6 5

In a KangaNews-Westpac 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 Australia’s new prime minister, Malcolm Turnbull – making the political backdrop a key talking point.

B Y H E L E N C R A I G

POLITICS: STABILITY COULD LIFT BUSINESS

CONFIDENCE

Panellists agree that the installation of a new federal government carries at least some potential to lift Australian business sentiment. However, they say this will hinge on the new administration delivering on the expectation that it will be more able and willing to tackle structural issues.

The immediate reaction to the defeat of Tony Abbott by Malcolm Turnbull as leader of Australia’s Liberal Party – and thus prime minister – on September 14 was one

of muted optimism. Analyst and market views coalesced around the concept of a moderate potential upside for Australian business confidence based on hopes of a more coherent economic platform and better marketing of this programme to the electorate.

Speaking just three days after the leadership change, senior business leaders participating in a panel discussion at the fifth KangaNews-Westpac Corporate Debt Summit say they also envisage a potential boost to business confidence.

Ryan Stokes, Sydney-based chief executive officer at Seven Group Holdings (Seven Group), argues that any reduction in political uncertainty can only be beneficial for the wider economy – almost regardless of policy outcomes. “We have seen a very early indication of a strong lift for the government in opinion polls, which is likely to bring about a positive change in consumer sentiment as consumers begin to feel more confident about the political environment,” he says.

BIGGER ISSUES

However, the change of leadership will not act as a panacea for confidence levels which have remained stubbornly low since the financial crisis. In fact, Stokes is somewhat surprised that positive fundamentals such as relatively low unemployment and the robust housing market have not boosted consumer expenditure. He comments: “The consumer environment has been quite risk averse but perhaps consumer sentiment – and as a result business confidence – may begin to change.”

Grant Fenn, chief executive officer and managing director at Downer Group (Downer) in Sydney, reveals an undercurrent which he identifies as a big issue for both the Australian economy

and consumer sentiment, and which he hopes new federal leadership will reduce. “Vast parts of our economy are presently very unsettled. This is based on a view that the Australian economy needs to ‘adjust’, but not quite knowing what this adjustment ought to be,” he says.

Australians do not like seeing their government prevaricating, Fenn adds. “There are serious concerns about job stability in industries such as mining and gas. To the extent that the new prime minister sets out a deregulation

agenda, people may start to take the view that the adjustment required might not be as painful as they had been expecting.”

The business leaders also argue that greater confidence in the government may at least obviate the lull in business confidence which is often observed in the run up to an Australian federal election – the next one of which must be held before January 2017. It had been feared that the country could become mired in a protracted campaign between an unpopular government and an unconvincing opposition, all viewed as a precursor to another change in government.

Game CHANGERS

6 6 | K A N G A N E W S O C T / N O V 2 0 1 5

LONG VIEW

While the immediate response to the Turnbull accession to the premier’s lodge is clearly a hope for a shift to a more coherent, business-friendly policy agenda, the main concern is that the new administration will not be able to dump the short-term outlook which has dogged its predecessors. “What we’d like to see change under the leadership of the new prime minster is the need for a bias – at both a policy and investment level – towards things that

incentivise long-term efficiency,” insists Michael Carter, executive vice president, strategy and business development at Aurizon in Brisbane.

He adds: “It is important to concentrate on the fact that this need exists, irrespective of the change. The need is to have a government focused on helping business achieve certainty around its investments, specifically by itself looking beyond a year-to-year electoral cycle.”

INTRODUCING THE PANELLISTSThe participants in the closing panel at this year’s KangaNews-Westpac Corporate Debt Summit (pictured above, left to right) boast an impressive array of qualifications to comment on the state of play in and future prospects for corporate Australia.

PANELLIST: Michael Carter, executive vice president, strategy and business development, Aurizon

Michael Carter has broad experience in leadership roles over a 25-year career in the rail industry – including freight, passenger and heavy-haul rail operations. His experience includes significant national and international industry roles in rail and transport.

He has been a core member of Aurizon’s executive leadership team for a decade, playing a prominent role in the company’s successful transition from a government-owned railway to a top-50 ASX company.

Carter was appointed executive vice president, strategy and business development in December 2013. From 2005 to 2013 he was the leader of the Network business for Aurizon – formerly QR National Network – with full profit and loss accountability.

PANELLIST: Grant Fenn, chief executive officer and managing director, Downer Group

Grant Fenn has more than 20 years’ experience in operational and financial management as well as strategic development. He joined Downer Group (Downer) in October 2009 as chief financial officer and was appointed chief executive officer in July 2010.

Prior to joining Downer, Fenn had a 14-year career at Qantas Airways during which he held a number of senior roles and was a member of the executive committee for 10 years. These roles included executive general manager of strategy and investments, and executive general manager – associated businesses, responsible for the airports, freight, flight catering and Qantas Holidays businesses.

PANELLIST: Ryan Stokes, chief executive officer, Seven Group Holdings

Ryan Stokes is managing director and chief executive officer of Seven Group Holdings and has been an executive director of the company since February 2010. He has been a director of Seven West Media since 2012, and was an executive director and then chairman of Pacific Magazines from 2004 to 2008 and a director of Yahoo7 from 2005 to 2013.

As a director of WesTrac, Stokes has extensive experience in China, having developed relationships with various mining and media companies over the past 15 years. He is also a director of Coates Hire and has been chief executive officer of Australian Capital Equity since April 2010, having been appointed an executive director in 2001.

PANELLIST: Robert McNamara, group chief risk officer, Lend Lease

Robert McNamara was appointed group chief risk

officer at Lend Lease in August 2014. Prior to this, he held the role of chief executive officer of Lend Lease’s Americas business – a role he was appointed to in April 2010.

McNamara is responsible for ensuring Lend Lease achieves world’s best practice in risk management and operational excellence. He also oversees Lend Lease’s building, engineering and services businesses in Australia.McNamara sits on the boards of numerous public and privately held firms.

MODERATOR: Bill Evans, chief economist, managing director and global head of economics and research, Westpac Banking Corporation

Bill Evans has worked as a research manager for the Reserve Bank of Australia, treasurer at Commonwealth Bank of Australia, and as director and head of financial markets at Schroders Australia.He joined Westpac Banking Corporation (Westpac) in 1991 as chief economist and head of research. Evans is Westpac’s economic spokesman and is responsible for all of the bank’s economic research. He was chairman of Australian Business Economists for eight years and is now a life member.

CORPORATE DEBT SUMMIT

6 7

Robert McNamara, group chief risk officer at Lend Lease in Sydney, argues that the best results come from government and business working together with a long-term view. He explains: “When we look at new opportunities, the keys are to target education, to drive new sectors where we know we excel, and not get to caught up in just concentrating on the next day’s news. In other words, taking a longer perspective.”

McNamara says he remains positive about Australia’s business and economic prospects – particularly if all parties continue to embrace the current direction. He reveals: “Lend Lease has a A$5.2 billion [US$3.5 billion] presold residential portfolio which will take until 2018 or 2019 to produce, and the employment and spend peak for this portfolio is 2017. As a country we need to continue to think and invest long term.”

INFRASTRUCTURE: FISCAL PRESSURE ON

STATE OUTCOMES PROVIDES IMPETUS FOR

DEVELOPMENT

There is broad agreement among panellists that Australia’s medium-term growth prospects hinge on expanding its infrastructure-investment pipeline – and that achieving this goal will mean addressing the associated challenges. The role of Australia’s states is a central component.

F enn says an all-round approach to the way Australia approaches its infrastructure task is needed. This includes responsibilities on the part of federal and state

governments as well as the private sector. “Government has a part to play in infrastructure planning,

but the federal government specifically can only be a component of this,” Fenn insists. “In fact the state governments ought to be playing a very significant role.”

Fenn argues that state governments have been very willing to talk infrastructure, but says he has seen very little action. “We are presently in a period where all of the state governments want to talk about building infrastructure – but at this stage only New South Wales and Victoria are actually getting on with it.”

Other states’ hands may soon be forced. “The loss of royalty incomes in Queensland and Western Australia will ultimately translate into a need to sell off public assets,” Fenn adds. “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.”

OUTCOME RELEVANT

The shock result in Queensland’s January 31 election, which saw a massive Liberal-National government majority wiped out by the Labor opposition, saw a U-turn of intent around the state’s infrastructure plans. The outcome propelled into the spotlight such questions as whether Australia has the most appropriate model for improving infrastructure.

Carter says the development pipeline should be achievable by more than one method. “Our bias is to economic infrastructure

which is going to increase productive efficiency,” he says. “What we want is openness to different pathways to this outcome. But I strongly believe that there are many, many opportunities to improve the economic infrastructure away from Australia’s big, bulk commodities.”

RESOURCES: HEADLINES FAIL TO RECOGNISE

UNDERLYING STRENGTHS

Attention-grabbing headlines around falling iron-ore prices do not accurately portray the longer-term prospects of the Australian resources sector, specialists said at the KangaNews-Westpac Corporate Debt Summit. They also maintain that Australia’s coal-mining industry has a solid footing for the future.

The underlying iron-ore price is not of itself the most important factor for the country’s core iron-ore producers, argues Seven Group’s Stokes. What is more

important is that they are producing the best quality at the lowest cost, and that they remain competitive even in a lower-revenue environment.

This premise is partly built on offshore demand for iron ore continuing on its present trajectory – of which Stokes insists there is little reason to doubt. “Provided we maintain lowest-cost production, volumes should remain. As long as China is still fundamentally demanding 900 million to 1 billion tonnes of steel per year – which for its continued urbanisation we believe it should – demand for iron ore should persist.”

Australia’s iron-ore producers’ abilities to compete on a global basis are also subject to external influences – but the country has idiosyncratic advantages, too. “As long as our producers remain profitable beyond their major competitors they are well placed. In Australia we have high-quality ore and a geographic advantage. If we can continue to produce at a cost in the high teens of dollars per tonne, we will be able to compete with any producer in the world,” Stokes concludes.

COAL INDUSTRY UPDATE

Aurizon’s Carter sees stable and steady returns into the future for the coal industry, meanwhile – given Australia is likely reaching the end of the first phase in the coal cycle. “In my experience, having seen the cycle a few times, picking the top of the market is not tricky, although in this particular instance I find it difficult to pick the bottom,” he adds.

This means that coal volumes are at incremental levels rather than “massive” volume increases, Carter continues. “Aurizon is a volume-based company and volumes are up – in fact volumes have been up every year for the last four.”

The vast majority of Aurizon’s coal-industry customers are in cash-positive positions, Carter reveals, with only a small proportion suffering going into the current phase. “The declining Australian dollar has undoubtedly helped,” he says. “While a handful of miners have deferred or slowed production expansion, the phase has been overwhelmingly shaped by those which are

6 8 | K A N G A N E W S O C T / N O V 2 0 1 5

CORPORATE DEBT SUMMIT

moving greater volume. Our view is that, while the boom period has passed, the coal mining industry is strong into the future.”

BASIS TO AUGMENT

Although the outlook for the resources industry is apparently broadly better than headlines might suggest, market participants do not foresee a rebound in demand sufficient to imply further wide-scale investment. “We aren’t expecting iron-ore demand to rise but equally we’re not expecting it to fall away,” Stokes comments.

Assuming demand holds firm, Stokes suggests that the total production cycle is the most important driver for the Australian economy, with the critical issue at this stage being cost control.

He also reiterates the fact that a great deal of energy has already gone into lowering the cost base in iron-ore production. “Iron-ore producers have not been given due credit for the effort they’ve put into reducing costs,” he says. “Every supplier has been squeezed in this process, but it has been an effective mechanism which has close to halved cost for some producers.”

PROPERTY: ABUNDANCE OF GLOBAL CAPITAL

MEANS NO CALL FOR CONCERN

With seemingly ever-more focus on the state of play in Australian cities’ residential and commercial property markets, Lend Lease is in prime position to comment on the state of local and international demand for these assets.

The Australian housing market has become an increasing area of focus for observers in the country and outside, as it has continued to outpace the rest of the economy.

The Reserve Bank of Australia has been walking a tightrope between its general desire to cut rates to promote rebalancing in the wider economy and concern that cheap credit may be inflating a housing-market bubble. Of particular concern is the perception that a large proportion of property investment is being driven by offshore capital which may not prove sticky.

McNamara says Lend Lease’s broad view is that the Australian property market is fundamentally sound. Although he acknowledges that property is a cyclical business, he argues that Lend Lease knows how to manage the cycle and says that “the engines are still very powerful”.

McNamara says: “We have undertaken some property sales where we have released a substantial amount of inventory – 300-500 units – and all of the units have sold before noon. This suggests to me that demand remains strong.”

He makes light of suggestions that Lend Lease is only able to sell sites like Barangaroo in Sydney because of international buyers. “Lend Lease sells to a broad range of purchasers. The average for foreign investment across the industry is about 35 per cent, and Lend Lease is in line with that.”

Presented with a choice of whether he personally would make a property investment in London, New York, Sydney or Melbourne, McNamara responds: “All of them, but in a disciplined and measured way.” He adds: “Lend Lease targets gateway cities that we believe fit our underlying criteria – that is, they have positive economic and social trends, allow us to deliver safely and profitably and are at the right time in the cycle.”

“From a GDP perspective, what’s being produced is on the increase,” he says. “The growth of capital globally provides opportunities for all our businesses.”

M&A: CEOs SIT ON OPPOSITE SIDES OF

THE FENCE

The chief executives of Downer and Seven Group shared disparate views on the M&A environment at the KangaNews-Westpac Corporate Debt Summit.

S tokes believes the current environment lends itself to greater M&A activity, and that a pickup should be anticipated. He says: “The situation in which some

companies find themselves, given market pressures and other dynamics, will exacerbate this.”

“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.”G R A N T F E N N D O W N E R G R O U P

“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.”R YA N S TO K E S S E V E N G R O U P H O L D I N G S

6 9

There are some good examples, he continues. “Woodside Energy’s interest in Oil Search suggests that in this market and at this oil price it is cheaper to buy proven assets than to explore new ones.”

By contrast, Fenn notes the extent to which the depreciation of the Australian dollar in recent months makes offshore acquisition far more challenging for Australian companies. On the flipside, Australian assets are much more attractive to overseas suitors. This dynamic, he says, is illustrated by New York- and Toronto-listed Brookfield Infrastructure Partners’ bid to buy Asciano.

For Downer itself, Fenn says the biggest issue in the current environment is finding a company which looks attractive enough to buy. He explains: “Australian assets – particularly given rhetoric from government around civil infrastructure, transport and so forth – are more attractive for large European-based construction firms. I can’t see this changing in the near future.”

Stokes believes a culture change needs to occur at board level for the M&A environment to flourish. “An aspect of corporate Australia is that boards can get quite ‘sticky’ and not be overly welcoming of changing processes,” he says.

Stokes therefore suggests Australia might start to see some “activist drives”. He explains: “Certain shareholder bases become quite assertive about what they would like to see happen to a business. Whether through pure M&A or the activist dynamic, I think we will start to see corporate activity start to pick up.”

INDUSTRIAL RELATIONS: RIGID STRUCTURE

REMAINS BUT BUSINESSES ARE MAKING INROADS

Senior executives say while Australia’s rigidity around industrial-relations legislation remains, other factors – including wage outcomes – are starting to make this issue more conducive for businesses.

Business leaders argue that Australia’s changing economic landscape is making industrial relations a top-line agenda item once more. Specifically, with the mining

boom now off its peak they say industrial laws will need to be re-examined in order to unlock productivity and boost competitiveness.

However, the path to change is slow. “Through the boom the skill shortage was real, and drove up costs,” Stokes argues. “In the first phase of the resources cycle suppliers were squeezed. In the next stage 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.”

Fenn believes a sea change is coming for workers. He comments: “Wage rates have certainly been increasing throughout the last decade in the construction and mining sectors. For instance, mining services providers have traditionally never even really competed on wage rates. Typically the resource owner has dictated on-site roster arrangements and wages.”

This has changed, Fenn continues. “We are now starting to see companies which require production or maintenance services actively ‘EBA [enterprise bargaining agreement] shopping’ and thereby bringing tier-two, tier-three or even tier-four contractors into the market. The new focus is absolutely around wage outcomes. We have an issue with a very stiff, structural position around legislation, but we are seeing other things happen to drive wages down.”

ADVOCATING CHANGE

There will always be a focus on top-tier firms, adds McNamara. “On any given day Lend Lease employs 20,000-25,000 workers in Australia. This drives us to continue to work with all our stakeholders to achieve the best outcomes for the construction industry and our clients.”

The opportunity for producers to reduce cost is one advantage of being at the low point of the cycle, insists Carter. He explains: “In terms of construction costs, the West Pilbara iron-ore project development has recently been priced at a level which is 25 per cent lower than three years ago. One of the silver linings of being in the low point of the cycle is that it offers us the ability to reality check how to be optimally competitive and efficient.”

Carter suggests responsibility lies with business to operate as efficiently as possible within the existing framework while advocating for change. Aurizon recently won the right to extinguish some EBAs by approval of the Fair Work Commission. “This was about working the framework as best we could over a significant period of time, even though the process itself was challenging,” Carter explains. •

“The need is to have a government focused on helping business achieve certainty around its investments, specifically by itself looking beyond a year-to-year electoral cycle.”M I C H A E L C A R T E R A U R I Z O N

“We have undertaken some property sales where we have released a substantial amount of inventory – 300-500 units – and all of the units have sold before noon. This suggests to me that demand remains strong.”R O B E R T M C N A M A R A L E N D L E A S E