Episode 4: Kylee Anastasi and James Sherrard on constructing the pathway to economic recovery

Episode transcript

Peter Van Onselen: With a mammoth infrastructure spending boost predicted on top of last year's 100 billion dollars over 10 year pledge. All eyes are on the Federal Budget. So what impact has COVID-19 had on the government's long term infrastructure projects? Can we expect increased state government collaboration?

And what difference has this federal budget made in this episode. We go in search of answers.

My name is Peter Van Onselen and you're listening to the PwC Federal Budget podcast.

I'm joined now by Kylee Anastasi and James Sherrard Infrastructure Partners at PwC. Kylee I'll start with you if I can so much in this budget when it comes to infrastructure both what we heard about it before it was delivered and then obviously once the papers dropped as well. What's your broad take at the moment?

Kylee Anastasi: Yeah thanks Peter. I think you know the infrastructure budget announcements that we've seen really solidify the federal government's increasingly pragmatic approach to creating jobs by supporting infrastructure sectors that at times have been traditionally the domain of state and local governments.

Peter Van Onselen: And from your perspective James, what jumped out at you once we got the full suite of what's actually in the budget as opposed to, I suppose, the standard budget leaks around projects like infrastructure in the lead up?

James Sherrard: So it was interesting how overtly was spoken about the need for business to lead this recovery. And that then being straight to the infrastructure from our perspective $14 billion on roads and rail and the heavy infrastructure to get people back to work quickly.

So that ties to jobs that’s $4 billion for new work and $10 billion for sort of existing committed funds. I also really liked the slant towards renewables and water as a priority.

Some of the spending that's proposed is around waste recycling, couple of $250 million there. And down to the local road safety initiatives, I believe that's designed at local communities spending money quickly getting people back to work quickly.

Peter Van Onselen: I really want to get into some of the specifics I suppose around this infrastructure spend. Vis-a-vis the PwC clients and what it does mean for business, but before doing that Kylee let's look at what you just mentioned before this whole issue of state collaboration. How important is state collaboration to this sort of infrastructure projects that are being flagged in the budget or indeed at the necessary follow up infrastructure projects that we can expect there after?.

Kylee Anastasi: So I think you know most people will be aware that the vast majority of infrastructure in Australia is delivered by the state governments and traditionally the federal government has played a key role in supporting delivery of projects by the state and it's utilised a number of different ways to do that including providing direct grants to projects.

What we're seeing in this budget in particular is an increased focus on projects that are already underway and essentially looking to accelerate those projects and there's a few sort of critical reasons that the feds are looking at that.

Number one they're able to deploy funds quite quickly given that these projects are already either close to delivery or about to be delivered. So this has a far more immediate impact on creating jobs than if they were to launch some sort of nation building initiative that would take time to plan and then move into delivery.

So that's why we see a lot of announcements relating to maintenance upgrades, expanding grid capacity as well as improving efficiency of our freight networks for example and a lesser focus on newer greenfield infrastructure.

There's another important issue in there in that there is a recognition that our population growth will slow over time. And so these investments are specifically targeted at developed areas both in our cities and our regions. And it's about improving existing connections whether that be transport connections, energy, water connections.

And that's really focused again on supporting where people currently live work and play rather than looking at more ambitious greenfield type developments that we have seen in the past from the federal government budgets.

James Sherrard: I also really liked the commentary around, and the change of tact around the use it or lose it for the state spending. That's a recognition and understanding that yes the states do spend most of the money but they need to do it in a timely fashion. There is a lot of red tape that is perceived to tie up the start and the commencement of many projects. And so that use it or lose it seems to me designed around cutting through some of that, getting decisions made quickly and getting projects to market faster.

Peter Van Onselen: You've both alluded to this already but let's get a bit more specific if we can. The impact of COVID-19 on the infrastructure priorities and the spend. Kylee how do you see that?

Kylee Anastasi: I think it's seen a fundamental shift in what we consider as priorities for our infrastructure market. I think an important part of the budget announcements is some additional funding for infrastructure Australia for example.

And really now is the time to start looking at how we prioritise our national infrastructure pipeline. Looking at what benefits are assessed and how we we value some benefits that perhaps in hindsight in previous years have not been such a priority for our community but are now becoming increasingly important and I think you know we see the emergence of digital technology for example as becoming a key platform for some of the budget announcements and also this notion of connectivity and how we make sure that our cities and our regions are better connected.

Peter Van Onselen: And James what about the quantum of the spend in the context again of COVID-19. Politicians have long liked to talk up on both sides how much they spend on infrastructure and big projects around infrastructure, but in the context of COVID there really has been a lot of reference to there being a significant uptick because of the need for it in the current crisis. How do you see that?

James Sherrard: Look there's definitely a greater spend on infrastructure and COVID has been the catalyst for a lot of that. The interesting balance that I see here is that the amount of money being allocated to short term projects designed to get people back to work and get back to work fast is about right. From my perspective.

But it's critical to have some of those longer, big, heavy, longer term projects which give big business confidence to hire, to engage in R&D, to invest in their own business growth over time. And it's those longer $14 billion roads, rail some of the heavier water investments that keep big business that level of confidence.

Peter Van Onselen: What about the risks when so much money is being looked to be spent as quickly as they're looking to spend it because of that. I guess if you like other priority of trying to stimulate the economy that's now in recession. Kylee are there risks that you see there with infrastructure projects that are either chosen or perhaps even not chosen because of that other factor at play?

Kylee Anastasi: Absolutely I think there's a critical issue of how we actually deliver this increasing infrastructure. Perhaps the programs that are targeted at upskilling and reskilling may help that.

But we do have an issue, we have a rather hot infrastructure market that's been running now in Australia pretty consistently and so adding to that pipeline there is a question around our market capacity whether that's our local supply chains our local workforce to actually sort of step up and make sure that the funds that have been announced can actually be spent and realise the jobs and benefits that that the government is really looking for and it underpins our economic recovery.

Peter Van Onselen: James would you want to add to that?

James Sherrard: I think the whole topic of risk and risk allocation more importantly around major projects is something that needs a lot more time and energy spent on it. We've seen numerous extensions of time claims related to major infrastructure projects in Australia and a lot of disincentives for tier 1 contractors to engage in some of those bigger projects. And that's also a disincentive for international firms to go into the market.

The risk allocation between government and the private sector needs to be better thought out as far as risk responsibility that people can take on and actually risk that can cover. Otherwise it's driving down or risk is being priced into projects at an unacceptable level. And the risk is being driven down through the contractors to individuals of the firms that really are not equipped to take on that level of risk. Ends up in disputes, ends up in courts, ends up in delays and ultimately greater costs for projects delivery.

Peter Van Onselen: When it comes to PwC clients looking at infrastructure spending and I guess also projects around urbanisation, Kylee what are the big take outs that they should be focused on in your view?

Kylee Anastasi: From our clients perspective, and our client base is the public sector both federal, state and local as well as the private sector market, the real opportunity here that I see at least is around this notion of convergence of opportunities. And what I mean by that is a more holistic view of the role that infrastructure has both in our economic recovery and also in our communities. And by accelerating the infrastructure program that's been announced under this budget I really think the federal government has a great opportunity to really generate demand for its announced programs and that's incentivising.

Whether it's state governments, local governments or the private market in taking up offers to think differently about how we deliver our infrastructure. Looking at new technologies, how do we reduce emissions for example. What is the role of recycled materials and in this way they can really provide certainty to the jobs growth that's needed but also drive that innovation that's so desperately needed from how we deliver infrastructure from our private sector partners.

Peter Van Onselen: There's been a lot of focus on urban infrastructure projects but there's also a lot happening when it comes to regional infrastructure. What do you see in that space?

Kylee Anastasi: I think there's been a growing recognition both at the federal level and also at the state level in recent years about the importance of ensuring that our regions thrive and actually covid in some ways has helped even more to shine the spotlight on our regions with a growing recognition that perhaps if we all don't need to live so close to our urban centres that there are opportunities for some of us to move into more regional areas and really support regional local economies.

In this budget in particular there is a significant focus on regional infrastructure. When you think about the 2 billion dollars or additional 2 billion dollars committed to the national water grid for example a lot of that is focused on regional communities as well as growing new agricultural regions particularly in the north of the country.

There's also a continued focus on regional rail both inland rail and also faster rail connections and I think that's really encouraging for states such as Western Australia, Victoria, South Australia and also New South Wales. And of course there is a significant focus on the safety of our regional roads.

So there are a lot of different elements of the infrastructure program that really is specifically targeted on our regions and I think we know that we'll see certainly an increase not just in job creation in our regions but also that level of attraction for people who perhaps are moving away from urban centres and looking for not only a better quality of life but also improved services. You know when it comes to schools hospitals and mental health for example which were also funded quite heavily through the federal budget

James Sherrard: If there's one thing that comes it has demonstrated very clearly it's our ability to work remotely. We're expecting that to open up regional centres more effectively and therefore the support for infrastructure for those regional centres is critical. Whilst not called out largely we do know there's a large focus on improved communications and the infrastructure that supports those communications. And of course water.

We also saw references drawn to support for the bushfire affected areas. So it's good to hear that those haven't been forgotten and the regional areas those beneficiaries because they are the most impacted by those catastrophic fires earlier on in the year.

Peter Van Onselen: And James your take on perhaps some of the differences that might be in play as well from state to state. I mean we've obviously got one federal government but then you've got different political complexions as well as different cultural and structural approaches from state to state. So in order to follow that I guess different collaborations from state to state. How do you see that?

James Sherrard: Most of the money is now being funneled through the state through their infrastructure bodies and to all the states and jurisdictions now have raised those bodies and then some delivery agencies which actually are spending the money through various different projects.

It's those agencies and those delivery agencies and infrastructure bodies that are the most efficient that we'll be able to get the spend through and the shovels in the ground faster and that ‘use it or lose it’ principle will become overtly important for those groups. So I think it's going to be interesting to see how quickly and how efficiently those organisations can bring themselves up to speed with spending money and getting projects shovel ready.

The private sector many of our clients are now in the renewables area and I think they'll take away some great comfort from the spend that's going to waste, into water, and into other renewables as part of this budget.

Kylee Anastasi: Yeah I think there's also from a private sector perspective when you look at the announcement that has been made to boost the guarantees for the National Housing Finance Investment Corporation mythic, you know I think that's a really big step for the federal government in boosting its commitment to housing in this country.

What that does hopefully is really attract private investment into that market and help manage the risks of getting these sorts of projects up and running. This is an example of where the federal government is really trying to address fundamental market risks in the hope of attracting private investment.

And we have seen the federal government look at a pilot recently with super funds coming in to help with financing of housing initiatives. So hopefully you know this step of increasing their commitment to housing will help generate and sort of drive private investment into areas that we haven't traditionally seen in the infrastructure market.

Peter Van Onselen: Kylee Anastasi and James Sherrard infrastructure partners at PwC thanks so much for your insights.

Kylee Anastasi: Thank you.

James Sherrard: Thanks very much.

Peter Van Onselen: Thank you for listening to the PwC 2020 federal budget podcast.

We hope you enjoyed our commentary for additional in-depth analysis head over to pwc.com.au/federalbudget where you will find articles about the 2020 Federal Budget and what it means for the economy, our society and you.

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