2.2 Condition of the Commonwealth’s infrastructure

The condition of Commonwealth infrastructure varies markedly. In some cases, assets are new and are currently being brought into service, as is the case with the National Broadband Network. In contrast, other property holdings, including various military barracks, post offices and lighthouses, predate Federation.

As outlined in the Commission’s Phase One Report, managing the Commonwealth’s property holdings involves considerable legacy issues, such as contamination and underinvestment in repairs and maintenance.

In considering the condition of the Commonwealth’s infrastructure, the Commission has not undertaken a detailed engineering analysis or developed a comprehensive asset management plan for these assets. Nevertheless it makes some observations around maintenance and funding arrangements for asset replacement.

Maintenance

A failure to optimise infrastructure investment through timely maintenance will lead to higher management and maintenance costs over time while reducing the capacity, reliability, safety and efficiency of the Commonwealth’s assets.

The private sector and government business enterprises that operate on a commercial basis fund maintenance from revenue and best practice dictates this expenditure is in accordance with long-term asset management plans.

Maintenance has generally been managed for the infrastructure assets of Commonwealth public corporations.

Maintaining the Australian Rail Track Corporation network has been and remains a major task. The Corporation currently has responsibility for the management of over 8,500 route kilometres of standard gauge interstate track in South Australia, Victoria, Western Australia, Queensland and New South Wales. It also manages the Hunter Valley coal rail network, and other regional rail links in New South Wales.

In 2012-13, the Corporation reported annual infrastructure maintenance expenses of $174.6 million. Also, in recent years there has been a significant level of investment as part of past stimulus packages, resulting in improved track reliability and transit times on some sections of track. A major capital investment programme in excess of $3 billion is committed to 2017-18.

However, in recent years some of the capital projects undertaken by the Australian Rail Track Corporation have had marginal benefit-cost ratios, were not needed to meet future demand projections or did not effectively address expected capacity constraints.

Examples include the Broken Hill to Parkes concrete re-sleepering project, and the Whyalla to Broken Hill and the Parkes to Cootamundra re-railing projects, with a combined total cost of $656 million.

The Corporation has subsequently written down a significant proportion of the value of these investments on its balance sheet as income forecasts in future years on its interstate network are not expected to fully offset the upfront capital costs.

Assessing the quality of the Australian Rail Track Corporation’s network is complicated, even for subject matter experts.

An Australian Transport Safety Bureau report on the Melbourne-Sydney line released last year provided a detailed independent review which, through its ‘Track Quality Index’, provided a measure of alignment, gauge and twist of the rail track assets. Over the period from 2007 to 2011, a steady improvement in asset condition was recorded.

However, over the same period there was a marked increase in condition incident reporting by train crews, particularly on the Victorian sections. The Australian Transport Safety Bureau observed that the replacement of wooden sleepers with concrete improved some of the track quality components — and hence improved safety — but did not lead to sustained improvement in vertical alignment which influences the smoothness of a rail ride.

Despite the investment in the Australian Rail Track Corporation’s network, the size and age of the network mean that it requires constant attention.

A separate Australian Transport Safety Bureau report concluded that defective track led to a derailment near Caragabal in New South Wales 2011, and temporary speed restrictions were imposed near Moree so lines could be repaired.

A report by the New South Wales Office of Transport Safety Investigations on a 2012 derailment of a coal train near Narrabri found the main cause was a buckle in the track. The Australian Rail Track Corporation’s services in North-East Victoria have also been affected by an increasing incidence of mud holes.

Airservices Australia owns air traffic control and landing infrastructure including 1079 buildings at 684 sites around Australia, two major centres in Melbourne and Brisbane, four terminal control units, 29 towers at international and regional airports, and aviation rescue and fire fighting stations at 22 airports. Airservices also maintains a range of aviation navigation and surveillance equipment around the country.

The Commission understands Airservices Australia intends to invest $1.1 billion over the period from 2013 to 2018. Ongoing investment in tower infrastructure and technology, the replacement of back-up terrestrial based navigation aids and surveillance equipment upgrades account for the majority of investment in the upcoming years and are designed to improve the efficiency and safety of air transport.

Future investments also include replacing and upgrading Airservices Australia’s core air traffic management system, which will reach its end of life in the second half of the decade.

Since 2009-10, Australia Post has invested over $1 billion in its letters, parcels and retail networks. Australia Post is also investing $2 billion over the next four years to modernise its parcels and retail networks and develop digital communications to meet anticipated consumer demand.

The National Broadband Network is at an early stage and other processes to review it are underway.

There are significant maintenance issues across the Commonwealth’s property estate.

The domestic property estate managed by the Department of Finance comprises 104 properties including commercial office buildings and public interest properties, such as the Prime Minister’s Official Establishments.

The condition of this estate has deteriorated primarily due to underinvestment in regular maintenance, ineffective asset management plans and in many instances the deferral of maintenance expenditure in response to budgetary pressures.

As a result, increased expenditure on maintenance and related functions is now needed to bring assets back to minimum standards. Deferral of maintenance is penny wise and pound foolish.

Recent examples include urgent repairs to the facade of the heritage-listed John Gorton Building in Canberra to meet work health and safety requirements, the repair and maintenance of The Lodge and remediation projects on contaminated sites on the Cox Peninsula in the Northern Territory and Sydney’s Malabar Headland.

A 2009 review of the Defence estate noted that many Defence facilities date back to World War Two and in some cases well before then. The Defence estate comprises three million hectares with some 400 owned properties (including 72 significant bases and several world heritage areas), 25,000 buildings and 6,000 other structure assets.

Over the last two decades Defence’s capital funding has been primarily directed to military equipment rather than facilities, with average capital reinvestment in the estate falling by about a third. As a result funding is increasingly diverted to ‘stop-gap’ repairs and maintenance to keep old facilities going. For many Defence properties, contamination is also a significant issue.

CSIRO’s assets include 1,000 buildings at 54 locations. A comprehensive review in 2011‑12 assessed 83 per cent of CSIRO buildings as needing significant maintenance to preserve operational capability.

In addition to budgeted repairs, an additional $175 million in maintenance expenditure is needed over the next ten years to maintain CSIRO properties to meet external compliance requirements and certification standards.

The CSIRO also owns and operates three national facilities: the Australian Animal Health Laboratory, the Marine National Facility, and the Australian Telescope National Facility. Other agencies and universities use these facilities extensively, free of charge.

While introduction of user charging is an option, CSIRO has received funding to provide these facilities and most users of CSIRO’s national facilities are funded by the Commonwealth. Nonetheless, the cost of owning, operating and maintaining these facilities needs to be better managed.

A 2010 audit of the overseas estate (managed by the Department of Foreign Affairs and Trade) undertaken by the Australian National Audit Office found that some buildings were old and had heritage significance, making maintenance, and compliance with relevant standards, challenging and expensive. Preventative maintenance had been ad hoc and inadequate in the past.

Improved asset management

The Commission considers better asset management practices and improved planning of property maintenance is necessary.

The Audit Office has previously recommended agencies document a management plan to optimise the life and functionality of their assets, while scheduling down time to minimise disruption. Plans need to reflect that the maintenance spend may not be uniform over future years.

The quality of an asset management plan is paramount. There have been instances where asset management plans are in place, yet maintenance issues have still arisen. For example, the Department of Finance has a comprehensive Capital Asset Maintenance Plan for the John Gorton Building which was prepared in April 2010.

At the time, the condition of the building facade was rated as fair, with $1.2 million in refurbishment scheduled for 2015-16. However in 2013-14, funding was provided for urgent refurbishment of the facade. The amounts allocated were not disclosed, but are expected to be several tens of millions of dollars.

Deferring maintenance in response to short term budget pressures can be discouraged by requiring it to be reported, as occurs in the United States. New Federal Financial Accounting Standards there require agencies to measure and report on the value of deferred maintenance and repairs.

The Commission considers that a similar approach should be adopted by the Commonwealth.

Contamination

While the Commonwealth has significant land holdings affected by contamination, the total extent across all agencies is difficult to estimate.

The Department of Finance is presently leading a whole-of-Commonwealth study on the management of contamination in Commonwealth land.

As part of this study, Finance surveyed 45 agencies on the level of contamination on land they own or use. The results show that 94 per cent of Commonwealth owned properties, a total of 2537 properties, may have had activities with the potential to have caused site contamination, but only 15 percent of these are known to require remediation.

Some 70 per cent have not been subject to a preliminary site investigation. Extrapolation of these findings suggests that just over half of Commonwealth property could have some level of contamination.

Estimated remediation costs can be in excess of potential divestment proceeds from the sale of land and failure to adequately provide for contamination liabilities can lead to large, unexpected further calls on the Budget.

Defence only makes a provision for decontaminating land where a legal or constructive obligation exists.

As at June 2013, this provision stood at $872 million. For other Defence land, the potential costs are unknown and have not been assessed. Other agencies may include some provisions for property remediation, for example Finance includes a provision of $5.6 million, but not specifically for decontamination. While the cost of decontaminating all Commonwealth property is unknown, it is likely to be billions of dollars.

In its Phase One Report, the Commission suggested that the Commonwealth’s Budget should more accurately reflect the expected costs associated with contingent liabilities such as loans and guarantees.

A similar principle could be extended to cover liabilities such as the expected remediation costs of contamination on Commonwealth land. As with the other liabilities, this would need to be reflected as a best estimate and refined as the true extent of actual contamination and estimates of remediation costs becomes better known.

As an interim measure, the Commission suggests that there be greater transparency about the level of contamination and that agencies should maintain a register of contamination affecting their properties.

As part of their regular maintenance program, agencies should also aim to complete preliminary investigations of the extent of contamination on all properties over the next five years. Whether additional investigation is required should be determined on a case by case basis, based on value for money considerations.

Funding for asset replacement

As well as experiencing challenges associated with appropriate maintenance of infrastructure, many Commonwealth agencies experience challenges funding asset replacement.

To partly address this, arrangements have been in place for a number of years under which agencies (other than Defence) receive a departmental capital budget. This provides them with up to $10 million for individual asset purchases. Total capital budget allowances for each agency are based on their historical capital spending.

Where agencies required additional funding to replace assets beyond this amount the portfolio minister could bring forward a new spending proposal through the Budget process. In recent years, this has meant identifying offsetting savings from elsewhere within their budgets.

While some agencies have funded new capital expenditure for minor capital works and refurbishments through their capital budgets, others have found this difficult for a number of reasons including:

  • departmental capital budgets were reduced by 20 per cent in 2011-12 as a one‑off budget saving;
  • major capital items are necessarily lumpy and expensive, and hence it is difficult to identify offsetting savings to accommodate them;
  • cost savings that accrue beyond the forward estimates period are not considered offsets for capital costs even if the overall proposal has a positive net present value; and
  • some assets are becoming more expensive to replace in real terms associated with technological development.

In the case of property sales, with limited exceptions, agencies are required to return all divestment proceeds to the Budget. In its Phase One Report, the Commission noted this policy provides little incentive for agencies to pursue property divestment. It also provides disincentives for agencies to maintain assets to an appropriate standard to optimise ultimate disposal values.

The current funding model presents a risk that when agencies need to fund major investment proposals over the departmental capital budget’s $10 million there is no obvious source of funding.

Consistent with its Principles of Good Government, the Commission considers that new investment should be funded if it is an important priority of government and if ownership of the asset is value for money.

A sensible approach to this issue would be to create a central provision to fund major capital assets at the Commonwealth general government level.

Agencies would bid for the allocation of capital funding from the provision, which at the whole of Commonwealth level would be better placed to address the infrequent and ad hoc nature of capital expenditure.

The provision to fund major capital acquisitions could be set at the value of the total depreciation of Commonwealth’s major assets each year plus the net proceeds of own-use asset sales.

Creating this provision will not have an impact on the underlying budget balance at the time it is established. The underlying cash balance will be affected when an asset is purchased.

The reporting of this provision in the Budget papers will enhance transparency and planning in relation to replacement of the current stock of Commonwealth assets, which are essential to the delivery of Commonwealth services.


Recommendation 1: Improved management of Commonwealth infrastructure

The condition of Commonwealth infrastructure varies markedly. Better asset management is needed to ensure long-term sustainability. The Commission recommends the Government:

  1. ensure all agencies maintain current asset management plans which cover the full range of activity from acquisition, management, maintenance and disposal;
  2. require agencies to report on the value of deferred maintenance and repairs in the notes to their financial statements, drawing on the asset management plan;
  3. develop an estimate of the cost of remediating contamination on all Commonwealth property and report this as a contingent liability in Budget papers and agency financial statements; and
  4. create a new centrally managed provision to fund major capital assets, from which agencies can seek funding as part of the Budget process. This provision should be equal to the value of depreciation on the Commonwealth's major own-use assets plus the net sales proceeds of such assets.