WIDESCREEN MASTER TEMPLATE

AUSTRALIAN TRANSPORT

INFRASTRUCTURE

INSIGHTS REPORT

July 2021

FOR PUBLIC RELEASE

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Contractors ("Client") to provide a review of the Australian

transport infrastructure industry and draw insights that may

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CONTENTS

Table of Contents

Definitions

1. Background & Executive Summary

2. Maximise Taxpayer Benefit

3. Project Packaging

4. Sovereign Capability

5. Appendences

6. Bibliography

DEFINITIONS

Term

Definition

Term

Definition

Alliance

Contract

A contracting mechanism that allocates collective

responsibility for risk, performance and outcome between the

contractor and client.

Local Industry

Participation

Plan (LIPP)

A written plan based on the National Framework which was

agreed between the Commonwealth and the States in

2001 to promote, develop and maintain a sustainable

Australian industry capability by encouraging competitive

Australian industry participation in investment projects

Australian

owned

Ultimate owner of the majority of the Australian entity is

based in Australia

Mega

- Project

A (transport) infrastructure program valued at $A1bn+

AOC Australian Owned Contractors

Mega

-mega

Project

A (transport) infrastructure program valued at $A5bn+

COAG

Council of Australian Governments

Mid

-tier

A collective term used for all Tier 2 & Tier 3 contractors

EPC

A contract under which a single entity bears responsibility for

engineering, procurement and construction elements of the

project.

Mixed

Contract

The packaging of projects into smaller programs of works,

delivered by specialists in each field.

Foreign owned

Ultimate owner of the majority of the Australian/ based entity

is based overseas.

Multiplier

2.99 as per ABS 5209.055.001 table 5 for FY2018

Infrastructure

Investment

Program

The program of funds allocated to projects for the

Commonwealth’s investment in land transport infrastructure

under the NLT Act.

Multiplier

effect

The effect a change in one economic variable (i.e

infrastructure spending) inducing a larger increase in

another (GDP)

Industry

Capability

A tender evaluation criteria that allocates a percentage of

the assessment to upskilling and involvement of sub-tier 1

contractors and local supply chains.

National Land

Transport

Network

National Land Transport Network as in force from time to

time that is determined by the Commonwealth Minister

under Part 2 of the NLT Act as amended from time to time.

DEFINITIONS

Term

Definition

Term

Definition

NLT

National Land Transport Act 2014

Program or

Programs

Sum of Projects within a particular State agreed between

the Commonwealth and a State at any given time, to be

managed on a programmatic basis.

NPA

National Partnership Agreement

Tier 1

Contractors with the technical & financial capability of

delivering mega-

projects over $1 billion without partnering.

PPP

A Public Private Partnership

– a cooperative arrangement

between two or more public and private entities.

Tier 2

Medium-sized construction firms that have both the

technical and financial capacity to deliver projects up to

$500 million, before requiring support of a joint venture

partner.

Project

Interface Risk

The risk associated with managing a projects interface with

various stakeholders, including other projects, utility owners,

local landowners etc. The interfaces may be physical or

relational

Tier 3

Smaller firms, with both the technical and financial

capability to deliver projects < $100 million. They are

usually less willing to take aggressive price or risk positions.

Project or

Projects

A project approved under the NLT Act.

REPORT SCOPE

For the objective of providing AOC with insights regarding the transport infrastructure industry to

further support their members, the scope of this report was to review and draw insights from:

▪ Jointly-funded transport infrastructure projects where funding is provided to the Australian States & Territories from the

Commonwealth

▪ Funding to the States & Territories was through the Federation Funding Agreements (formerly, National Partnership Agreements)

▪ Attention was focussed on transport infrastructure projects valued at $A500m+

The specific areas of focus were:

• Are tax-payers getting maximum benefit from mega-projects?

• What are the implications of mega-projects and is there an alternative?

• Is there a need for Sovereign Capability regarding transport infrastructure projects?

Where new areas of focus were raised during the literature review or stakeholder consultation, these issues also informed the study.

1. BACKGROUND &

EXECUTIVE SUMMARY

BACKGROUND

1.1 Background

In 2014 the Federal Government entered into a funding

agreement with the Australian States & Territories to finance a

portion of transport infrastructure programs through The

National Land Transport Act (NLT) (Australian Government,

2014).

The NLT provides the primary mechanism for the Federal

Government to provide this funding while also setting out the

roles and responsibilities of each party. Each State & Territory

has a separately agreed schedule to the NLT which sets out the

projects and quantum of Federal investment.

On 1 July 2019, the Australian Government and state and

territory governments (states) entered into a National

Partnership Agreement (NPA).

The NPA supports the delivery of infrastructure projects and

sets out how the Australian Government and states will work

together to deliver infrastructure projects for the benefit and

wellbeing of Australians (Australian Government, 2019).

The NPA covers projects administered by the NLT Act. Each

state has a separately agreed schedule to the NPA which

indicate the levels of funding the Australian Government

intends to provide for land transport infrastructure

investments. These schedules are updated following the

Federal Budget each year.

On 28 August 2020, as a consequence of the formation of the

National Cabinet (replacing the erstwhile COAG), the Council

on Federal Financial Relations took responsibility for all

Commonwealth-State funding agreements and conducted a

review of the stock of existing agreements. The review set out

to consolidate and rationalize agreements where possible. This

included the existing NPAs that are now captured under

Federation Funding Agreements .

The Federal Government has recently announced a A$110b, 10-

year infrastructure investment pipeline commencing in 2020

primarily driven by the policy that investing in infrastructure is a

critical tool to create jobs, drive economic recovery, and position

our economies for sustainable growth (Australian Government,

2021).

While this commitment is welcomed by industry, the size of some

projects is demonstrating a rise of “mega projects” & “mega

mega projects”. So much so Infrastructure Australia in its 2019

Infrastructure Audit noted that “ Mega-projects have become a

default, however they are stretching industry and government.

The size, scale and complexity of new infrastructure projects is

changing. Procurement and planning are correspondingly more

complex. Underdone planning and rushed procurement can lead

to lasting shortcomings in infrastructure performance. This is

compounded by a much-needed increased focus on

sustainability, security and resilience expectations”.

Transport megaprojects are inherently complex, and it’s

unavoidable that some of the time things will go wrong.

Shortcomings in dividing projects into bundles of work, in

apportioning risk between the parties, and in selecting a suitable

contract type for the job is exacerbating problems of an already

complex program of works.

This report documents that the rise of mega project has seen an

increase in risk, reduction in competition, decrease in project

success and ultimately a sub-optimal outcome for asset owners,

contractors and the Australian taxpayer. Procurement practices

now require reform to overcome these outcomes and to

maximise this opportunity.

“Mega projects have become a

default, however they are

stretching industry and

government …”

(Infrastructure Australia, 2019)

AUSTRALIAN INFRASTRUCTURE INSIGHTS OVERVIEW

While Australia embarks on an almost unprecedented period of transport infrastructure project planning

and delivery, we need to ensure we do not squander the opportunity

1.2 The Australian Infrastructure Market

With the Australian Federal Government planning to

invest A$110bn over 10 years from 2021/22 in Transport

Infrastructure across the nation, it’s now more important

than ever that this investment is maximised to bolster

the Australian economy and its return to Australian

taxpayers (Australian Government, 2021).

The evolution of major transport infrastructure project

procurement has changed significantly in the past 10

years. The rise of mega projects, those of value A$1b+,

and mega-mega projects , those with a value of A$5b+,

while arguably easier for governments to manage, has

seen a reduction in competition, increase in total costs

and an overall decrease in project success (Grattan

Institute, 2020).

The nation now has nine transport infrastructure projects

that are each worth more than A$5bn, compared to just

one – the Airport Link M7 – ten years ago. In 2001 there

were just two projects worth A$1b, today 14 (Grattan

Institute, 2020). These large-scale projects see private

industry bear the majority of project related risk.

Australia has a proud history of delivering large

transport infrastructure projects however the transition

of procurement approach to put large programs of work

to tender (often contracts in excess of A$2b) means only

foreign owned tier 1 contractors can deliver them.

There is acknowledgement that some projects will not

be able to be reduced in size and the need for tier 1

capability to support these programs is required. There

is however, an opportunity to build sovereign capability,

both within Government and Australian mid-tier

contractors to ensure future transport infrastructure

programs can be delivered to support a future

Australian owned tier 1 contractor.

A key message of this report is the growing need for

industry capability requirements in procurement

practices. The benefits of this approach are:

• Maximising taxpayer benefit (see Section 2.0)

• Decreased risk (see Section 3.0 ‘Procurement Models’)

• Increased competition (see Section 3.0 ‘Procurement

Models’)

• Strengthen sovereign capability (see Section 4.0)

The existing procurement model transfers the majority

of project interface risk, i.e managing various contracts

within the project, from the government to the

contractor, for a price.

In theory, this works well to protect the government

however key risks always return to the asset owner

regardless of the contract mechanisms in place.

Currently, of all the tier 1 contractors who operate in the

nation, none are Australian owned.

Australian contractors, predominately due to balance

sheet size – not technical ability, are unable to tender to

lead and deliver these projects as head contractor,

leaving Australian owned mid-tier contractors to act as

sub-contractors only, engaged outside of the head

contract.

While the need for large tier 1 capability is recognised

and supported, the current government procurement

model for transport infrastructure projects requires

review and adjustment.

While transport infrastructure spending may be used by

the Federal and State governments to stimulate the

economy as we look to transition into a post-COVID

world, the structure of these mega-projects is ultimately

leading to Australia, and Australian taxpayers, not

maximising the benefit from this investment.

The sheer size of these mega-projects ensures that

competition is excessively thin due to the limited

number of contractors that can, and are willing, to price

for sole delivery risk of what are larger and more

complex programs of works. Reducing these contract

sizes to something more manageable, $A500m or less,

would enable increased tendering competition,

diversification of risk – both delivery and financial, and

ultimately better project outcomes (Ryan P.W, 2017)

MAXIMISING AUSTRALIAN TAXPAYER BENEFIT

Governments must ensure taxpayers are receiving maximum benefit through consideration of broader

economic impacts of engaging foreign owned tier 1 contractors to deliver mega projects.

I. As tier 1 contractors sub-contract out work to mid-tier contractors, who in turn may further sub-contract out project delivery, we

have a layering effect of profit margins across the tiers of contractors. For a A$1b mega-project, with a tendered profit margin of

9.1%, this margin-on-margin effect, if given 3 layers of contractors, increases the total program cost by A$75m-A$90m.

II. Tier 1 contractors who operate in Australia are the only businesses financially capable of delivering mega-projects. These

contractors are repatriating profits to their foreign owned parent entities. For a A$1b mega-project this could equate to A$45m of

taxpayer funds being repatriated overseas as project profits.

III. For any infrastructure mega-project undertaken by a foreign owned tier 1, 5-6% of the contract value is priced in to cover head

office & white -collar activities undertaken overseas. For a A$1b program, this equates to A$50m-A$60m not invested back into

the Australian economy.

IV. Australian infrastructure projects have a multiplier effect on the broader Australian economy. For every A$1 invested in Australian

construction, the wider Australian economy benefits by A$2.99 (Australian Bureau of Statistics, 2019). For a A$1b mega project,

given the taxpayer funds used to cover head office costs and repatriation of profits, would equate to the Australian economy

missing out on A$280-A$310m of further economic benefit.

PROCUREMENT MODELS [RISK AND COMPETITION]

i. Both the number and size of mega ($A1b+) and mega mega ($A5b+) transport infrastructure projects are on the rise.

ii. Evidence indicates that the larger the project, the higher the propensity that the project will incur budget and cost over-runs and

the quantum of the over-run will be higher.

iii. Current procurement practices suggest that Government procurement teams are looking to transfer as much risk to the

contractor as possible. This is to give them cost surety, however tier 1 contractors may not be the best to manage this risk,

resulting in project variations and potential litigation. Smaller contract sizes and best practice risk management can de-risk the

overall project.

iv. Similar to above, Government procurement teams are looking to employ EPC (Engineer, Procure & Construct) lump sum project

contracts where a single contractor holds responsibility for the entire project under a single contract. This is the most common

contract type, being used for 53% of mega projects however when this contract type is used, these contracts only obtain a 39%

success rate regarding desired outcomes.

v. When project sizes are announced larger than $A500m (the maximum amount most mid-tier contractors can bid for given

financial balance sheet requirements), competition significantly decreases and thins out. This lack of competition reduces

downward pressure on contract tenders, resulting in Australian taxpayers paying more for Australian infrastructure projects.

Breaking mega and mega-mega projects into smaller programs of works will decrease delivery risk and

increase tender competition, ultimately driving positive project and taxpayer outcomes.

STRENGTHENING THE AUSTRALIAN CONTRACTING INDUSTRY

i. Building sovereign capability will ensure that if/when the Australian transport infrastructure market cools and foreign owned tier 1

contractors allocate resources to other countries, Australia still has the capability to deliver large scale transport infrastructure

projects as they arise.

ii. Ensuring “Industry capability” criteria is included in tender assessments has demonstrated that mid-tier Australian contractors are

given the opportunity to operate at head contractor/project leadership level. This enables a transfer of knowledge and skills to

support the Australian mid-tier contractors, supporting their ongoing growth and ability to successfully tender and deliver larger

projects.

iii. One main advantage for Australian owned contractors to operate at head contractor/project leadership level is the ability to use

and introduce their local supply chains to the foreign owned contractor/s. This allows local supply chains to grow not only for the

current project but future projects delivered by the tier 1 contractors rather than leveraging what is likely a foreign supply chain.

iv. Having Australian owned mid-tier contractors involved at head contractor/ project leadership level through industry capability

criteria or project packaging (breaking mega-projects to <$500m) has seen Australian companies capture 70% of the aggregate

contract value vs 1% when they don’t.

There is a need to develop formal government procurement mechanisms that strengthen sovereign

government PMO offices and foster a stronger Australian owned contracting industry. These mechanisms

need to be employed when assessing and selecting head contractors for transport infrastructure projects.

2. MAXIMISING

TAXPAYER BENEFIT

2.1 MARGIN LAYERING

2.1 Project pricing layering effect of tendered

profits (margin on margin)

It is a common industry practice for head

contractors to sub-contract elements of mega-

project programs into smaller work packages for

various reasons, including; to mitigate delivery

and financial risk, and to access capabilities &

capacity of local talent (Institution of Civil

Engineers, 2017). These work-packages are

commonly subcontracted out to the mid-tier

contractors.

Tier 2 contractors, similar to above may then

choose to self deliver or break up the contract

into smaller work-packages and sub-contract

them out to tier 3 contractors. However it should

be noted that typically, tier 2 contractors have

more self delivery capability than their tier 1

counterpart.

At each stage of the disaggregation of the

original contract, sub-contractors are including a

tendered profit margin into their price. This has

the effect of the tier 2 contractor putting their

tendered profit margin on top of the tier 3 price,

which also includes their profit margin. This

continues up the contractor stack until the tier 1

head contractor applies their tendered profit

margin.

Figure 1 outlines how this applies in a practical

sense and illustrates for a $1b mega-project, with

a tendered profit margin of 9.1% (Ryan and

Duffield, 2017), this is effectively margin on margin

which, if given 3 layers of contractors, increases

the total program cost by A$75m-A$90m.

Comparatively, if the tier 2 contractor/s could

operate at head contractor level, with no tier-1

contractor above, this tendered profit margin

would effectively be removed and lower the total

project cost.

Depending on which “layer” was removed, the

Australian taxpayer could save between A$75m-

A$90m per A$1b Mega-project. Following this

methodology would indicate that for a A$5b

mega-mega project, the Australian taxpayer

would save A$450m.

Our current tier 1 orientated program delivery

approach may not be maximizing taxpayer

returns.

*Combined contract is representative of a consortium comprising Tier 1 and Tier 2 contractors

A$m

Figure 1: Pricing margin on margin

2.2 Repatriation of final project profits

Figure 2, developed by the Grattan Institute in their

report “The rise of megaprojects: counting the costs”,

shows the growth in transport infrastructure is driven

by projects costing more than $A1b, mega projects

and A$5b+, mega-mega projects. These projects

come with an increasing level of complexity and risk

(Grattan Institute, 2020). Australian mid-tier firms,

while they may posses the technical capability to

deliver these projects, do not have the financial

strength to tender for them. Table 1 outlines recent

mega projects and who the successful head

contractor is. It should be noted the majority of these

are a range of international contractors including

Bouygues, Samsung, Salini Impregilio (now Webuild),

Dragados, Acciona, CPB and John Holland.

Figure 2: Growth in Mega and Mega-mega projects

While final project profits are extremely opaque,

especially in foreign jurisdictions, recent analysis of 28

completed construction projects >A$500m between

2000-2017 indicate a net loss of 7.3% however more

than 50% of this was driven by just 2 projects (Ryan and

Duffield, 2017). Removing these 2 projects results in a

net loss of 1.5% over 26 projects.

Figure 3 considers the 16 projects which were delivered

profitably (57% of the projects) and shows that the

average final realized profit margin was 4.5%. (Ryan

and Duffield, 2017).

-actual average final profit for the 16 profitable

completed projects was A$50.25m on an average

contract value of A$1,129m.

57% of recently completed projects over $500m

had a profitable outcome. The average realized

final profit of 4.5% was available for profit

repatriation back to foreign tier 1 owners (Ryan and

Duffield, 2017)

Applying this average final profit margin to a standard

A$1b mega project would indicate c.A$45m in project

profits (Australian taxpayer funds) being repatriated back

to the foreign owned tier 1 parent company. With the

growth in mega projects, this figure is set to soar.

Table 1: Contracts awarded or commenced 2015-2020

Figure 3: Realised profit for completed projects >$500m

Estimated value of work done on transport

infrastructure projects per quarter (

A$b)

2.2 PROFIT REPATRIATION

2.3 Head office cost coverage in projects

Contractors of any size require both a corporate head

office to undertake not only administrative support but

also white-collar roles; lawyers, human resource

management, procurement etc. For tier 1 contractors,

these head office functions are predominately

domiciled in their country of origin. Table 2 outlines the

company of origin of Australia’s most prominent tier 1

contractors.

Table 2: Majority owner of dominant tier 1 contractors

in Australia

A recent survey of Australian Owned Contractors

indicates that the range of head office cost coverage

included in contract prices is between 4% and 8% with

an average of 5.8% (Australian Owned Contractors,

2021).

Tier 1

contractor

Ultimate

majority owner

Ultimate

majority

owner - head

office location

John Holland China

Communications

Construction

Company Ltd

(CCCC)

Beijing, China

CPB

Contractors

Groupo ACS Madrid, Spain

Acciona Acciona Madrid, Spain

This money is retained on-shore when Australian

owned contractors are awarded the head contract

as their profits are distributed to a predominantly

Australian shareholder base and their head office

costs are spent onshore.

Using this range as a proxy for tier 1 contractors would

indicate that for a A$1b mega project, between

A$40m - A$80m (an average of A$58m) is being

extracted from Australian taxpayers to fund foreign

tier 1 head office costs and white-collar activities

being undertaken overseas. These funds are

effectively leaking out of the Australian economy,

along with the profit elements discussed on the

previous page.

2.4 Multiplier effect of transport infrastructure

investment

Australian infrastructure projects have a multiplier

effect on the broader Australian economy. The

multiplier effect is correlated with alleviating

unemployment directly and by secondly improving

the productive potential and efficiency of the

economy. For every A$1 invested in Australian

construction, the wider Australian economy benefits

A$2.99 (Australian Bureau of Statistics, 2019).

For a mega project, delivered by a tier 1 contractor

this multiplier is reduced by the amount of money

which is extracted from this investment to cover costs

associated with a foreign head office and the

repatriation of profits. This would lower this multiplier

by 10.3%* from 2.99 to 2.68. Figure 4 illustrates for a

A$1bn megaproject, this equates to a reduction of

A$310m of broader economic benefit, or alternatively,

greater Australian economic benefit would increase by

A$310m if the tier 1 contractor was Australian owned. For

a A$5b mega-mega project, this difference is A$1.54b.

The larger the project, the larger the missed

opportunity for not having an Australian owned

contractor within the head contract. Impact on

the Australian economy equates to roughly 30% of

the contract value.

Figure 4: Economic impact of tier 1 project delivery A$m

Impact to Australian economy (A$m)

Project/contract size

* 4.5% average project profit + 5.8% average head office cost coverage = 10.3%

2.3 HEAD OFFICE COST COVERAGE & MULTIPLIER IMPACT

3. PROCUREMENT MODELS

3.1 MEGA PROJECTS - AUSTRALIA

3.1 Australian Megaprojects

Not only has Australia seen a considerable increase in

Infrastructure investment recently, but the

procurement tendencies have shifted too.

Megaprojects are becoming increasingly prevalent.

Figure 5 below, developed by the Grattan Institute in

their report “Megabang for megabucks: Driving a hard

bargain on megaprojects”, illustrates the shift in

procurement of government infrastructure projects.

The data presents a positive correlation between time

and project size (Grattan Institute, 2021).

The Grattan Institute noted that the average contract

size within a megaproject had risen 38 percent and its

no longer a rarity for a single contract on a

megaproject to be worth as much as A$4 billion or

A$5 billion (Figure 8 – outlined in section 4.3). The

growth in contract size calls into question how many

firms can feasibly bid for such work (Grattan Institute,

2021).

Before the Covid pandemic, the value of Australian

transport infrastructure under construction exceeded

A$125b for the first time in the nation's history.

Reflective of the rising popularity, over two thirds of

this infrastructure under construction (by dollar value)

was on projects of value A$5b or greater (Grattan

Institute, 2021).

Not only are megaprojects becoming increasingly

prevalent across the nation, but they are costing the

taxpayer considerably more than originally promised.

Between 2001 and 2020, projects with an initial price

tag of A$1b or more overran their costs by an average

of 30% (Grattan Institute, 2020). The government has

spent A$34b more than initially promised to the

Australian taxpayer over the same time period. Figure

9 outlines project overruns by project size, showing

less cost overruns with smaller projects.

With more interdependencies, megaprojects are

increasingly complex, and contractors are asked to

manage risk profiles magnitudes higher than they

have been previously (Grattan Institute, 2021).

As projects increase in size, they increase the risk of

cost overruns. Since 2001, more than a third of

transport infrastructure cost overruns stemmed from

just seven big projects.

This relationship between project size and cost

overruns is not a new phenomenon. Danish economic

geographer Bent Flyvbjerg coined the following

phrase.

‘the iron law of megaprojects: over budget,

overtime, over and over again’. (Bent Flyvbjerg et

al, 2002)

As a nation, we need to procure transport

infrastructure that promotes the highest net benefit to

taxpayers.

When looking at megaprojects, their typical

procurement methodology and associated success

outcomes, its apparent that the existing model is not

sustainable.

It is important not to lose sight of the value

megaprojects and public investment bring to

Australia. A productivity gain assessment made in the

2018/19 Budget Paper #1 approximated that for every

dollar invested in infrastructure, A$4 GDP is generated

for the economy over an asset life of 25 years

(Australian Government 2019).

The issue is not the megaprojects; it is the

procurement of the major works packages within

them.

Figure 5: Growth in Mega and Mega-mega projects

Estimated value of work done on transport

infrastructure projects per quarter (

A$b)

Figure 7 illustrates the success rate of megaprojects by

contract type. It is clear when considering best practice

risk management, mixed contract procurement models

bolster considerably higher success rates than the other

mechanisms.

The tendency of the Australian Government to

procure lump sum megaprojects is proving very

costly to the Australian Taxpayer.

3.2 MEGA PROJECT PROCUREMENT MECHANISMS

3.2 Megaproject Procurement Mechanisms

Major Infrastructure projects are typically procured

through one of four models (Merrow, 2011):

• EPC - Lump Sum: A single contractor is responsible

for engineering, procurement and construction for the

whole project or a portion of the whole project, under

a single contract.

• EPC/ EPCm Reimbursable: A single contractor is

responsible for all (or greater majority) of the project

under a contract that reimburses the contractor

based on quantity of services and materials provided.

• Alliances: The grouping of all (or most of) the head

contractors under a single compensation scheme to

align goals of the contractor with those of the project

sponsor and share risk in a collaborative “no blame”

culture.

• Mixed: Separation of the construction, procurement,

fabrication and engineering contracts. Each contract

is awarded to the party best able to manage its

associated risk.

The models most suitable for selection vary pending the

type of project, complexity of the project, and the

capacity and capability of both the contractor and

client.

Figure 6 illustrates the most commonly adopted

procurement models for megaprojects.

Megaprojects procured under a single contract infer

that one party assumes all or the majority of the project

delivery risk.

Best practice contracting and procurement ensures risk

is apportioned to the party best placed to manage it

(APM Group, 2020). This increases the likelihood of two

beneficial outcomes:

1. Decreased cost

2. Increased chance of successful delivery

Mixed contracts break a project into components

delivered by specialists in each respective area. The

procurement model removes the need for a large tier 1

entity to absorb the risk of the whole project (Merrow,

2011). This aligns more closely with best practice risk

management than EPC style contracts.

EPC Lump

Sum

53%

EPC / EPCm

25%

Alliances

12%

Mixed

10%

Figure 7: Procurement model success – Megaprojects

(Merrow, 2011).

Figure 6 Megaproject Contract Types (Merrow, 2011)

3.3 RISK MANAGEMENT AND IMPLICATIONS

3.3 Infrastructure Risk Management

As Australian governments look for cost surety, they are

looking to engage contractors on fixed price EPC contracts

or Alliance contracts. Australian infrastructure contracts

are presenting with higher risk than ever seen before for

contractors. EPC style contracts see private entities retain

almost the entirety of project related risk, where Alliances

introduce a risk sharing mechanism between the private

and public sector.

Figure 8, developed by the Grattan Institute in their report

“Megabang for megabucks: Driving a harder bargain on

megaprojects” illustrates the sheer quantity of Australian

mega contracts issued since 2006. It is evident that there

is a developing trend to procure infrastructure under

increasingly large contracts.

As these contracts continue to grow in size and

broaden scope, they are becoming more difficult to

manage. Transport Infrastructure projects are being

developed in large cities and contractors need to

balance environmental concerns, community

interactions, and complex interfaces with existing

utilities and other projects under construction

(Grattan Institute, 2021).

The Grattan Institute found that large and complex

projects are more likely to endure cost overruns. Not

only is the propensity of cost overruns higher but so

too is the quantum when they do overrun. The drivers

behind these overruns extended from the large

number of interdependent elements that can be

disrupted if one or more components go wrong.

Figure 9, developed by the Grattan Institute in their

report “The rise of megaprojects: counting the costs”

illustrates that as projects increase in size and

complexity, the likelihood and magnitude of cost

overruns increases.

The underlying issue is that megaproject

procurement in Australia does not align with best

practice risk management. Best practice

construction and procurement allocates risk to

the party best able to manage it (APM Group,

2021).

Risk management as per best practice drives lowest

possible costs for the project and greatest value for

money for the client. Australian procurement

practices are looking to push the majority of risks

onto contractors under a fixed price arrangement.

Collectively, these attributes impose considerable

uncertainties to contractors requested to tender and

deliver the works. As we have previously outlined,

realised profit margins, for those projects which are

profitable, are typically low. Taking a significant loss

on a single project can jeopardise a company’s

ongoing viability. Therefore, if the Australian

government looks to shift the majority of these risks to

construction companies, they will naturally seek

opportunities to cover this risk through higher bid

costs, risk premiums, costly insurance or an

adversarial approach to variations. This may lead to

disputes, delays and ultimately project failure.

Figure 8: Procurement model success - Megaprojects

Figure 9: Prevalence and magnitude of cost over runs

Contract Size

It is very likely that with this risk remaining with

Australian Governments, leveraging inter-agency

relationships and a shared vision for the nation, would

drive a better outcome for the project.

By aligning procurement methodologies more closely

with best practice risk management, a corresponding

reduction in cost overruns will ensue.

In essence, the current procurement

methodologies for megaprojects are not driving

best possible project outcomes and hinder value

for money for taxpayers.

Breaking megaprojects into smaller contracts is part

of this solution. As contract size reduces, scopes

tighten, and the risk profile is more easily quantifiable.

Australian mid-tier contractors are afforded the

opportunity to bid for these projects, immediately

injecting greater competition and assisting

government agencies to identify which contractor can

best manage risk and deliver best project’s outcomes.

3.3 RISK MANAGEMENT AND IMPLICATIONS (CONTINUED…)

Megaprojects that are broken into smaller contracts

and allocate risk to the most suitable party are less

complex, comprise tighter and more developed scopes

and pose less delivery risk to contractors.

This procurement contracting model is more closely

aligned with mixed contracting, leveraging the

expertise of specialist contractors to drive down costs

and improve delivery outcomes. Figure 10 illustrates

how the governance structure varies between an EPC

contract and a Mixed Contract.

By not packaging up all the works into large contracts,

there is increased interface risk that must be managed

between the various contractors (DLA Piper, 2020). This

contract model presents a challenge to Australian

Governments, but not one they should shy away from.

This challenge is an opportunity for government PMO

offices to develop their capability as outlined in Section

4.3.

The Australian Defence Force has recently embraced

this opportunity and is increasing their capability at

managing major works packages thus building

sovereign capability (detail in Section 4.1).

In addition to reducing contract size, the Australian

Government needs to retain risk they are more capable

of managing.

Infrastructure Australia noted one particular example of

this, where governments were transferring regulatory

risks and responsibility for negotiating with other

government agencies such as utilities (Infrastructure

Australia, 2019).

There are two key issues in relation to risk in Australia’s

current transport construction industry:

1. Contractors are required to manage increasingly

large and complex risks under the current contract

models.

2. Government is transferring risk to the private sector

that the government is more proficient in managing.

The first issue aligns with taxpayer value for money.

Taxpayers are paying more for infrastructure due to the

current procurement mechanisms adopted. Contractors

are charging increased risk premiums in order to

manage these program packages.

In researching and delivering the 2019 Infrastructure

Audit, Infrastructure Australia rightly points out that

industry is facing commercial challenges which are in

part due to poor procurement practices – for instance,

inefficient risk allocation and, in particular, excessive risk

transfer from the public sector (Infrastructure Australia,

2019).

Best practice contracting and procurement allocates

risk to the party best able to manage it (APM Group,

2021). Evidence suggests breaking megaprojects into

smaller contracts around the A$500m mark will support

this.

“…governments across Australia keep having

successive project cost blowouts. We are in the

midst of Australia’s biggest infrastructure boom,

but as an industry, we are teetering on the brink of

collapse” (Joe Barr, 2020).

Figure 10: EPC vs. Mixed Contracting Structure

EPC Mixed contract

3.4 COMPETITION IMPACTS

3.4 Transport Infrastructure Competition

Aspects of the market’s traditional risk transfer model

are leading to declining competition within public

tenders for transport infrastructure projects, as the

scale and risks associated with them become too

great for mid-tier contractors, entrenching status quo.

As noted by Infrastructure Australia “In some

instances the scale of works packages inhibit

participation by tier 2 and 3 contractors, thereby

limiting competition on a project that would

otherwise be within the skill range and capability

of these businesses” (Infrastructure Australia,

2019).

To maximise net benefit to the Australian taxpayer, it is

imperative Australian transport projects are delivered

at the lowest possible cost to the desired quality level.

The key driver of low-cost goods/ services is market

competition. Competition bolsters productivity,

promotes economic growth and drives innovation

(Department of Justice, 2002).

In today's current market conditions where tier 1

capacity is at or quickly approaching maximum

capacity, a challenge to government procurement

offices is to consider adjustments to the risk allocation

and scale of contracts issued to the market to ensure

competition. For example, the New South Wales

Government’s Rozelle Interchange project exceeded

the market’s appetite and saw only a single bidder

(Infrastructure Australia, 2019).

In 2017, the New South Wales government tendered a

A$3.9b program of works for the Rozelle Interchange,

the most technically complex component of West

Connex.

The tender closed with only one bid, developed by a

consortium of three foreign owned tier 1 contractors.

With only one bid, the government could not validate

the ‘value for money’ requirement of the tender

evaluation criteria and in the interests of protecting

taxpayers, had to reject the offer.

As noted by Croagh, “we must seek to involve more of

the industry in the mega projects by dividing the

projects into smaller packages which will make them

more accessible to our high quality second and third

tier contractors (Croagh, 2020).

One of the biggest issues with megaprojects is the

reduction in tendering competition they induce. In

order for contractors to tender for projects, they must

meet at least two separate criteria required of them by

State Governments.

• Technical competency

• Financial capacity

Most tier two contractors have the technical

competency to deliver major projects of works,

however, are held back by their financial capacity.

Firms must have 8% of a contract value in net tangible

assets to be considered financially capable of

delivering a project.

There are no Australian and few international firms

with a strong onshore presence and the balance sheet

required to tender for the megaprojects currently

being taken to market.

As these projects increase in size, and continue to be

procured under EPC style contracts, there is a reducing

number of firms capable of tendering.

“…national leadership demands greater interest in

ensuring the tendering processes are efficient,

cost-effective, and flexible; and promote

something that we are very keen on, something

that the Prime Minister Scott Morrison is

absolutely committed to, and that is competition

in the market.” (Michael McCormack, 2018)

As noted by The Grattan Institute, “If very few firms are

willing and able to take on the kind of work that is

becoming increasingly common, there may be less

competition for government transport projects. And

less competition could call into question whether

governments can get infrastructure at the lowest long-

term cost to taxpayers” (Grattan Institute, 2021).

In fact, The Australian Competition and Consumer

Commission would welcome more entrants; its

Chairman has expressed concerns about the

construction industry, saying “if we had more

competition, particularly at the top end ... that would be

a lot better for the Australian economy” (Sims, 2021).

3.4 COMPETITION IMPACTS (CONTINUED)

It is possible to have the benefits of a mega project

along with a highly competitive tendering process.

The adoption of mixed contract procurement will allow

mid tier contractors to compete against tier 1’s for a

number of contracts that collectively make up a

megaproject.

Tier 2 and tier 3 contractors are comfortable taking on

head contractor roles on projects from A$50 -

A$500m (Ryan P.W, 2017). Bridge and Bianchi (2014)

explored this, indicating the splitting of megaprojects

into multiple contracts would create an improved

pipeline of contracts for local contractors and new

Australian market entrants.

Bridge and Bianchi saw this as a necessary step to

drive a competitive market environment and

maximise value for Australian taxpayers.

A common industry comment is “why don’t mid-tier

Contractors form consortium’s to deliver

megaprojects as a collective?”.

Alliance contracts are the only procurement

mechanism that allows mid-tiers to band together in

delivery or join the foreign tier 1’s. Alliance

mechanisms see the government absorb

considerably more risk than in EPC style contracts

alleviating the balance sheet requirements to bid on

projects where they would wear the risks. When

bidding for EPC lump sum contracts in a consortia,

each firm must demonstrate joint & several liability.

This means each firm must have the 8% reserve,

rather than it be shared collectively amongst the

head contractors. This is the original barrier to tender

in the first place. Hence if the mid-tier’s couldn’t bid

for the contract by themselves, they still can’t bid as

part of mid-tier consortia.

If a megaproject needs to be delivered in a large

works package, there is benefit for mid-tiers to join

part of the head contract and increase competition.

Figure 11 outlines the variance in contract delivery

between Australian and Foreign owned entities when

reviewing Australian, publicly funded Infrastructure

projects >A$500m. The projects considered have been

awarded, construction commenced or completed

since the FY2018-19 Federal Budget.

“ In the last few years we’ve seen an absolute

explosion in the number of mega-projects and

mega-mega -projects …As the size of projects

has increased so too has the size of contracts

within them, and once you get to that kind of the

competition really thins out.”

Marion Terrill, lead author and Transport and Cities

Program Director at The Grattan Institute.

It is clear that where projects are packaged or mid-tier

inclusion incentives exist in the tender evaluation

criteria, Australian contractors are enabled to

compete for the works, resulting in Australian owned

entities extracting 60% of contract value, compared to

1% when these measures are not in place.

Figure 11: Industry capability maximizing Australian value

3.5 BENEFITS OF PROJECT PACKAGING

A suite of benefits are available for realisation by breaking projects up into smaller packages of works and

allowing mid-tier Contractors to participate. These benefits are illustrated in Figure 12.

3.5 Benefits of Project Packaging

While we have noted that improved mega-

project outcomes can be delivered by

packaging contracts into smaller programs of

works, and the best contract type to undertake

this is a mixed contract arrangement,

unfortunately for government procurement

teams, there’s little guidance on how to conduct

this with best practice.

Neither the national PPP (public private

partnership) guidelines nor the 2014 Austroads

and Australasian Procurement and

Construction Council’s procurement guidelines

specify the principles that should determine

how packaging could be successfully done.

The Queensland Government (Department of

Employment, Small Business and Training)

outlines that there is an option to design

‘smaller packages of work to be offered to a

greater number of suppliers’, and that

‘feedback may also be received on the ways

the project can be packaged and presented to

the market’. Although in practice Victoria does

have published guidelines underpinning the

methodology, they only go so far as saying that

project bundling should ‘take into consideration

specific project attributes and risks’, and refer to

a series of criteria that should be considered

Program packaging is a sovereign

capability which needs to be

strengthened. As the benefits to mega

project outcomes, asset owners, the

Australian economy and ultimately better

outcomes for Australian taxpayers, is

clear.

when packaging works so as to obtain the

best overall value for money. NSW recently

released a memorandum across its

government offices, pushing a range of

infrastructure procurement related initiatives,

including project packaging, encouraging tier

1 and tier 2 joint ventures, and best practice

risk management.

This capability to undertake adequate

program packaging and manage a portfolio

of projects instead of a single tier 1 head

contract, is a sovereign capability which the

Federal Government is best placed to

strengthen. The ability to deliver the benefits

of mega projects to asset owners, the

Australian economy and ultimately better

outcomes for Australian taxpayers depends

on it.

Figure 12: Benefits of project packaging

4. DEVELOPING

SOVEREIGN CAPABILITY

4.1 NEED FOR SOVEREIGN CAPABILITY

4.1 The Need for Sovereign Capability

The lack of Australian owned tier 1 contractors means

that bidding / delivery decisions for major infrastructure

works packages are made with little to no local influence.

Section 4.2 will outline the amalgamation of major

contracting entities over the preceding two decades, all

of which now have offshore controlling interest.

Decisions about whether to bid into the Australian

Infrastructure market, whether to involve local

contractors and whether to engage local suppliers are

now made in boardrooms across the globe.

There is genuine concern that as the Australian

infrastructure market cools down, these resources will be

shifted to other markets, leaving the nation without the

sovereign capability or capacity to undertake required

capital works projects.

In 2019, Infrastructure Australia warned ‘while large

scale projects are becoming common place, they

are stretching the capacity of industry and

government’.

Australia’s continued reliance on these select foreign

owned tier 1 contractors is further beginning to put a

strain on the nations capacity to deliver the required

infrastructure pipeline.

The current procurement strategy for major projects

considerably narrows the field of potential contractors,

almost entirely by way of balance sheet strength as a risk

mitigation requirement. The ability to address capacity

issues in the market are hindered by the existing

procurement model due to only a select few contractors

having the financial capacity to tender for the projects.

Echoing this concern, Prime Minister Scott Morrision

stated “We are really starting to hit our head on the

ceiling in terms of how much infrastructure work

you can get under way at any one time. And that’s

actually putting some cost pressures into the

system” (Coorey, 2019).

A survey of 12 Australian owned, mid-tier contractors,

indicated that not one of the entities is at capacity. In

addition, eleven of the twelve firms surveyed expressed

interest in participating in major infrastructure projects

(Australian Owned Contractors, 2020). Discussed at

length in Section 3.0, to enable these contractors to

participate in major infrastructure projects, works

packages need to be broken into smaller contracts.

Australia's lack of diverse capability means the nation

relies on a small competition pool of foreign owned

contractors. The result of this anti-competitive market is

higher costs and sub-optimal outcomes.

In Section 3.4, the case of the Rozelle interchange was

investigated, where a tender went to market, receiving

only one response, a joint submission by CPB, John

Holland and Lendlease, the three most prominent tier 1

contractors in Australia. The lack of competition meant

the Australian Government had to reject the offer due to

an inability to ratify the value for money component of

the tender evaluation criteria (O’Sullivan, 2018).

“Australia is in the top 25% of the world in terms of

what its paying for infrastructure compared to

similar countries. As a nation, we are 26% higher

than Canada, 9% higher than Japan and more than

three times as high as Spain” says Marion Terrill

(Grattan Institute, 2021).

There are instances where projects can't be delivered in

smaller works packages. In these situations, Australian

mid-tier contractors should still be afforded the

opportunities to play a leading role in their delivery

through the use of an “industry capability” criteria, part of

the procurement process for some major public

infrastructure projects (A$500m+). Industry capability

criteria will encourage head contract participation, skills

development and growth of Australian contractors. This

procurement mechanism is investigated in Section 4.5.

The Australian Department of Defence has established

the Australian Industry Capability (AIC) contractual

framework focused on developing a sovereign defence

industry and ensuring small businesses remain a key

part of Defence. While a different industry, the notion of a

need to build sovereign capability is not unheard of.

Rationale for this framework was outlined by Hon. Melissa

Price MP (Minister for Defence Industry) on 24 September

2020, where she announced that “We continue to develop

a true sovereign defence industry– one that builds up our

manufacturing base, creates thousands of Australian

jobs and ensures Australian small and medium

businesses play a fundamental role in our major works

programs.”

4.1 NEED FOR SOVEREIGN CAPABILITY

Minister Price further stated, “We not only want to do

this– we need to do this, to ensure Australian

businesses are stronger and more competitive– both

at home and abroad” (Department of Defence, 2020).

A key pillar of this framework was an update to the

Commonwealth Procurement Rules which applies to

A$4m+ procurements. The new rules treat AIC and

sovereign capability as an economic benefit to be

assessed as part of the value for money

considerations (Kuper, 2020). They are now issuing

more effective guidelines to their tender evaluators

regarding this.

While some may argue that Defence is very different

to transport infrastructure, both industry’s spend

billions and the themes of developing a self-reliance

on Australian capabilities, with businesses that are

stronger and more competitive still applies. The need

to enhance sovereign capability in transport

infrastructure delivery is not about opaque or overt

support, simply opportunity to deliver and grow.

The Australian Government needs to firstly include

industry capability criteria in procurement

assessments and secondly, develop smaller

programs of works that the balance sheet of mid-tiers

can support. A procurement model of this nature will

enable Australian mid-tier contractors to firstly tender

as the head contractor, either with tier 1 partners or on

their own, putting competitive pressure on price,

diversifying the total value of project packages and

de-risking the delivery. On top of this, it will enable

mid-tier contractors to gain experience

and develop the project management, delivery

experience and project leadership skills required to

deliver Australia’s extensive transport infrastructure

plan- building sovereign capability further along the

transport infrastructure supply chain.

4.2 The loss of Australian owned tier 1 contractors

Tier 1 contractors have a long-standing relationship

with Australia, playing a major role in building the cities

within which we reside. In fact, a number of the foreign

tier 1’s delivering major programs of works in Australia

today, were built up by the Australian taxpayer.

Lendlease Engineering (now Acciona), John Holland, and

Leighton Holdings (CPB Contracting) were all once

Australian owned businesses. Today, they are all foreign

owned entities, leaving Australia without any local tier 1

contractors (Grattan Institute, 2021). The journey to

become a tier 1 contractor is a long and difficult one.

Contracting is a high cash flow business and as such it

takes a long time to build the balance sheet required to

support major infrastructure works packages.

Figure 13, recreated from the Grattan Institute report –

“Megabang for megabucks: driving a harder bargain on

megaprojects” illustrates the journey of three major tier 1

contractors from Australian to foreign owned entities.

The common theme observed with these contractors is

an increase in scale leading into the 2000’s, enabled

through delivery of publicly funded infrastructure, before

a series of mergers and acquisitions. As the companies

amalgamated and grew, their ownership became

increasingly foreign (Sarah, 2015). Now all three have a

majority foreign ownership structure.

These once Australian owned tier 1 contractors were

supported by governments across the nation to build

scale and experience. Projects like the original Snowy

Hydro Scheme, awarded to John Holland in 1968, the

Sydney Opera House, awarded to Lendlease in 1959, and

the Brisbane Airport, awarded to Leighton Contractors in

the 1980’s, played a role in putting these firms on path to

tier 1 status.

Australian Offshore Patrol Vehicles in Construction

Source: Australian Defence Magazine

4.2 THE LOSS OF AUSTRALIAN OWNED TIER 1 CONTRACTORS

These infrastructure projects were Federally funded

through taxpayers' dollars and the nation had pride in

the infrastructure built, and those building it. The

benefit was not simply world class infrastructure, but

the upskilling, development and experience of tier 1

contractors on home soil.

The landscape these Australian based contractors

operated in while they grew has significantly

changed. The procurement model for public

infrastructure projects is no longer fit for purpose to

enable sovereign capability development for

Australian owned contractors or to enable them to

develop tier 1 status. This model needs urgent reform.

The inability of mid-tier contractors to gain head

contractor experience on complex major infrastructure

projects is preventing them from growing into the next

tier. The existing procurement model is a considerable

barrier for development of Australian owned

contractors.

Discussed in Section 3.1, megaprojects are now

procured under contracts comprising significantly large

programs of works (Grattan Institute, 2021). There are

many prerequisites required to bid for these, the most

prominent being financial capacity. A recent survey of

Australian Owned Contractors highlighted that 65% of

survey respondents advised that they had the technical

capability to deliver a project of up to $A500m however

had been restricted due to financial capacity

considerations (Australian Owned Contractors, 2020).

In order to enable the development of new, Australian

owned mid-tier contractors and sovereign capability,

this procurement model needs to change.

Figure 13: History of tier 1 contractors in Australia

4.3 Government Procurement Capability

The skills of the public sector are as critical as the

private sector. High-quality outcomes across project

procurement and delivery require the achievement of

commercial alignment between the asset owner

(Government) and the delivery partner (Contractor)

(Infrastructure Australia, 2019).

High quality procurement and project management

skills within the public service support value for money

outcomes for users and taxpayers, while minimising

unforeseen risk to sector participants. The potential

contribution of a skilled public sector procurement or

project manager is therefore substantial (Infrastructure

Australia, 2019). There is a strong case for the public

sector to develop highly skilled candidates with these

skillsets as they hold a disproportionate ability to drive

value for money outcomes for the government and

taxpayer, while also supporting a well-functioning and

stable industry.

There is an opportunity for government to greater

prioritise the development of commercial, financial and

project skills amongst the public services in order to

reduce total project costs, avoid cost overruns and

disputes. This opportunity presents through increased

involvement in major infrastructure delivery.

4.4 SOVEREIGN CAPABILITY DEVELOPMENT - GOVERNMENT

4.4 Suggestions for Federal, State & Territory

Government procurement offices.

As the sheer number and size of transport

infrastructure projects increases, government

capability needs to ensure it is at a level that these

projects can be adequately assessed, managed and

delivered to maximise successful outcomes for the

Australian taxpayer. The Government has a role to

play, demonstrating best practice capabilities.

Best practice was identified by Infrastructure Australia

in the Infrastructure Decision-making Principles,

published in June 2018 (Infrastructure Australia, 2018).

This document lays out clear expectations for

nationally significant, publicly funded projects across

the project lifecycle – from problem identification to

post-completion review. However, of the 39 projects

that have been assessed by Infrastructure Australia

over the past three and a half years, none has met all

11 principles (Infrastructure Australia, 2018).

McKinsey & Company, in its 2019 paper “Australia’s

infrastructure innovation imperative” outlined a range

of capabilities that Government procurement

agencies needed to strengthen in order to maximise

the benefit of transport infrastructure projects to the

Australian economy, including:

▪ Projects prioritisation and selection- develop the

capability to perform rapid options analysis, while

reorienting formal business-case analysis to avoid

simplifying projects to single metrics and focus on

scenarios that take future disruptions into account.

The extended timeframes associated with business-

case development conflict with shorter decision-

making timeframes, limiting their usefulness.

▪ Portfolio management of the large portfolio of

infrastructure megaprojects through their lifecycle. This

is a risk that cannot be delegated as a set of

capabilities driven by government’s unique position as

the integrator and ultimate owner of all risk (regardless

of contractual mechanisms).

▪ Ability to rapidly develop, quantify, and assess

customer and community benefits of alternative modal

(for instance, autonomous busway versus heavy rail

versus light rail versus motorway) and scope options

for a new transport corridor, within a short period. Rapid

options assessment would then be very likely used by

the government prior to announcing a specific mega-

project

▪ Ensure transparency—measures to increase

transparency around costs and progress of public

projects can be enhanced by digital technologies that

provide real-time progress information

Further capabilities required by Federal Government

include:

▪ Ensure broader economic implications are considered

through industry sustainability and sovereign

capability assessment criteria inclusion in Infrastructure

tender expressions of interest.

▪ Address sovereign capability considerations when

assessing tender responses or include these criteria

upfront in tender requirements

Infrastructure Decision-making Principles,

published in June 2018 laid out clear

expectations for nationally significant, publicly

funded projects across the project lifecycle …of

the 39 projects that have been assessed by

Infrastructure Australia over the past three and

a half years, none has met all 11 principles

(Infrastructure Australia, 2018).

▪ Adequate risk identification and ensuring

management of those risks are borne by the party

best able to manage them. This allocation of risk, or

risk transfer, is a fundamental capability which best

sits with governments. The tangible benefits outlined

earlier are too great to not get this right.

▪ Ability to appropriately package smaller projects

rather than defaulting to mega-projects is a

capability which would unlock competition and

improve project success. The interface risk associated

with these contracts would also need to ensure

adequate capability is in place.

▪ Develop and share a centralised data base on project

related information to establish a national central

data repository regarding transport infrastructure

projects to learn from and inform decision making

▪ Post funding follow-up/review to ensure the

conditions of funding are met by the State and

Territory Government procurement teams

4.5 SOVEREIGN CAPABILITY DEVELOPMENT – MID TIER CONTRACTORS

4.5 The need for capability amongst mid-tier

contractors

Mid-tier contractors must ensure they develop

(strengthen) the requisite internal capabilities to plan

and deliver a portfolio of (complex) infrastructure

projects from conception and selection through to

completion, incorporating the relevant processes,

technology, and business partnering skills to drive

enhanced performance and project outcomes

(McKinsey and Company, 2019).

Partnering with tier 1 contractors at a head contractor

level enables transfer of practices and procedures

which would upskill the mid-tier contractors to get that

vital practical, on project exposure managing complex

projects.

Another clear benefit of ensuring mid-tier contractors

have a partnership type arrangement with a tier 1 at the

head contractor level would be the ability for the mid-

tier contractor to use and introduce their local

Australian supply chains and networks to the larger tier

1 contractors who may currently rely more so on their

international networks and supply chains.

This would not only give local businesses the

opportunity to supply these projects but would ensure a

cascading effect of upskilling local suppliers and

businesses along the supply chain, ensuring more

Australian content in Australian infrastructure projects.

This successful approach was put in place when Main

Roads WA stated its preference for tier 2 and tier 3

contractors inclusion in head contractor leadership

when it issued its expression of interest document for

the Bunbury Outer Ring Road project in September

2019 (Australian Owned Contractors, 2019).

Main Roads WA included an “industry sustainability”

criteria in the tender assessment criteria, with a 10%

weighting, asking respondents to outline how they

would include these mid-tier contractors in the

delivery consortium.

This industry sustainability criteria requested

respondents to address :

▪ Alliance structure & composition,

▪ Building industry capability

▪ Sustainable procurement

With industry sustainability given the same weighting

as project management capability, design capability

and construction capability, on 12 October 2020, Main

Roads awarded the project to the Southwest Connex

Alliance which 2 Australian owned mid-tier

contractors- NRW Holdings and MACA- together

comprised 50% of the head contract (Jones, 2020).

Another clear example of how the inclusion of an

“Industry capability” criteria has supported sovereign

capability building was the involvement Georgiou

(Australian owned tier 2 contractor), had in the

successful delivery of the WA Gateway Project in WA.

The procurement model of including “Industry

capability” had a 5% weighting which was a criteria at

the EOI (non-priced) stage of the tender.

This resulted in each consortium containing an

Australian mid-tier contractor in the $900m contract.

Georgiou held an 18% share in the consortium for the

design and construction of the project. As a leading

mid-tier contractor, Georgiou was able to build its

capacity as a business and civil contractor due to its

participation in the successful project.

Partnering with tier 1 contractors at a head

contractor level enables a transfer of practices

and procedures which would upskill the mid-tier

contractors

Gateway WA project

Source: Signfix Australia

4.5 SOVEREIGN CAPABILITY DEVELOPMENT – MID TIER CONTRACTORS

Outlined across Section 3.0, the other mechanism

Government can employ to increase mid-tier

participation in major infrastructure projects is a

reduction in the size works packages.

There are two examples where this mechanism has

been used. In 2017, the Victorian government intended

to undertake a program of works labelled the Suburban

Roads Upgrade, procured through three availability

type Public Private Partnerships for the western, south-

eastern and northern suburbs of Melbourne (ANZIP,

2021).

The first of these PPPs, named the ‘Western Upgrades

Package”, was procured as planned. Taking stock of the

unfavourable procurement model, the Victorian

Government shifted its delivery of the remaining two

packages, splitting up the proposed A$2.2b of works

into 12 individual projects. These projects are being

awarded progressively to a pre-qualified panel with

significant mid-tier representation (ANZIP, 2021).

This is an excellent example of best practice major

infrastructure procurement, increasing competition and

affording mid-tier contractors the opportunity to

tender.

The other example is a more recent development in

NSW. Since 2018, the NSW government has been

conscious of the importance of maximising the

Australian benefits of its Infrastructure program. The

government released a 10-point commitment to the

Construction Industry.

The commitment covered areas including;

procurement, risk, bidding costs, high performance,

skills and training, diversity and transparency (NSW

Government, 2018).

Recently, the Premier of NSW, Gladys Berejiklian,

approved and published a memorandum to the State

Government to support the procurement of large and

complex projects. The memorandum builds on the 10-

point commitment, establishing more explicit

initiatives to increase participation, competition and

efficiency in NSW infrastructure delivery, providing

more value for money for NSW citizens (Berejiklian,

2021).

In place from 1 July 2021, the memorandum is

applicable for projects of value more than A$500m.

The memorandum addresses three key themes:

• De-risking pre-construction

• Procurement approach

• Reducing costs and improving timeframes

Within these themes, there are two key practices that

speak directly to the suggestions of this report:

1. Project packaging

“Size contract packages across the NSW portfolio to

facilitate competitive bids from a wide range of

participants. To utilise the full capacity of the

construction market, offer tender packages capable of

being more readily priced and managed by either tier 2

contractors or join ventured between tier 1 and 2

contractors.” (Berejiklan, 2021)

2. State role in stakeholder management and

communications

“Increase the states role… with a view to ensuring

that responsibilities are allocated to the parties

most able to manage outcomes. The respective

roles should reflect the party best able to manage

the risk.” (Berejiklan, 2021)

Project packaging and best practice risk management

are key areas that must be addressed to improve

project outcomes and increase the nations sovereign

capability at both government and contractor level.

Western Roads Upgrade

Source: Infrastructure Magazine

4.5 SOVEREIGN CAPABILITY DEVELOPMENT – MID TIER CONTRACTORS

The aforementioned case studies highlight two key

levers that can be capitalised upon to bolster sovereign

capability:

1. The inclusion of “Industry capability” requirements in

tenders, promoting mid-tier participation in major

works packages;

2. Projects broken into smaller packages of works,

allowing mid-tier contractors to increase

competition and drive costs down.

Both of these mechanisms have demonstratable

positive outcomes for this nation.

As outlined in Figure 11 (and replicated below), when

reviewing Infrastructure projects >A$500m where

contract has been awarded, construction commenced

or completed since the FY2018-19 Federal Budget, there

are clear benefits to Australia when projects are

packaged, or mid-tier contractor involvement is

required.

When there have been requirements included in tender

assessments for Australian mid-tier involvement or

programs have been packaged into smaller projects,

Australian contractors are not only able to participate,

but extract significant value. Circa 60% of total contract

aggregated value is delivered by majority Australian

owned firms, compared to the alternative way of simply

appointing a foreign owned tier 1 as head contractor,

whereby only 1% of total aggregate value of contracts is

delivered by Australian businesses.

Figure 11: Aggregate value of total value of contracts

Source: Churchill independent analysis of AOC data

CONCLUSION

When considering the unique position Australia currently

finds itself as its economy and population transitions from

dealing with the fall-out of the initial COVID virus shock in

early 2020 to an ongoing rhythm of a “new normal”, the

Federal Government needs to operate in a manner which

demonstrates clear leadership.

Through its large portfolio of budgeted transport

infrastructure projects to be delivered over the next 10 years,

the Australian Federal Government has the ability to shape

the economic landscape for decades to come through

ensuring benefits to taxpayers are maximised, competition is

encouraged and sovereign capability is strengthened.

Several Australian State Government departments are now

starting to understand that better outcomes are achieved

through the need to enhance both competition and

sovereign capability. They are addressing this by packaging

large projects into sizes where mid-tier contractors can

meaningfully submit a tender, either as sole head

contractors or in partnership with a tier 1 contractor.

Alternatively, they are including “industry capability” type

criteria in their tender assessments. Some may argue that

the States are taking a leading role and that the Federal

Government has delegated maximising taxpayer benefit,

enhancing competition and developing sovereign capability,

to the various States to administer and employ at their

discretion.

While this practice and recent change in approach from the

various States is welcomed, inconsistencies exist. This

approach is not uniform across the country, nor even for

every (mega)-project within the same State.

The Federal Government through acting in its capacity as

financier has the ability to change this. State based local

industry participation policies should be made consistent at

the Federal level to enhance local content in major projects.

The Federal Government has the responsibility to take a

leading role to ensure best practice procurement of

transport infrastructure projects is coordinated across the

various States & Territories. This was somewhat

acknowledged in the development of the Department of

Finance- Commonwealth procurement rules.

While some may question the effectiveness of their

implementation or adherence, the principle of ensuring best

practice is consistently applied across States & Territories-

especially when considering “Value for Money” and

“Encouraging Competition” is still valid.

The Federal Government needs to ensure a consistent, best

practice framework is developed which can be implemented

across all Australian State and Territory procurement

departments regarding transport infrastructure projects.

This standardised framework needs to consider maximising

taxpayer benefits, encourage competition by packaging

projects away from mega-projects and developing

sovereign capability both within Government as well as the

contractor to ensure successful project delivery and

enhanced domestic supply chain resilience.

A unique time, with a unique opportunity. The Federal

Government needs to ensure it is not squandered.

A unique time, with a unique

opportunity. The Federal Government

needs to ensure it is not squandered.

5. APPENDIX

5.1 FEDERALLY FUNDED INFRASTRUCTURE PROJECTS

Requirement for Project consideration – contract value >$500m, awarded, construction commenced or completed since FY2018-19 Budget.

Project Name State

Value of Project

Commonwealth

Commitment

Lead Contractor Ownership Tier

% Overseas

Overseas

Value $

Tier One %

Tier One Value $

Bruce Highway

- Cooroy to Curra

Section D

QLD $1,000,000,000

2018

2019 Budget

Contract One

- BMD,

Bielby

Contract Two - CPB

Contractors

Australian/

Foreign

Mid

Tier/

One

40%

$400,000,000

40%

$ 400,000.00

M1 Pacific Motorway

Varsity Lakes

to Tugun

QLD $1,000,000,000

2018

2019 Budget

Packages A&C -

Seymour

Whyte

Package B

SGQ, McIlwain

and Albem Operations.

Australian/

Foreign

Mid

Tier/

One

66% $660,000,000 66% $660,000,000

M1 Paciific Motorway - Eight Mile

Plains to Daisy Hill

- Package 1 – Sports Drive to

Gateway Motorway.

Package 2 –

Pacific Highway early

works.

- Package 3 – Watland Street to

Sports Drive.

- Package 4 – Rochedale bus

station and park 'n' ride.

QLD $750,000,000

2018

2019 Budget

Package One - Bielby

Package Two - Georgiou

Package Three - Bielby

, JF

Hull

Australian

Mid

Tier

0% $0 0% $0

Bunbury Outer Ring Road WA $852,000,000

2019-2020

Budget

Acciona, NRW, MACA,

AECOM and Aurecon

Australian/

Foreign

One/ Mid

Tier

50% $426,000,000 50% 426,000,000

Western Sydney Airport NSW $5,300,000,000 Bechtel Foreign One 100%

$5,300,000,000

100%

$5,300,000,000

Brisbane Metro QLD $1,244,000,000

2018

2019 Budget

Acciona Foreign One 100%

$1,244,000,000

100% $1,244,000,000

Ballarat Rail Line Upgrade

Stage 1

VIC $601,200,000

Post 2016 Election

Acciona, Coleman Rail Foreign One 100% $601,200,000 100% $601,200,000

Gippsland Rail Line Upgrade VIC $532,800,000

Post 2016 Election

UGL Limited, Decmil

Australian/

Foreign

Mid

Tier/

One

75% $399,600,000 75% 399,600,000

Source: Source – Answer to Question on Notice 201, Senate Estimates 19 October 2020

5.2 COMPLETED PROJECTS (RYAN & DUFFIELD, 2017)

Project ID Contract Value (m) Tendered Profit $ Tendered profit % Final Profit $ Final Profit %

1 $670 67 10.0% -110 -16%

2 $1,200 84 7.0% 84 7%

3 $1,000 70 7.0% 20 2%

4 $3,500 315 9.0% -1200 -34%

5 $583 35 6.0% 11 2%

6 $471 33 7.0% -120 -25%

7 $500 40 8.0% 38 8%

8 $2,282 251 11.0% 40 2%

9 $600 54 9.0% -20 -3%

10 $1,550 124 8.0% -25 -2%

11 $1,111 100 9.0% 100 9%

12 $1,000 90 9.0% 95 10%

13 $667 60 9.0% 0 0%

14 $667 40 6.0% -240 -36%

15 $988 79 8.0% 15 2%

16 $756 68 9.0% 25 3%

17 $843 59 7.0% 45 5%

18 $1,750 140 8.0% 50 3%

19 $1,633 196 12.0% 120 7%

20 $850 85 10.0% -230 -27%

21 $1,464 161 11.0% -90 -6%

22 $4,830 483 10.0% -1050 -22%

23 $2,000 200 10.0% 65 3%

24 $660 66 10.0% 66 10%

25 $1,957 137 7.0% -200 -10%

26 $830 83 10.0% -170 -20%

27 $1,092 131 12.0% 30 3%

28 $1,100 77 7.0% -30 -3%

5.3 MEGAPROJECTS

Project Name

Value of Project

% Overseas

Overseas Value

Tier One

Tier One Value

State

Lead Contractor

Melbourne Metro

$11,000,000,000

100%

$11,000,000,000

100%

$11,000,000,000

VIC

Lendlease (now

Acciona of Spain), John Holland (China), Bouygues

(France)

Snowy Hydro 2.0

$5,100,000,000

100%

$4,000,000,000

100%

$4,000,000,000

FED

Salini (Italy), Clough (South Africa)

Pacific Highway

- Woolgoolga to Ballina

$4,900,000,000

100%

$4,900,000,000

100%

$4,900,000,000

NSW

Laing

O'Rouke (UK)

WestConnex Rozelle

$3,900,000,000

100%

$3,900,000,000

100%

$3,900,000,000

NSW

CPB Contractors (Spain), John Holland (China)

WestConnex 3A

$3,200,000,000

100%

$3,200,000,000

100%

$3,200,000,000

NSW

Lendlease (now

Acciona of Spain), Bouygues (France), Samsung

(Korea)

WestConnex 2

$3,000,000,000

100%

$3,000,000,000

100%

$3,000,000,000

NSW

CPB Contractors (Spain), Samsung (Korea), Dragados (Spain)

NorthConnex

$3,000,000,000

100%

$3,000,000,000

100%

$3,000,000,000

NSW

Lendlease (now

Acciona of Spain), Bouygues (France)

WestConnex 1B

$2,700,000,000

100%

$2,700,000,000

100%

$2,700,000,000

NSW

CPB Contractors (Spain), Samsung (Korea), John Holland (China)

Forrestfield

-Airport Link

$1,860,000,000

80%

$1,488,000,000

80%

$1,488,000,000

Salini Impregilo (Italy), NRW (Australia)

Toowoomba Second Range Crossing

$1,600,000,000

100%

$1,600,000,000

100%

$1,600,000,000

QLD

Acciona

(Spain), Ferrovial Agroman (Spain)

The Northern Road

$1,584,500,000

80%

$1,267,600,000

80%

$950,700,000

NSW

Georgiou (Australia), Lendlease (now

Acciona of Spain), CPB

Contractors (Spain)

Sydney Metro

- line-wide

$1,400,000,000

100%

$1,400,000,000

100%

$1,400,000,000

NSW

CPB Contractors (Spain); UGL (Spain)

Tullamarine freeway widening section 1

$1,280,000,000

100%

$1,280,000,000

100%

$1,280,000,000

VIC

Lendlease (now

Acciona of Spain), CPB Contractors (Spain)

Metrnonet Thornlie

-Cockburn

$1,250,000,000

50%

$625,000,000

100%

$125,000,000

Downer (Australia) and CPB Contractors (Spain)

Gateway Arterial Road (Gateway Motorway North)

South of Nudgee Road

- Deagon Deviation

$1,162,000,000

100%

$1,162,000,000

100%

$1,162,000,000

QLD

Lendlease (now

Acciona of Spain)

Sydney Metro

- Central Station

$950,000,000

100%

$950,000,000

100%

$950,000,000

NSW

Laing O'Rourke (UK)

Northern Connector

$885,000,000

100%

$885,000,000

100%

$885,000,000

Lendlease (now

Acciona of Spain)

Pacific Highway

- Warrell Creek to Nambucca Heads

$830,000,000

100%

$830,000,000

100%

$830,000,000

NSW

Acciona

(Spain), Ferrovial (Spain)

Pacific Highway

- Oxley Hwy to Kundabung

$820,000,000

100%

$820,000,000

100%

$820,000,000

NSW

Lendlease (now

Acciona of Spain)

Bruce Highway Caloundra Road

- Sunshine Motorway

$812,950,000

100%

$812,950,000

100%

$812,950,000

QLD

Fulton Hogan (New Zealand), Seymour Whyte (France)

Source: Response to Question 201, Department of Infrastructure, Transport, Regional Development and Communications, 19 October 2020.

5.4 ASSUMPTIONS

Calculation

Assumption

Calculation

Assumption

Multiplier effect

In analysis of the multiplier effect, it has been assumed that

a linear relationship exists between the multiplier

constituents.

Head office coverage costs

Head office costs are assumed constant

irrespective of project size. A figure of 5-6% has

been adopted for this report, sourced from

survey outcomes administered by AOC.

Decrease in Multiplier

The only decrease in the multiplier effect has been

assumed to extend from repatriation of head office costs

and profits.

In reality this is a conservative assumption as it is likely that

on top of this, foreign tier-

1’s would leverage partially foreign

supply chains to procure the relevant goods for a project

they are leading delivery of. Speaking relatively, a mid-tier

contractor would likely leverage a more locally dominated

supply chain.

Project profitability

When analysing repatriated profits, the

projects considered were those that generated

a net positive Final Profit.

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