Defence Management – Capital works: A lot of work to come | ADM Oct 08
Bruce Ferguson
The Helmsman Institute has just completed its second annual outlook for capital projects.
This report looks across the main project sectors of the Australian economy and creates a future forecast for anticipated capital project spend.
This report is unique in that the report looks at current plans of government and industry, differing from most reports that look at historical spending.
Our current report has found that despite the sub-prime crisis, falling asset prices and talk of recession, overall capital investment levels in Australia remain healthy with a continued spend that is maintaining rates 300 per cent above traditional levels shown prior to 2004.
While the frantic double digit growth rates of the past three years are set to moderate to rates closer to overall GDP growth, the absolute level of investment is forecast to remain high for at least the next three years.
Three sectors in particular are driving continued high levels of capital investment – public infrastructure, mining and defence.
These three sectors will account for in excess of $65 billion in capital investment for each of the next three years.
Each of these sectors has specific structural drivers that will ensure that investment levels stay high for the foreseeable future.
Public Infrastructure
Infrastructure spend is driven by the mining boom in Western Australia and Queensland, but also more generally across the country by the need to redress decades of under-investment.
Continuous economic growth over the past 17 years at an average rate of 3.6 per cent pa means that the economy is now operating at close to full capacity.
The 2008-09 Federal Budget acknowledged that future growth therefore depends on expanding the productive capacity of the economy through investing in both:
• Hard infrastructure - roads, transport systems, communications, water and sewerage, electricity, gas, ports etc
• Soft infrastructure - schools, universities, research facilities, hospitals, libraries, etc.
Regardless of this growth imperative, much public infrastructure is now reaching the end of its design life and requires replacement in any case.
Another structural driver of capital investment in public infrastructure is technological change, particularly in areas such as telecommunications where substantial investment is required to maintain international competitiveness and Australia’s ability to attract foreign investment.
Population growth is stretching urban infrastructure in large population centres such as Brisbane, Sydney and Melbourne, as well as in the new mining boom towns being created in Western Australia and Queensland.
Climate change and other environmental issues are also beginning to have an impact with investment in new types of projects such as desalination plants, wind power and tidal power.
The State Governments with the largest populations (New South Wales and Victoria) and the greatest exposure to the resources boom (Western Australia and Queensland) have therefore made record increases in public infrastructure investment.
Mining
Mining continues to be driven by strong demand from China.
Slight dips in economic growth forecast for our main trading partners will be largely offset by the boom in terms of trade and recent exchange rate depreciation.
The mining sector now dominates private new capital investment in Australia, growing from around 14 per cent of total investment in 2000 to almost 30 per cent currently.
While overall private sector investment has doubled since 2000, mining investment has increased fourfold in the same period.
The scale of mining projects is orders of magnitude greater than in most other industries, both physically and financially.
The mining industry is driven by export demand, principally from China and Japan.
While a dip in growth rates is forecast for our major trading partners and some uncertainty exists about continued growth for Japan in the short term, the medium and long term outlooks remain robust.
In its August 2008 Statement of Monetary Policy, the Reserve Bank of Australia expected that “growth in Australia’s major trading partners will be around 4.25 per cent in 2008 and then slow to 3.75 per cent in 2009, down from 5.25 per cent on average in 2006 and 2007. A modest recovery in global growth is then projected for 2010.”
Defence
Recent growth has been driven by “war on terror” reconfigurations and catch-up from delays related to the Kinnaird review.
Continued high investment levels will be driven by the need to replace ageing assets - 80 per cent of the Australian Defence Force’s warfighting assets will be replaced or upgraded over the next 10-15 years.
The 50 per cent growth in investment levels over the past three years has been driven by two factors - catching up with the backlog of capital renewal driven by the Kinnaird review, and a repositioning of defence capability to match the needs for security in the current threat environment.
The Kinnaird review was established as a result of project issues, most notably the Collins class submarine issues, and it recommended a range of new structures and policies for project delivery and approval.
Implementation of these recommendations required restructuring of the Defence department which absorbed its focus for a number of years.
In addition, projects now need a two pass process for approval, which initially added time to project approvals.
This created a backlog in projects, and further ageing of Defence capability.
This backlog began to clear in 2006.
The “war on terror” and the new asymmetric paradigm for warfare (where small non-state organisations create impact beyond that of traditional armies), has required all Western forces to restructure and to develop rapid, mobile, expeditionary forces, with high technical requirements for networking, and considerable amphibious capability in airlift and naval capability.
The initial components of this transformation are beginning to flow through the system.
In addition current units in service are expected to have much lower lifetimes due to the dramatically increased operational tempo.
Growth Constraints
Our data suggests that investment levels in these sectors are being constrained by project delivery capabilities rather than the appetite for investment.
Planned investments are being spread across future years to “load level” project resources and a significant proportion of projects are being reprogrammed into the future each year due to delays in delivery.
Previous research by Helmsman has demonstrated that growth in three critical resources used in capital projects, (trades, engineers and project managers) has either been flat (trades and engineers) or negative (experienced project managers).
It is this shortage of resources that is causing projects to be reprogrammed into later years.
Given the size of the capital investments being made in these sectors and the benefits expected to flow from them it is somewhat surprising that so little is being invested in developing the required project delivery capabilities.
The Helmsman Institute recommends that project management for large complex projects in these sectors focus more on accelerating delivery of outcomes, actively reducing risk and authentically aligning stakeholders - and less on adhering to process for its own sake.
Based on studies of a number of major project resets the Helmsman Institute believes that delivery of most major projects can be accelerated by 10-20 per cent, even in the face of apparent external resource constraints and even for well advanced in-flight projects.
The Helmsman Institute believes that relatively small investments in building advanced project execution capabilities to accelerate project delivery will yield very large paybacks for the organisations involved and for the Australian economy.
Bruce Ferguson is the Chairman of the Helmsman Institute for Project Governance.