01 Oct 2019
ANZ Research’s 2019 Major Projects report outlined a solid pipeline of major infrastructure and non-residential building projects ($A100 million+) over the five years to 2023-24. What we couldn’t have factored in was a shock global pandemic and the ensuing direct and indirect effects on the overall non-residential construction sector.
While the pandemic doesn’t appear to have had a severe effect on non-residential construction work done in the June 2020 quarter, the outlook is concerning. Approvals are dropping and capital expenditure plans have slumped. The tepid business investment environment pre-pandemic has deteriorated further.
"While the pandemic has undoubtedly worsened the broader investment environment, things weren’t going so well before it arrived.”
Private sector engineering construction work done actually recorded an 8.4 per cent quarter-on-quarter jump in the June quarter. Public sector engineering construction also expanded by 1.3 per cent quarter-on-quarter.
While private sector non-residential building work done fell by 1.6 per cent quarter-on-quarter, this was not a particularly large fall; although public sector non-residential building work done (−3.4 per cent quarter-on-quarter) recorded its largest quarterly fall since 2016.
Construction was designated an essential service in Australia, and work was able to continue, albeit with social distancing requirements. On some worksites, work hours and/or the number of shifts were increased which appears to have at least partially offset any hit to productivity.
However, the outlook is not ideal. ANZ Research expects private sector engineering construction to deteriorate over 2020-21 as businesses defer or cancel investment commitments and development of new projects is halted or slowed amid ongoing uncertainty.
The pipeline of private infrastructure projects has already been falling for a year. And non-mining firms are planning to reduce total capital expenditure by almost a fifth in 2020-21. The mining sector’s previous plans for a solid rise in mining capex have also evaporated with firms now expecting essentially flat growth.
While the pandemic has undoubtedly worsened the broader investment environment, things weren’t going so well before it arrived. Private investment was falling, not only in Australia but across many developed economies, due to subdued capacity utilisation, soft profit growth and sticky hurdle rates.
Because of this, ANZ Research was pleased to see the Federal Budget’s focus on encouraging business investment. However, the government’s approach of trying to engineer a private sector recovery rather than directly lifting public spending even further does come with risks if the private sector uptake does not meet expectations. This risk is not immaterial in a world where business confidence and conditions are fragile.
ANZ Research thinks the public sector needs to help fill the hole. And indeed, there has been a raft of announcements of new and fast-tracked projects from all levels of government. How effective this will be in the near-term will depend on how quickly funding announcements translate into activity.
Public infrastructure funding
In the 2020-21 Federal Budget, capital spending for 2020-21 through to 2022-23 has been revised up by $A33.4 billion compared with the Mid-Year Economic and Fiscal Outlook in December 2019. Just over half of the addition is due to increased financial asset investment, including $A4.5 billion in increased equity to the National Broadband Network. An additional $A2.7 billion is devoted to direct capital investment by the Commonwealth. And around $A12 billion of the upgraded estimates is for higher capital grants to the states and territories.
As a share of gross domestic product, the capital spend reaches 2.9 per cent, slightly below the high point reached in 2009-10, post-global financial crisis (GFC). It does, however, hold near this level over a number of years - unlike in the post-GFC period where it quickly fell away.
As usual, there was a focus on transport projects in the Budget. But disappointingly, direct investment in social infrastructure was lacking, for example in education, health, aged care and social housing.
Water and waste infrastructure did get a look in. The Budget allocated $A2 billion over 10 years for the National Water Infrastructure Development Fund and $A190 million to establish a Recycling Modernisation Fund to improve Australia's waste and recycling capacity. Both these measures will be in partnership with the states and territories.
There was also some funding support for energy infrastructure but ANZ Research thinks the Budget was a missed opportunity to invest in transmission infrastructure and renewable energy zones (REZs), which were identified in the Australian Energy Market Operator’s (AEMO) 2020 Integrated System Plan (ISP) as necessary to advancing the National Electricity Market transition at least-cost.
As ANZ Research noted in the 2019 Major Projects report, there are limitations to using infrastructure investment as short-term economic stimulus, particularly large-scale road and rail projects, which have long lag times. In contrast, small-scale projects or maintenance works are realistic alternatives. So ANZ Research was pleased to see that under the JobMaker Plan, $A2 billion was allocated over 2020-21 and 2021-22 for small-scale road safety projects and upgrades, and the Local Roads and Community Infrastructure Program was extended out to 2021-22 to the tune of $A1 billion.
Small-scale projects and maintenance works can be preferable as short-term stimulus for three key reasons:
This last point contrasts with the transport megaprojects currently underway, which are concentrated in the capital cities, particularly Sydney and Melbourne. Consequently, concerns over capacity constraints had been rising over recent years. Victoria in particular recorded a rapid escalation in road and bridge construction output prices through 2017 and 2018.
Output price growth for road and bridge construction and other heavy and civil engineering construction peaked in 2018-19 and has since eased considerably. But the pandemic may yet throw up challenges with borders shut to skilled migrants indefinitely and many countries turning their attention to infrastructure-led stimulus which could intensify competition for limited resources, including materials and equipment.
While this additional infrastructure investment is presented as new funding, it appears for some projects it may be displacing state/territory funding previously committed. For example, the $A292 million for Barwon Heads Road will replace some of the $A318.3 million funding to the project committed by the Victorian government in its 2019-20 budget, which at that stage was equivalent to the total estimated cost of the project. That cost appears to have escalated to $A365 million but the federal government will now be picking up $A292 million of the bill.
Although some of this federal funding will not be “new” strictly speaking, it should ultimately enable state and territory governments to allocate their saved funding to other projects.
So far, Western Australia is the only state or territory to have released its 2020-21 budget. The flagship $A5.5 billion WA Recovery Plan had already been announced, including investment in infrastructure, schools, TAFE and community facilities and maintenance works.
There have been several announcements from the other states and territories since the pandemic began, including:
Australia could see more funding committed and will get more details on the projects when budgets are released. But ANZ Research suspects the 2020-21 budgets aren’t the “be all and end all” – it may just take time for more infrastructure spending to come through.
Australia may yet see larger projects put forward.
Catherine Birch is Senior Economist at ANZ
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
01 Oct 2019
06 Oct 2020