Chief Executive's Review

Major infrastructure projects and contract mining in Australia and Indonesia, together with a solid level of new work, formed the basis of an excellent full year result for Thiess.

For the full year to 30 June 2010, Thiess earned a record segment result of $425 million, up 132 per cent (versus $183 million for the year to June 2009) and segment revenue of $6.6 billion, up 21 per cent (versus $5.5 billion in the comparable year). Thiess’ work in hand rose by 10 per cent to $16.3 billion as at 30 June 2010 (versus $14.8 billion for the previous year). In addition, Thiess Services has work in hand beyond 5 years of $1.3 billion and Thiess also has $300 million worth of mining work extending past 5 years.

Work on the $4.1 billion Airport Link in Brisbane, currently the Group’s largest infrastructure project, being constructed by a Thiess John Holland JV, reached 50 per cent completion in June 2010 and remains on track for a June 2012 finish.

Thiess has a strong presence in the hospital sector with award and commencement of the $68 million Townsville Hospital Expansion this year while the $727 million Royal North Shore Hospital and Community Health Services Redevelopment Project in New South Wales is on track for completion by July 2014. In Queensland, work commenced on Brisbane’s $123 million King George Central building. Good progress was made on the $370 million Lotus Glen Correctional Centre Stage 1 near Mareeba and the $313 million Hinze Dam Stage 3 on the Gold Coast was nearing completion.

In New South Wales, a Thiess-led alliance was selected to develop the eastern section of the $1.7 billion Hunter Expressway and work is expected to commence in the coming months once final project costs are approved by government. In Victoria, Thiess is a member of the alliance selected to construct a $560 million 9.7 km section of the M80 Ring Road, between the Calder Freeway and Sydney Road. The M80 will link a number of corridors and major arterial roads and facilitates freight movement between Melbourne, regional Victoria and interstate capitals.

Work on the $3.5 billion Victoria Desalination Plant is now more than 25 per cent complete. Concrete pad foundations for the reverse osmosis building are nearing completion and approximately 530 tonnes of structural steel have been erected. Pipeline installation is progressing well and 15.5 kms of pipeline has been laid.

In South Australia, Thiess has achieved practical completion of the $73 million Coast to Coast Light Rail Project, which is extending Adelaide’s existing light rail network by 2.8 km.

In Western Australia, work continued on the Gorgon LNG Project on Barrow Island for Chevron Australia. Thiess is part of the JV to design and construct the Gorgon Village and has an additional $516 million contract for site preparation and temporary facilities. In the Pilbara, Thiess completed a $369 million civil and infrastructure project for BHP Billiton at Yandi.

Thiess Services secured a $739 million JV for capital works for South East Water in Victoria, a $381 million remediation project on the Hunter River in New South Wales for BHP Billiton, and a $324 million performance-based contract to upgrade and maintain the electrical distribution network for Perth and south-west regional Western Australia for Western Power. Since year end, Thiess Services has also secured a $93 million 5-year contract to provide network construction and maintenance services for Ergon’s electricity network in Queensland.

The largest contract miner of coal in Australia, Thiess continued to achieve good output despite heavy seasonal rains in the Bowen Basin. New contracts and extensions were awarded including a $742 million, 10-year contract at the Curragh North coal mine for Wesfarmers; a $142 million, 1-year extension to the Tarong Coal Project for Tarong Energy; and a $229 million, 3-year contract extension at South Walker Creek for BHP Mitsui Coal, all in Queensland.

Thiess’ long established mining operations in Indonesia continued to perform well during the year. Indonesia remains a strategically important part of Thiess’ business contributing some $830 million of revenue and $4.9 billion of work in hand.

Construction, particularly transport infrastructure, contract mining and telecommunications were the primary drivers of Leighton Contractors’ solid revenue and profit this year. Their diverse business model is delivering with its telecommunications arm Nextgen Networks now the third largest data carrier in Australia, in addition to its telecommunications services and maintenance capability.

A record segment result of $271 million for the full year to 30 June 2010, up 5 per cent versus $258 million in the year to June 2009 was achieved on segment revenue of $5.3 billion, down 7 per cent compared with $5.7 billion for the previous year. Work in hand at 30 June 2010 increased 3 per cent to $9.8 billion compared to $9.5 billion at 30 June 2009.

Nextgen Networks, wholly owned by Leighton Contractors, is currently engaged in the roll out of the Federal Government’s $256 million telecommunications Regional Backbone Blackspots Program where nearly 6,000 km of new fibre optic cable is being laid in six regional areas around the country. The project is a key building block for the roll-out of the National Broadband Network (NBN). Leighton Contractors’ telecommunications subsidiary Visionstream continues to provide a range of construction and maintenance services across Australia and in New Zealand. Visionstream completed the first year of its 10-year contract to provide field services to Chorus, the network operating arm of Telecom New Zealand, and is meeting all targets.

Ongoing infrastructure demand in Queensland provided opportunities during the year. Queensland Rail awarded the CoalConnect Alliance (which includes Leighton Contractors) a $335 million contract to construct a rail link between Goonyella and Newlands. Work also commenced on the $281 million Eastern Busway and Stage 2 of the QUT Science and Technology hub.

In Queensland, Leighton Contractors continued completing major projects ahead of time as demonstrated on the CLEM7 and Gateway Bridge upgrade. The $2.1 billion CLEM 7 tunnel was completed in March 2010 and the toll road opened to the public five months ahead of schedule. The $1.5 billion Gateway Upgrade Project achieved a number of milestones including the award of a $240 million extension for additional upgrade works in April. The new Gateway Bridge was officially opened to the public 6 months early in May 2010 and upgrade works have commenced on the existing bridge.

Strong road capability helped secure a number of large road projects in New South Wales on the Pacific and Hume Highways. The Kempsey Bypass Alliance was awarded a $345 million contract to design and construct 14.5 km of divided highway between Kempsey and Frederickton, including a 2.2 km major bridge crossing the Macleay River and floodplain. A $470 million JV contract to design and construct the Sapphire to Woolgoolga upgrade project on the Pacific Highway was also secured.

The Tarcutta Hume Alliance commenced work on further upgrades to the Hume Highway and work on the $527 million Ballina Bypass proceeded on schedule. The company is the preferred contractor for the $550 million Hills M2 Motorway upgrade in Sydney and is short-listed for the western section of the $1.7 billion Hunter Expressway. In Western Australia, the $111 million Mandurah Entrance Road is nearing completion.

The rail business continued to grow. Work started on the $150 million Upper Hunter Valley rail project, won by an alliance involving Leighton Contractors, and the $260 million Richmond Line project remained on schedule. The Westall Rail project, a management contract to deliver a $151 million rail upgrade in Victoria, is also off to a good start.

Leighton Contractors and Saipem are making good progress on the $900 million 2.1 km jetty and marine structures for Chevron’s Gorgon LNG development in Western Australia. An additional contract worth $150 million was awardedin May 2010 as a result of increased scope. Leighton Contractors’ subsidiary Broad Group Holdings Limited is nearing completion on the $123 million Alluvion office development in Perth.

Mining operations had a record year with revenues over $1.3 billion. HWE Mining secured a 3-year $169 million extension at the Woodie Woodie manganese mine for Pilbara Manganese. BHP Billiton has agreed to extend the Area C iron ore mine contract for a further 5 years with a value of approximately $2 billion which will be formalised in a deed of variation to be finalised within 6 months. Coal mining operations in Queensland’s Bowen Basin and New South Wales’ Hunter Valley generally met production targets despite some seasonal rain.

In New Zealand, progress on the complex Newmarket Viaduct road project was satisfactory and the Manakau Motorway Link is approaching the final stages of construction. Mining projects at the Favona and Rotowaro mines performed as expected.

On 1 September 2010, Leighton Contractors’ Managing Director, Peter McMorrow, retired from the role and was succeeded by Craig Laslett, previously Deputy Managing Director. Peter will become Executive Chairman of the subsidiary, Broad Group Holdings, based in Perth.

John Holland reported another solid result with good performances across its multi-disciplined contracting, engineering and services businesses. Over the last year rail services and maintenance has developed into a major part of its Australia-wide rail business, with revenues of almost $200 million in this area alone.

A strong segment result of $180 million was earned for the full year to 30 June 2010, up 20 per cent (versus $150 million in the previous year) from segment revenue of $3.6 billion, down 2 per cent (versus $3.7 billion in the comparable year). Work in hand rose by 7 per cent to $5.3 billion as at 30 June 2010 versus $4.9 billion last year.

The company maintained its position as the leading rail contractor in Australia with expertise covering short term construction and rehabilitation contracts, and long term partnerships with public and private clients for the provision of construction, rehabilitation and maintenance services. In addition to services and maintenance revenue, rail construction revenue for the year was $549 million.

In New South Wales, construction of maintenance facilities for Reliance Rail was completed during the period, as was the Cronulla Rail Line Upgrading and Duplication project. The Hunter8 Alliance made good progress on the $268 million Maitland to Whittingham Third Track project, with Stage 2 expected to move ahead in the 2011 financial year. Also in New South Wales, John Holland was awarded a $73 million management contract to construct the Liverpool Turnback project for the Transport Construction Authority.

In Victoria, the Metro Trains Melbourne Consortium, which includes John Holland, was selected under a contract worth $5.3 billion in total to operate and maintain Melbourne’s metropolitan passenger train franchise for a period of eight years. John Holland is also a member of the alliance selected to deliver the South Morang Rail Extension project in Victoria.

In Queensland, John Holland was awarded an $88 million contract to construct the Middlemount coal rail loop while in South Australia a JV, including John Holland, commenced the delivery of trackwork upgrade to the Adelaide metropolitan passenger rail network worth $160 million.

John Holland has developed significant tunnelling expertise in Australia and overseas. John Holland and Leighton Asia successfully completed the KSL rail project in Hong Kong including twin 1.1 km rail tunnels under Canton Road in Kowloon and works have progressed on the Melbourne Main Sewer Replacement project and the Northern Sewerage project in Melbourne.

Meanwhile in Queensland, the Thiess John Holland JV completed over 4.6 km of tunnel excavation for the Airport Link project in Brisbane. The first of the tunnel boring machines was commissioned in July, with the second due to be operational by August 2010. Work on the Northern Busway component is proceeding according to plan. The Department of Defence awarded John Holland a $80 million contract to construct facilities for the Enhanced Land Force at Enoggera. The $462 million Darra to Springfield Transport Corridor project Stage 1, a combined road and rail expansion project, is expected to be completed in early 2011. A new $337 million 30-month contract at the Isaac Plains coal mine in Central Queensland was secured to deliver full service mining operations.

In New South Wales, work on the Kapooka and Singleton defence facilities continued in line with program, and work commenced on the Cessnock Correctional Centre.

In Victoria, construction commenced on the $125 million Western Highway realignment between Melton and Bacchus Marsh, west of Melbourne. Work on the $303 million West Gate Bridge strengthening project continued under challenging industrial relations conditions. The first four projects to be delivered by the $138 million Barwon Water Capital Works Program Alliance were approved and are underway. The $406 million Sugarloaf Pipeline project was successfully completed in the second half of the financial year.

In Tasmania, the $100 million Brighton Bypass joint venture is progressing ahead of program. Another project in Tasmania to deliver and install backhaul cable as part of the NBN rollout made good progress.

In Western Australia, construction of all seven phases of the Joondalup Health Campus redevelopment has commenced. The redevelopment includes upgrades to access roads and car parking facilities, and construction of a new central plant building, three-level public ward block, emergency department, private ward block and St John Ambulance centre. Good progress was made on the $170 million Devil Creek gas project awarded earlier in the year.

Strong performances from the Hong Kong, Indonesian and Mongolian operations were the major drivers of a significantly improved result from Leighton Asia. The year ahead offers many opportunities in Hong Kong, Macau and Mongolia to further develop this division.

For the full year to 30 June 2010, Leighton Asia earned a segment result of $88 million, up by more than 5 times (versus $16 million in the previous year) from segment revenue of $1.1 billion, up 68 per cent (versus $682 million in the comparable year). Record work in hand, rising by 89 per cent to $6 billion as at 30 June 2010 versus $3.2 billion at 30 June 2009, was significantly boosted by $1.6 billion of new contract mining and related work in Mongolia and Indonesia.

A US$5 billion high speed rail service between Hong Kong and mainland China is being built by the Hong Kong Government with completion scheduled for 2015. A US$412 million contract was awarded to Leighton Asia to construct the Tse Uk Tsuen to Shek Yam section of the Guangzhou-Shenzen-Hong Kong Express Rail Link. Leighton Asia will construct a 7.6 km twin-track tunnel, including ventilation and access facilities. Other sections of the rail link will be available to tender.

In Hong Kong, Leighton Asia has completed a number of hospitals and, in January 2010, a US$219 million JV contract to design and construct phase 1 of the new Tung Chung Hospital on Lantau Island was awarded.

The US$411 million Central Reclamation project and the US$147 million Lai Chi Kok Transfer Scheme continued to make good progress throughout the year. Work commenced on the US$285 million Harbour Area Treatment Scheme (HATS) and the US$178 million Ocean Park redevelopment is on track for completion in December 2010.

In Indonesia, a US$877 million six-year contract extension to expand the MSJ coal mine to over 8 million tonnes per annum (Mtpa) was awarded to PT Leighton Contractors Indonesia, reflecting a strong contract mining performance on this mine since 2004. Operations at the Toka Tindung gold project in North Sulawesi recommenced after a four-year hiatus under a US$108 million mining services contract. Output from the Wahana coal mine was in line with expectations at around 3 Mtpa. The Indonesian operation has over $3.2 billion of work in hand at 30 June 2010.

In July 2010, a US$155 million contract for the provision of mining services at the Martabe gold mine in North Sumatra, Indonesia was awarded. This further diversifies Leighton Asia’s operations in Indonesia by geography and product.

In the Philippines, mining operations continued at the Masbate open cut gold mine. The second phase of the North Luzon Expressway tollroad is nearing completion.

As Mongolia moves to open up its vast minerals wealth for development, Leighton Asia forsees a significant level of resources related opportunities. During the year, the Ukhaakhudag (UHG) metallurgical coal mine began a series of expansions designed to take it from 2.5 Mtpa to a targeted production level of 15 Mtpa by January 2013. At 30 June 2010 the contract is worth A$1.4 billion over the next 5 years.

Activity at the Khuushuut coal mine also commenced with the award of a US$185 million contract to develop and operate the mine. The 6-year contract will initially produce 3 Mtpa of coking coal ramping up to between 5 and 6 Mtpa. The initial fleet of 3 Cat 777 dump trucks were driven 1700 km from Tanjin in China to the remote site.

A US$298 million contract to design, construct and maintain a 225km rail link from the South Gobi region of Mongolia to the border with China was secured. It is expected that work will commence early next calendar year once a decision to use the Chinese rail gauge has been ratified.

In other Asian markets, good progress was made on the Conrad Resort in Thailand and works commenced on the 33-storey Zuellig building in Makati City, the Philippines, which aims to be the most sustainable building constructed in that country.

Stronger performances from operations in India and the offshore oil and gas business delivered an improved result for Leighton International which were offset by challenging conditions in the Middle East for Al Habtoor Leighton Group.

Leighton International, including operations in the Middle East, earned a reduced segment result of $24 million for the year to 30 June 2010 (versus $143 million in the year to June 2009) from segment revenue of $1.8 billion, down 26 per cent (versus $2.4 billion in the comparable year). Work in hand excluding the Gulf operations increased by 18 per cent to $1.2 billion as at 30 June 2010 versus $1.0 billion at 30 June 2009. The Gulf operations work in hand at 30 June 2010 was $2.4 billion (Leighton’s 45% share) down by 24 per cent.

In India, design and construction of the Ramanujan IT Park in Chennai for Tata Realty and Infrastructure continued on schedule. The project, which has an excellent safety record, is being developed on a 25 acre site in a special economic zone. A contract to undertake the engineering, procurement and construction (EPC) of the US$498 million Chenani to Nashri Tunnel in Jammu, in northern India was also signed. The 2 lane, 14 metre diameter tunnel, which will be drilled and blasted, will be 9 km long and provide all weather access to this remote area.

Other projects secured in India during the year include the US$67 million Cairn Energy Mangala Development Pipeline Project and the US$43 million Vizag Port expansion. The US$641 million Pipeline Replacement Project, off the west coast of India, continued to make good progress and the final third season of operations will be completed in 2011.

Leighton International completed the Agra and Indore toll roads during 2009/10 and expects to sell their 49 per cent investments this year. The division is in discussions to bring in a strategic partner who can open doors for Leighton in India and expand the pipeline of work to take the Indian business to the next stage.

In Malaysia, work commenced on the US$158 million rail track duplication project between Ipoh and Padang Besar and contracts were signed to construct the ARE Long Term Storage Facility.

Activity levels in Dubai remain subdued as the Emirate works its way through the aftermath of a property bubble collapse.

Al Habtoor Leighton, a 45 per cent owned associate company, recently negotiated settlements on some projects albeit with deferred payment conditions.

Al Habtoor Leighton has been working under an interim agreement on a building project, the Dubai International Finance Centre, with the expectation that a US$200 million contract will be awarded. Work is also continuing on the Dubai Pearl project, although at a reduced level.

Good levels of work were maintained in Abu Dhabi and Qatar. Progress was made on the US$322 million Khalifa Port project, the Zayed University and the Capital Gateway Project. The Sorbonne University was successfully completed one month ahead of schedule.

On Saadiyat Island, the joint venture between Al Habtoor and Murray & Roberts to construct the US$492 million St Regis Hotel made rapid progress on a site with limited access. Following substantial completion of the US$695 million Saadiyat Link road project, the Al Habtoor Leighton Group was retained to construct the district cooling civil works. A small piling contract for the Guggenheim Museum project was also secured.

In Qatar, the first stage of the US$725 million Al Shaqab equestrian centre has been handed over to the client and final completion is scheduled for March 2011. Good progress was also made on the Duhail and Umm Qarn water reservoir project. There are still significant tendering opportunities in the region but the reduced level of activity in Dubai means contractors are pursuing work in the other Gulf countries with aggressive competitive tendering. Al Habtoor Leighton remains focused on converting tender opportunities suited to its capabilities and also on broadening its geographic base by pursuing opportunities in Saudi Arabia and Kuwait.

Non-residential property markets in Australia remained weak, affecting sales and development in the commercial, industrial and tourism sectors in particular. For the full year to 30 June 2010, Leighton Properties recorded a segment loss of $73 million versus a loss of $59 million in the year to June 2009.

Two major sales were completed during the year. In March 2010, the South Tower of the HQ Development in Brisbane’s Fortitude Valley was sold for $94 million to an investment foundation of 18 Swiss pension funds. The HQ Development opened in May and over 300 Queensland based Leighton Contractors employees moved from five separate offices into the HQ South Tower. The completed buildings each have a 6 Star Green Star design rating and are fully leased.

In November 2009, the King George Central building in Brisbane was sold to Commonwealth Property Office Fund for $210 million. Currently being constructed by Thiess, the A grade office tower is due for completion mid 2012. Some smaller commercial and industrial properties in Sydney and Melbourne were sold during the year, but the outlook for the industrial market in particular remains flat.

Construction of the Viridian Village tourism development in Noosa has been completed and opened in July. The 5-star resort and conference facility is the largest in Noosa, accommodating up to 350 people. The resort comprises luxury villas and apartments and is operated by the internationally renowned Outrigger Resorts Group.

The Hamilton Harbour residential development in Brisbane, a joint venture with Devine, has generated strong interest from the public. Tower 1, with 260 apartments, is almost fully pre-sold while Tower 2 is over 80 per cent sold off the plan. Construction commenced in May following a successful financing facility led by CBA.

Despite lingering economic uncertainty and ongoing volatility in global financial markets, the outlook for the Group in the 2011 financial year remains positive. The Group expects to deliver an increased revenue and operating profit on the back of high levels of work in hand and gradually improving economic conditions in Australia and offshore. However, the road ahead may be rocky as governments, corporations and markets work their way through the residual effects of the global financial crisis.

The Australian economy is forecast to continue to improve, with GDP growth estimated to rise to 3.2 per cent in FY2011 from 2.2 per cent in FY2010. The emergence of a two-speed economy remains a real possibility as growth in resource exports is not matched by the investment in cities and infrastructure. Infrastructure Partnerships Australia currently estimates the backlog of infrastructure projects to be valued at $770 billion.

Reduced Federal Government stimulus spending may impact the overall construction market, primarily at the smaller end of the scale, but private sector investment in infrastructure and resources is expected to increase as a level of certainty returns to the market. Managing this transition will be a critical factor for maintaining Australia’s economic growth.

Infrastructure Australia’s June 2010 report to the Council of Australian Governments called for the active engagement of private and superannuation funds and expertise in the delivery of vital infrastructure. The development of a robust and equitable private sector funding model remains a priority. Equally, clear government policy in relation to taxation, health and telecommunications will serve to make Australia a preferred destination for international investment.

Infrastructure Australia’s report also included an updated priority list which includes over $80 billion of projects in road and rail transport, water, energy, freight networks and ports. In addition, the rollout of the $43 billion NBN is well established with early stage works already under construction and the involvement of all major industry participants.

Australian commercial and industrial property construction remains weak and is likely to bottom out in 2011.

Gradual improvement in credit market conditions and underlying demand may see commercial property recover towards the end of 2010. The outlook for industrial property is not expected to improve substantially until 2012. Tourism related developments have been affected by the historically high Australian dollar lowering inbound tourism numbers.

Construction of hospitals, schools and other government related facilities is expected to remain at current high levels, or even increase slightly, and residential property markets generally are factoring in further growth.

Asia has become the engine of world growth and although the Group does not operate in China, demand from China is a key factor. China’s calendar year GDP growth is forecast to ease to more sustainable levels from 10.5 per cent in 2010 to 9.6 per cent in 2011 as government stimulus is withdrawn.

Although volatility in commodity markets has been a feature of the past 12 months, demand has increased as government stimulus packages flow through global markets, and as China and India continue to experience solid economic growth. Iron ore, coking coal and thermal coal prices are expected to remain high, driven by the recovery of advanced economies and stronger demand from emerging Asia. World steel production has substantially returned to pre-GFC levels and further growth is expected through 2011 and beyond.

Thermal coal production in Indonesia is forecast to be the country’s fastest growing main energy source over the next decade, supported by strong exports to Asia and rapidly growing domestic consumption. Domestic demand will be underwritten by a shift from oil to coal fired power stations.

Mongolia is rapidly becoming a major supplier of quality coking and thermal coal, aided by its close proximity to steel and power producers in China. Considerable foreign investment has accelerated the development of a number of significant resource projects. The country’s infrastructure is also benefitting from increased activity in the sector.

Hong Kong’s GDP is expected to come back to 4.4 per cent growth in 2011 from 6 per cent in 2010. However, the local construction market is expected to grow at 5.5 per cent per annum over the next 5 years on the back of major transport and infrastructure programs designed to encourage economic activity and forge better linkages with the mainland.

Real GDP growth in India is forecast to average over 8 per cent from 2010 to 2015. The short-term challenge for the Indian government is to manage relatively high inflation and an expanding deficit without impacting growth. Despite this, investment in infrastructure remains one of the government’s top priorities and construction GDP growth is forecast at 10 per cent from 2010 to 2015 and is expected to make up around 11 per cent of total GDP by 2014.

The developing markets in Asia are forecast to grow at 8 per cent annually over the next 5 years, but will remain closely linked to China’s economic performance.

The Gulf Cooperative Council countries are forecast to grow at an average rate of 5 per cent per annum from 2011 to 2015, supported by resurgent oil prices, continued fiscal stimulus spending, and increased production from Qatar’s LNG industry. Qatar’s GDP growth in 2011 is forecast at 14.3 per cent versus 3.1 per cent for the United Arab Emirates and 3.7 per cent for Saudi Arabia.

In Australia, infrastructure spending in 2010 was boosted significantly by the Federal Government’s stimulus package and continued growth of the economy, resulting in 21 per cent higher activity levels than in 2009. For 2011 and 2012, public sector work is expected to gradually reduce as stimulus funding decreases, but overall the infrastructure market should remain above 2009 levels as the private sector drives economic growth. Sustained investment by the private sector, whether through corporations or superannuation funds, will be a critical factor for growth.

Despite the recent Federal election, new infrastructure opportunities remain abundant as State budgets focus on infrastructure renewal and delivery, particularly in Queensland and Victoria. Major Federal and State initiatives over the next few years include:

• Social Infrastructure: the National Building Stimulus package provides for $16.2 billion of approved education building construction over the next two years; $5.5 billion of social and defence housing; and a further $4.5 billion that is unallocated.
• Transport: in 2010/11, transport infrastructure spending is estimated to reach $6 billion in New South Wales; $7.3 billion in Queensland; and $5.8 billion in Victoria with an increased focus on rail projects.
• Telecommunications: construction of the $43 billion NBN commenced in 2010 and is expected to continue until 2017.
• Water: around $12.9 billion of Federal programs an State initiatives will create construction, operation and maintenance opportunities over the next 2 years.

In the medium- to long-term, continued population growth in capital cities will necessitate ongoing infrastructure investment in public transport and roads, ports and freight hubs, education, health, power and energy, community facilities and the environment.

New South Wales has announced a $62 billion infrastructure program over 4 years; Victoria is implementing a $38 billion Transport Action Plan over 10 years; and Queensland’s $107 billion, 20-year infrastructure plan, part funded by asset sales, is progressing with over $17 billion of budgeted expenditure in 2010/11. The Federal Government is also committed to providing significant infrastructure funding to Queensland and Western Australia as it derives income from the Mineral Resource Rent Tax in future years.

Public transport and roads will form the bulk of the national infrastructure spend as projects such as the $4 billion Melbourne Metro stage 1, the $2.2 billion South West Rail Link in Sydney, and the $837 million Darra to Springfield Rail and Road project in Queensland come to market.

The utilities sector will continue to provide new sources of work, particularly in water, power and electricity, and telecommunications. The need for major desalination plants in the short to medium term is declining as current projects are completed. However the $1.6 billion Lytton Desalination Plant in Queensland and the $312 million Southern Seawater Desalination Plant in Western Australia remain on the horizon. The upgrade of water and waste water facilities is an ongoing feature of all State budgets as aging infrastructure is replaced. Potential opportunities include the $550 million Water Security Program in the ACT and the $1.1 billion Northern Irrigation Renewal in Victoria.

Investment in electricity generation is forecast to grow by 23 per cent annually from 2011 to keep pace with population growth and a rapidly expanding resources sector. Proposals for the $1.9 billion Macquarie Bayswater power station in New South Wales and the $1.2 billion Yallourn replacement power station in Victoria are currently being assessed. Alternative energy sources such as wind and coal seam methane gas are gaining ground, particularly in Queensland where AGL has proposed a $700 million wind farm at Coopers Gap and a number of consortiums are vying to develop the first coal seam gas train.

Social infrastructure, particularly health and education, will remain at high levels. Projects related to the Building the Education Revolution program will continue throughout 2011, and the involvement of the Federal government in the funding of State-based health services may lead to the construction of additional health care facilities such as GP super clinics and regional cancer centres. Major health projects currently under consideration include the $1.4 billion Royal Adelaide Hospital, the $1 billion Parkville Comprehensive Cancer Centre in Victoria, the $1.5 billion Sunshine Coast Tertiary Hospital and the $1.2 billion Queen Elizabeth II Medical Centre in Western Australia.

Telecommunications will continue to be driven by the $43 billion NBN initiative. Positive outcomes from negotiations between the Government and Telstra have added a degree of certainty to this nation building initiative. Currently, over $1 billion of contracts have been awarded for projects such as the Regional Broadband Blackspots Program and the initial rollout in Tasmania. Over the next 7 years the NBN will generate a wide range of design, construction and maintenance opportunities.

The Australian Government announced a new Resources Super Profits Tax (RSPT) in May 2010 which created significant uncertainty in the resources industry and the wider investment community. After months of debate, it was agreed that the RSPT would be replaced by a Minerals Resource Rent Tax (MRRT) that is similar in structure to the existing Petroleum Resource Rent Tax. Introduction of the MRRT, which is planned to commence in 2012, is dependent on the re-election of the Government.

Demand for the major mineral commodities produced in Australia - iron ore, coking coal and thermal coal, and gold - remains high, which in turn has kept prices above the longterm average for the past 12 months. Minerals exports have risen to account for 40 per cent of Australia’s total exports, and the resources industry generates around 8 per cent of GDP. The bulk of these exports go to China, Japan and Korea for their steel making industries. Over the next 3 years, Australian iron ore production is forecast to grow at 9 per cent per annum, whilst coking coal and thermal coal production are forecast to grow at around 6 per cent per annum.

The major Australian miners have signalled increased investment and higher production levels to match anticipated demand in coming years. Both BHP Billiton and Rio Tinto have tabled plans to significantly increase iron ore production from the Pilbara and are investing in vital rail, port and processing infrastructure to facilitate this expansion.

Around $17 billion worth of iron ore projects are either committed or under construction, with an additional $26 billion of projects at various stages of planning. These are often dependant on proposed infrastructure investment such as BHP Billiton’s $2 billion Rapid Growth Project 6 port project, Rio Tinto’s $2.6 billion Pilbara 320 rail project and the $3 billion Cape Lambert port expansion.

Growth forecasts for coking and thermal coal exports have been revised upwards for the next 3 years based on better than expected demand. Australian coal export capacity has historically been constrained by bottlenecks in rail and port infrastructure. Additional port capacity of 150 million tonnes per annum is expected to come online in Queensland by 2014 to meet export demand.

Australian coking coal exports are estimated to increase by 11 per cent in 2010, and currently account for around 65 per cent of the global export market. Export growth from 2010-13 is forecast at 5 per cent per annum. Similarly, thermal coal production is estimated to grow by 7 per cent per annum over the next 3 years, supported by average annual export growth of 9 per cent. Over $5 billion worth of coal projects are currently committed or under construction, with an additional $25 billion worth of coal-related projects in the pipeline.

The $15 billion plus Olympic Dam expansion, a multiresource development by BHP Billiton in South Australia, is currently progressing through various feasibility and environmental assessments.

LNG developments in Australia and neighbouring regions share a positive long-term outlook based on the rising energy demand across the region, particularly in China and India. An estimated $68 billion of LNG projects are committed or under construction, with a potential $111 billion worth of projects in the planning stage.

Commercial and industrial property construction will continue to be slow in 2011, followed by 8 per cent annual growth projected for the following 5 year period. The return to growth will be based on sustained business confidence, improving employment conditions, particularly in Sydney, and stability in credit markets. Better than expected employment figures have reduced the availability of quality space and inventory levels are low. Positive signs support industry forecasts that commencements will grow at a compound annual growth rate of 13 per cent from 2010 to 2015.

The tourism sector is expected to remain flat as long as the Australian dollar remains high relative to the US dollar and regional currencies, limiting hotel and leisure opportunities. Retail related developments are likely to contribute significantly to construction growth within the sector. Growth at an average rate of 11 per cent from 2011 to 2015 is expected as a result of an upturn in residential construction and the development of high rise apartment precincts incorporating retail space. Relatively low interest rates, the continuation of the first home buyers grant, and lagging supply are the key factors that should drive residential property to maintain a growth rate of 7 per cent per annum over the next 4 years.

Surging exports, strong domestic demand and well targeted stimulus funding, were the driving forces behind 8 per cent annual growth across most of Asia (ex Japan) in 2010. This is expected to continue through to 2015 even as government stimulus is replaced by private sector investment.

Although the outlook for Asia post-GFC is extremely positive, there will still be challenges for regional economies dealing with rapid expansion, inflation, population growth, structural and currency issues. China is fast becoming one of the world’s dominant economies and, as the region’s largest trading partner, its performance will be critical to the overall economic health of Asia and the Pacific region.

Construction in Hong Kong is returning to the high levels of pre-1997 on the back of a large infrastructure program. The pipeline of major government funded infrastructure projects from 2010 to 2016 is up by 50 per cent from last year to HKD312 billion (A$45 billion). The majority of projects are in new mass transit and fast rail lines; roads, bridges and tunnels; and urban renewal projects such as the redevelopment of the former Kai Tak airport.

Mongolia’s economy, where GDP growth is forecast to be above 10 per cent per annum over the next decade, will be driven by growth in the mining sector. A resource-rich nation with large deposits of coking and thermal coal, copper, gold and rare earth elements, the mining sector currently contributes about 26 per cent of GDP and over 60 per cent of Mongolia’s total exports. Foreign direct investment has doubled over the past 6 years, with 80 per cent directed to the mining sector. Oyu Tolgoi, a new mine being developed by Ivanhoe, Rio Tinto and the Mongolian Government, will be the world’s largest copper mine with estimated reserves of 3.3 billion tonnes of copper, molybdenum and gold. Tavan Tolgoi, with 6.3 billion tonnes of coking and thermal coal, could potentially produce 15-20 Mtpa for more than 200 years. Development proposals for this massive resource are currently being reviewed by the Mongolian Government. Given Mongolia’s remote location and its undeveloped infrastructure, transportation of imports and exports remains an important issue. Approximately 6,000 km of rail and 550 km of road projects are planned to commence in the next few years.

Indonesia is another major coal producer in the region, with growing domestic and offshore demand, particularly from across Asia. Real GDP growth is forecast to average over 6.5 per cent from 2010 to 2015 and the outlook for the mining sector and resources related construction remains positive. The Indonesian Government has signalled its intentions to replace oil fired power stations with coal fired power stations which would require domestically produced thermal coal. Recent changes to legislation concerning foreign-owned mining companies are not expected to have any immediate impact on current operations.

India continues to outperform within the Asia region, supported by a surge in manufacturing and construction. India’s rapid progress, driven by its growing middle class, is creating numerous points of stress on the economy particularly in infrastructure. The Indian Government has earmarked approximately US$20 billion for key economic infrastructure development in 2010/11. However, if India is to reach its annual growth target of 10 percent, it will need to spend between US$500 billion and US$1 trillion on infrastructure over the next 5 years. At least US$110 billion has been identified as investment necessary to improve road and rail infrastructure, with US$30 billion targeted to be raised by the private sector.

The medium to long-term outlook for the Middle East is positive as oil prices remain above US$50 per barrel and global demand for LNG continues to increase. Whilst the collapse of the Dubai property market has impacted growth in the region, a more measured approach to development is visible in Abu Dhabi, Qatar and Saudi Arabia. As expected, these markets have become more competitive, but the number of planned projects expected to come to the market remains high as more certainty returns to the global economy. Approximately US$1.9 trillion of projects are expected to be awarded in the Gulf Co-operative Countries from 2010 to 2014, which is greater than the value of projects awarded from 2005 to 2009. Over 85 per cent of these projects are located within Saudi Arabia, the United Arab Emirates and Kuwait. Of these, around 75 per cent relate to the building and infrastructure sectors.

The Group’s core strategy of diversification – by brands, markets, geography and delivery systems – moderates the cyclicality of the Group’s various markets. Diversification also provides exposure to growth markets, opening up numerous opportunities. Asia and the Middle East are expected to deliver a greater proportion of the Group’s revenue, profit and work in hand over the next 5 years. The Group’s solid balance sheet and strong competitive position will continue to drive good returns and long-term growth for shareholders.

Wal King AO
Chief Executive Officer