Game CHANGERS In a KangaNews- Corporate Debt Summit first, four senior executives from the resources, infrastructure, property and media sectors sat on a panel session to offer top-level insights into the Australian economy. The session took place in the same week as the installation of ’s new prime minister, Malcolm Turnbull – making the political backdrop a key talking point.

BY HELEN CRAIG

POLITICS: STABILITY COULD LIFT BUSINESS BIGGER ISSUES CONFIDENCE However, the change of leadership will not act as a panacea for Panellists agree that the installation of a new confidence levels which have remained stubbornly low since the federal government carries at least some financial crisis. In fact, Stokes is somewhat surprised that positive potential to lift Australian business sentiment. fundamentals such as relatively low unemployment and the However, they say this will hinge on the new robust housing market have not boosted consumer expenditure. administration delivering on the expectation He comments: “The consumer environment has been quite risk that it will be more able and willing to tackle averse but perhaps consumer sentiment – and as a result business structural issues. confidence – may begin to change.” he immediate reaction to the defeat of Tony Abbott by Grant Fenn, chief executive officer and managing director Malcolm Turnbull as leader of Australia’s Liberal Party at Downer Group (Downer) in , reveals an undercurrent T– and thus prime minister – on September 14 was one which he identifies as a big issue for both the Australian economy of muted optimism. Analyst and consumer sentiment, and and market views coalesced which he hopes new federal around the concept of a leadership will reduce. “Vast parts moderate potential upside of our economy are presently for Australian business very unsettled. This is based on a confidence based on view that the Australian economy hopes of a more coherent needs to ‘adjust’, but not quite economic platform and knowing what this adjustment better marketing of ought to be,” he says. this programme to the Australians do not like seeing electorate. their government prevaricating, Speaking just three Fenn adds. “There are serious days after the leadership concerns about job stability in change, senior business industries such as mining and gas. leaders participating in a To the extent that the new prime panel discussion at the fifth minister sets out a deregulation KangaNews-Westpac Corporate Debt Summit say they also agenda, people may start to take the view that the adjustment envisage a potential boost to business confidence. required might not be as painful as they had been expecting.” Ryan Stokes, Sydney-based chief executive officer at Seven The business leaders also argue that greater confidence in the Group Holdings (Seven Group), argues that any reduction in government may at least obviate the lull in business confidence political uncertainty can only be beneficial for the wider economy which is often observed in the run up to an Australian federal – almost regardless of policy outcomes. “We have seen a very election – the next one of which must be held before January early indication of a strong lift for the government in opinion 2017. It had been feared that the country could become mired in polls, which is likely to bring about a positive change in consumer a protracted campaign between an unpopular government and sentiment as consumers begin to feel more confident about the an unconvincing opposition, all viewed as a precursor to another political environment,” he says. change in government.

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officer at Lend Lease in August INTRODUCING THE PANELLISTS 2014. Prior to this, he held the role of chief executive officer The participants in the closing panel at this year’s KangaNews-Westpac of Lend Lease’s Americas Corporate Debt Summit (pictured above, left to right) boast an business – a role he was appointed to in April 2010. impressive array of qualifications to comment on the state of play in and future prospects for corporate Australia. McNamara is responsible for ensuring Lend Lease achieves PANELLIST: Michael Carter, PANELLIST: Grant Fenn, chief Ryan Stokes is managing world’s best practice in risk executive vice president, executive officer and managing director and chief executive management and operational strategy and business director, Downer Group officer of Seven Group excellence. He also oversees development, Holdings and has been an Lend Lease’s building, Grant Fenn has more than executive director of the engineering and services Michael Carter has broad 20 years’ experience in company since February 2010. businesses in Australia. experience in leadership roles operational and financial He has been a director of McNamara sits on the boards of over a 25-year career in the rail management as well as since 2012, numerous public and privately industry – including freight, strategic development. and was an executive director held firms. passenger and heavy-haul rail He joined Downer Group and then chairman of Pacific operations. His experience (Downer) in October 2009 Magazines from 2004 to 2008 MODERATOR: Bill Evans, chief includes significant national as chief financial officer and and a director of Yahoo7 from economist, managing director and international industry roles was appointed chief executive 2005 to 2013. and global head of economics in rail and transport. officer in July 2010. and research, Westpac As a director of WesTrac, Banking Corporation He has been a core member Prior to joining Downer, Fenn Stokes has extensive of Aurizon’s executive had a 14-year career at experience in China, having Bill Evans has worked as a leadership team for a decade, Airways during which he developed relationships with research manager for the playing a prominent role in held a number of senior roles various mining and media Reserve Bank of Australia, the company’s successful and was a member of the companies over the past 15 treasurer at Commonwealth transition from a government- executive committee for 10 years. He is also a director of Bank of Australia, and as owned railway to a top-50 ASX years. These roles included Coates Hire and has been chief director and head of financial company. executive general manager of executive officer of Australian markets at Schroders Australia. strategy and investments, and Capital Equity since April 2010, He joined Westpac Banking Carter was appointed executive general manager having been appointed an Corporation (Westpac) in 1991 executive vice president, – associated businesses, executive director in 2001. as chief economist and head strategy and business responsible for the airports, of research. Evans is Westpac’s development in December freight, flight catering and PANELLIST: Robert economic spokesman and 2013. From 2005 to 2013 he Qantas Holidays businesses. McNamara, group chief risk is responsible for all of the was the leader of the Network officer, Lend Lease bank’s economic research. He business for Aurizon – formerly PANELLIST: Ryan Stokes, was chairman of Australian QR National Network – with full chief executive officer, Seven Robert McNamara was Business Economists for eight profit and loss accountability. Group Holdings appointed group chief risk years and is now a life member.

LONG VIEW incentivise long-term efficiency,” insists Michael Carter, executive While the immediate response to the Turnbull accession to the vice president, strategy and business development at Aurizon in premier’s lodge is clearly a hope for a shift to a more coherent, Brisbane. business-friendly policy agenda, the main concern is that the new He adds: “It is important to concentrate on the fact that this administration will not be able to dump the short-term outlook need exists, irrespective of the change. The need is to have a which has dogged its predecessors. “What we’d like to see change government focused on helping business achieve certainty around under the leadership of the new prime minster is the need for a its investments, specifically by itself looking beyond a year-to-year bias – at both a policy and investment level – towards things that electoral cycle.”

66|KANGANEWS OCT/NOV 2015 Robert McNamara, group chief risk officer at Lend Lease in which is going to increase productive efficiency,” he says. “What Sydney, argues that the best results come from government and we want is openness to different pathways to this outcome. But business working together with a long-term view. He explains: I strongly believe that there are many, many opportunities to “When we look at new opportunities, the keys are to target improve the economic infrastructure away from Australia’s big, education, to drive new sectors where we know we excel, and not bulk commodities.” get to caught up in just concentrating on the next day’s news. In other words, taking a longer perspective.” RESOURCES: HEADLINES FAIL TO RECOGNISE McNamara says he remains positive about Australia’s business UNDERLYING STRENGTHS and economic prospects – particularly if all parties continue to Attention-grabbing headlines around falling embrace the current direction. He reveals: “Lend Lease has a iron-ore prices do not accurately portray A$5.2 billion [US$3.5 billion] presold residential portfolio which the longer-term prospects of the Australian will take until 2018 or 2019 to produce, and the employment and resources sector, specialists said at the spend peak for this portfolio is 2017. As a country we need to KangaNews-Westpac Corporate Debt Summit. continue to think and invest long term.” They also maintain that Australia’s coal-mining industry has a solid footing for the future. INFRASTRUCTURE: FISCAL PRESSURE ON he underlying iron-ore price is not of itself the most STATE OUTCOMES PROVIDES IMPETUS FOR important factor for the country’s core iron-ore DEVELOPMENT Tproducers, argues Seven Group’s Stokes. What is more There is broad agreement among panellists important is that they are producing the best quality at the that Australia’s medium-term growth prospects lowest cost, and that they remain competitive even in a lower- hinge on expanding its infrastructure- revenue environment. investment pipeline – and that achieving this This premise is partly built on offshore demand for iron ore goal will mean addressing the associated continuing on its present trajectory – of which Stokes insists challenges. The role of Australia’s states is a there is little reason to doubt. “Provided we maintain lowest- central component. cost production, volumes should remain. As long as China is enn says an all-round approach to the way Australia still fundamentally demanding 900 million to 1 billion tonnes of approaches its infrastructure task is needed. This steel per year – which for its continued urbanisation we believe it Fincludes responsibilities on the part of federal and state should – demand for iron ore should persist.” governments as well as the private sector. Australia’s iron-ore producers’ abilities to compete on a global “Government has a part to play in infrastructure planning, basis are also subject to external influences – but the country has but the federal government specifically can only be a component idiosyncratic advantages, too. “As long as our producers remain of this,” Fenn insists. “In fact the state governments ought to be profitable beyond their major competitors they are well placed. In playing a very significant role.” Australia we have high-quality ore and a geographic advantage. If Fenn argues that state governments have been very willing we can continue to produce at a cost in the high teens of dollars to talk infrastructure, but says he has seen very little action. “We per tonne, we will be able to compete with any producer in the are presently in a period where all of the state governments want world,” Stokes concludes. to talk about building infrastructure – but at this stage only New South Wales and Victoria are actually getting on with it.” COAL INDUSTRY UPDATE Other states’ hands may soon be forced. “The loss of Aurizon’s Carter sees stable and steady returns into the future for royalty incomes in Queensland and Western Australia will the coal industry, meanwhile – given Australia is likely reaching the ultimately translate into a need to sell off public assets,” Fenn end of the first phase in the coal cycle. “In my experience, having adds. “In fact, the only thing I’m sure of is that pressure on state seen the cycle a few times, picking the top of the market is not fiscal performance will ultimately mean a better outcome for tricky, although in this particular instance I find it difficult to pick infrastructure and service providers.” the bottom,” he adds. This means that coal volumes are at incremental levels rather OUTCOME RELEVANT than “massive” volume increases, Carter continues. “Aurizon is The shock result in Queensland’s January 31 election, which saw a volume-based company and volumes are up – in fact volumes a massive Liberal-National government majority wiped out by have been up every year for the last four.” the Labor opposition, saw a U-turn of intent around the state’s The vast majority of Aurizon’s coal-industry customers infrastructure plans. The outcome propelled into the spotlight are in cash-positive positions, Carter reveals, with only a small such questions as whether Australia has the most appropriate proportion suffering going into the current phase. “The declining model for improving infrastructure. Australian dollar has undoubtedly helped,” he says. “While a Carter says the development pipeline should be achievable by handful of miners have deferred or slowed production expansion, more than one method. “Our bias is to economic infrastructure the phase has been overwhelmingly shaped by those which are

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“The loss of royalty incomes in Queensland and Western Australia will ultimately translate into a need to sell off public assets. In fact, the only thing I’m sure of is that pressure on state fiscal performance will ultimately mean a better outcome for infrastructure and service providers.”

GRANT FENN DOWNER GROUP

moving greater volume. Our view is that, while the boom period McNamara says Lend Lease’s broad view is that the has passed, the coal mining industry is strong into the future.” Australian property market is fundamentally sound. Although he acknowledges that property is a cyclical business, he argues that BASIS TO AUGMENT Lend Lease knows how to manage the cycle and says that “the Although the outlook for the resources industry is apparently engines are still very powerful”. broadly better than headlines might suggest, market participants McNamara says: “We have undertaken some property sales do not foresee a rebound in demand sufficient to imply further where we have released a substantial amount of inventory – wide-scale investment. “We aren’t expecting iron-ore demand 300-500 units – and all of the units have sold before noon. This to rise but equally we’re not expecting it to fall away,” Stokes suggests to me that demand remains strong.” comments. He makes light of suggestions that Lend Lease is only able Assuming demand holds firm, Stokes suggests that the total to sell sites like Barangaroo in Sydney because of international production cycle is the most important driver for the Australian buyers. “Lend Lease sells to a broad range of purchasers. The economy, with the critical issue at this stage being cost control. average for foreign investment across the industry is about 35 per He also reiterates the fact that a great deal of energy has cent, and Lend Lease is in line with that.” already gone into lowering the cost base in iron-ore production. Presented with a choice of whether he personally would “Iron-ore producers have not been given due credit for the effort make a property investment in London, New York, Sydney they’ve put into reducing costs,” he says. “Every supplier has been or , McNamara responds: “All of them, but in a squeezed in this process, but it has been an effective mechanism disciplined and measured way.” He adds: “Lend Lease targets which has close to halved cost for some producers.” gateway cities that we believe fit our underlying criteria – that is, they have positive economic and social trends, allow us to deliver PROPERTY: ABUNDANCE OF GLOBAL CAPITAL safely and profitably and are at the right time in the cycle.” MEANS NO CALL FOR CONCERN “From a GDP perspective, what’s being produced is on With seemingly ever-more focus on the state the increase,” he says. “The growth of capital globally provides of play in Australian cities’ residential and opportunities for all our businesses.” commercial property markets, Lend Lease is in prime position to comment on the state of local M&A: CEO s SIT ON OPPOSITE SIDES OF and international demand for these assets. THE FENCE he Australian housing market has become an increasing The chief executives of Downer and Seven area of focus for observers in the country and outside, Group shared disparate views on the M&A Tas it has continued to outpace the rest of the economy. environment at the KangaNews-Westpac The Reserve Bank of Australia has been walking a tightrope Corporate Debt Summit. between its general desire to cut rates to promote rebalancing tokes believes the current environment lends itself in the wider economy and concern that cheap credit may be to greater M&A activity, and that a pickup should be inflating a housing-market bubble. Of particular concern is the Santicipated. He says: “The situation in which some perception that a large proportion of property investment is companies find themselves, given market pressures and other being driven by offshore capital which may not prove sticky. dynamics, will exacerbate this.”

“In the next stage of the resources cycle there will need to be a structural adjustment to the cost base – and much of this will be via employment. Taking the cost out of wages on the way down is a challenging process and it will take time for a structural change to occur.”

RYAN STOKES

68|KANGANEWS OCT/NOV 2015 There are some good examples, he continues. “Woodside Energy’s interest in Oil “The need is to have a government Search suggests that in this market and at this focused on helping business achieve oil price it is cheaper to buy proven assets than certainty around its investments, to explore new ones.” specifically by itself looking beyond By contrast, Fenn notes the extent to which the depreciation of the Australian dollar a year-to-year electoral cycle.” in recent months makes offshore acquisition MICHAEL CARTER AURIZON far more challenging for Australian companies. On the flipside, Australian assets are much more attractive to Fenn believes a sea change is coming for workers. He overseas suitors. This dynamic, he says, is illustrated by New comments: “Wage rates have certainly been increasing York- and Toronto-listed Brookfield Infrastructure Partners’ bid throughout the last decade in the construction and mining to buy Asciano. sectors. For instance, mining services providers have traditionally For Downer itself, Fenn says the biggest issue in the current never even really competed on wage rates. Typically the resource environment is finding a company which looks attractive enough owner has dictated on-site roster arrangements and wages.” to buy. He explains: “Australian assets – particularly given rhetoric This has changed, Fenn continues. “We are now starting to from government around civil infrastructure, transport and so see companies which require production or maintenance services forth – are more attractive for large European-based construction actively ‘EBA [enterprise bargaining agreement] shopping’ and firms. I can’t see this changing in the near future.” thereby bringing tier-two, tier-three or even tier-four contractors Stokes believes a culture change needs to occur at board level into the market. The new focus is absolutely around wage for the M&A environment to flourish. “An aspect of corporate outcomes. We have an issue with a very stiff, structural position Australia is that boards can get quite ‘sticky’ and not be overly around legislation, but we are seeing other things happen to drive welcoming of changing processes,” he says. wages down.” Stokes therefore suggests Australia might start to see some “activist drives”. He explains: “Certain shareholder bases become ADVOCATING CHANGE quite assertive about what they would like to see happen to a There will always be a focus on top-tier firms, adds McNamara. business. Whether through pure M&A or the activist dynamic, I “On any given day Lend Lease employs 20,000-25,000 workers think we will start to see corporate activity start to pick up.” in Australia. This drives us to continue to work with all our stakeholders to achieve the best outcomes for the construction INDUSTRIAL RELATIONS: RIGID STRUCTURE industry and our clients.” REMAINS BUT BUSINESSES ARE MAKING INROADS The opportunity for producers to reduce cost is one Senior executives say while Australia’s rigidity advantage of being at the low point of the cycle, insists Carter. around industrial-relations legislation remains, He explains: “In terms of construction costs, the West Pilbara other factors – including wage outcomes – are iron-ore project development has recently been priced at a level starting to make this issue more conducive for which is 25 per cent lower than three years ago. One of the silver businesses. linings of being in the low point of the cycle is that it offers us usiness leaders argue that Australia’s changing economic the ability to reality check how to be optimally competitive and landscape is making industrial relations a top-line efficient.” Bagenda item once more. Specifically, with the mining Carter suggests responsibility lies with business to operate boom now off its peak they say industrial laws will need to as efficiently as possible within the existing framework be re-examined in order to unlock productivity and boost while advocating for change. Aurizon recently won the right competitiveness. to extinguish some EBAs by approval of the Fair Work However, the path to change is slow. “Through the boom the Commission. “This was about working the framework as best we skill shortage was real, and drove up costs,” Stokes argues. “In the could over a significant period of time, even though the process first phase of the resources cycle suppliers were squeezed. In the itself was challenging,” Carter explains. • next stage there will need to be a structural adjustment to the cost base – and much of “We have undertaken some property sales this will be via employment. where we have released a substantial amount Taking the cost out of of inventory – 300-500 units – and all of the wages on the way down is units have sold before noon. This suggests a challenging process and it will take time for a structural to me that demand remains strong.” change to occur.” ROBERT MCNAMARA LEND LEASE

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