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1997 Workshop report"Sydney or the Bush" Institutional investors' views of how to attract investment to regional Australia

Lessons from 50 case studies considered at the Institutional Investor Information Service (IIIS) workshops held in Western Australia, New South Wales, Queensland & Victoria during 1997
....includes summaries of workshops held in Ballarat, Mildura, Wangaratta, Traralgon, Townsville, Ipswich & Perth.

Prepared by Australian Project Developments Pty Ltd, Canberra
on behalf of the Australian Council for Infrastructure Development (AusCID)
December 1997

Background

The Institutional Investor Information Service aims to improve the interface between the major institutional investors and various project proponents in regional Australia. It is managed by the Australian Council for Infrastructure Development (AusCID), the peak body representing some 45 of the major financial institutions, construction companies, consultancy groups etc.

A key element of the IIIS is the series of workshops in regions, whereby particular projects are explained and debated. The AMP and the Commonwealth Bank, and more recently other companies, have assisted greatly by making executives available at their own expense. Their involvement has been critical to the success of these workshops. (See Acknowledgements at page 43)

Observations and Recommendations

At the fourteen workshops conducted to date, we have examined 50 projects in terms of their potential to attract finance from institutional investors. These workshops have also provided an excellent insight into the constraints to specific projects, and hence their ability to generate wealth and employment in regional Australia. The projects comprise:

As part of the workshop arrangements, we also made 15 site visits across the Pilbara, Kimberley, Goldfields, South West (WA) and Central West (NSW) regions and held countless discussions with project proponents, mayors, councillors, council CEO's, company executives, CEO's of water and port authorities, and regional development practitioners.

We believe the IIIS workshops are an Australian first in terms of institutional investors working together, and at the `coal face' with the regional project proponents. Many of our findings translate into other regions and project circumstances - in order to facilitate the exchange of ideas, summaries of the most recent workshops are included in this report. The document is to be distributed all those who attended the workshops, as well as to AusCID member organisations and relevant Ministers and officials.

Based on our work to date, we make seven observations and suggested actions. They are an amalgam of the views and ideas of the institutional representatives.

Observation 1: Regional markets often lack critical mass

The generation of robust revenue streams is arguably the biggest challenge in terms of attracting institutional investment to regional projects.

Financiers are ever-vigilant in their search for sufficient users of a particular piece of infrastructure. However regional markets often lack critical mass and are too `thin' - regional projects have difficulty in demonstrating that there is sufficient ongoing demand.

Regional leaders acknowledge this, and the chicken and egg situation facing them - cities have the critical mass to grow spontaneously, while rural and regional areas have an uphill battle. The small towns are particularly disadvantaged, since the scale of their infrastructure requirements is generally too small to interest institutional investors.

The related notions of industry clusters and agglomeration economies were mentioned in various workshops, where strategic planning and the funding of particular pieces of infrastructure can provide the necessary focus for further private sector investment. Most of the port and tourism infrastructure exhibit these characteristics e.g. Mildura CBD/waterfront development, Bunbury port, Jervoise Bay.

Recommendations

Observation 2 - The preponderance of `public interest' in regional projects.

Many of the projects we examined have significant public interest aspects, which complicate matters for private investors who do not see their role as paying the government's way. If the private sector is expected to pay for public goods or services, then the rate of return will obviously be lower than otherwise - conversely, if governments are not willing to pay their share, then a stalemate is likely. Our consideration of the Sydney-Canberra High Speed Train project in fact identified legitimate areas for public funding - indeed without this, there are doubts that a commercial return can be achieved.

The problem lies in our inability to adequately determine that share of a project which is `public interest' (ie. a public good). There do not appear to be any economic or public finance models to help us differentiate between public and private interest. This can often lead to a stand off - or governments eventually picking up the tab, and attempting to claw it back through some form of tax.

At the workshops, we have discussed the notion of `cocktail' funding, whereby costs are apportioned in line with the beneficiaries (user or beneficiary pays). For example, the transport hubs (Kalgoorlie, Maitland, Dubbo, Wodonga) each have a case for some level of government funding, in line with external benefits associated with environment, traffic, urban amenity, public safety etc. We suggest that if governments could `regularise' a method of better identifying the appropriate level of public funding, then the involvement of private sector investors could be much enhanced.

It would allow governments to agree on a likely public funding scenario beforehand, and to indicate in the tender documentation (perhaps without being too specific) that public funding for part of the project would be available. Private sector financiers might then have an improved understanding of the dimensions and risk profiles of a project.

Recommendations

Observation 3 - The relevance of politics in regional infrastructure

Regional project proponents are well aware of the `window' for government funding which elections provide, particularly in marginal electorates. We detected an indifference by some people when we advised them that the financial viability of certain projects perhaps wasn't there - presumably they had already committed themselves to lobbying local MP's and Ministers. When governments succumb to this lobbying, it cuts directly across efforts to explain the need for project proponents to invest in feasibility studies etc. as a means of developing financially-sound, bankable projects.

We also observed that while regional bodies are generally innovative and forward-looking, some lack the financial resources or the commitment to fund feasibility studies.

Recommendations

Observation 4 - The Orphan syndrome

There is continuing evidence that projects in the `below $20m' category will not attract private sector interest unless tendering costs are significantly lowered, or they can be bundled into bigger projects. Ideally we should aim for both. Otherwise many small projects with good rates of return will continue to be ignored because of nagging doubts about low population growth, or overheads, or the tendering costs involved.

These small projects are the so-called `orphans' to which Dennis O'Neill refers. The small water and airport projects are good examples. They can be vital to the proper functioning of a regional economy, but currently attract nil interest as a private financing opportunity because tendering costs can add up to around $400k - $500k even on a $5m project (or $8-10% of costs). The problem seems to be exacerbated by the impact of Compulsory Competitive Tendering (CCT) on various water authorities and local government bodies. While CCT seeks to respond to accountability and value-for-money objectives, it can have undesirable side effects in terms of economic efficiency.

We have followed up this issue with the Victorian Government which has provided informal advice that a 1994 Act administered by the Minister for Housing/Major Projects enables `designated projects' to be let via limited tender. There are various provisos, including a minimum project value, a minimum of 3 pre-qualified contractors/consultants etc. This seems encouraging and the Department of Infrastructure and associated agencies are open to fresh ideas. There may therefore be scope to bundle 5 or 6 `Stanhope Water' projects to test the feasibility of private sector equity in water resources (The Riverland water project in SA involved the bundling of some smaller projects).

Recommendation

Observation 5 - Interdependence of Projects

The workshops brought home clearly the high level of interdependence between projects, and that one needs to take a helicopter view to see how various pieces of infrastructure can coalesce to provide an economic framework for private investment. This is evident in in Gippsland where the economics of a proposed new port (Port Welshpool) arguably depend on timber and coal exports, which in turn require cost-effective shipping out of the region. The achievement of significant timber tonnages may also require some major changes in land use patterns in the region, together with some best practice water conservation and irrigation. Similar interdependencies can be seen in the Bunbury area.

This suggests that apart from the bundling of small projects of a similar type (e.g. water), there may be scope to bundle interdependent projects from within the same locality. There are obvious pros and cons of this, but it seems worth investigating.

The workshops have also highlighted the interdependence between infrastructure projects, property/commercial developments and venture capital investments. The distinction is important for the investment community since different financing techniques are involved. In order for regional project proponents to properly develop and `position' their projects, the three distinguishing characteristics of infrastructure projects should be reinforced - a monopoly or limited franchise, an essential service, and a single use.

Recommendations

Observation 6 - The need to think outside the square

On occasions we encountered projects which had hit the proverbial `brick wall' - in some cases, the reasons were impeccable (i.e. the project is not yet viable!) However, in the majority of cases the problem seemed to be the lack of a sufficiently big, broad or holistic view. Some people are too easily discouraged and not able or willing to think outside the square. This means that relatively small impediments are enough to close down people's thinking.

An opposite example is where the Twofold Bay (Eden) port has moved into final funding stages because the proponents mounted a case based on extensive consultancy work, and cooperation across some 14 councils and three RDO's, in the context of the South East Australian Transport Strategy (SEATS). This enabled the substantiation of this port as part of a whole economic infrastructure, and ensured that it was not easy prey to minority groups/issues. The SEATS agenda also involved key State agencies, which meant that issues `outside the square' could be taken into account.

Recommendation

Observation 7 - Don't stop now, it's getting interesting

The workshops have confirmed the benefits of continued interaction.

The regional project proponents have appreciated the opportunity to get inside the heads of institutional investors - particularly to better appreciate the various risk factors. They have also accepted the challenge to think outside the square, but institutional investors need to keep in contact to provide the necessary reality checks. This is a very important future role for the institutions.

The institutional investors have also learned a good deal. The majority of the 18 executives participating in the workshops have had little exposure to projects in regional Australia outside some of the electricity and gas projects. The workshops have provided a reality check for them as well, and is useful `conditioning' since, as the larger urban-based infrastructure projects are progressively funded, the focus should shift towards the smaller projects in the regions - for example irrigation, sewerage, co-generation plants, transport terminals, regional airports, and tourism facilities.

Queensland and NSW are looking to further workshops in early 1998. These workshops will provide the various players - AusCID, institutional investors, regional project proponents, governments - with further opportunity to explore various issues in a specific project context, and thus adjust their respective thinking and approaches to project development.

Recommendations

Project proponents utilise the IIIS mechanism.

All stakeholders reflect on the lessons learned from the initial 50 projects, and apply them as appropriate to other projects and their day to day thinking.

Table 1 - Projects considered at the 1997 IIIS workshops

Water (13)

  

Kalgoorlie - Esperance water pipeline

315.0

Kalgoorlie wastewater treatment plant

2.4

Kemerton Industrial Park - water supply (WA)

16.0

Pokolbin water pipeline (NSW)

up to15.0

Tandou/Menindee Lakes (NSW)

8.1

Tumut - Visy Paper mill - water requirements etc.

30.0

Robinvale Irrigation & Drainage scheme

30.0-100.0

First Mildura Irrigation Trust (FMIT) Horticultural Expansion

250.0

Stanhope water treatment (Vic)

4.0

Korumburra-Leongatha water works (Vic)

10.0

Rosedale sewerage pre-treatment (Vic)

5.0

Flinders Dam, Richmond, Qld

80.0

Lockyer Valley recycled water, SE Qld

250.0-350.0

   

Transport hubs (4)

  

Kalgoorlie - Boulder

n/a

Maitland

n/a

Dubbo rail freight

18.2

Wodonga freight centre

n/a

   

Energy (6)

  

Kemerton gas-fired power station (WA)

117.5

Oakagee Port - power station/port (WA)

1,000,000.0

Western NSW gas-fired electricity generation

50.0

Leongatha - natural gas reticulation (Vic)

10.0

Energy Recovery from Biowaste (Queensland)

n/a

Derby Hydro Power (WA)

125.0

   

Marine (5)

  

Jervoise Bay marine precinct (WA)

180.0

Bunbury Port container handling

8.0

Twofold Bay port (NSW)

(0ption 2) 12.0

Port Welshpool Deepwater Port (Vic)

30.0

Dampier Marine Services Industrial Estate

50.0

   

Tourism & Urban Development (11)

  

Port Kalbarri harbour/marina (WA)

25.0

Honeysuckle (Newcastle) marina

10.9

Ballarat Hotel/Convention Centre

25.0

Warrnambool Marine Centre

0.0

Mildura CBD & waterfront development

116.0

Mildura marina

50.0

Wodonga - Riverland Interpretative Centre

n/a

Panorama Cable Car, Townsville

6.5

Spaceworld, Logan Shire, Qld

est 10.0

North Ipswich rail precinct

45.0

Ipswich Rivercat

n/a

   

Airports (2)

  

Geraldton

7.5

Learmonth

9.1

   

Rail (2)

 

Sydney - Canberra high speed train

  

Ballarat-Geelong standard gauge rail

9.0

   

Roads (1)

  

Murray River Crossings

105.0

   

Forestry (4)

  

Central Victoria Farm Plantations

n/a

Plantations North East, Victoria

220.0

Gippsland Plantations

n/a

Softwood Sawmill, Ingham, Qld

15.0

   

Agriculture/Mariculture etc (2)

  

Kuruma Prawns, Abbott Point, Qld

12.0

Killarney whiskey, SE Qld est

5.0

Ballarat Workshop, 16 September 1997

Speakers: David Miller (Business Ballarat), Michael Ronaldson (Federal Member for Ballarat, and Parl. Secretary to the Minister for Transport & Regional Development), Adrian Wood (IIIS), Graham Pooley (AMP), Paul Stagnitta (CBA), Jeremy Brasington (ANZ) and Mary Stanley and David van den Brule (BusinessVictoria)

Attendance was around 50, and included a good cross-section of local government, regional and business leaders from other cities/towns viz. Geelong, Torquay, Warnnambool, Horsham etc. Mr. Miller, in his welcoming comments to participants, indicated that one of the biggest challenges is the attraction of investment into the region.

Mr. Ronaldson suggested that local economic performance determined national economic performance, and that access to finance was a critical element. He explained that the series of IIIS workshops across Australia were being funded by his portfolio, together with various State governments. The aim was to bring together those with the money for infrastructure projects with those needing it - this often requires `thinking outside the box', or indeed opening up an 8 or 9 sided cardboard box, given the number of issues which often need to be addressed. He urged participants to think long-term and to focus on ways to achieve the critical mass and revenue streams which are so critical to attracting investor interest. He also flagged the Howard Government's announcement of a $500m Rural Package earlier that week.

Mr. Pooley of the AMP explained the various classes and characteristics of infrastructure, and noted the declining rate of return over time as the market matures. AMP has a stake in projects such as Yallourn generation, Transurban tollroad, Sale prison, Riverland water, APAC airports, United Energy. The key issues in the context of regional infrastructure include the need to contain bid costs, quality of ongoing management, how to exit at the end of the arrangement, and collateral benefits.

Mr. Stagnitta (CBA) spoke about the importance of understanding `risk' in its various forms, particularly since infrastructure projects are usually funded on a non- or limited recourse basis ie. no access to the balance sheet. This means that cash flows must be sufficiently robust to generate an adequate return on investment. Critical mass is important as are defined revenue sources. The CBA will look at a mix of debt and equity, and suggests that regional project proponents be willing to do their homework.

Mr. Brasington (ANZ) suggested that infrastructure underpins society - it doesn't drive it. The two recurring things are equity and debt, with the latter being more risk averse. He indicated that while numerous projects and concepts were brought to them, many did not have sufficient supporting information. However, the fundamental concept or idea is the most important - and one can usually tell within 5 minutes if a project idea has commercial merit.

Mr. van den Brule (BusinessVictoria) argued that it is very important to get infrastructure right. His organisation likes to work in partnership with others to facilitate improved prospects for projects. We need to be open and think laterally. He appreciated the wide representation of the workshop and looked to working with them.

Project 1 - Four Star Hotel/Convention Centre

Description

4 star hotel/ convention centre complex, with 150 rooms, and catering for 1,000 convention guests. Gaming facilities are also a possibility. Total cost of $25m.

Surveys have indicated that a large number of conferences and conventions could be held in Ballarat if such a facility existed. An infrastructure audit under the auspices of the Victorian Government indicated that an Eureka Stockade Centre was the no.1 need, followed by a convention centre. The market is the growing number of interstate and international tourists, as well as Australian and international business people, who regularly visit international companies in the vicinity, the University of Ballarat and Ballarat Health Services.

Conference organisers are apparently keen to utilise non-capital city locations, and Ballarat's tourist attractions (Sovereign Hill/Birthplace of the Republic, Lake Wendouree, Begonia Festival etc) position it very well. Its proximity to Melbourne (1.25 hours from Melbourne by a major highway, and 1 hour from Tullamarine Airport) make it ideal for corporate functions and family breaks from capital city life.

Mr. Eugene Kneebone of the Ballarat City Council indicated six positives - an excellent choice of sites (either around the Camp Street which is the epicentre of a proposed arts precinct, or at 5 other locations); incentives from Council (rate relief, project facilitation, advocacy); demonstration of need; tourism attractions; assistance from government agencies (e.g. design competitions, feasibilities); and political purpose and will.

The missing ingredient is risk capital. Asian investors and Australian super funds have looked at the proposal, but have not yet been forthcoming.

Comment

Mr. Brasington (who grew up in Ballarat), felt that economies of scale are the key. Big cities obviously have it, and there seems to be a stigma on the rural sector. People want to be near casinos, nightclubs, theatres. He suggested that Ballarat should not try and compete head on, but position itself by offering a softer option based around Lake Wendouree, the gardens, the history. He felt that the conference facility aspect was the stronger case for funding.

Mr. Bruce Clark, a former Council Commissioner with a close knowledge of the project, said that the State tourism department saw it in a positive light, but the superannuation funds say they cannot afford the risk, notwithstanding the many attributes of the city and environs.

Mr. Stagnitta said that the project was clearly a property transaction, and driven by tourism which is a cyclical business. The demand risk is of an equity-type. Mr. Pooley agreed, and noted that it doesn't fit the three basic requirements of an infrastructure project - namely a monopoly aspect, a single purpose, and an essential service.

Two comments from the floor were that perhaps this project is at the wrong end of the equation - we need to be concentrating on value-adding our raw materials, and since Ballarat is rural it may be better to focus on wool and similar.

Mr. Kneebone indicated that there was currently a bid in for Federation Funding in respect of the Camp Street precinct. This provided the possibility for State support. He indicated that Council had discussed the issue of taking equity in the project.

In later discussions over coffee, it was felt that the Camp Street concept, if supported by the Commonwealth and State governments for good public interest reasons (urban renewal, environment, history etc.) could provide an attractive site. It would provide a regional centrepiece to draw visitors to the city. Other tourism icons such as the Surf Coast, the Twelve Apostles, Ararat Pagoda, Grampians, Naracoorte Caves - although seemingly some distance away - all offered part of an internationally significant tourist trail, and a Ballarat Hotel/conference centre could fit into a wider scenario such as this. The weekend and corporate clients from Melbourne are obviously another target market.

Conclusion

While this project is a property development, there are some very significant public interest issues indirectly associated with it. viz. urban upgrade, historical importance to the nation (especially if the Republic eventuates), gateway to western Victoria. Accordingly, there may be scope for a public/private funding cocktail, whereby government agencies could fund certain public-type aspects (particularly if the Camp Street site is suitable) as a precursor to private sector investment.

Project 2 - Warrnambool Marine Centre

Description

Comment

Mr. Tom Lindsey, the former chair of the Green Triangle RDO, emphasised that the project was currently being considered by the Victorian Government, and the purpose of its workshopping was more to gauge investor reaction to commercial development of the wider marine tourism concept. He noted that Warrnambool was also famous for its Grand Annual Steeple and its 32 hurdles - the project proponents have already cleared a number of their own hurdles, and are intent on going the full distance.

He added that around $100m of community expenditure is likely in the Warrnambool area over the next 12 months.

Mr. Stagnitta indicated that it seemed to be a very appropriate piece of infrastructure to facilitate the tourism industry. He felt that it would be useful to have an idea as to what extent local businesses intended to utilise and leverage benefits from it.

Mr. Pooley explained that in the SA water project, a number of smaller projects were bundled together. He noted that the Warrnambool Marine Centre is a public good, and the general intention to linking it with other tourism /education/environment agendas was very sensible. He wondered whether some commercial projects linked to the wider agenda could be bundled to achieve the $20-30 million threshold of the institutional investors.

In the above regard, the proposed Hotel/Convention Centre proposal at Warrnambool is relevant, as would the similar project in Ballarat, which could be seen as complementary, as distinct from competing, exercises - that is, two facilities of this quality - but with different themes - could provide some powerful marketing opportunities on a national and international scale. The two projects could feed off each other, provide a tourism loop/trail, and thereby hold tourists in the region for longer periods.

Mr. Noske (Green Triangle RDO) commented that there were significant superannuation savings disappearing from the region, and that projects like these were critical in establishing some building blocks for the retention of savings.

Mr. Brasington confirmed the importance of identifying revenue streams for commercial projects associated with this concept, and agreed that the bundling approach was appropriate.

It was suggested that putting in place some of the ideas discussed would require a good deal of commitment, as well as a partnership approach. These ingredients seemed to be there. The possibility of a workshop of key facilitating agencies, including institutional investors, was suggested.

Conclusion

This project was considered to be a very interesting example of how public expenditure might be used to facilitate private sector funding of commercial projects. The idea of a follow-up specific workshop between public and private organisations should be pursued.

Project 3 - Ballarat-Geelong Standard Gauge Rail Link

Description

This project involves expenditure of $9m to enable the rail link between Ballarat and Geelong to be standardised. The particular problem is that the standardisation of the Melbourne-Adelaide line involves a routing from Melbourne via Geelong and then onto Ararat and westwards, thus by-passing Ballarat.

It was explained that the key economic corridor is now Melbourne-Geelong. If Ballarat is not part of a major transport/communication corridor, it will be on the back foot. There is a need to develop a stronger north-south corridor, with a better link to the Riverina and Sunraysia regions.

Mr. Alan McLean of the Golden Region RDO explained that a 1992 study by Econsult had costed the rail upgrade at $2m for the route to the west (ie. to Ararat) and $7m for the route to Geelong in the south. This would enable better two-way flows. The Ballarat-Geelong line upgrade would particularly improve the flow of produce from areas to the immediate north (eg. Maryborough) as well as the Sunraysia and Riverina, through Ballarat and on to Geelong.

A certain sense of urgency was indicated, since these rail links would link the heartland of Victoria with the port of Geelong. This access is considered very important, particularly since the roadlink between the two cities is "average".

Comment

Mr Pooley indicated that considerable interest is now being taken by institutional investors in railway infrastructure now that the Commonwealth Government has announced fundamental changes to allow private sector ownership of rolling stock etc. The track itself would continue to be owned by the State Governments - in this case VicTrack - and private investors and/or companies requiring movement of their output would pay a toll to use their track. However, robust revenue streams are required to drive such arrangments.

One participant indicated that the Alice Springs/Darwin rail project would have relevance for Ballarat, since a major transport corridor could develop from Melbourne through to Darwin. Given that we need to look ahead in terms of infrastructure requirements, this particular possibility needs to be monitored.

Mr. McLean acknowledged that for Ballarat/Geelong rail corridor to be justified on economic grounds would require the substantiation of a customer base, particularly those north of Ballarat. There is therefore a need for an updated market demand study, with realistic assessments of what tonnage might actually move onto this new track. In this regard, one of the panel suggested that the port of Geelong would presumably have an interest - and it is also instructive to note that this is now in private sector hands.

It was suggested that another key organisation which would need convincing is VicTrack, and perhaps a dialogue between the port of Geelong, VicTrack, Ballarat interests (including local companies) as well as industry/regional organisations to the north, would provide the way forward. This would include the above-mentioned market demand study.

Conclusion

A market demand study, if favourable, could be followed up with firm discussions with Victrack and IIIS advisers.

Project 4 - Central Victorian Farm Plantations

Description

This project involves connecting landholders seeking to develop farm plantations with equity providers. The institutional investment is required for the establishment of timber plantations on cleared, privately owned land as well as for ongoing management. The land would be supplied by the landholder in a joint venture arrangement. The CVFP region extends from Geelong through Ballarat to around Daylesford and Maryborough and then west to Terang. The project involves planting certain type of gums on some 100 properties across the region. Plantings of between 10 and 40 hectares of land on each property is envisaged.

The project benefits are fourfold:

The key stakeholders are the landholders, CVFP, 14 local government municipalities, the Victoria Government via the Private Forestry Council, and the Commonwealth Government via the DPIE Farm Forestry program.

Comment

Mr Pooley suggested that project size may not be the issue. Companies like Amcor and Fletchers are very relevant, and hence obviously need to be involved in the initiative at some point. Whoever the investor is, there would need to be an exit arrangement. AMP could take an equity position through a listed company if the figures looked attractive.

It was suggested that projects like this often start out being driven by a public interest but can become significant opportunities for private investors. It would be interesting to know the level of interest from major timber producers/millers, since they are the key given that they are expected to purchase landholders' timber output some years hence.

It would seem appropriate that AusCID is kept informed of progress with this project in order that institutional investors could provide inputs at key points.

Conclusion

This project could have some very significant long-term investment opportunities for the private sector. Although at the early stage, it would seem appropriate to keep investor groups fully informed, and provide them with an opportunity to input into deliberations.

Mildura Workshop, 17 September 1997

Speakers: Cr. Eddy Warhurst (Mayor of Mildura), Adrian Wood (IIIS), Graham Pooley (AMP), Paul Stagnitta (CBA), Terry Fitzgerald (BusinessVictoria), and Rod Brown (Australian Project Developments)

Councillor Warhurst opened theWorkshop and indicated his own strong interest in how institutional investors can assist in regional development, particularly in areas such as the Western Murray and Sunraysia where there are significant projects on the horizon.

Mr. Wood outlined the background to the IIIS, and its essential aim of providing a two-way interface between regional project proponents and institutional investors. He indicated that Mr. Rod Brown would be providing an outcomes report on these workshops, whereby each project is brought to the attention of the AusCID network of companies, as well as key Commonwealth and State portfolios.

Mr. Pooley (AMP) explained the 3 key characteristics of an infrastructure project - namely its monopoly or limited franchise requirement; essential service; single purpose. He referred to the tradeoff on almost every project between risk and return. He indicated that rates of return on infrastructure projects had progressively fallen over the last 5 years or so as the market matures and organisations become more familiar with the product.

Mr. Stagnitta referred to the need for robustness of cashflows and the need to be innovative. Every project is unique and different financing solutions may be required. He indicated that institutional investors are loathe to become involved in projects less than $25-30 million in size because of the bid costs involved (which can be in the $500,000 upwards range). It is therefore important to look at bundling of projects.

Project 1 - Robinvale Irrigation and Drainage Scheme

Description

Comment

Mr. Stagnitta asked for confirmation that the project involves the upgrading of existing as well as new infrastructure, and enquired about the likely size of the revenue stream. Mr. Ron Dudley (SWRA) indicated that these could be made available. These figures would incorporate the new additional costs into the overall rate, therefore enabling the SRWA to recoup its investment.

Mr. Chris Stolz, the CEO of SRWA, said that one concern is that the new expenditure might have to be met by jacking up water rates, which is difficult when various growers are under pressure from the Government's citrus decision etc. In view of the ageing of the pipeline/pump infrastructure, an asset replacement scheme is needed, and that perhaps institutional investors can be involved. The institutional investors advised that they could look at equity as well as a debt finance arrangement.

Mr. Stagnitta suggested that the SRWA might entertain a larger scale project, put it to tender, and be willing to work with local and overseas operators who have real skills in this area.

Mr. Brown suggested that this could be a very significant regional project. It has employment generation aspects, an export constraint aspect, and environmental dimensions. The project proponents might think about it as a best practice model, which could also focus on any opportunities to achieve construction efficiencies eg. the cost of piping, the cost of laying, work practices etc.

Mr Dudley indicated that the project could quite easily be scaled up to $100 million or above, and that the SRWA would give further consideration to this.

In later discussions, it was suggested that further thought be given to what type of structure could maintain effective ownership with the SRWA, but also provide for the operational side of the project being undertaken by private operator. This would be a type of outsourcing, enabling private sector efficiencies and perspectives to be introduced. A financial arrangement delivering zero increase in water rates might also be an aim. If construction cost savings could also be achieved, these could be passed on to the growers, thus improving their competitive position.

Conclusion

This project has potential to be a model water infrastructure project. It was agreed that costings would become clearer once Sinclair Knight complete the feasibility study and cost benefit analysis. In the meantime, it was suggested that the parties give thought to how an innovative financing arrangement and structure could be put together, and whether the Commonwealth and State Governments would be interested in facilitating some part of this project. The prospects of it being scaled up to around $100 million is also being examined.

Project 2 - Murray River Crossings

Description

There are some 30 bridges across the Murray River which are considered to be in disrepair. Eight bridges in particular have been identified as requiring urgent attention - Robinvale, Echuca, Cobram, Corowa, Swan Hill etc.

These 8 bridges have a combined repair/refurbishment cost of $38.4m - this would extend the life of the bridges but not meet the needs of the road system. This option also entails continuing high maintenance costs since the designs and construction materials are generally outdated. It is therefore proposed that these 8 bridges be replaced, at a total cost of around $105m.

Mr. Laurie Eakin, CEO of the Western Murray RDO, explained that the problem had become more acute since the 1991 Premiers' Conference. This agreed the Commonwealth's role be confined to national roads, States being responsible for designated State roads - most others fell into `local roads'. A submission had been made to the Vaile Committee pointing out that these bridges were a declining asset and were restricting economic development. The Robinvale bridge, for example, is only one lane. It is currently undergoing a $5m upgrade - but should have been replaced.

It was emphasised that these bridges are part of the national transport infrastructure, and provide the essential linkage between the nation's two largest domestic economies and export facilities. The region is recognised as one of our fastest growing agriculture/processing areas.

Comment

Mr. Eakin suggested that tolls were not the answer - but that a shadow toll would be preferable. The payback to the investor/constructor would need to be negotiated between governments. A sweetener by way of a government grant under the Federation Fund or similar might improve the return to a sufficiently attractive level. He felt that it was a difficult project, but nevertheless exciting - it has regional development, environment, safety, and social aspects to it.

Mr. Pooley agreed that a shadow toll would be the preferred option, whereby a road counter would provide the data to determine how much governments would pay to the owner of the bridge. This system would also ensure that there would be no diversion around the bridge.

Mr. Stagnitta indicated that cheaper finance might be available due to its government-backed nature. It was also suggested that the private sector could probably finance and construct these bridges cheaper than public authorities - it was noted that the costings provided were from the RTA, and that efficiencies may be possible if a suite of say 5 bridges was built by the one consortium.

Conclusion

It was agreed that projects such as this were interesting from both a long-term development viewpoint, as well as from a policy perspective. However the commercial viability of the project is currently difficult to assess, as is the apportionment across three levels of government of the considerable public benefits. Nevertheless some form of mixed public/private funding (with public aspects being clearly defined), with a private sector consortium handling the design, construction, funding and management could be envisaged.

Project 3 - Mildura CBD & Waterfront Development

Description

This project is part of the Sunraysia 2000 regional plan incorporating a land development package unique to the Murray River. It involves the relocation of a freight centre and a new transport interchange; medium density residential development, service station, office buildings; re-routing of roads; commercial/tourism precinct, with interpretative centre, restaurants, convention centre; and an arts precinct

The project benefits include significantly improved economic/tourism opportunities, the prospect of linking the CBD with the Murray River, improved visual and environmental amenity, and short and long term employment generation.

Mr. Bill Nichol of Mildura Council explained that the project had wider implications such as the integration of the rail with the standard gauge, and an upgrade of the regional airport where Council has spent $3m, but more is required. Some 100,000 passengers/year use the airport, and with a levy of $4 in/out, this generates $800k pa.

The total cost of the project is estimated at $116m, comprising $19m from the public sector, $90m from the private sector, and $7m possibly from mixed arrangements. The proponents are looking at attracting funding from the Heritage Trust in respect of certain stormwater construction.

Comment

Mr. Stagnitta felt that its mixed funding aspect made it difficult to assess, although this might be very necessary for it to proceed. If an overall perspective is applied, the revenue streams are a combination of property rents and cashflows from commercial projects. The project is a classic chicken and egg situation - what part of it kicks it off? Once the project begins moving, a cluster effect would presumably commence.

Mr. Pooley agreed with the above comments, and noted that since it was a commercial property deal with significant tourism aspects, there would be economic risks associated with the normal business cycle. There is no monopoly element or essential service aspect to it - hence it's not an infrastructure project per se. Nevertheless, it is a very interesting, visionary project worthy of closer inspection.

The project was likened to the Honeysuckle Creek project in Newcastle, which had been funded by a mix of Commonwealth, State, local government and private sector funding. This project has been a key part in the reinvigoration of Newcastle's CBD and commercial activities associated with it.

Conclusion

This project is appropriate for placement on the IIIS project register, but warrants prior investigation by an IIIS investment adviser. The public aspects of the project are noteworthy - hence the possibility of Commonwealth/State/local government support should be ascertained.

Project 4 - Mildura Marina

Description

Involves the development of a 12.5 ha parcel of land on the Victorian bank of the Murray River, next to the Chaffey Bridge.

Proposed expenditure is $50m and includes the following elements: marina catering for 120 craft, slipway, refueling berth; specialty shops, cafes; conference facility, 120 room 3 star hotel; residential accommodation; restoration of the original bridge as the link across the marina.

The project benefits include a controlled environment for watercraft, transformation of the city's northern gateway, tourism and commercial focal point, and substantial jobs.

Comment

Mr. Bill Nichol of Mildura Council explained that this marina would be the first on the Murray. Some of the distinctive features include the use of the former bridge span across the Murray, and the best practice environment aspects of the mooring area etc. The proposal is currently undergoing an EIS.

Messrs Stagnitta and Pooley suggested that this project was closely allied with Project 3 and that their comments were virtually identical - viz. a seemingly quality commercial development which would require close evaluation to determine the robustness of revenue flows. The mix of public and private benefits was another similarity, although the public aspects of this particular project were probably less than the larger project.

It was observed that the marina concept might provide an opportunity for a small-scale aquatic industry to develop, benefitting from the various synergies associated with the overall development.

Conclusion

As for Project 3

Project 5 - First Mildura Irrigation Trust (FMIT) Horticulture Expansion

Description

Comment/Conclusion

This project is an interesting one, and potentially very significant to the economic development of the region. It was not considered in detail at the workshop, but subsequent discussions suggest that the IIIS Project Review Service should be utilised. This would provide advice, inter alia, on various funding options.

Wangaratta Workshop, 22 September 1997

Speakers: Bernard Young (BusinessVictoria), Dennis O'Neill (AusCID), Graham Pooley (AMP), Kath Baker (CBA) and Rod Brown (Australian Project Developments)

This workshop was attended by around 35, with a good mix across local government, development organisations and major businesses. The participation of Minister Bill Baxter also facilitated the discussion.

Mr. Young indicated that the Victorian Government was interested in attracting private sector investment into the State by assisting councils to develop various types of infrastructure, and gave examples of Tatura water and Euroa township as where this has been achieved. He referred to the Rural Community Development Scheme being relevant for community assets, such as the King George gardens in Wangaratta. He also indicated the desire of BusinessVictoria to work with local groups to develop ideas and projects.

Mr. O'Neill explained the significant changes underway in terms of infrastructure financing and the role of the private sector - the basic requirements of institutional investors were summarised, as was the membership of AusCID and the objectives of the IIIS.

Mr. Pooley (AMP) explained his organisation's interest in regional infrastructure (see Mildura summary), and noted that the expected rates of return on infrastructure projects in Australia was falling over time as the market begins to settle.

Ms. Baker summarised the CBA's involvement in infrastructure to date (viz. Solaris Energy, City Power, Hazelwood, Brisbane Airport) and explained the various types of risks which can impact on a project's viability. Regulatory risk was very important, and the impact of Commonwealth/State policies was emphasised in this regard. She also referred to the need for robust revenue streams, the fact that `cash flow is king', the significance of harmony between project participants, and the need to generate critical mass.

Project 1 - Water Treatment Plant - Stanhope

Description

Involves the construction of water treatment facilities and associated works at Stanhope to provide WHO standard water to the Bonlac Foods milk processing factory and to the township (population of 500, about 20km west of Shepparton)

Capital expenditure is estimated at $3.5m to $4.0m, representing the construction of a 10ML/day water treatment plant, as well as an 190ML raw water storage and associated pumps/pipes. The projected demand is 1.6ML for the township (stable), and 7.0ML for the Bonlac plant but rising to 12.0ML by the year 2010.

It is proposed that Bonlac would enter into a long-term take or pay contract for a minimum 900,000KL per year for 15 years, with the bulk water entitlements being negotiated between the parties and Goulburn Murray Rural Water Authority.

Approvals are required from the Victorian Treasury and Bonlac Foods Ltd.

Mr. Laurie Gleeson, the CEO of Goulburn Valley Water, described the considerable investment in water infrastructure underway in the region eg. the tertiary treatment plants in Shepparton ($17m), Mooroopna ($4m) and Tatura ($4m). He explained that Bonlac, previously located in Shepparton, had moved to Tatura to take advantage of a greenfield site. Access to infrastructure finance is not critical in view of the currently low interest rates and the fact that the Authority is lightly geared. However, the Authority needs to undertake ongoing water infrastructure upgrades.

Comment

Mr. O"Neill suggested that this project was similar to one at Kalgoorlie, where both the town and the mines need better quality water, and some innovative thinking is required to find the best solution. Given that the tendering costs for this project could be around $500k (or over 10% of its total value), one needed to think outside the square - for example, everything may not need to go to tender, and a limited tender may be an option. He said that unless the costs of tendering can be lowered, then projects such as this could stay in the orphan category. Ms. Baker agreed with this assessment, explaining that due diligence could total $500k.

Mr. Gleeson added that there were also costs from the tenderers' perspective as a result of probity and accountability requirements

Mr. Pooley indicated that AMP's experience with the Riverland water project involved the bundling of some smaller projects, and had kept tendering costs in check.

Minister Baxter suggested that one option would be for the company concerned to fund the project and to on-sell some of the water to the town. Mr. Gleeson said that this approach might be also relevant to Girgarre, a town with a population of 200.

Mr. O'Neill said that options such as those being discussed had to be taken seriously - as the big infrastructure projects disappear, the marketplace will have to come to terms with smaller projects. Bonlac may say it's not its core business to be financing water projects - consequently an alternative option might be for Bonlac to outsource to another private sector player. Mr. Baxter noted however the likelihood of opposition to the privatisation of water, and thus the Macquarie Bank's prediction of a 50% privatisation of water resources by around 2010 is perhaps ambitious.

If privatisation options are too problematic at this time, a debt arrangement would be the logical alternative. The scope for a cocktail of public funding (ie. from State/Commonwealth/local sources) would not appear great unless some convincing best practice aspects could be built into it eg. as part of a bundle of small, strategically significant projects which could not otherwise happen without a hike in water rates.

Conclusion

This project could provide a litmus test on two grounds - whether other like projects could be bundled with it to form one sizeable tender, and whether any modifications could be made to local government tendering procedures (CCT) to reduce tendering costs on smallish projects. The project should be considered as part of a bundle for consideration within the IIIS mechanism.

Project 2 - Wodonga Freight Centre

Description

This project involves the development of an inter-modal freight centre ie. rail/road interchange, freight transfer, storage, consolidation/break bulk, vehicle storage, maintenance, transit facilities, bonded stores.

Wodonga currently operates as a transport hub on a limited scale. It is a major road terminal and transit point, is a railhead for the Victorian broad gauge line, a transfer point for the standard gauge, a depot centre for Alpine, Snowy and Riverina transport, and is a transport node for surrounding manufacturing and transport companies.

Mr. Young (Business Victoria) said that the project had numerous benefits, including a reduction in freight transport times, more competitive pricing for inwards and outwards goods, reduced traffic in urban areas, the ability to load/unload direct for export/import, cost efficiencies via optimal usage of each transport mode. He indicated that while costings are not yet available, a preliminary feasibility study is underway.

Comment

Ms. Baker indicated that the project was not strictly infrastructure, but nevertheless seemed an admirable property project. The existing concentration of manufacturing and transport activities suggested that the area had perceived advantages.

Mr. Pooley agreed and felt that there were elements of land capture which would assist in generating cash flows. One key issue is to ensure that a monopoly position is maintained, which would arguably require agreement from various local councils in NSW and Victoria not to duplicate such a facility within a certain radius of Wodonga. Business demand would be another obvious requirement.

Mr. O'Neill felt it was a very attractive project, and similar to ones at Dubbo and Maitland which had been workshopped some two months ago - there may therefore be merit in comparing notes. Key questions include the ownership of the land, whether there are State laws or other processes involved, reaching agreement among 7-8 councils, whether a name player such as Brambles or Ansett could play a lead role and hence defray some of the market risk, and what land values could be captured.

The lack of cost competitiveness of rail was raised by Mr. David Mann who indicated that rail cannot compete with 4 hour road deliveries to Melbourne. A move to standard gauge would however provide an 8 hour trip between Melbourne and Sydney. It was suggested that the region needed to be part of the national rail system, but the Albury-Junee section was not standard gauge.

Minister Baxter felt it important to address the public interest aspects of the Wodonga Freight Centre. This would enable a better idea of the relocation of the rail yards etc. out of Wodonga and the likely costs of land purchases, as well as the costs and benefits of the standardisation of the Albury-Junee section.

There was also discussion about the potential to develop an airport at Barnawartha to enable a three-way transport interchange.

Conclusion

This project is a potentially very significant one. While it has undeniable best practice features, its long-term viability will arguably depend on whether rail can compete effectively with road over medium distances. This will be influenced in part by the National Rail agenda and the attitudes of the Commonwealth, Victorian and NSW governments.

The next step is to consider the results of the feasibility study, which should give a better idea of the likely demand for the Freight Centre, and whether there is justification for public funding of any part of the Centre and/or the Albury-Junee link. At face value, the lack of a standard rail link to the north is the major limiting factor.

Project 3 - Plantations North-East

Description

Involves the establishment of up to 130,000 ha of softwood plantations in the immediate region by the year 2020 - an effective trebling of forest resources. Output would be mainly destined for export markets where demand is growing at 2.3% pa.

Mr. Bernie Evans, Executive Officer of Plantations North East, indicated that the estimated capital expenditure for establishment is $220m, based on $10m per year over 22 years. The land purchase requirement is $264m over the same period - an alternative is to lease the land at $0.75m per year, rising to $16m per year over 22 years.

The project would increase the long-term sustainable softwood supply by up to 400%, and underpin a major processing and export log expansion.

The land base would be private land.

Comment

Ms. Baker indicated that the CBA was well aware of the Forestry Plantation agenda unfolding in various regions, and the encouragement being offered to farmers as a result of tax rulings.

Mr. Pooley indicated that the AMP has not invested specifically in the industry, but has an interest through its ownership in Amcor, Kimberley-Clark etc. He noted the long pay back period. One possibility would be a portfolio approach, perhaps via a Trust mechanism (Listed Trust).

Mr. O'Neill suggested that it was important to separate out the public, as distinct from the private, interest. In response to a question on why Australia has to export woodchips, he suggested that the ability of Australian timber producers to capture the benefits of downstream processing depended largely on being as competitive as possible in terms of energy, transport and other cost elements as implicit in the Hilmer micro-economic reform agenda.

Mr. Evans indicated that some cashflow would be available within 10 years, and that first thinnings would generate earnings after 14-16 years. He argued that the potential for agribusiness was greater than the figures suggested, and that there was the possibility of government funding of various R&D and export aspects.

Conclusion

See comments in respect of Victorian Farm Plantations (Ballarat workshop), which is a virtually identical project.

Other Projects

Three other projects were briefly discussed:

Mr. Pooley made the general observation that tourism projects had particular market risks, while Ms. Baker indicated that the `coach stop' issue was a typical enquiry, and that numerous small towns were similarly affected. She felt that this was more in the court of private operators. Various additional suggestions were offered over lunch, including the option of raising these projects with the Victorian and Commonwealth agencies. Contact names were provided.

Gippsland Workshop, 23 September 1997

Speakers: Mr. Bill Bodman OAM, Mr. Dennis O'Neill (AusCID), Mr. Graham Pooley (AMP), Ms. Kath Baker (CBA), Mr. Mervyn Moon (BusinessVictoria).

The workshop was well attended, with around 40 people representing councils, Gippsland Development Ltd., private sector organisations such as Eastern Energy and Green Inc., and State government organisations.

Project 1 - Gippsland Plantations

Description

Gippsland Farm Plantations Inc. has the objective of achieving 240,000 ha of commercial plantations in Gippsland over the next 10 years, a net increase of 156,000 ha over current area.

The agenda is broadly the same as for the western district and the North East (see earlier) - in terms of scale, the Gippsland expansion would be 20% larger than that for the North East.

A well documented submission was tabled (available from AusCID or APD). It explains that Gippsland has Australia's largest integrated pulp and paper mill (at Maryvale), one of the largest and most technically advanced hardwood mills in the southern hemisphere, and some of the best tree growing conditions in Australia.

Mr. Rob Willesdorf of GFP Inc. explained that the internal rate of return was 6.7%, or 5.7% if plantation insurance was taken out, and that port infrastructure would be required (see Project 4).

Comment

Ms. Baker indicated that the CBA was well aware of this and similar projects, and that it lent itself to structured finance arrangements. Recent tax rulings were also relevant. She felt that the IRR at 6-7% seemed a bit on the low side (notwithstanding that they were conservative), especially given the 20 years until significant cashflows would be seen.

Mr. Pooley suggested that it was obviously important for the paper companies to be involved investment-wise in these plantations.

Mr. O'Neill wondered whether cheaper land was available for these plantations, rather than tying up what might be valuable agricultural land. It was explained that this was an option, but that yields would drop, and that the economics of the project was quite sensitive to yield. There was also a discussion about the possibility of using waste water to irrigate plantations in areas of lower rainfall. Mr. O'Neill wondered about the opportunities for value adding this resource, and was informed that there were significant sawmilling opportunities and other possibilities from native hardwood.

Conclusion

The project is of a sufficient scale to interest institutional investors and, as for the other plantation projects in Victoria, it was suggested that the paper companies be kept involved. Institutional investors should also be briefed on a regular basis.

Project 2 - Korumburra-Leongatha Waterworks

Description

Involves the upgrading of treatment plants to meet government policy concerning nutrient reduction, the construction of a treatment plant for industrial waste and the upgrading of pipelines. Particular benefits are the removal of the antiquated disposal structure across Venus Bay and the opportunity to build state-of-art technology into the system.

Capital expenditure is estimated at $10m over next 3-4 years, and another $10m by year 2011.

Mr. John Stone of South Gippsland Water explained that the project is in its early days, and depends on the commercial and industrial demand. The main drivers are the Korumburra treatment plant, which is overloaded and discharging into Foster Creek. There is expected growth via Burra Foods, which is looking for overseas markets and needs clean water. The EPA is imposing increasing quality requirements for effluent, and there is good support from the Victorian Government for the promotion of food processing.

The project is being driven by a Steering Committee comprising the South Gippsland Shire, DCNR, Murray Goulburn and Burra Foods. Consultants GHD have developed 9 options, the preferred being as described above. Early indications are that $4.3m would be sourced from users, $2.2m from local government, and $4.0m from State government or the private sector.

Comment

Mr. Pooley suggested that the cheapest option might be for the authority to build it itself, using borrowings from the private sector, and with the possibility of some government contribution.

In answer to a query from Mr. Bodman, it was explained that the State Government was showing interest and that this might extend to some financial support.

Ms. Baker suggested that the level of need, and hence ability to contribute, by the major companies would be a critical aspect. This has not yet been firmed up.

Mr. O'Neill suggested that changed circumstances in relation to EPA standards, export opportunities etc. were driving the need to think outside the square - small projects on a stand alone basis were unlikely to find support from institutional investors. Amalgamations and more standardised contracts seem necessary. As Mr. Pooley and Ms. Baker implied, there is a challenge for the major local companies to think broadly - if they can't outsource, then perhaps they can internalise the project. It may also be an opportunity to invite other towns/regions into a bigger project agenda.

Conclusion

This project is very timely and important on a number of levels. It would benefit from having some professional advice via the IIIS mechanism. This should include the possibility of project bundling.

Project 3 - Rosedale Sewerage Pre-Treatment

Description

This is one of the key projects of Gippsland Water, involving a plant to treat effluent in the Regional Outfall Sewer, prior to its discharge into the open channel section. The capital expenditure is $5m initially, but the long-term solution represents an investment of around $30-40m.

While part of the problem is the odour from the open channel, there are other drivers such as reduced environmental problems across the wider system. The construction of the extended aeration waste treatment plant includes sludge handling facilities.

Mr. John Mitchell, CEO of Gippsland Water, explained that it has assets of $400m, and an annual budget of $60m (of which $20m is capital expenditure). There is interest in the development of energy-intensive clusters, and the fact that major purchasers of power bring world-wide networks. The suppliers of power (eg. Eastern Energy) also have these links. The environmental industry is seen as the industry of the future - hence the interest in institutional investors being somehow involved. Other stakeholders/users of this project include the power generators, the EPA, Australian Paper, Australian Leather Holdings, La Trobe and Wellington Shires.

Comment

It was noted that this is a relatively typical project, but arguably the tip of the iceberg in terms of future water infrastructure requirements for central Gippsland. The need for strategic links between the water industry and investors, involving some form of education agenda, was discussed.

The fact that Gippsland Water is lowly geared indicates that borrowings are one option. The alternative is to take in some equity, which could provide the conduit for the new technology required - the bundling up of this project with others is another related possibility.

There was some discussion of whether the accessing of R&D funding from public sources may be possible. This could also boost the rate of return of the project.

Conclusion

This project has similarities to Project 2 - it could have particular merit for certain institutional investors, but requires some linking with other projects. See `Overall Summary' section.

Project 4 - Port Welshpool Deepwater Port

Description

The construction of a full wharf, port handling facilities and the dredging of a deep water channel (10-12m). Estimated cost is $30m, a large proportion being dredging.

The location is Barry Point, Port Welshpool in South Gippsland. The local State MP, Peter Ryan, has been the driver of the project, and the Deputy Premier is believed to be supportive.

The demand is expected to come from raw logs (200,000 tpa), processed timber, wood chips, briquettes, prefabricated housing components, fast ferry to/from Tasmania. The off-shore oil rigs are another dimension, as is the Esso land at Port Welshpool - the latter could be a key issue.

Project benefits include the provision of an export port for Gippsland (as an alternative to Melbourne or Geelong) which is considered a major impediment to the efficient movement of bulk commodities. The timber plantation project now underway (Project 1), and the prospect of major exports of brown coal and energy-based manufactures, are considered to underpin the Port Welshpool project's long-term relevance.

Comment

Both the CBA and AMP felt that the fundamental issue will be the tonnages, and whether shipping companies will have the incentive to use the port. The Hastings port has recently moved into private ownership and its owners would presumably see Gippsland as a natural catchment.

There was some discussion as to whether Hastings port would be in direct competition - although some rationalisation and specialisation of cargo types between the two ports could be possible. Whatever happens in a Hastings-Port Welshpool scenario, the port of Geelong was seen as the likely loser in attracting Gippsland produce over the long-term. The fact that Hastings port is essentially a privately owned operation suggests that Port Welshpool should also be likewise.

The discussion then centered on whether the port could be a best practice model of stevedoring. Since it would be a greenfields site, it would be easier to implement efficient work practices, plant configuration etc. It was noted that Geelong was 50% more expensive than the NZ average in terms of stevedoring. The CEO of the Gippsland Port Authority agreed that the greenfield dimension meant that an exciting opportunity exists to do something differently and much better - improvements of around 60-70% should be the aim, and the regional leaders had to think about the port as providing the impetus for new industries.

Mr.O'Neill asked that the shipowners be added to the list of stakeholders.

Conclusion

This project could be a very significant one if some of the anticipated industrial and resource projects in Gippsland come to fruition. While the feasibility is still underway, the results will serve as a starting point for further examination of issues. The project seems very appropriate for IIIS evaluation.

Other Projects

Townsville Workshop, 28 October 1997

Speakers: Richard Power (Townsville Enterprise), Steve Wilson (Councillor, Townsville C.C.), Adrian Wood (AusCID), Mark Henschke (NAB), Mike Montefiore (HRL Morrison/Infratil), Carolyn Kerr (CBA), Michael Otago (Qld. Dept. of Econ. Development & Trade), Ian Johnson (LGAQ), Stuart Booker & Ian Munro (Qld Treasury) and Rod Brown (Australian Project Developments).

Attendance was around 60, with a good cross-section of business people and local and State government officials. Mr. Power opened the workshop with an upbeat presentation of the region's economic performance, with growth of 7.5% forecast over the next 12 months. High growth in zinc, copper, defence, power will be offset by low growth in public administration, housing etc. He also explained Townsville Enterprise's role as a regional development body. Cr. Wilson then sketched the major projects underway - the power station, port, minerals development to the west, Chevron gas etc. Building approvals are running at record levels, and there is an air of excitement about the city's future.

Mr. Wood explained AusCID's aim of promoting private sector involvement in infrastructure, the background to the IIIS, the key requirements of viable infrastructure projects, and the likely demand for infrastructure in Australia.

Ms. Kerr indicated that the CBA was one of the first institutions to be involved in infrastructure financing. It has 8 professionals in its infrastructure equity group, and has a stake in the Brisbane airport, the M4/M5 motorways in Sydney, power stations etc. She explained the importance of a monopoly/franchise situation and essential service characteristics, and the need to understand different types of risks. She highlighted the importance of a strong cash flow, business plans and best practice characteristics.

Mr. Montefiori noted that while governments come and go every 3-4 years, companies are judged every day by stockbrokers et al. He suggested that no genuinely commercial project will ever suffer from a lack of funds. If it founders, it is either not sufficiently robust, or is a low priority for the sponsors (despite what they might say). As a former senior Commonwealth and State bureaucrat, he appreciates the inherent conflict between government, with its emphasis on the public interest, accountability and a political profile, and the private sector which is driven by the maximisation of shareholders funds. Generally speaking, government officials do not understand commercial risk, while people on both sides do not appreciate the difference between economic and commercial benefits - jobs and exports are nice buzz words for governments, but they do not necessarily equal cash!

Mr. Henschke explained NAB's project financing operations and its involvement in various projects. He felt that one of the key issues is the overall ownership of the project - his interest is in ensuring that there are key parties who know the project, and who won't `cut and run'. There needs to be a genuine appetite for risk. The management structure needs to have experience, while clear and identifiable revenue sources are necessary. Risk factors need to be understood, while the demonstration of viability is obviously important. Due diligence of technical, legal, market, environmental issues is usually done by the banks or their specialist advisers. He suggested that one means of reducing up-front costs would be for project proponents to do their homework, generate the necessary data/information, and thereby minimise the time required in the due diligence phase. The early involvement of the institutions in terms of ball-park positioning is also important.

Mr. Johnson (LGAQ) felt that the involvement of the private sector in infrastructure was timely, given that public funds are limited and the many small projects at the local level. However the issue was not straightforward - some see a rise in costs and a loss of control, others see it as a means of building in innovation. There is a need for a comprehensive analysis of the pros and cons. His suggestion was for local government to develop broad specifications prior to calls for expression of interest from the private sector, and to then sharpen the specifications. The LGAQ is developing guidelines in this area.

Mr. Otago explained that the Queensland Government is currently awaiting a Commonwealth decision on changes to customs arrangements to allow activities associated with trade development zones. The State government had commissioned its own study on the effectiveness of TDZs in overseas countries - the broad finding was that those which had already succeeded had comparative advantages (location, infrastructure) and that the TDZ arrangements helped in reducing transaction costs. The Commonwealth's proposed changes to manufacture-in-bond could possibly see the development of various TDZs across the country.

Project 1 - Panorama Cable Car

Description

A cableway to the peak of Castle Hill (300m) on the edge of the Townsville CBD. Castle Hill dominates the centre of Townsville, and has commanding views over the Pacific Ocean, Magnetic Island and the city.

Total cost of Stage 1 is around $11.45m, including the cableway ($3.19m), building, carparks, landscaping ($4.66m), tourism experience fitout ($0.99m), fees, project management ($0.75m), land/development costs ($0.60m), promotion expenses ($0.40m), café, souvenir shop, furnishings, equipment etc ($0.56m)

Subsequent stages provide for a restaurant, function room, office building, home units at the top, and serviced apartments and a 200 room motel at the bottom of Castle Hill.

Price Waterhouse has estimated Year 1 net cash inflows at $2.1m, followed by $2.2 in Year 2. A return on assets of around 20% pa is forecast in the first two years.

The cableway would be the latest in detachable grip cableway technology. Passengers would be carried in six seater gondolas over the 800 metre, 5 minute route. The top station would house an interpretive facility, a licensed café, the tourist experience and a souvenir shop. The building design provides scope for the addition of the restaurant and function room.

The project proponents, AIS Investments Pty Ltd, has commissioned numerous reports viz. marketing study, project valuation, construction/fitout costs, financial modelling, cableway operation etc.

Mr. Richard Ferry, the principal of a local real estate group, explained that the AIS group is headed by an American Chinese, Mr. Chan, who has already invested some $12m in Townsville mall and hotel developments etc. In 1982 he bought the base station and land on the hilltop. Mr. Chan has had significant involvement in the gasware market in Australia (Primus stoves etc.)

Mr. Ferry considered that projects of between $5-20m were in limbo, because local financiers were only able to cope with financing up to $5m, and institutional investors were not much interested below $20m. Support from local and State government has been very good.

Mr. Chan is keen to attract a local Australian investor who is knowledgeable in tourism. He wishes to keep equity of between 20-50% - hence he is looking for around $6.0m from investors (perhaps a split of $2m debt/$4.45m equity), and to keep the operation lowly-geared.

Comment

Ms. Kerr (CBA) felt that the crucial factor will be the level of patronage. Mr. Montefiore (Morrison & Co) agreed, and it was noted that extensive tourist usage forecasts had been generated and that some of the demand data had been modelled on the Great Barrier Reef Wonderland.

It was also confirmed that equity finance is currently more expensive than debt finance, although there are understandably other considerations to be taken into account.

Mr. Henschke (NAB) suggested that consideration be given to the special angles regarding depreciation.

The discussion then moved to the need to position this project as part of a tourism trail or cluster, whereby other major attractions such as the Great Barrier Reef Wonderland (visitation of 150,000 annually, 20% from overseas), the Pandora Shipwreck Museum ($17.5m expenditure) with its `Bounty' connections, the Breakwater Casino, Magnetic Island etc. all formed part of a larger tourism agenda - instead of being seen as competing attractions, there should be scope for collaborative agendas.

The strong growth in the region and investor confidence as a result of the city's buoyancy is a plus in terms of market risk. The construction/technology risk is likely to be low, given Mr. Ferry's point about the design coming from a world leader - this should nevertheless be confirmed. The recent upheavals in SE Asian capital markets is noteworthy in terms of its possible effect on tourism numbers. The discussion on environmental aspects of the project was not extensive, and the state of play should be confirmed. The support to date from local and State government was noted.

Conclusion

This project is potentially a very significant piece of tourism infrastructure, linking well with existing tourist attractions. It also has residential/commercial aspects in subsequent stages. The project lends itself to IIIS evaluation and display on the IIIS Register.

Project 2 - Flinders River Dam

Description

The Flinders River has its headwaters midway between Townsville and Mt. Isa, and flows northwards into the Gulf of Carpentaria near Karumba. The idea of damming this river stems from the very significant flows during the monsoons.

The proposal involves an earth wall 2 km long between two ridges, approx. 10 km north west of Richmond (400 km east of Mt. Isa). A rough pre-survey estimate of the cost is $80m.

The dam would store around 600,000 megalitres - the annual flow of the Flinders River at the dam site is estimated to be in excess of 700,000 megalitres.

The proponents suggest that cotton crops totalling 12,000ha could generate $36m output annually - in recent correspondence, Queensland Cotton has indicated that the region's physical environment has the basic elements to support irrigated cotton development, and the topography would lend itself to the flood furrow system. The soil type, structure, depth is apparently suitable for cotton production and other crop rotational activities. The topography and soils are similar to areas west of Moree in NSW. Preliminary advice to the project proponents is that sugar cane, grain and cereal crops are also a possibility.

The State Government has agreed to fund a major feasibility study. On completion of this study, the final methodology and proposed funding would be investigated. The current ballpark suggestion is $60m from the Commonwealth (possibly via the Federation Fund) and $20m from the Queensland Government.

Comment

Cr. John Wharton of Richmond Shire indicated that the project would be environmentally sound in that all run-off would be controlled, and water rehabilitation would be a key aspect. Premier Borbidge is allegedly supportive if the feasibilty study proves it up. The cost of the project would include compensation for land and the movement of power lines.

Mr. Henschke (NAB) suggested that a very good long-term understanding of the hydrology of the site would be necessary, as well as the cropping aspects. He felt that there seemed to be no particular reason why the project `couldn't go' and that a grant or long-term equity from the State government appeared to be an option. A comment was also made that evaporation rates would be high in this area due to both the high temperatures and the relative shallowness of the dam.

Mr. Montefiori stated that he `liked water projects' and would be interested in following the progress of the project. The discussion then turned to the scope for a mix of public and private funding in respect of this project, given that there were broader economic benefits (externalities) as well as commercial benefits for companies.

Mr. Brown suggested that, at face value, it may be difficult to attract Commonwealth Government funding, particularly to the tune of $50-60m - while the Federation Fund and Heritage Trust were available, Commonwealth examples of involvement in dams are very sparse. Nevertheless, close liaison with State officials was recommended given that (i) the State might be more receptive to investing in the project, (ii) States do the first screenings of submissions prior to forwarding their priority projects to the Commonwealth. If the project could be positioned as a best practice environmental exercise it might attract Commonwealth government funding at the margin.

Conclusion

The completion of the feasibility study will shed more light on this potentially exciting project. The fact that the State Government has provided significant funds for the study is an indication of its serious intent. If the study is positive, the utilisation of an IIIS adviser and the IIIS Register would logically follow.

Project 3 - Softwood Sawmill at Ingham

Description

Softwood sawmill and dry milling operation providing a full range of rough, dressed, finger-jointed, kiln dried or chemically treated softwood timber, plus mouldings and round log products. Estimated cost of $15m. (to operational status)

Based on plantation timber, guaranteeing supply over 10 year span at approx. 70,000 cubic metres pa. Planning beyond 10 years indicates a resource of approx.160,000 cubic metres pa.

The licence by the State Dept. of Primary Industry to harvest the softwood plantations in the Cardwell/Ingham plantation area is the critical issue. Ingham Sawmills Pty Ltd (major stakeholders - John & Robyn Pelleri) is understood to be the only tenderer remaining for consideration by the Department, since Boral and CSR have withdrawn.

Ingham Sawmills is now inviting parties to discuss and/or present financing proposals for approx. 66% of the project cost. The proponents claim that financial analysis has indicated that such funding can be negotiated for repayment within the first five years of operation.

Mr. Keith Bagley, the spokesman for the proponents, indicated that the present mill is hardwood and that various critics had said the output wouldn't sell in southern markets - but they did! He indicated that the various risks are well-documented and understood, and that the project has been in the planning stage for 3 years.

Comment

Mr. Montefiori indicated that there is obviously another tier of important information which is not available to the workshop for confidentiality reasons. If this material stacks up, then it would, by definition, be capable of attracting private sector funding.

Mr. Henschke raised the volatility issue, in terms of demand/supply aspects, while Ms. Kerr said it was difficult to pass any comment without access to the details.

Mr. Brown indicated that from a national/State/regional viewpoint (as distinct from a commercial viewpoint), the project was a worthy one, given that the plantation has now reached commercial stage, and that there are employment and value added advantages of the project. He complimented the project proponents on their detailing of the `Key Risks' in the project profile - in summary, while technology and construction risks are considered to be minimal, issues to be addressed include volume, market and environmental risk.

Conclusion

This project appears to be very timely from an industry development viewpoint. The proponents are seeking $10m of capital (with an emphasis on debt). It is difficult to judge the specifics until the financial details are tabled, which very much lends this project to evaluation under the IIIS mechanism. The role of the QDPI in answering investor queries regarding some of the risk categories will also be important.

Project 4 - Kuruma Prawns

Description

Involves the farming of penaeus japonicus prawns, known in Japan as kuruma ebi - the most highly prized species. This species lives naturally in waters adjacent to Abbot Bay, which is near Bowen in North Queensland.

Abbot Bay Kuruma Ltd (ABK), an unlisted Australian public company, owns a large aquaculture site (641 ha) at Abbot Bay. The company is capitalised at $12.5m, and is offering up to 49.9% equity in the company in order to develop the site.

The first stage involves the development of 50 ha of ponds, with associated equipment viz. hatchery, seawater intake pumping system/pipeline, chilling and packing plant, workshop, feed storage, office, staff amenities, roads, accommodation etc. This infrastructure will be further utilised in Stage 2, which will incorporate a further 80 ha of ponds. The project would be the largest of its kind.

It was explained that the site is pristine - it is virtually unpopulated and the site would have access to unpolluted seawater which has a temperature ideal for growing two crops per year. The site is adjacent to National Highway One and is easily accessible to Cairns Airport.

Comment

Ms. Kerr indicated that exchange rates and transportation costs/scheduling would be risk areas that a financial institution would focus on. The support of the CSIRO, QDPI and universities was noted an obvious plus. Crop loss insurance would be required.

Mr. Montefiori felt that it had the hallmarks of a quality project with very significant value added. Mr. Henschke suggested that world market trends would, in his mind, be an obvious starting point. The IRR of 26.5% was in the right ball-park, and it was noted that this is a conservative estimate.

While the possibility of the involvement of a major Japanese trading house was discussed, it was felt that a more direct means of selling into the Japanese market would enable significant cost savings.

It was observed that the project requires quality infrastructure at a number of levels - mains power, labour, airport, good water, roads. The proximity of James Cook University and the Australian Institute of Marine Science is relevant, in that technical support could presumably be accessed at short notice.

Conclusion

This project appears to be very timely and likely to interest venture capital providers. It was suggested that this report could provide the basis for a follow-up, although the IIIS Register should also be utilised.

Ipswich Workshop, 29 October 1997

Speakers: Cr. Paul Pisasile (Ipswich C.C.), Wendy Protheroe (Qld. Department of Economic Development & Trade), Adrian Wood (AusCID), Haydon Coles (CBA), Mike Montefiore (HRL Morrison/Infratil), Ian Johnson (LGAQ), Phil Jardie (Qld. Treasury), Rod Brown (Australian Project Developments)

The workshop was attended by around 90 people drawn from across SE Queensland. The workshop was co-chaired by Ms. Protheroe and Cr. Pisasile.

Ms. Protheroe welcomed participants by urging them to fully participate and interact with the institutional investors. She emphasised that one of the key aims was to learn from the projects to be workshopped, and to `think outside the square' in order to progress some of the issues involved.

Mr. Montefiore, who was previously a senior executive in Queensland Treasury prior to moving to Morrison & Co., suggested that one of the reasons why Queensland doesn't yet abound with good private sector infrastructure is `deal ownership' - whereby various government agencies (eg. Department of Works) have preferred to do projects themselves. There is a need to find ways of shaking them loose. It's about projects and not ideology. He referred to the punishment received by investors if they get caught up with project `dogs' - hence the emphasis on rigour and due diligence, which stems from corporate law requirements. This explains in part why bidding costs are so high. His company's costs associated with (successfully) bidding for Perth Airport were around $4m, and the 4 or so unsuccessful bidders would have faced similar costs. However it is also a fallacy to think that `government money is free' - it is government equity, and equity is more expensive than debt. This is because when things go wrong, the ATO is first in the queue, followed by debtors, and lastly equity providers. One needs to understand risks and cover them off.

Mr. Coles (CBA) explained that he is also Chairman of the Infrastructure Association of Queensland. He referred to a report prepared by Mr. Fred Argy (former head of EPAC) which suggested that increased private sector provision of infrastructure would generate efficiency gains, provide infrastructure earlier, and free up government funds for other programs. Mr. Coles felt that there are very few areas where the private sector should be barred. The appropriate split between risk and reward is not fully understood as yet, and it also had to be noted that while contractors have traditionally led the infrastructure agenda, it is increasingly the financiers who are the key players.

Cr. Pisasile thanked the investor representatives for their frank preliminary views, and indicated that it was important to hear this. From a local government perspective, businesses need to kept informed.

Mr. Johnson noted that from the LGAQ's viewpoint, there are undeniable constraints to the ability of local government to fund the spectrum of infrastructure required in Queensland. The opportunity to get the private sector involved is now here, and already some innovative things are happening in this area.

Project 1 - Energy Recovery from Biowaste

Description

Energy recovery from renewable or alternative energy sources is a major policy issue, and there are numerous opportunities for institutional investors to facilitate technology development by investing in various smaller scale projects at the local level, including the bundling of Green Power and Green Energy.

Recycling schemes are now an integral part of domestic waste reduction strategies, and are achieving reductions of around 15% by volume of solid waste destined to landfill. Although recycling costs $70-$140 per tonne to implement, these are usually offset by reduced collection costs. Biowaste represents the largest component of the solid waste stream - even though green waste schemes can achieve a further 20-35% reduction in costs, they have not been as successful as recycling schemes.

Energy recovery from biowastes meets the combined objectives of the renewable energy and solid waste reduction programs. Even though suitable combustion technologies are available, there are few GreenEnergy installations in operation in Australia - however there is scope for bundling such projects as a means of attracting private sector investment.

Further details are provided in the project summary prepared by Dr. Tim Kempton, Environmental Resource Management (Qld) Pty Ltd, PO Box 764 Kenmore 4069.

Comment

Dr. Kempton explained that the main purpose of raising this project at the workshop was to flag the need for financiers to take a greater interest in order that better packages can be put in place. If this can be done on a few projects, then it could be replicated. He felt that risk management and risk insurance were important issues.

Mr. Montefiore (Morrison & Co) agreed with Dr. Kempton's assessment, and noted the technology packages which had been developed in the sugar industry. He felt that the main aim is to market the licence, noting that the technology element is generally small. He also flagged that this was still a specialised area in terms of private sector funders. The sale of energy as well as hardware were also means of addressing the demand risks.

Mr. Coles (CBA) agreed that the skills in the private finance market were limited in this particular field. He suggested that further enquiries be pursued among some of the specialist funders. If their interest can be progressively developed, the financial skills in this area would spread to the top end of the market and gradually reduce the front end costs involved.

The discussion then focussed on the best means of identifying the specialist funders. While Dr. Kempton obviously had good contacts, there may be scope to identify interested parties via the IIIS Register. Mr. Brown offered to make enquiries to the Dept. of Industry, Science & Tourism in Canberra as well as to GREEN Inc. in Gippsland which was thought to be pursuing a similar agenda - the Qld. Department of Economic Development & Trade as well as AusCID in Sydney might also have some insights.

Conclusion

It was agreed that the issues raised in this project were at the leading edge of both technology and financing, and that governments could arguably assist in facilitating progress in this area. Certain institutional investors could be very interested in Dr. Kempton's proposal, and it was agreed that some leads would be provided.

Project 2 - Killarney Whiskey

Description

Involves the building of a distillery for the production of an Australian Irish-style whiskey (with that spelling) at Killarney in the McPherson Ranges outside Warwick. The area's soft Irish appearance, the pre-existing Irish place name and the use of Darling Downs grain are seen as strategically important advantages.

No firm indications are yet available as to the funding requirement. However, two ownership structures are being considered by the current stakeholders, who are local farmers and citizens concerned with low farm incomes. They are working together on the Eastern Downs Turnaround Group (EDTG). There is the possibility of equity participation by a European distillery group.

Considerable preliminary work has been completed, including product market research. Discussions have been held with a number of wine clubs who have expressed interest in purchases. At this stage, the proponents are looking at the premium end of the market, keeping it at a small scale and gradually building up from there.

Comment

Mr. Montefiore felt that the name certainly rolls off the tongue (!), and that marketing would be very important given the competition at the top end of the market. While obviously not an infrastructure project, it should generate general investor interest by virtue of its uniqueness.

Mr. Coles suggested that quality would be critical, as would be the need to focus on the overall operation. There was a general discussion of quality in the context of Corio whisky which was made in Australia and held a reasonable market share at the lower end of the market in the 60s and 70s. Some at the workshop who remember the Corio product suggested that a quality higher than Corio would be required, especially if Killarney whiskey is targetted at the top end of the market. The role of an Irish distiller would thus be a key.

The images/words mentioned by the presenters, John Searle and Kerry Cranitch, such as `mysterious' and `illicit' were seen as appropriate to a degree (and generated some banter). The use of spring water and the connection to fine foods, Celtic origins etc. were also seen as intelligent.

One fundamental issue that stakeholders will need to decide is the project scale - this could be a chicken and egg situation since, without significant investment, the quality and marketing needs may not be properly addressed. This is general advice only, and a full-scale feasibility study is required. If it can be commercially viable, it should generate wider economic and social benefits in the region, given that it could strengthen the tourism and value-added agriculture industries. The institutional investors were impressed by the fact that this project is an example of self-help initiatives being pursued by local farmers and concerned citizens.

Conclusion

This project requires a full feasibility study. If it proves positive, assistance via the IIIS mechanism would then seem appropriate.

Project 3 - Spaceworld - Logan Shire

Description

Comprises interractive technological exhibits and innovative `space' environments along the lines of Disneyworld's EPCOT Centre and the Cape Kennedy Space Centre.

Estimated cost of $12m to establish - $10m for construction, $2m for fitout. Entry fee would be around $4 to $6. The Logan City Council would provide 10% equity through prime real estate, services, car parking facilities and intellectual property.

Involves a multi-storey earth-integrated dome structure rising like a bubble in the earth's crust. Above this is a glass lift cylinder and three `landing pod' legs, and a three storey hemisphere floating well. Features include a `living space' exhibition with hands on displays of leading technologies in the fields of astronomical research and telecommunications, meeting rooms, private amphitheatre, interior displays, souvenir/book shop, School of the Future, office, two large telescopes and a Constellation theatre on the top floor. The Astronomical Observatory would utilise a large computer-controlled telescope, supported by a `state of the art' audio/video `space window' CD ROM system. A spiralling walk through gardens covering the dome would be used to tell the history of the Earth as well as space/astronomy.

Mr. Gary Keller, CEO of Logan CC, indicated that the project had evolved from an engineering interest, but the emphasis was now on securing financial support. It is in the heart of the fastest growing corridor in Australia and provides environmental quality, amenity, and lifestyle diversity. Other major tourist attractions such as Dreamworld, Seaworld, Movieworld and Brisbane's Southbank complex are within easy reach.

A business plan has been commissioned. An application for Federation Funding has been made.

Comment

Mr. Coles sought information on the revenue stream and was advised that rental income would be substantial. He suggested that emphasis should be placed on ensuring that patronage risk is covered - this is a confidence thing. Given its theme park aspect, big sponsors should be sought.

Mr. Montefiore thought it was a beaut presentation, but wondered why the Council is driving it. Cynics would say that it's just a bit of dirt - hence it is important not to confuse the project aims. Is it a tourist project, or a mix of elements eg. tourism, education, environment? Expertise will be required - debt financing could be difficult because fingers have been burnt on tourism projects.

Mr. Brown felt that the project could be positioned as a best practice exercise focussing on tourism, education, astronomy etc. This might also help attract support from public sector sources. The fact that Queensland is now leading the nation in its support of the space industry, and that Griffith University and QUT had a growing reputation in this field were significant factors. There are also some innovative space-related companies in the region, as well as Boeing looking to play a bigger role around Ipswich etc. All this adds to Logan having some competitive advantages in terms of attracting sponsors, and generally making the project a success.

Conclusion

This is a piece of tourism infrastructure with the attendant market risks. The location is very good and the utilisation of the IIIS mechanism is recommended.

Project 4 - North Ipswich Railyards

Description

Redevelopment of a 57 ha site into four precincts - rail technology ($15m), residential gardens ($15m), sporting and leisure ($10m), riverside park ($5m). Total cost of $45m.

Ipswich is the birthplace of Queensland railways, and locals indicated that Ipswich was actually proposed as the site of the State capital in the early 1800s. Queensland Rail has de-commissioned North Ipswich railyards as an operational unit, having upgraded their existing railyards at Redbank.

A high level Steering Committee (which includes the Transport Minister, the CEO of QR, the Mayor of Ipswich, the local State member) has been formed.

The project profile includes an interesting overview of the economic catalysts and seed actions required - for example, the Rail Technology Precinct requires catalysts by way of the sale/lease of buildings and a Rail Technology Centre. Seed actions include the deployment of QR workers to restore buildings/exhibits, site remediation, establishment of a temporary museum, and marketing. The proponents consider that the seed actions will require the injection of government funds. They also consider that experienced operators of comparable developments would provide the opportunity to refine development concepts and improve the project's viability.

Some 12 site reports (ie. on different aspects) have been prepared since 1993 and more are underway. Market analysis has been undertaken. For example, the Sporting and Leisure Precinct includes the construction of an indoor aquatic centre where indications are that 51.4% of users will come from a 5 km radius which contains a population of around 100,000. Similarly, the medium range forecasts for the Rail Technology Centre are 275,000 visitors, generating gross revenue of $6.875m.

Comment

Mr. Coles wondered whether the key driver was rail aspects or heritage aspects, or both. There are many things to focus on, and there appear to be numerous community service obligation (CSO) angles to it. Given the complexity of the project, one approach might be to rezone it and let developments take their course - however this may not capture the public benefits being sought.

Mr. Montefiore felt that it is a hard project given its various dimensions and the mix of public and private funding being sought. Nevertheless he saw it as a visionary project and agrred that it would be smart to involve organisations with experience in like projects. Barclay Mowlem was given as an example in this context. It was generally agreed that subsequent commercial evaluations would shed more light on the final dimensions of the project.

Mr. Brown thought the project was visionary and would be a boon for the city. Its integrated nature was very interesting as well as raising numerous coordination issues. The Steering Committee's membership is excellent. It was noted that Commonwealth support via the Federation fund was proposed - in this regard, the State government would be providing priorities. Rail projects often suffer the `Casey Jones' syndrome where financiers including governments see the main drivers as a collection of railway enthusiasts with little commercial nous. This project is not in this category, but its innovation and best practice aspects will need to be clearly and strongly marketed in order to overcome possible biases.

Conclusion

This project is possibly ready for closer consideration by an IIIS investment adviser - however further information is required from government agencies as to the likely level and nature of public funding.

Project 5 - Ipswich Rivercat

Description

Involves the operation of fast ferries on the Brisbane River between Ipswich and the Brisbane CBD.

The travel time is estimated at around 70 minutes one way, which is slightly longer than the travel time by car at peak hour.

The estimated cost of these craft, which are constructed in southern Queensland, is $1.2m each. In order to provide a half-hourly service, four craft are required ie. $4.8m total. The craft each carry 100 passengers.

This project's viability would be enhanced by the Ipswich railyards development since the ferry terminal would be close by. Some passenger forecasts have been developed and, according to Mr. John Marchant of the Ipswich Region Development Corporation, the figures look promising.

Comment/Conclusion

This project was raised in the `informal - other projects' segment. Further information would be useful in terms of better understanding the economics of the project. It is a straight commercial deal, and local banks might be interested from a debt financing perspective - however venture capitalists in the tourism industry would be interested in examining it. The local finance network could be tapped into - alternatively the IIIS Register would access a wider audience.

Project 6 - Lockyer Valley Recycled Water

Description

Provides for the reticulation of Brisbane's wastewater to the Lockyer Valley (west of Brisbane) and its treatment for use on irrigated crops etc.

The total cost is estimated at around $250m - $350m, and the project has been receiving media coverage in terms of a visionary, best practice environmental project with direct commercial benefit.

The project is ranked as category 1 in the Queensland Water Infrastructure Implementation Plan 1998-2002, and $250k has been suggested for a scoping study to commence in 1998.

Comment/Conclusion

This project was raised in the `informal - other projects' segment. At face value it could be of particular interest to institutional investors such as Lend Lease, AMP etc. The project is of sufficient scale and there is growing demand for facilities of this nature. Further discussions between the project proponents and AusCID/IIIS executive officer are recommended.

Perth Workshop, 7 November 1997

Speakers: Chris Fitzhardinge (WA Dept. of Commerce & Trade), Dennis O'Neill (AusCID), David Beatty (NAB), Chris McSweeney (Clough Engineering/Lend Lease), Chris Leslie (Macquarie Bank), Rod Brown (Australian Project Developments)

The IIIS panel members had attended the community-based Pilbara Infrastructure Conference in Newman as observers on the day prior to the Perth workshop. Attendance at the workshop was around 30, and represented a very good cross-section of key investors and bankers in Perth - the interaction was particularly good.

Mr. Fitzhardinge opened the workshop by explaining that it was one of a series where specific projects were brought to the attention of institutional investors. This workshop was featuring one project from each of the Gascoyne, Pilbara and Kimberley (GPK) regions which collectively generate $7.9 billion of output annually, and have a population growth of 0.94% pa. While these regions are important for exports and defence reasons, they also raise important social and economic equity issues. The major resource developments in these regions have a need for enhanced infrastructure, and if these and other projects can broaden the economies of these regions, then the Regional Development Commissions will be interested - they can provide various information/data as well as facilitate the projects. The State Agreement Acts spell out the role of government, including areas where the State will take an identified risk.

Mr. Beatty (NAB) said that the challenge in project financing was to quantify the risks, and to allocate these risks. Infrastructure projects involve non-recourse financing, which means that there is no recourse to balance sheets - only to the assets and cash flows of the project in question. He said the key questions in his mind were - does the project stack up? If not, what are the weaknesses? Is it robust? Are the statistics and forecasts reliable? What is the expertise of the contractors? What are the tax issues? Are cash flow and debt in sympathy? Sensitivity analysis is important, and one of the best tools is break even analysis. Other issues are the nature of political support and whether it will be ongoing, and who can share the risk. There is also an overriding need to maintain a flexible approach.

Mr. Leslie (Macquarie Bank) felt that the essential question is whether it is a `good' project, as distinct from a `nice' project - people don't give their dollars away lightly. He appreciated that regional communites are seeking infrastructure which can be very expensive - equity investors are more likely to take risk, but they will require a higher rate of return to justify that risk. The challenge/role for groups like Macquarie Bank is to get projects over the line. He referred to the six categories of risk which should be the score card for all projects - market/demand risk, construction/technical risk, finance/tax risk, operational risk, policy/regulatory risk, and legal/documentation risk, with the first four usually being dominant.

Mr. McSweeney (Clough Engineering) indicated that his company has a turnover of around $600m per year (half overseas) and employs 5,000 people, although this fluctuates. They have close links with Lend Lease in view of the latter's skills in project financing eg. Ord River Hydro, Prospect Water in Sydney, Geelong port etc. Clough Engineering takes a hard-nosed, traditional approach - they see themselves as a contractor, but are concerned about project specifications which load the risks onto the contractor - if these risks don't eventuate, it is money in contractors' pockets - but if the reverse occurs, they will try to claw it back through legal channels etc. The alternative is to explore shared risks and alliances, and the alignment of goals. This is the Clough/Lend Lease approach.

Project 1 - Derby Hydro Electric

Description

Tidal power station, generating between 32-48 MW of energy, with potential to supply towns of Derby, Broome, Fitzroy Crossing, the local mining industry plus the Western Metals' mine operation at Blendevale.

Estimated cost of $125-130 million.

The Kimberley coastline experiences huge tides - up to 10 metres. The conditions at Doctor's Creek, a short distance north of Derby, are ideal for a tidal power station. The station would be the second largest in the world - the largest, in France, is not however capable of generating continuous power. The Derby power station involves a double basin system, whereby barrages (total length of 1.7km) and sixteen sluices are built across the two arms of Doctor's Creek to create a high and a low basin. The water movement from the high to the low basin drives six 8 MW turbines which are located in a channel cut between the two basins. During neap tides, which occur two days each fortnight, power output is supplemented with thermal electricity.

The major stakeholders are Infratil Australia (52%) and Tidal Energy Australia P/L (48%). Mr. Peter Wood, the CEO of Derby Hydro Power, indicated that the project advantages include the fjord coastline, high tides, zero fuel costs, long life (French operation has a life of 120 years).

Substantial preliminary analysis has been conducted and a feasibility study is underway, with financial support from Western Energy. The support from the State Government to date has been invaluable. Development capital has been used to date, but once the feasibility study proves up the project, debt and equity finance (65% debt/35% equity) will be required. However the project proponents must have control of the project before these fund raisings are sought - this will be via off-take/sale arrangements, Heads Of Agreement, technology agreements, land approvals, government support etc.

Comment

Mr. Beatty suggested that some of the key fundamentals are there, and the principals are acting prudently. For example, it is good that they are speaking with Western Power. The proposed debt/equity mix appears feasible.

Mr. O'Neill asked whether there is a demand risk in view of the fact that 36% of the off-take would be accounted for by Western Metals. Mr. Wood acknowledged that it is a new mine but Western Metals has raised funds to date and has already invested $20m in the mine project. This, together with the fact that the energy will be significantly cheaper than alternative sources, provides confidence.

Mr. Leslie considered it to be a good project and encouraged the proponents to keep going. The question was raised whether the project could assist the growth of other industries/projects. Mr. Wood replied that Western Power would determine the price of power to customers, since his company would be the wholesaler. He suspected that they may need to increase capacity down the track to meet demand - aquaculture is one emerging industry that could provide a new market.

Mr. McSweeney felt that the economics of the project are quite interesting, given that the energy source is virtually free. Diesel-generated power currently costs around 26 cents per kwh to produce - since Western Power's selling price is around 13 cents, this equates to a cross-subsidy somewhere in the system of 13 cents per kwh. Mr. Woods indicated that another benefit is the greenhouse tax credits - in fact he indicated that the Prime Minister's portfolio had recently telephoned to enquire about this aspect.

Other speakers suggested that this project had excellent synergy with the town of Derby and the surrounding region, and was also `environmentally sexy'. Mr. O'Neill suggested that with the demise of the infrastructure bond facility, the tax rebate scheme which replaced it may not apply to projects of this sort. He offered to follow up on this. Mr. Wood suggested there were many ways in which the Commonwealth would benefit from such a project - hence a grant towards the cost would be both appropriate and welcomed.

Conclusion

This is a unique project with some outstanding features, as well as direct economic benefits to businesses in the region. It would appear timely for the proponents to use the IIIS investment adviser system (in tandem with the feasibility study underway) to prepare the way for the debt and equity capital raisings.

Project 2 - Dampier Marine Services Industrial Estate

Description

Involves the development of a marine facilities base, within the jurisdiction of the Dampier Port Authority, to service the North West Shelf.

Estimated capital expenditure is $50 million. This mainly comprises dredging for supply vessels with 7m draft ($21.5m), 10ha of laydown area and 100ha of serviced industrial land ($15.4m), 700m land-backed wharf ($6.42m), cyclone-sheltered mooring area for small vessels ($2.75m), slipway for repairs/maintenance of vessels up to 2000t ($2.44m), and navigational aids ($1.1m). There is potential for staged development eg. only 300-400m of wharf may be required initially.

It is claimed that the project would generate 180 jobs during the construction phase, and 25 jobs thereafter.

Financial evaluations to date suggest that $30m of the project could be appropriate for private sector investment, while the dredging, land servicing, and navaids (total of around $20m in rough terms) could be provided as public works. A feasibility study by CMPS & F has been completed for the WA Government, and a geophysical survey is available.

The Burrup Peninsular is subject to native title claims and some environmental assessment will be required eg. mangroves.

Mr. Rob Gates of the WA Department of Commerce & Trade indicated that the needs analysis had pinpointed four factors - first, the Carnarvon Basin has the Woodside expansion underway, the Gorgon $10 billion petrochemical plant under investigation, plus increased exploration activity; secondly, there is no cyclone shelter available for vessels in the 20-45m range; thirdly, there is a need for maintenance and logistics support for the 60 vessels operating in the area at any one time; fourthly, there are no slipping or repair facilities in the region, with vessels having to sail 880 n.miles to Fremantle or 1,000 n.miles to Darwin.

Some of the risks involve the possible competition from the adjacent Woodside facility, the mangrove issue, aboriginal heritage issues, and political will (a Cabinet Submission has been lodged presumably to determine government interest in the overall project)

It is proposed that a call for expressions of interest be made next year - this would canvass interest across the world. A comprehensive Master Plan would also be produced around that time.

Comment

Mr. Fitzhardinge indicated that various interests saw government as a key player in view of various public good aspects.

Mr. Leslie felt that it could be a very exciting project. From a financing viewpoint, there appeared to be some underlying savings for the likes of Woodside as well as other companies. If they can appreciate the benefits, it would obviously improve the revenue side. It is not a traditional infrastructure project since there is not a classical monopoly - there would therefore be a role for the WA government to provide some form of franchise ie. to ensure that a competing facility was not allowed within a certain distance. The fact that there is significant port development elsewhere in WA lends support to the need for a franchise.

Mr. Beatty agreed that without the monopoly aspect, one would have to look at how much could be tied down. The discussion then centered on what the ACCC might say about government providing a mandate for this facility. The general consensus among the Panel was that there are significant upstream and downstream benefits, 10 day travel savings to Fremantle, and the fact that competition from Fremantle andDarwin would remain. One idea was to place a time limit on the franchise. Mr. Fitzhardinge suggested that, if needed, this project could be a good test for the ACCC's public interest clause.

Mr. McSweeney wondered whether Woodside could find its own supply base being stretched, and may therefore require additional space in the future. He felt it necessary to bring Woodside into the equation, but agreed that it is hard because they are so focussed on the bigger picture. Woodside's position is critical, as is the timing.

Mr. O'Neill suggested that this project might be viewed as `transformational' infrastructure ie. some government contribution will draw forth private investment - but without government support, the project probably will not happen.

Mr. Brown wondered if there is scope to reduce the significant dredging costs. If 10-20% savings could be achieved on the $20m dredging costs, it might be critical to the project's viability. It was pointed out the cost estimate was based on local conditions, and that a mega dredge operating out of Singapore could probably achieve sizeable cost savings. However the relocation costs are very high, unless some other dredging requirements could be built into a bigger schedule. However there might be local content/industrial relations concerns with such an idea.

Conclusion

This seems to be a potentially key piece of infrastructure for the region. As Mr. McSweeney suggested, some further dialogue with Woodside seems necessary. It is `early days' and the involvement of an investment adviser as issues unfold will be important. It would seem premature for governments to be committing funds to the project until a better idea of private sector funding possibilities is available.

Project 3 - Learmonth Airport Upgrade

Description

Involves the construction of a passenger terminal building with associated landside and airside pavements at Learmonth Airport on Exmouth Gulf. The estimated cost is $9.1m.

The background to the project is that the Gascoyne region is experiencing strong tourism growth. The developers of Exmouth Boat Harbour are proposing that a condition of their development is that the airport be upgraded. The RAAF base runway at the airport is 3050m in length, and thus capable of handling very large craft. The region is also a significant producer of seafood and there is also the prospect of agricultural exports.

In 1996, Learmonth Airport had a passenger uplift/discharge of 17,030 domestic passengers - by the year 2004, this figure is forecast to rise to 50,000 domestic passengers. Some international charter flights have operated to the region - at around one per month. This passenger traffic is forecast to be around 7,000 by the year 2004.

The new terminal is designed to function in both international and domestic mode. The floor space can be adjusted by partition walls to accommodate passenger loads, and has the potential to be used as a conference/meeting venue.

The WA Tourist Commission supports the project in the context of the overall development of the Gascoyne tourism industry - tourism highlights include Shark Bay, Carnarvon and Coral Bay. Ecotourism is growing at 30% pa. The Shire of Exmouth has allocated $4.0m to the project from the Exmouth Development Trust Fund, which was established as a result of the closure of the US defence facility in recent years. In 1996, the State Government, at Ministerial level, gave a financial commitment to partially fund the project via the Regional Airport Development Grants.

The Shire of Exmouth is currently evaluating the capability of the airport to sustain an immediate $1m borrowing to initiate the project, subject to the debt being serviced by airport user charges.

The proponents see an opportunity for investors to provide infrastructure capital through an airport security bond, where the principal and interest is repaid entirely by the borrower at the end of an agreed period of say 10 years. This would allow the proponent time to develop the market, generate sustainable growth, and build cash reserves.

Comment

Mr. Beatty was informed that the airport became the Shire's property in 1993 as a result of the Commonwealth Government's local airports ownership program. The airport has strong Department of Defence interest, and some $69m is to be spent there from January 1998 on resurfacing the runway, constructing aircraft shelters and upgrading other facilities to NATO standards. Mr. Beatty felt that landing fees and other revenue opportunities needed to be fleshed out.

Mr. Leslie felt that it was a sensational building concept. He could appreciate that there is an opportunity for private sector funding to bridge the gap, but was not yet exactly sure. He thought that a key issue would be the negotiation of bilateral rights with Singapore etc. He sought more information on the nature of discussions with the WA Department of Transport as regards the level of the State's earlier funding commitment, and the likely level of landing charges. It was explained that a passenger levy only applies at present - if the Shire proceeds with this facility, it would seem necessary for landing fees to be reintroduced. Care would need to be exercised as regards costs in the face of customer demand.

The issue of duty free operators was also raised by the institutional investors. It was explained that this aspect would be an important part of the project. The potential of seafood sales was significant, and the Kailis seafood company which operates near the airport is a driver of the project.

Mr. McSweeney said that a crucial issue was the government position on funding, landing fees, bilateral air arrangements etc. These all needed to be firmed up. Mr. Fitzhardinge agreed with this, and noted that the economic reality is that a funding gap will exist. The Shire is also caught in a bind - it wants to make the project a success, but is wary of the possibility that the Department of Defence will then expect some share of the revenue to meet runway maintenance etc. It was hoped that the Commonwealth would appreciate the importance of this project to the economic and social cohesion of the region, and not impair its economic viability.

Mr. O'Neill suggested that this was tentatively a joint public/private project, but the key question is how do you get the dollars on the table? There is a need for long-term patient capital in respect of numerous regional projects, whether by an AIDC arrangement, the QIFF model in Queensland, or facilitating local government bond raisings. Mr. Leslie agreed that there were benefits all round, but there is still the classic problem of addressing risk in its various forms.

Conclusion

Mr. Fitzhardinge closed the discussion on this very interesting and topical project by suggesting that project proponents everywhere need to minimize the use of the `raffle ticket' approach. We need to be realistic about attracting government funding, and greater attention to strategic concepts is required. Institutional investors should be involved at an early stage as regards likely funding, but also to provide a reality check. Mr. Brown added that an on-site workshop of the 6-8 key parties might be the best way of firming up the concepts and an appropriate funding mix.

Acknowledgements

Numerous State and local government officials contributed significant time and resources to the 1997 IIIS workshops. The cooperation of the project proponents is acknowledged, since it is testing to have project ideas exposed to scrutiny in a public forum. Thanks also to the following executives who gave freely of their time and expertise:

AMP

Commonwealth Bank

ANZ Bank

National Australia Bank

HRL Morrison & Co (Infratil)

Clough Engineering/Lend Lease

Macquarie Bank

AusCID

Contact Details

Mr. Adrian Wood, Executive Officer, IIIS
Level 7, Hambros House
167 Macquarie Street
Sydney NSW 2000

Phone 02 - 9231 0764
Fax 02 - 9231 0765
Email iiis@iiis.aust.com

Mr. Dennis O'Neill
Executive Director
Australian Council for Infrastructure Development (AusCID)

Phone 02 - 9231 0722
Fax 02 - 9231 0765
Email: auscid@ozemail.com.au

Mr. Rod Brown
Managing Director
Australian Project Developments Pty Ltd
PO Box 1145
Woden ACT 2606

Phone/fax 02 - 26231 7261
Email: apd@orac.com.au

Disclaimer:

Opinions by individuals/organisations in respect of the above projects are made in good faith, based on information available at the time. While every care has been taken in developing these opinions, the individuals/organisations concerned accept no responsibility for the accuracy or currency of such opinions, nor interpretations placed upon them.

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