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Queensland Treasury Response to
Commonwealth Grants Commission
Discussion Paper 2008/03
The Assessment of State Capital Needs
July 2008
Contact Officer:
Peter Johnson
Economic and Inter-Governmental Relations Branch
Queensland Treasury
(07) 3225 8261
[email protected]
SUMMARY OF QUEENSLAND’S POSITION
Queensland considers there is a strong conceptual case for the assessment of capital
needs and that in order to deliver an average level of service, States will need
comparable levels of physical assets per capita. Queensland strongly supports an
assessment of net non-replacement capital expenditure.
Queensland supports a direct assessment of a State’s capital expenditure. New capital
formation is a combination of providing services to an expanding population, as well
as responding to changing demography. However, Queensland considers that
population growth is a key determinant of a State’s capital needs. Given the
immediacy of meeting population growth needs, a direct assessment most closely
reflects State decisions in regard to capital investment.
The significant population growth in Queensland has been highlighted in the response
to CGC Staff Discussion Paper 2007-33, Assessing Capital Needs – An Alternative
Approach, and was demonstrated extensively throughout the Commission’s State visit
to Queensland. Key Queensland Government departments, including Queensland
Health and the Department of Main Roads, demonstrated the impact that the
population growth has on demand for State-provided services and the need for
physical assets to support and facilitate service delivery.
The direct assessment methodology as presented Discussion Paper 2008-03 is simple,
transparent and robust. Queensland does not believe further complex adjustments
should be introduced to the assessment.
Whilst accepting the conceptual case for expenditure disabilities, Queensland believes
that adjustments for expense disabilities are not necessary as actual expenditure data
is used in the proposed methodology.
Queensland believes that PPPs are simply a method of procurement and a policy
choice and that there should be no PPP adjustment to the direct assessment
methodology.
ISSUES
Direct Assessment
Queensland supports the direct assessment of capital needs over the indirect holding
cost approach. The direct approach is simple, transparent and robust. It provides states
with funding when it is most needed, namely when non-replacement or new capital
has to be physically built or purchased. Equalization is best achieved by providing
states with above average capital needs with funding at the time that capital costs are
incurred. The direct assessment methodology best reflects what States do.
Queensland supports an assessment of replacement capital through the allocation of
depreciation across the related expenditure categories. This assessment adequately
assesses the ongoing costs of assets over their useful life.
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The direct assessment of non-replacement capital expenditure is necessary to assess
‘new’ physical assets. The proposed methodology includes an assessment of the
change in national average stock; differential population growth; and assessed State
expense disabilities.
In comparison, the indirect model is more complex, does not reflect what States do,
and would require significantly more data spanning long periods of time. The holding
cost approach also requires assumptions about asset lives, for both the depreciation
and holding cost components. Greater judgement, particularly about the latter issues is
required, thereby making the assessment more subjective.
Construction and building activity is running at a high level throughout Queensland.
High levels of activity across the entire State has tended to place pressure on the
availability of engineering and construction resources needed to deliver the
Government’s capital works program. In 1998-99 Queensland’s capital expenditure
totalled $5 billion. In comparison, the total capital spend for 2007-08 is $15.8 billion.
This includes $5.9 billion in the General Government (GG) sector and $9.9 billion in
the Public Non-financial Corporation (PNFC) sector. On a per capita basis, this is the
largest capital program of any State. Queensland has consistently had a higher level of
capital expenditure (on a per capita basis) than the national average, in both the
general government and PNFC sectors. The gap has widened in the past few years as
Queensland’s capital expenditure increased rapidly, as demonstrated in Figure 1.
Figure 1: Purchases of non-financial assets $pc 1991-92 to 2007-08 (GG sector)
Queensland
Rest of Australia
1,600
1,400
Nominal Dollars $ pc
1,200
1,000
800
600
400
200
0
1991-92
1993-94
1995-96
1997-98
1999-2000
2001-02
2003-04
2005-06
2007-08
Source: ABS, Government Finance Statistics (cat no 5512.0) and Mid Year Reviews
Population Growth
Queensland considers the primary driver of the demand for new infrastructure to be a
state’s population growth. Queensland’s rate of population growth has been
significantly higher than the national rate of growth for a consistent period of time, as
demonstrated in Figure 2. In the decade 1996 to 2006, Queensland’s population grew
by over three quarters of a million people.
2
Figure 2: Population Growth (%) – Selected States
QLD
NSW
VIC
AUST
3.0
2.5
2.0
1.5
1.0
0.5
2005-06
2004-05
2003-04
2002-03
2001-02
2000-01
1999-00
1998-99
1997-98
1996-97
1995-96
0.0
Source: Australian Bureau of Statistics, Population by age and sex (cat no 3201.0)
Queensland’s population has increased by 22.5% from 1996 to 2006, in comparison
the population of the two largest States New South Wales and Victoria grew at 9.9%
and 12.6% respectively over the same period. Population growth in the State is
particularly strong in the South-East corner (SEQ), accounting for 21% of the nation’s
population growth between 2001 and 2006. By comparison New South Wales total
share of growth for the same period was 19%.
This unprecedented population growth is driving the need for new infrastructure in
Queensland. The Queensland Government has committed more than $107 billion to
planning and delivering infrastructure projects over the next 18 years. Projects range
from building new road and transport links to ease Queensland’s burgeoning
congestion issues, to delivering water and energy supplies.
Queensland is managing the significant population growth in SEQ through the South
East Queensland Infrastructure Plan and Program1. More than 160 projects have been
delivered since the inception of the plan 3 years ago and this investment has exceeded
$8.5 billion.
Although the majority of capital expenditure is on roads and transport projects, the
diversity of new infrastructure investment is across all service provision categories,
servicing the broader needs of an expanding population.
1
http://www.dip.qld.gov.au/regional-planning/south-east-queensland-infrastructure-plan-and-program.html
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The range of infrastructure investment includes:
 transport and freight;
 water;
 social and other community infrastructure including schools and major tertiary
hospitals; and
 information and communication technology.
Queensland considers the proposed methodology for the assessment of
non-replacement capital expenditure adequately identifies the demands that rapid
population growth places on States and the need for infrastructure investment to keep
pace with population growth. Queensland supports the direct assessment as it
appropriately delivers funding in a timely and contemporaneous manner.
Expense Disabilities
Queensland recognises that the cost of capital investment varies by State. In
Queensland the impact of location and climatic conditions influence the costs of
delivering new infrastructure.
Location
Location based disabilities do impact on the cost of delivering infrastructure. The high
level of activity, which increases the competition for scarce resources and drives up
costs, throughout the State compounds the effect of building infrastructure in a
dispersed state.
Figure 3 shows that Queensland’s regional capital program makes up a significant
proportion of the total program. From 2004-05 through to 2006-07, Queensland’s
regional capital program was consistently around 60% of the total capital program and
well above regional Queensland’s population share of 55% of the State’s population.
Figure 3: Queensland regional capital program vs. population share
Regional Capital Program as % of State Program
70%
Regional Population as % of State Population
60%
50%
40%
30%
20%
10%
0%
2004-05
2005-06
2006-07
2007-08
Source: Queensland Budget 2007-08, BP3 & ABS Catalogue 3218.0
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2007-08 saw this trend reduce slightly with 55% of total capital spending allocated to
regional Qld, which is still equivalent to the regional population share. Investment in
water projects, in particular the South East Queensland Water Grid, additional
expenditure on roads and transport to cater for South East Queensland’s significant
population growth, accounts for this shift in proportion.
Queensland’s regional capital program per capita has increased by an average of 24%
each of the last three years. In comparison, the next largest capital program per capita
is Western Australia, who spent $2,725 per person in 2007-08, whilst $3,354 per
person was spent in regional Queensland alone. Queensland’s regional capital
program per capita is double that of New South Wales’ entire program per capita and
over three times the size of Victoria’s program2. There are also significant
construction cost variations by location within Queensland, generally due to
remoteness and the additional transport and labour costs associated with construction.
These remote northern areas are also in a cyclone zone.
Rawlinsons index
The Rawlinsons Building Index provides an indication of the materiality of these
movements in building costs in recent years. The index charts overall building costs,
taken as a function of variations in the prices of labour and materials in addition to the
broader cost effect of building activity levels and resource availability
(i.e. competition for resources) at any time. The Rawlinsons Regional Index3 gives a
broad indication of regional cost variation within Queensland as it relates to total
project costs. Regional prices are reported using 2007 figures for respective capital
cities as a base. Table 1 below gives a cross section of regional centres and their
relative price differentials.
Table 1: Rawlinsons Regional Index, selected regional centres
State
Regional Centre
Value
QLD
Mornington Island
Weipa
Bamaga
Birdsville
Mt Isa
Longreach
Bowen
Charleville
Cairns
Bundaberg
Townsville
Mackay
Broome
Kalgoorlie
Geraldton
Broken Hill
Armidale
Wagga Wagga
200
180
170
150
145
135
110
120
109
107
105
105
155
135
110
125
110
105
WA
NSW
Source: Rawlinsons Australia Construction Handbook, Regional Indices
2
Queensland State Budget 2007-08, BP 3 & ABS Catalogue 3218.0
In reporting regional indices, choice of material and degree of prefabrication are not taken into account and may
have a significant bearing on cost differentials.
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Table 1 shows there is a wide range of variation in construction costs throughout
regional Queensland, with Weipa returning an 80% escalation above Brisbane prices
and Townsville returning 5%. WA and NSW similarly experienced a large range of
variation across regional areas, although neither State returned as high escalation
figures as Queensland.
Although Queensland returned higher escalation figures than other States, the regional
areas returning the figures are clustered in the far north of the State, suggesting that
distance and dispersion from urban centres are key factors in relative construction
prices. Other regional areas in Queensland, including those located in mining areas all
returned escalation figures similar to that seen in other States, with construction prices
between 20% and 50% higher than Brisbane. Urban centres of Townsville, Cairns and
Mackay experienced escalation in prices of between 5% and 9% above Brisbane
construction prices.
This demonstrates both the conceptual case for a location adjustment and also
highlights how significant the cost variations are inter- and intra-state. In fact, the
Rawlinsons index tends to understate the differences as costs escalate very quickly.
Climatic conditions
In Queensland the main impacts of climatic conditions and natural hazards, which
have implications for buildings and building construction standards are:



Increased risk of damage from more frequent or intense tropical cyclones, storms
and storm surge and stronger winds,
increased cracking of drier soil and from increased ground movement impacting
on foundations and pipe work; and
Increased damage from flooding.
These climatic conditions require building responses, including:
 Higher standards for the thermal performance of the building shell (or cooling and
ventilation systems) across all categories of buildings;
 A possible extension of cyclone affected areas southward and inland and a need to
require improved building performance for wind loads;
 Higher costs for foundation and pipe work protection; and
 Improved standards to ensure buildings can withstand flood and stormwater
incidents.
Building Compliance
State and Territory Building Acts adopt the Building Code of Australia which has
maintenance standards for some aspects of commercial buildings. Building regulation
generally only applies to new buildings. The building approval process requires
certification of compliance with relevant building standards and for minor works
owners are required to follow standards by self assessment rules. Examples of current
standards which relate to climate are water efficiency, cyclone safety (and wind loads
generally), stormwater drainage, flood levels, bush fire protection and structural
soundness.
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The direct assessment of non-replacement capital expenditure uses actual per capita
expenditure GFS data. The actual expenditure data will reflect any additional costs
faced by States due to location and climatic conditions. If an adjustment is made to
the non-replacement capital expenditure GFS data for expense disabilities, the
assessment may overstate the impact of these disabilities. Queensland considers that
an adjustment for expense disabilities is not required.
OTHER ISSUES
Public Private Partnerships (PPPs)
PPPs are considered a method of procurement and are used where it is likely this
method will result in better value than traditional infrastructure or service delivery
methods. Actual selection of particular delivery models is dependent on both agency
and individual project drivers, such as a project complexity and delivery timeframes.
The decision to choose a PPP to deliver a project is simply a policy choice of States.
Smaller States may consider they are at a disadvantage in attracting private
investment in infrastructure projects, but the perceived benefits may not materialise.
Political presentations of PPPs oftentimes exaggerate the benefits of PPPs typically by
a factor of between 3 and 10 times; costs are expressed in economic terms rather than
actual payments out of the State budget; the full payment stream is not explicitly
expressed; and costs are discounted in a way that creates economic savings but do not
actually save money in the budget4.
In addition, there is a higher cost of financing infrastructure through PPPs compared
to traditional public sector debt financing. Larcombe and Fitzgerald5 have found that
the private sector requires a rate of return of around 9% per year compared to 6 % per
year for the public sector. Using these rates, a project costing $4 billion through
conventional public sector financing would cost $5.6 billion if financed through a
PPP.
In NSW the government contracted a private sector consortium to build, maintain and
provide security in nine state schools, which the government will lease back for 30
years. The government has however acknowledged that, if all goes well, the project
will produce only a 4% saving over the 30 year life of the project to taxpayers
There have been high profile failures in delivering PPPs, for example the Cross-City
Tunnel in Sydney and the Spencer Street Station in Melbourne.
The use of private funds rather than public funds increases the level of liability
exposure when service contracts fail. As the Sydney Airport Rail Link contract (New
Southern Railway) demonstrates, when essential services provided by the private
sector fail, the public sector is forced to act as guarantor. The public sector risk can be
greater as the ability to directly manage the risk is reduced.
Peter Fitzgerald (University of Wollongong, 2006), PPPs – The Next Big Thing, or Big Mistake?
Larcombe & Fitzgerald (2003), Paying for Private Profit: A Review of the Public Private Partnership Model
in the Provision of Community Infrastructure and Services
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5
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The New Southern Railway linking central Sydney CBD with Kingsford Smith
Airport shows that the government must continue to underpin major infrastructure
projects even when run by the private sector. Professor Bob Walker estimates that in
the case of the Sydney Airport Rail Link, the private sector stood to make a 23% of
return despite incurring minimal risks6. However, the NSW government incurred
construction and volume risks, contributed most of the funding, and may only break
even after 23 years and at best earn only 2% per annum on the investment.
The public sector remains the provider of last resort. In cases where the private sector
loses money and terminates a contract the public sector must step in to maintain
services. For example the 257 bed La Trobe Hospital, which had been owned and
operated by private company Australia Health Care (AHC), was handed back to the
Victorian government after reporting losses.
Queensland does not believe it is appropriate to make a complex PPP adjustment to
the capital assessment, PPPs are a policy choice and do not necessarily deliver cost or
efficiency savings to States.
6
Bob Walker, Privatisation, Infrastructure and Local Government, address to the NSW State Assembly NSW
Local Government and Shires Association, Sydney, 2001
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