with those transit projects’; and that ‘the extensive literature on transit-related value capture provides conclusive evidence that government investment in transit infrastructure raises land and property values’. It cited an international review where ‘Canadian scholars recently found rail transit increased land or property values by an average of 20% across 23 previous studies on the topic’. One Australian study identified land value uplift of up to 40% in Perth’s housing market in 2014; while another found a 4% increase in property values in 2015 associated with Brisbane ferries.
The Committee for Sydney has published an issues paper, Are we there yet: Value capture and the future of public transport in Sydney, which ‘identified a best practice approach to value capture, concentrating on models that will work for the Australian context’. It found ‘that value capture offers the “best option to solving the funding conundrum” facing public transport infrastructure’, but that ‘to get community buy-in, a clear nexus between the additional cost and the provided benefit is central to success’. The Committee for Sydney noted, however, that ‘there is a still a lack of coherent and clear policy direction on how it should be implemented and which model should be adopted’. This policy vacuum had resulted in lost opportunities:
It is widely accepted now, for example, that a value capture approach should have been implemented in relation to the building of the North-West Rail Link (now Sydney Metro) as the costs of this massive project were carried by the public sector but the returns were privatised by land owners. We must avoid similar unearned private uplift to land values around the Western Sydney Airport arising from public intervention as rezoning there provides a real opportunity to introduce value capture with widespread public support. The same can be said of the Sydenham to Bankstown extension of the Metro: we must avoid history repeating itself and the government depriving the community of a significant and justified return.
The Committee for Sydney stated that:
Value capture or sharing approaches can be applied as a contribution to the cost of the infrastructure itself, or to ensure that appropriate community infrastructure is in place to meet the needs of an expanded population enabled by, for example, a new rail link. There is an array of potential initiatives of this kind to be explored. They are, with road pricing/user charge strategies, variants of a ‘beneficiary pays’ approach.
Policy innovation and a politically mature conversation with the community on such approaches is vital as ‘business as usual’ will not deliver the investment required. This discussion is needed because it’s not just federal funding that Sydney needs; to some extent it needs to tax itself if it is to fund the infrastructure demands of a city of 8 million people. That requires both new funding mechanisms and renewed community involvement.
The potential and the importance of value capture was illustrated in two examples provided by Mr Tim Williams, Chief Executive Officer of the Committee for Sydney. In relation to the tremendous property value uplift brought about by the extension of the railway to Castle Hill in Sydney, he stated:
The official position of the Committee for Sydney is that we should never make the mistake we made at Castle Hill ever again, because if we are going to create fortunes like that, if we had just as a government gone to people there and said, ‘By the way, we are going to bring some tremendous value uplift. Can we share some of it?’, they would have said yes. So I don’t think we need to make that error again. We just need to be a bit more confident about the value that we know we are creating. There is a fairness out there, I think, that the public sector should get some return for that.
He also cited the example of the Crossrail in London as a case where more could have been done to capture the value of property uplift:
I was involved 10 years ago in the case for Crossrail in London. There are two things about this. One is that it does have a modest value-capture element to it, which is the business rates side of it. But we missed completely—mea culpa—the value uplift in residential development that was coming around the stations. If you go there now—even though they are not open yet—people living within 800 metres of the new stations are seeing twice the value uplift of those that are farthest away. I don’t think people would consider it an unfair conversation to say, ‘We are going to create some great value for you. Can we have a share back?’ I think that moment has come in the Australian discussion.
The City of Sydney stated that ‘value capture mechanisms can fund infrastructure by capturing optional land-value uplift resulting from rezonings and big infrastructure improvements’; and that ‘value capture (contributions charge in exchange for the option of taking up a rezoning) can be potentially applied by all levels of government to raise the necessary funds to invest in infrastructure’. It argued that value capture was ‘effective in delivering equitable social outcomes because it enables the value created by urban renewal to be shared between government and the private sector’. It suggested that value capture ‘ensures that planning gain resulting from a change to planning controls is equitably distributed between the private landowner and the public provider of infrastructure improving the feasibility of delivery of a project, which in itself, may be a societal benefit’.
The City of Sydney rejected concerns from the development industry that value capture ‘increased costs and even impacts on housing affordability’:
The City’s approach is to capture only a portion of the land value increase in value resulting from an optional rezoning. This preserves the construction profit for development projects to ensure they remain viable. Developers price in any levy into what they pay for the land component reducing the windfall profit to the unimproved land owner.
The City of Sydney noted that ‘this method underpins contributions for community infrastructure in Green Square within the City of Sydney Local Government Area, and is being used to deliver affordable housing in two investigation areas of the City of Sydney Southern Employment Lands’. Focussing on policy at the national level, the City of Sydney stated:
Successful implementation of value capture systems in Australia will require the coordination and cooperation of all three tiers of Government. The City Deals program recently initiated by the Federal Government involves agreements between the three tiers of government to achieve specific outcomes, and it is expected that most City Deals would include a value capture component, depending on its viability.
The City of Sydney supported the recommendations of the Committee’s report on the role of transport connectivity on stimulating development and economic activity, Harnessing Value, Delivering Infrastructure, which included a number of recommendations on value capture.
Associate Professor Matthew Burke urged the exploration of value capture mechanisms for funding infrastructure. He noted that:
The Commonwealth has encouraged the states to consider value capture/value sharing funding and financing. Options such as tax increment financing, which applies levies on future increments in property value within a designated area around a station, and special assessment districts, where authorities apply a more blanket charge in a designated area, need to be considered more often, and not just on a project-by-project basis.
He identified barriers to the uptake of value capture, including:
… a lack of understanding of the size, shape and timing of property value impacts from public transport projects, stakeholder support, community willingness-to-pay/accept, and the many detailed policy and legislative issues that need to be resolved at state and local government level. It is also more difficult for agencies in certain states to consider specific approaches when they do not use broad-based land taxation.
He argued that ‘shifting to a broad-based land tax would offer the states significant advantages, capturing more of the value gains that come from rezonings or infrastructure investments’.
Mr Philip Davies, Chief Executive of Infrastructure Australia, stressed the importance of explicitly linking financing methods and planning. He noted that ‘the more joined up we can make the planning the better. I think the problem at the moment is people are pursuing value capture where we’ve already got hard hats and boots on-site, and it’s way too late.’ He highlighted the opportuning to develop integrated planning and financing around value capture in the development of High Speed Rail in eastern Australia:
The high-speed rail corridor is a good example because it cuts through a number of jurisdictions on the east coast. One thing with that corridor is that we need to see some alignment of planning and value capture policies across the states. Again, I think that’s a role for the federal government. Maybe it needs incentivising. One would have thought that, in preserving that corridor for the future, these kinds of things could be put into the package to say: as an outcome of this exercise we want to align some of our planning policies; we want to align our principles around value capture. That would have a broader impact than just the high-speed rail corridor, but it would be a way for the federal government to get some proper process and proper policy in place around value capture.
Australasian Railway Association made a similar point, noting that ‘early acquisition of properties for the purpose of corridor protection can also be an important platform for value capture’. The ARA believed that governments could reduce their direct financial investment ‘by introducing funding mechanisms such as value capture along the route and around stations’, including by ‘acquiring larger parcels of land than is required for the corridor and selling the land back to developers, as well as encouraging Transit-Oriented Developments’. It observed, however, that ‘the first step requires the preservation of the land for the route’.
Ms Megan Motto, Chief Executive Officer of Consult Australia, saw a significant role for value capture, ‘not only in funding the infrastructure assets we need and in adding that layer of value onto just pure patronage payment, but also, for example, in opening up regional communities and allowing more teleworking and more capacity for people to come from regional centres into the city to where the jobs are—there’s a huge array of opportunity there’. Her only caveat was that ‘we need to be careful about having the methodology for understanding that business case’. There needed to be ‘rigour in how we identify the costs that will be incurred and the value that’s going to be created, in a realistic way’.
Professor Sue Holliday supported value capture ‘as long as it is valuable in linking into existing infrastructure and not wasteful in terms of being speculative, because that's what it is if it is just buying up farms in the middle of nowhere, away from existing towns and infrastructure’.
SGS Economics and Planning linked value capture to metropolitan governance (see Chapter 13), stating that ‘to properly fulfil the subsidiarity principle, a metropolitan government should be able to act autonomously on the matters within its jurisdiction’:
This means independent access to a sufficient tax base, and a process of democratic accountability for how this tax base is deployed in the service of the metropolitan constituency. Working on the presumption that the overall tax burden on the community will be kept within bounds, the institution of genuine metropolitan government would entail some reallocation of existing tax revenues (for example GST), retirement or reduction of some distortive or otherwise unhelpful taxes (such as payroll taxes and several transaction taxes) and the introduction of market reforms which can simultaneously generate substantial revenues and play a part in optimising metropolitan economies and growth patterns. The latter could include the creation of metropolitan markets in development rights, as currently occurs in the ACT under that jurisdiction’s leasehold system.
SGS argued that ‘this would make value capture a consistent, substantial, predictable and transparent source of base load funds, as distinct from its sporadic and opportunistic use in part funding individual infrastructure projects’. It cited research that ‘conservatively estimates that value capture through a system of development licence fees could generate upwards of half a billion dollars per annum in Victoria’.
Not everyone agreed with the concept of value capture. The Shopping Centre Council of Australia (SCCA) was ‘sceptical of the use of ‘value capture”’. The SCCA was of the view that ‘there is no credible method to properly isolate and quantify the contribution made by an infrastructure project, let alone a proposed future infrastructure project (e.g. under a “cities plan”), to an asset’s land value’. It argued that ‘, value is driven by many factors beyond the mere presence of a piece of infrastructure’.
Mr Brendan Lyon, outgoing Chief Executive Officer of Infrastructure Partnerships Australia, was also critical of the concept of value capture. One risk in value capture was that it would be another impost on the cost of housing. Mr Lyon stated:
If there is an additional cost that is imposed at the front, that won’t be donated by the development companies, I shouldn’t have thought; it will be passed through as one of the input costs on the production of that new housing. Value capture can take on a sort of mystical tone when some of the advocates are talking about it. It does make a practical, logical sense to think of, but the next piece is what happens to that land with that additional input cost that’s been put on it. It’s turned into housing. We are trying to get costs down so that we don’t see the flight of key workers out of the major capital cities. So I think there is some practical limitation to the role that value capture can play.
Mr Lyon referred to value capture as ‘a hard way to raise not very much money’, and suggested that ‘that’s why we haven’t seen it implemented—it is because it does create losers. In my observation, the wins, in terms of additional revenue, are not practically material in terms of the overall capital cost.’ He saw value capture more as ‘a planning tool to align governments and align land use planning towards the sort of outcomes you would want’. He suggested that it was ‘very hard to make multi-billion-dollar infrastructure pay for itself’; and ‘even harder to put onto the release of new housing in an already hot property market’. He thought it made sense, however, for ‘the Commonwealth to look at how it can use its power and influence to help the states to make the best land use planning decisions and to consider the options and so forth’. He stated that ‘the overall limitation on innovative finance is that we are still collecting it from the community, in another form, and that’s where it should be considered alongside the overall burden that people face’. He concluded:
With regard to some of the earlier discussion we had, you are in fact talking about multi-tiers of government and about using the land taxing provisions or the value capture provisions to make the overall process and tax burden more efficient. That is exactly the point I was making before: that these things should not be considered in isolation from everything else; that it needs to be considered within the overall tax mix and tax burden on the economy and the incentives created.
The GPT Group expressed similar sentiments, arguing that value capture ‘is limited when it is considered simply as a short-term capital recovery strategy, derived from collecting funds from land owners in the immediate vicinity of a piece of infrastructure’. Such methods would impact project viability, increasing ‘the cost of development on prime sites, thus generating an unintended outcome of making marginal sites more attractive for development at the expense of better located sites’. GPT stated that:
The challenge is to review thinking around value capture, and view it as a long-term idea that focuses on supporting transport and infrastructure outcomes at a metropolitan level rather than solely through a land uplift framework…
By thinking about value capture or return on investment (ROI) from a long-term perspective, ROI can instead be achieved by government through increased future tax revenue collected over an entire metropolitan catchment. As Australian cities continue to become among the most liveable in the world; they will continue to attract new investment in jobs and housing. As a result, total tax revenue would increase. This alternative framework for conceptualising ROI for infrastructure spending would allow the best possible transport outcomes to be delivered.
GPT proposed the Australian Government taking leadership ‘in reforming property taxes to create an ongoing capital recovery mechanism for the gradual rise, over time, in the value of property located close to desirable infrastructure’. This contrasted with ‘the current situation where property taxes are levied by all three levels of government, which creates uncertainty when it comes to investment’. GPT proposed a mechanism by which the three levels of government would ‘reach agreement at the outset of the urban renewal project so that private developers have certainty about what will be required of them’. This would allow ‘parks, schools, cultural and other infrastructure required to make the development successful can be delivered in a timely manner with investment certainty for all parties’.
Another concern raised was the different potential for value capture between urban and regional centres. RDA Tasmania noted that ‘Australia has a dispersed population across a large land mass which creates massive variation in the capacity of our different regions to capture value’. It was concerned that ‘infrastructure projects with a high potential for value capture may be prioritised by the Australian Government at the expense of projects in more dispersed and regional locations that have less or no capacity for value capture’. RDA Tasmania feared that ‘this could further exacerbate the disadvantage and divide that already exists’.
The Department of the Prime Minister and Cabinet noted that the Australian Government released a discussion paper—Using Value Capture to Help Deliver Major Land Transport Infrastructure: Roles for the Australian Government—that highlighted ‘the challenges and opportunities value capture presents to help deliver land transport infrastructure in November 2016’. The Department observed that the Australian Government ‘has a strong interest in making greater use of value capture to provide for a more efficient and equitable approach to infrastructure development and delivery’.
The evidence presented to the Committee highlighted the need to refine infrastructure procurement methods and bring them more closely into line with planning mechanisms. In particular, there was an identified need to align procurement with innovation, creating innovative outcomes underpinned by innovation in financing and funding methods.
The Committee endorses adopting a ‘whole-of-life’ approach to procurement. This approach would assess the creation of infrastructure in terms not only of what it will cost to build, but in terms of:
costs and benefits across the conceivable service life of a piece of infrastructure (keeping in mind that some rail lines, for example, have been in service for over a century);
how well it fits into long-term planning frameworks (i.e. how well it connects with other infrastructure to meet long-term goals); and
how well it meets other objectives in terms of economic, social and environmental sustainability.
The Committee recommends that the Australian Government adopt infrastructure procurement practices that require a ‘whole-of-life’ approach to infrastructure procurement which look at costs and benefits across the service life of any given piece of infrastructure, its place within long-term planning frameworks, and how well it meets objectives in terms of economic, social and environmental sustainability.
In order to achieve desired outcomes, government must be an informed client when procuring infrastructure. Procurement skills are essential to good procurement outcomes. Stakeholders stressed the importance of government purchasers knowing what they want and working in collaboration with contractors and other stakeholders to achieve outcomes.
The Barangaroo development was presented as a model of good government procurement, with the Barangaroo Delivery Authority defining the objectives of the project in a way which ensured positive economic, social and environmental outcomes. The Authority also worked collaboratively with the principal contractor to maximise the benefits of their expertise and innovation. Such independent development corporations are an ideal mechanism for promoting innovative and sustainable development. Other important elements of informed procurement are: maximising the potential of technological innovation and data collection; achieving economies of scale through coordinated procurement; and engaging with Tier 2 & Tier 3 contractors—sourcing their innovation and expertise, not just relying on single sources of information or expertise. This is particularly important in regional communities where local expertise is likely to reside in smaller businesses and where the employment benefits of engaging with tier 2 & 3 contractors is likely to be significant.
The Committee believes the use of independent development corporations to manage the procurement and development of infrastructure projects has the potential to ensure that infrastructure meets a range of relevant and viable objectives other than just cost-benefit ratio, promoting sustainable and innovative development.
The Committee also supports the concept of a procurement training program to develop and promote good procurement skills and practice at all levels of government. The Committee believes that technical innovation should be a fundamental goal of infrastructure procurement, and that data collection and management are an essential part of this. The Committee also endorses government procurement practices which support and engage with Tier 2 & 3 contractors.
The Committee recommends that the Australian Government adopt an approach to infrastructure procurement that:
where appropriate, utilises independent development corporations to manage the procurement and development of infrastructure projects;
promotes technical innovation; and
supports and engages with Tier 2 & 3 contractors.
The Committee recommends that the Australian Government, in conjunction with State and Territory Governments, establish a national training program for public sector infrastructure procurement.
One of the most important issues identified in the evidence was the need to refine appraisal methods. Concerns were raised that assessing individual infrastructure projects in isolation, focussing narrowly on the return of investment within artificial timeframes, and using discount rates significantly higher than official interest rates without regard to wider benefits, was skewing the field in favour of certain outcomes (for example, road over rail) and producing potentially unproductive and perverse outcomes (for example, facilitating urban sprawl rather than densification). The Committee heard that project appraisal methods should be consistent with a broader and more sophisticated view of procurement, that return on investment should be calculated over the life of the infrastructure, that discount rates should reflect both current interest rates and the probable life of the infrastructure, and that cost-benefit analysis should be required to take into account wider economic, social and environmental benefits associated with individual infrastructure projects within a broader planning framework.
The Committee believes that innovation in project appraisal is essential to successful urban development, and that individual infrastructure projects should be assessed not only in terms of the cost-benefit ratio, but also in terms of how well it integrates with long-term planning requirements; the wider benefits—economic, social and environmental—it produces; its contribution to innovation; and its potential to continue producing benefits beyond the immediate scope of the project. The Committee also believes that project costings should take account of the whole-of-life costs and benefits over the anticipated working life of the infrastructure and be assessed at a discount rate of four per cent.
The Committee recommends that the Australian Government should adopt an approach to infrastructure project appraisal that includes assessment of:
wider economic, social and environmental benefits;
costs and returns over the life of the infrastructure; and
cost of the project using a discount rate of 4 per cent.
The need for innovative financing and funding was highlighted in the evidence presented to the Committee. In particular, the potential role of value capture as a mechanism for financing the development of infrastructure and funding its ongoing operation was stressed by a number of witnesses and submissions. Value capture is employed successfully by MTR in Hong Kong. Under the ‘rail and property model’, rail projects are assessed in terms of their capital and operating costs over the life of the line. Revenue is estimated and the gap between the two identified. An assessment of development right is then used to fill the funding gap, with a land premium going to the government to meet pay for this development right. In conjunction with private developers, MTR invests in property development in and above the station precinct, creating an ongoing profit stream. The benefits to government include a free transport service, the land premium from lease of land, and an ongoing dividend from MTR’s profit (HK$4 billion per annum). The rail and property projects are implemented together in a coordinated way creating multiple uses of the same land; station areas including offices, shopping and residential within the airspace covering the station footprint. The outcome is rapid and coordinated development of infrastructure and commercial and residential space.
The potential for value capture to contribute to the development of infrastructure was discussed at length in the Committee’s previous report, Harnessing Value, Delivering Infrastructure. The Committee considers that the recommendations in that report are still relevant, and should be adopted by the Australian Government.
The Committee is conscious that there are significant opportunities to apply value capture to the development of infrastructure. Value capture should be part of the conception of any infrastructure project. It should be incorporated organically into its planning and development. Suitable value capture mechanisms should be identified and applied from the outset. Ideally, this should involve coordination between different levels of government and project developers to ensure a maximum return on investment on the beneficiary pays principle consistent with project viability. The development of value capture as an organising principle of infrastructure planning and procurement, and the reform of the taxation system to match its requirements, are fundamental to the significant investment in infrastructure required to ensure the efficient growth and functioning of Australia’s cities and regions.
The Committee recommends that the Australian Government develop a system of value capture as an organising principle of infrastructure planning and procurement, and progress the reform of the taxation system to match the requirements of value capture, in conjunction with State and Territory Governments, to provide a single, seamless, transparent system of taxes, charges and contributions, which allows for the costs of infrastructure development, where appropriate, to be met on the beneficiary pays principle.
Mr John Alexander OAM, MP
11 September 2018