Transfield ServicesInfrastructure Summit – 11 June 2015Keeping infrastructure development on track – planning for the long-termGraeme Hunt – Managing Director and Chief Executive Officer
Disclaimer and important information2
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Our story began in infrastructure4
2001 – Transfield Services was listed on the ASX
1987 – Awarded the Sydney Harbour Tunnel contract under “Build-Own-Operate-Transfer” (BOOT) scheme
1956 – Transfield was founded
1950s-1960s – Rapid growth with new divisions added to include steel fabrication, transmission lines, bridge building, aircraft manufacturing, galvanizing and general construction
1993 – Operations and Maintenance Division commenced operations at Mobil Altona, first contract in Hydrocarbons sector
1990s – Large contracts won through BOOT scheme, largest being the A$2billion Melbourne City Link Project
2006 Entry into the US via acquisition
of USM, followed by acquisition of Hofincons leading to entry into India
Formation of Flint Transfield Services (“FTS”) joint venture with Flint Services in Canada
2010 – Acquisition of Easternwell, a leading Australian services provider to the mining, oil & gas and infrastructure sectors
2012 Transdev 50/50 partnership, Harbour
City Ferries, appointed by the NSW Government to operate and maintain Sydney Ferries
Expansion of Transfield Worley Power Services (“TWPS”) JV
2013 Awarded A$200m contract to
provide maintenance and operations services to QGC upstream coal seam gas (CSG) assets in Queensland
Awarded a A$170m contract with NBN comprising Passive Fibre Network design in Sydney
Sale of 50% share in Transfield Worley New Zealand JV to existing partner WorleyParsons for A$30m
Easternwell integrated with Resources and Energy business
2014 Awarded A$1.22bn,
20 month contract for garrison and welfare support to the Australian Department of Immigration and Border Protection for offshore processing centres in Nauru and Manus Island
Sale of Hofincons and Middle East businesses
2004 – Acquisition of Serco NZ doubled the size of operations in New Zealand
2007 Entry into Chile via InserTS
joint venture Transfield Services
Infrastructure Fund, comprising interests in power stations and wind farms, floated on ASX, with Transfield Services holding c.49% of securities on issue
2011 Signed A$133mn contract with
NBN to design and construct Victoria’s fibre optic network
Sale of North American facilities maintenance company (USM) to EMCOR Group. Total cash value was US$255m
1956 1987 1990 1993 2001 2007 20132010 2011 2012 20142004 2006
Infrastructure – a core focus5
Our Sectors
Infrastructure
Defence, Social & property
Resources & Industrial
Americas Workforce of 19,000 | 9 countries | 9 sectors | 200+ clients
Our Services
Logistics and Facilities Management
ConsultingOperations andMaintenance
Well Servicing ConstructionCare & Welfare
What we do – selected examples6
We maintain and operate Sydney’s Harbour City Ferries for the NSW Government in partnership with Transdev
We provide shutdown maintenance and drilling services to various mining and oil & gas operators globally,including for Woodside
We maintain coal seam gas wells and other plants in Queensland for QGC’s CSG to LNG program utilising Easternwell’s well servicing rigs and provide services across the value chain
We install telecommunications networks for the National Broadband Network in Australia and the Ultrafast Broadband Network in NZ
We provide garrison and welfare services for the Australian Government on Nauru and Manus Island
We operate and/or maintain civil, mechanical, electrical and tolling assets for the Hills M2 Motorway and Lane Cove Tunnel in Sydney, City Link and East Link in Melbourne, and Presidio Parkway in the US
We provide estate management and garrison support services to the Australian Department of Defence on bases in Victoria,South Australia, Tasmania, Western Australia and the Northern Territory. We alsoprovide emergency servicesand maintain the Defence force national stores on every Australian base
We provide operations and maintenance services to oil & gas assets in both the upstream and downstream sectors in the US for clients such as Chevron, Exxon Mobil and Valero
8
I. It’s more than capital recycling
II. Why we must have consistent policy
III. The social benefits of smart long-term asset management
Outline
Infrastructure asset recycling9
Government Asset Recycling
• Australia’s Infrastructure funding deficit is around $700 billion
• Australia’s population is projected to rise from 23 million to 38 million by 2050, requiring significant upgrades in infrastructure
• Funding these projects represents a challenge; government revenue bases are shrinking and increased debt threatens credit metrics
• Governments to privatise up to ~$100bn of infrastructure
• Asset recycling facilitates larger scale deployment of capital than PPPs
Private Sector Asset Recycling
• Australia has reached the peak of an expansionary investment cycle in the resources and energy sectors
• The emphasis is now on ‘sweating the assets’ in order to optimise the investment
• Private enterprise may be holding non-core assets on balance sheet
• Australia is expected to become the largest LNG exporter by 2022, and selling infrastructure is a feasible strategy for releasing capital
• The LNG sector holds approximately $60bn of potentially divestible infrastructure to fund future opportunities
The energy sector has reached the peak of its expansionary cycle while state governments are under pressure to repair balance sheets. A period of significant asset recycling in both public and private sectors is on the horizon
Funding ShortfallsLimitations on Debt
FinancingDemand for New
Infrastructure
End of Expansionary Phase
Non-core Infrastructure on Balance Sheets
Need to Liberate Capital
Public Sector
Private Sector
Source: ANZ, Utilities and Infrastructure Market Update. March 2014.
Productivity Commission Review 201510
PC Review Timeline
Issues Paper released 22 Jan 2015
Submissions filed 13 Mar 2015
Draft report released July 2015
Further consultations From July 2015
Final Report tabled Nov 2015
Source: AMMA, May 2015.
KPMG analysis found…11
Source: AMMA, May 2015.
• Resources production costs 50% higher than global average
• Mining productivity declined by 45% in past decade
• From 2001-2012 resource construction wages rose 2.5x national average
• Wage in iron ore sector 21% higher than global average
• Longer approval times for large projects than Canada, UK and NZ
• Environmental approvals can take up to 2 yrs to produce and 1.5 yrs to assess
• Exports expected to account for 67% of 2014/15 mining revenue
• High mineral rents compared to Canada, NZ and US
Funding issues at Federal and State level12
FEDERAL BUDGET DEFICIT2015 -16
$35.1bn
WA2014-15: $1.29bn
deficit
2015-16:
$2.71bn deficit NSW2014-15:
$0.28bn deficit
NT2014-15
$0.06bn deficit QLD
2014-15:
$2.27bn deficit
SA2014-15:
$0.48bn deficit
2015-16: $0.41
surplus
VIC2014-15:
$0.9b surplus
2015-16: $1.2bn
surplus
Source: Western Australia State Budget (2015-16), South Australia State Budget (2014-15), Northern Territory State Budget (2015-16), Queensland State Budget (2014-15), NSW State Budget (2014-15), Victoria State Budget (2015-16).Note: Data sourced from state government budgets as at 6 June 2015.
It’s more than capital recycling…13
The impact of public infrastructure on productivity and economic growth
• Investing in the right infrastructure could give Australia a once in a generation opportunity to transition our economy away from such an overwhelming resources focus, with the attendant boom and bust cycle
• Roads, rails, ports, airports, utility networks and social infrastructure are not just the backbone of the nation, they are also the growth engines of our future
The imperative to recycle capital cannot be ignored
• The Federal Government’s Asset Recycling Initiative is critical
• State budgets and balance sheets remain under pressure and the need for new infrastructure has never been greater
• Australia’s infrastructure funding deficit is estimated to be $700bn1
• $5bn in incentive payments to States and Territories who sell or lease assets and reinvest the proceeds in new infrastructure (Asset Recycling Initiative)
Natural owners of infrastructure assets
• Public capital should be allocated based on long-term benefit and recycled as soon as the business cycle allows private capital inflow
• Assets are managed more efficiently by private operators working alone or in alliance with the Government
Impact of technology on delivery and management of infrastructure
• Infrastructure planning cannot occur in isolation, the incorporation of potentially disruptive digital technologies in our planning is crucial
• Technology has the potential to:₋ increase efficiency;₋ increase asset utilisation;₋ reduce operating costs; and₋ impact the overall cost of types of public
infrastructure required over the full lifecycle
Source: Infrastructure Partnerships Australia, Commonwealth Government Budget, Australian Infrastructure Audit – Our Infrastructure Audit (April 2015) and Citibank.
ACCC chairman Rod Sims has stated “the only good reason for government ownership is if there is a particular social objective in mind” noting “when the private sector own assets, that does provide better incentives for better performance”
Consistent policy is imperative14
long-term planning and reform of governance processes for infrastructure has been missing in public policyfor considerable time
The consequences of ‘short sightedness’ have yielded low productivity and high costs
Critical need to minimise delay, indecision and uncertainty between project announcement and start-up.Delays erode return on investment and discourage private sector appetite for risk
Source: SMART, University of Wollongong, ATSE - Infrastructure to meet Australia’s future needs.
Efficient recycling of
public investment
CertaintyDisruptive
digital technologies
Integrity of Process
Incentives
Government infrastructure policies should address
The risk of not providing certainty may result in the attribution of sovereign risk to Australian infrastructure transactions
The cost of inconsistent policy Queensland 15
The outcome of the Queensland state election resulted in $37bn of transactions being cancelled or deferred
3 Feb 2015
THE BRUTAL POLITICS OF PRIVITISATION
STARK AFTER QUEENSLAND ELECTION
SHOCK
The sudden and brutal change of governments in Queensland and
Victoria adds an element of uncertainty to infrastructure projects. In the
case of Queensland, it means $37 billion of transactions have
automatically been taken off the table. It will be a big blow for
investment banks, super funds and companies that anticipated being part
of the sales.
4 Feb 2015
QUEENSLAND ELECTION 2015: LNP DUMPS
ASSET SALES POLICY
The Queensland Liberal National Party has ditched its $37 billion
privatisation plan as part of a last minute attempt to form a minority
government… “They are all in grave doubt. That’s a tragedy for the
international investment community, but that’s a situation Queensland
is in”
The Need For Consistent Policy
• The $37bn in capital set aside by investors for the QLD electricity asset sales will now be reallocated
• Greater competition for NSW T&D assets
• The risk of state governments taking transactions off the table for political reasons will be factored into the price when bidders value infrastructure assets going forward
• In order to get the best price for assets, governments need to implement a consistent policy and reduce political risk for bidders
The cost of inconsistent policyVictoria 16
The cancellation of the East West Link increases the price of risk associated with business in Australia
3 May 2015
FEDERAL BUDGET 2015: DANIEL ANDREWS
REFUSES TO PAY BACK EAST WEST MONEY
Victorian Premier Daniel Andrews has refused to give into demands to
refund $1.5 billion of federal government funding slated for the
cancelled East West Link toll road.
15 Apr 2015
VICTORIA TO PAY $339M TO SETTLE EAST
WEST CLAIM
Major developer Lend Lease has walked away from a long-running
brawl over compensation for the scrapping of one of the nation's
largest road projects, under a $339 million deal which opens the way
for the property giant to win future billion-dollar contracts.
Transaction announced
Risks assessed and bids priced
Transaction cancelled
Loss of invested resources
15 Apr 2015
EAST WEST CONTRACTORS CALL FOR long-
term PLANNING AFTER SETTLEMENT
While contractors believe that an agreement allowing reimbursement
of the money invested by a consortium of Lend Lease, France's
Bouygues and Spain's Acciona for the costs of bidding for East West
Link and designing plans to build it is fair, they now regard Australia
as a more risky place to do business.
Resources industry’s reform priorities17
Source: AMMA, May 2015.
Accessible, reliable and competitive agreement options for new and existing projects
Agreement content restricted to employment matters
Balanced rules for strike action
Balanced and practical rules for unions entering workplaces
Balanced safety net protections for employees
Social benefits of long-term smart asset management 19
Employment growthBusiness expansion around new infrastructure results in significant job creation. Governments should not attempt to hold onto assets with the aim to protect employment
Productivity growthRoads, rail, ports, airports, utility networks and social infrastructure are the backbone of the nation and growth engine for the future. The World Bank estimates that every 10% increase in infrastructure provision increases output by ~1% over the long-term
Efficiency gains
Private sector owned assets provide better incentives for better performance. A University of Melbourne study notes that PPP contracted projects were able to deliver the construction phase of an asset with a delay of 1.4% of agreed time, versus traditionally procured projects which had delays of 26% of the agreed time
Cost savingsIn private hands, costs of operating infrastructure assets decline and projects are delivered more efficiently. Dealing equitably with the affordability of infrastructure services is an important consideration, as a matter of social policy
“If we get our infrastructure right, we will protect Australia’s quality of life at a time of population growth and global economic change” Infrastructure Australia
Optimal capital allocation
Efficient funding of infrastructure is focused on the allocation of project and systematic risks to those parties best able to manage them, both across the public and private sectors
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Source: The Australian Trade Commission (Austrade), Investment Opportunities in Australian Infrastructure. Australian Infrastructure Audit – Our Infrastructure Audit (April 2015).
Case study: Harbour City Ferries20
Our recent, successful transfer of approximately 550 staff from Transport
NSW (Sydney Ferries) to Harbour City Ferries (a Transfield Services –
Transdev JV) demonstrates our capabilities in transition and first generation
outsourcing.
Transfer of 85% of the incumbent workforce
Limited disruption to services through industrial activity since
commencement
Commencement of operations earlier than initially planned
Increase of customer patronage by 2.2%
Independent recognition of our achievements: Transfield won the 2013
Infrastructure Partnerships Australia Award for Operator and Service
Provider Excellence.
Harbour City Ferries
Significant efficiency gains can be derived from first generation outsourcing
Case study: Port of Miami Tunnel21
The Port Miami Tunnel (POMT) was the first major project
built through a public-private partnership (PPP) undertaken
in Miami
Transfield Services was part of the successful design,
construct, operate and maintain consortium with Babcock &
Brown and Bouygues Travaux Publics
The Port Miami Tunnel opened on 3 August 2014
Up to 22,000 vehicles using the tunnel in one day
Transfield Services has safely managed 243 traffic events,
with crews arriving on scene in an average of 6.5 minutes,
restoring traffic flow within 17 mins
Publicly recognised by the US Department of Transportation
Port of Miami Tunnel
The Port of Miami Tunnel showcases best-practice road infrastructure operation and maintenance systems and processes in the United States
Closing remarks22
Now is the time to work on infrastructure
Australia has a funding gap with budget deficits at the federal and state level
Asset recycling across the public and private sectors can provide funding for new infrastructure projects
Consistent policy is imperative to attract investment
Effective capital management will drive productivity, efficiency and economic gains
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