Get Costs under Control or We’ll All Be Poorer

The Australian
7 September 2012

This is an edited extract of a speech Business Council of Australia Vice President Graham Bradley delivered to the Infrastructure Partnerships Australia conference.

Asked about the implications of falling commodity prices this week in the context of the latest national accounts figures, Wayne Swan again used the resource investment pipeline as evidence of Australia’s ongoing economic wellbeing.

But the Treasurer conceded, on this occasion, that some projects might not proceed.

If we include both proposed infrastructure and resource project investment, the pipeline of major projects across the Australian economy is worth more than $900 billion. About half is under way or committed. The question is how we maximise the chances of successful delivery.

In recent weeks, $120bn of less advanced resources projects, including BHP-Billiton’s $20bn Olympic Dam open-cut project, have been deferred or are in doubt. To date, government leaders have not been inclined to publicly acknowledge or explain that the prospective project pipeline is far from assured. This is not only because uncommitted projects are at risk from a major downturn in commodity prices and demand but also because Australia has become too expensive.

The Business Council of Australia’s landmark study of capital projects in the Australian resources sector uncovered a 40 per cent cost premium on similar projects in the US. Productivity on resources projects located closer to our major cities is 35 per cent lower than in the US, with remote projects 60 per cent lower than comparable projects in the US.

Some commentators questioned our choice of the US, specifically the US gulf coast, as a benchmark. The region is commonly used by investors and cost estimators to assess resource and industrial project performance because of its market size, and the depth of project management and delivery capabilities.

For Australia, it provides a useful indicator of relative performance for project activity similar to our own portfolio. It’s also relevant because, in the case of the big oil and gas projects, we are going to be competing directly in the decade ahead.

The BCA’s pipeline project brought into sharp relief the need to better understand what’s driving Australia’s high project costs. Ultimately, our concerns resulted in the announcement of a wide-ranging inquiry into costs and productivity in the construction industry by the Council of Australian Governments that will report by mid-next year. This is nearly a year away.

Clearly, a lot of factors affect our cost structure but the experience on the ground is that high labour costs and low productivity are the big factors.

The situation is not sustainable. Something’s going to have to give. If we don’t adjust our policy settings – and fast – what will give will be delay, deferral and cancellation of projects, with loss of future economic value for the nation.

The full impact of Australia’s deteriorating productivity performance over the past decade has been masked by our high terms of trade. But those days are over. Australia is now part of a more competitive global economic landscape.

Either we boost productivity and stay competitive or we recalibrate our expectations for the future.

Our fundamental belief at the BCA is that enduring prosperity and rising living standards require a strongly growing economy.

And our strong sense is that some parts of the Australian community’s experience with economic growth gives them cause to be suspicious of it. This is creating an environment where necessary reform is difficult and vital projects are delayed.

Our pipeline study found low levels of community and governmental support for some projects, and little evidence that Australia was using its current opportunities to envisage and plan for what comes next.

So it’s a vicious circle whereby governments don’t explain, plan or prepare for growth, and we continue to play catch-up, and incur understandable community backlash against the policies needed to foster economic growth.

These issues are of enormous significance and require a concerted effort by all levels of government and by businesses to ensure Australians can see and experience the benefits of projects that will drive future economic growth.

The current project pipeline won’t come to a shuddering halt, but that doesn’t mean we shouldn’t be thinking very seriously about what’s going to support the economy beyond the commodity boom.

Our dollar is not coming down yet, but commodity prices are coming down fast.

Delivery of cost-effective economic and social infrastructure is essential to support future economic growth, and will be needed to maintain full employment once our terms of trade and commodities boom begin to wane.

The bottom line is that we could and should have a new Australia-wide pipeline of public infrastructure projects ready to roll as resources projects are progressively completed.

We need to have a set of infrastructure projects lined up that will have the biggest impact on Australia’s economic competitiveness and productivity, and on people’s lives. Not politically chosen projects based on untested cost–benefit analysis, or none at all.

The NSW government’s draft transport infrastructure master plan, released this week, is a step in the right direction.

A lesson we should have learned as a nation from our response to the GFC in 2008 is the value of having a well-developed, defined and costed set of attractive infrastructure investment that can be accelerated and will leave a meaningful, enduring legacy for future generations.

This is not just about infrastructure – it’s about what comes next in our economy.

If we can use the current capital investment pipeline and the economic options it gives us to create a growth vision we can all sign up to, we will have genuinely “spread the benefits of the boom”.