Tag Archive for: infrastructure

It’s not just inflation. Contracting practices are also stifling construction

Inflation is ganging up with long-standing problems in our contracting and procurement systems to stifle construction, innovation and ultimately our economic future. 

While the Reserve Bank fights inflation, the government must lead reform in procurement practices, with the aim of ensuring that more potential contractors can bid for major projects. Indeed, this period of exceptional difficulty for project contracting should be the motivation for addressing inefficiencies in contracting that have damped construction activity for too long. 

High inflation is not merely making life uncomfortable for people generally. It is also shifting investment dynamics, potentially damaging economic performance and competitiveness. The 40 percent surge in construction costs since the onset of the Covid-19 pandemic has dire implications for public and private sector investment. It threatens our infrastructure projects and thereby robs us of productivity gains and economic growth. 

The problem is acute in northern Australia, where construction costs have always been high and in the past few years have risen even faster than in the rest of the country. 

Inflation that outstrips growth in public finances diminishes the government’s ability to fund crucial infrastructure projects. Meanwhile, private industry, wary of somewhat unpredictable cost rises, must set higher elevated return thresholds, leading it to shy away from investment. 

This not only slows or prevents construction of facilities but also stifles economic growth. If infrastructure isn’t built, industries that need it won’t expand. 

This relatively recent inflation problem is overlayed on the stifling effect of long-standing contracting practices and procurement systems. 

Consider the example of government contracts. Often, governments engage architects and engineers to create detailed project designs then, in the tender phase, require contractors to warrant the buildability of the designs. This unreasonably gives bidders only a few weeks to evaluate a year’s worth of design work.  

The result? Many bidders inflate their prices to account for the uncertain risks; other companies simply choose not to bid. The result is less competition, which, in turn, drives prices higher, adding to inflation. 

Prerequisites imposed on contractors can also diminish competition. For instance, mandating unusually high levels of professional indemnity insurance may deter smaller subcontractors from participating in a project, again leading to fewer bids and higher costs. Punitive liquidated damages clauses further add to the financial burden and, again, compels bidders either to raise their pricing or withdraw from the tender process. 

The loss of competition has another effect: firms under less market pressure are less likely to innovate. And absence of small firms from projects is particularly damaging, because they are the greatest source of innovation. 

The complexities of the US Department of Defense’s contracting approach add yet another layer to this challenge. By favouring US firms and imposing compliance requirements that align with American requirements for lodging bonds to guarantee work they effectively shut many Australian companies out of lucrative opportunities. This not only limits the competitive field but also constricts the available talent pool, ultimately compromising the quality and efficiency of public works. 

Yet there is an opportunity here. The extraordinary additional stress on the major-projects sector created by high inflation should create the motivation for us to now reassess and refine contracting practices. A strong effort from the federal government to understand and mitigate the hidden costs associated with specific contractual clauses could revitalise competition, help mitigate immediate inflation and create permanent efficiencies. 

Moreover, by fostering an environment where a diverse range of contractors can compete, we may very well stimulate innovation. 

We need decisive leadership from policymakers. The Australian government must actively engage industry stakeholders in a dialogue about these issues, prioritising transparency and flexibility in contracting practices. This means re-evaluating the criteria that determine bidder’s eligibility for projects and making necessary adjustments to ensure that more companies—especially smaller, innovative firms—can be involved. 

Moreover, procurement processes should be streamlined to reduce the burdensome requirements that deter participation. By creating a more inclusive framework, we can not only enhance competition but also better position Australia for long-term economic growth. 

Fragile local communities are a security risk

Northern Australia is critical to Australia’s security and its position in the region. The complexities of our strategic environment require us to think more broadly and creatively about the role the north plays as the conduit for our regional engagement.

We know that Australia needs to operate ‘in and through’ the north to make a greater contribution to the region and to also draw our regional partners into Australia. Indeed, northern Australia has enduring and strong cultural, educational and health links into the Asia–Pacific that go beyond security.

There’s increasing appreciation that the success of our regional engagement depends on Australia’s north being prosperous, resilient and secure. This means that, for the north to play the role it should, its physical and social infrastructure needs to be robust.

Discussions about defence capability usually take us down the track of what’s needed to support and sustain air, sea and land power. However, there’s a little-discussed dependency that is crucial to the success of our military—and that’s the communities within which the defence organisation is located and operates. The smaller and more remote the community, the greater the dependency between that community and the Australian Defence Force. Bases need a support workforce in communities in which there may be limited other employment. Defence members need access to off-base recreational facilities. Local businesses rely on Defence to stay financially viable.

When all is going well, a kind of symbiosis develops. However, a small change to policy or base management, or an extreme weather event, for example, can have disproportionate impacts on local economies. But those impacts are not just on the local government areas, or LGAs, within which Defence is based, they’re also on neighbouring LGAs that Defence traverses during its operations.

Disturbingly, a quick review of the annual reports of local councils in northern Australia highlights that many LGAs in the north are struggling and some are financially unsustainable. This point was reinforced in some detail in a 2021 audit of Queensland LGAs, which found that 60% of the sector is at moderate or high risk of being financially unsustainable.

LGAs in Australia report their financial performance in terms of the extent to which revenues raised cover operational expenses only or are available for capital funding or other purposes. This is the operating surplus ratio, and LGAs seek to have a OSR of between 0 and 10%.

But the fragility of local councils is a national problem and not confined to the north. A review of non-capital-city LGAs where Defence is based shows that OSRs for the 2021 financial year vary between 11.9% for Mid-Western Regional Council in the central west of New South Wales and −12.6% for Wyndham City Council west of Melbourne. Other results worth mentioning are Wagga Wagga City Council (NSW), −7.3%; Toowoomba Regional Council (Queensland), –1.4%; Cairns Regional Council (Queensland), −1.4%; the City of Rockingham (WA), −0.8%; and Liverpool City Council (NSW), −5.0%.

While Covid-19 has had and continues to have a marked downward impact on OSR results, in many cases the downward trend started before the pandemic.

The significance of this is that local infrastructure, needed by Defence and others to operate effectively, has declined or is at risk of decline because LGAs don’t have sufficient revenue to construct, operate and maintain it.

Financial constraints mean that LGAs are increasingly resorting to loans and grants to fund maintenance of local infrastructure such as roads and bridges. Often the unintended consequence of funding shortfalls is that investment in social infrastructure is last on the priority list.

Concern about the financial viability of LGAs isn’t confined to northern Australia, but financial viability does have a disproportionate impact in the isolated and thinly populated areas prevalent in Australia’s north. In many ways, policymakers have neglected northern Australia and accepted that there are limitations to operating in that diverse and vast environment. But Defence is one of many users dependent on the infrastructure there, so it’s important to position this issue as a whole-of-nation one.

Other nations, including the US, Japan and Singapore, are investing heavily in Australia. However, they naturally prioritise investment that meets their needs rather than the foundation and supporting infrastructure for which three levels of government in Australia have responsibility. The issue here is sovereignty. There’s a risk that the current model positions Australia as a location for the US, Singapore or other nations rather than as a player of equal standing.

And other nations are rejecting the prevailing mindset, including within the Australian military, that it’s not possible to operate at certain times of the year in Australia’s north. We see this mindset in action with roads that are cut by floodwaters year after year but keep being repaired to the same standard so they continue to be at risk of flooding. The interconnections between national security, defence, resilience and the market play out more starkly in the north than elsewhere in Australia.

The challenge for the new minister for northern Australia is to ensure alignment of whole-of-nation outcomes and investment in the north. This is not about spending more money; it’s about embracing modern nation-building through cross-jurisdictional and cross-sectoral collaboration that achieves more effective multi-use—and multi-user—outcomes.

This contemporary approach to nation-building rejects ‘can’t’ and instead focuses on ‘how’.

Building back better

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Australian infrastructure, along with the threat of natural or manmade disasters, is particularly complex, making infrastructure failures inevitable.

That’s why I read with interest Paul Barnes’ post on improving the disaster resilience of critical infrastructure in northern Australia and the supply chains they depend upon.

We should be trying to counteract the rising costs of responding to disasters. The economic costs of rebuilding communities is shared by all Australians when Commonwealth funds are dispersed for recovery. The Productivity Commission established that the costs to the Commonwealth of recovery funds for disaster events since 2009 amounted to approximately $12 billion.

In spite of this dramatic spending, it’s the general practice in Australia not to improve our infrastructure, rather rebuild damaged and destroyed roads, buildings, and utilities to their original state.

Betterment—that is, rebuilding an asset to a more disaster-resilient standard—is rarely undertaken because it’s subject to ‘a lower reimbursement rate, a higher administrative burden and lack of a budget allocation by the Australian government (which means that offsetting savings must be made elsewhere to fund betterment)’.

The Productivity Commission has found that 97% of disaster funding is spent after a disaster and only 3% goes toward mitigation and preparedness. That equation needs to be rebalanced.

Five years ago, the Institution of Engineers released its Infrastructure Report Card report, which found that our infrastructure, (especially road and rail), is plagued by aging assets and inadequate capacity.

The Infrastructure Report Card found that little or no progress had been made since Engineers Australia conducted a similar audit in 2005.

In the earlier report, Australia’s overall result was a C+ and five years later, still a C+. The backlog of maintenance, repair and much-needed upgrades has only continued to grow since, leaving us with aging infrastructure that’s increasingly fragile.

Making infrastructure more resistant to disaster impacts is a choice which can involve making roads higher, bridges stronger, relocating rail lines, and perhaps duplicating electricity lines.

Paul’s message is that we need a stronger national effort to develop resilient infrastructure that’s adaptable and robust to respond to future demands.

While we have a 2010 national critical infrastructure resilience strategy that encourages organisations to ‘develop a more organic approach to deal with rapid on-set shock’, it isn’t clear whether our infrastructure managers have resilience measures for the various contexts they face or particularly sufficient knowledge on how failures in one system can lead to disruptions in others.

It’s not just the vulnerability of critical infrastructure systems either. It’s also whether there are inadequacies in our governance arrangements: many of the coupled infrastructure systems across northern Australia don’t follow jurisdictional boundaries. (The Australian government’s recent white paper on northern Australia defined the region as all of the Northern Territory and those parts of Western Australia and Queensland above the Tropic of Capricorn.)

Understanding the nature of damage to infrastructure resulting from natural hazards is critical.  It’s interesting here to look at the National Climate Resilience and Adaptation Strategy that was released by Environment Minister Greg Hunt in December last year.

That strategy states that in northern Australia, an important climate adaptation is building housing that is more resilient to cyclones:

‘On average, cyclones cause more than $630 million in damages per year, and this is likely to increase into the future. Learning from past experiences, the insurer Suncorp has partnered with James Cook University to analyse insurance claim data to better understand cyclone vulnerabilities in homes, and what can be done to address them. This research shows that simple, low-cost disaster mitigation can pay for itself after just one cyclone.’

Two processes in particular are worth progressing. First, apply the approach taken by Suncorp in response to north Queensland cyclones to provide insurance driven incentives for making identified improvements to houses derived from research on where such changes directly impact preventable damage in structures caused by cyclones. And second, identify assets that are vulnerable by location to known impacts of disasters and seek to strengthen those assets to reduce service recovery time.

Investing in northern infrastructure? Don’t forget to invest in resilience as well

Great Northern Highway

The north of Australia is booming with recognition of significant export opportunities into Asian markets across a number commodity types. In the first quarter of 2014, just over 90,000 cattle were exported from Darwin, mostly to Indonesia, but also to Vietnam, Malaysia, the Philippines and Brunei. More than 493,000 head were shipped in total that year and 615,062 head by the end of the 2015 reporting period.   In addition to livestock export and agricultural development, significant investments in energy production are evident with Chevron’s Gorgon Natural Gas Project and the Inpex Ichthys LNG Project, to name just two.

Promoting northern Australia as a bridge to southeastern and northern Asian markets by developing economic and trade opportunities makes sound strategic sense, a point that is generally well supported. Achieving this has required a forward look at infrastructure development needs and opportunities. So the publication of the Northern Australia Infrastructure Audit Report in January and the White Paper on Developing Northern Australia in June are timely. A suite of projected infrastructure components ranging from road and rail links, water supply and storage, relevant telecommunications assets and aviation and maritime terminus points are detailed in the White Paper, in particular.

A central intent of the White Paper was a stocktake of northern Australia’s natural, human, geographic and strategic assets, and detail of options to further development of minerals, energy, agricultural, tourism, defence and other industries. The Paper, which was supported by comprehensive guidance from a high-level advisory group, also provides a comprehensive assessment of risk exposures and impediments to realising such growth.

The detail and thinking represented in those studies provides a strong base for envisioning how networked infrastructure systems in Australia’s northern regions might be developed for both national betterment and providing capacity to deliver projected benefits of trade and business opportunities in Asia.

But those reports are only an initial step in an ongoing policy development process. More work needs to examine processes that detail how the current and projected (critical) infrastructure will remain resilient in order to protect and sustain the value gained by planned investment.

Also critical is the need to enhance the resilience of mobile telecommunication and broadcast infrastructures (radio and television) and the importance of improving freight network resistance to the impacts of floods and natural disasters. But the terms, ‘disaster resilience,’ ‘infrastructure interdependencies’ or ‘infrastructure resilience’ don’t appear in either the White Paper or the Infrastructure Audit Report.

While critically important infrastructure (assets) have been identified as central parts of investment planning and growth projections, more assessment is required on how to evaluate the effects on complex interconnected infrastructure systems from the impacts of natural disasters. Questions such as ‘can resilience, in context to the effects of natural hazards, be designed and built into new asset types or retro-fitted to existing infrastructure systems?’ need further consideration.

Changes to the way infrastructure systems are designed and maintained are needed particularly in the face of anticipated weather variability. We need to complement impact resistant infrastructure design (hardening) with resilient design. While building robustness into infrastructure is standard practice, the complexity of interdependent systems and the increased incidence of extreme weather require a shift towards having (energy and telecommunications) infrastructures operating under a ‘safe-fail’ approach that key parts of infrastructure remain intact and functional to support continuity and resumption of services even if large segments of infrastructure fail.

The absence of resilience in infrastructure can be significant. For example, after Hurricane Sandy, electricity supplies in Manhattan were lost for more than three days. In 2015, Chile experienced the equivalent of seven years of rain in 12 hours resulting in widespread loss of electricity. The cost of recovery from the 2013 typhoon Typhoon Haiyan was estimated at more than double the Philippines GDP.

Thus it would be useful to expand the predominantly economic assessment focus of the present Northern Infrastructure policy effort to include more analyses of how to incorporate notions of ‘resilience’ into the planned (critical) infrastructure elements in the north.

Proponents need look no further than our own Attorney General’s Department, which recognises the importance of critical infrastructure and maintains a national strategy. Definitions of critical infrastructure in this strategy refer to those (physical and virtual) elements that provide essential services for everyday life (such as energy, food, water, transport, communications, health and banking and finance) which, if disrupted or degraded, could have a range of serious implications for business (including other infrastructure components), government and the community.

Similar definitions of critical infrastructure exist in the US the European Commission and Canada.

While all of those national approaches to critical infrastructure include economic factors, they importantly include infrastructure vulnerabilities that link to debilitating impact on security, national economic security, national public health or safety, or any combination of those.

The current narrow approach to defining critical infrastructure issues in northern Australia planning is easily remedied by investing in more collaboration among the three Australian states and incorporation of guidance from the national strategy. In fact, the Queensland government’s release of a new draft State Infrastructure plan could be even more helpful. According to the plan, critical infrastructure must be sustainable (in design) and resilient to the effects of natural disasters as an enabler of improving ability to recover functionality once lost or degraded.

Ineffective management and sustainment of infrastructure may contribute significant loss of invested value. Ultimately, failure to include a broad appreciation of the benefits of requisite variety in our thinking about resilience of critical infrastructure systems most definitely will.