BIS Shrapnel has released the findings from its annual study of the road construction and road maintenance markets in Australia: Road Construction in Australia 2007 to 2022 and Road Maintenance in Australia 2007 to 2022.
The extent of the current upswing in public construction activity, in combination with such strong conditions across much of the economy (especially now that more general investment growth has joined the continued strength in the mining sector), has seen the impact of costs growth and skills shortages already come into play.
BIS Shrapnel economist and report author, Damon Roast, explains:
“An increasing number of major public projects have experienced cost blow-outs, but as the competition for resources increases between strong sectors of the economy, we feel there is a greater chance of some projects being delayed.
“This is most likely in areas such as Brisbane and south east Queensland, where the timetable for major road works is more congested and competition for resources from elsewhere is fiercer than in other cities or states.
The projected level of work in Perth is not as strong as Brisbane, but the competition for resources there may even be stronger.
“However, we believe there is a risk of projects in many states being delayed as long as demand remains strong across the economy.
We also believe the threat from skills shortages is set to increase in the next decade, given a growing percentage of the skilled workforce is approaching retirement age.”
While any delays to major projects are likely to feed into stronger levels of work in later years, BIS Shrapnel believes there is also a risk of the forecasts in later years not being reached.
This risk has been brought to public attention in the recent Federal election campaign.
“In the 1970s, 80s and 90s, the Federal Government used roads investment to boost the economy during times of weakness, while easing back in the good times.
However, in recent years, Federal roads investment has jumped considerably, especially with the advent of the AusLink program, where a greater percentage of investment in the nation’s major roads is eligible for at least partial Federal funding.
“For the first phase of AusLink -- set to conclude in 2009 -- the Federal contribution for major road investment was initially to be $7.7 billion, but is now set to be almost $10 billion.
Even allowing for cost overruns, there is little doubt Federal roads investment is now pro-cyclical.
“In this year’s Federal Budget, $16.8 billion was pledged for investment on major road and rail projects in AusLink 2.
However, this amount has already been exceeded by promises from both parties in the Federal Election campaign. This has occurred even though AusLink 2 projects have yet to be announced across all states and territories.
“Our analysis leads us to believe that, when all AusLink 2 projects are eventually announced, the total value of Federal major road and rail project funding will exceed $21 billion -- further evidence of how Federal roads investment is now pro-cyclical.
“In the event of an economic downturn in the period between 2009 and 2014, the government of the day will face a choice. Should they maintain a surplus budget (as both sides have promised) or continue to implement investment programs, such as AusLink 2, as planned?
“The Federal Government would need to choose between embracing debt to invest in infrastructure or putting programs on the backburner to keep the budget in surplus.
State governments already have a record on this. They generally spend in a pro-cyclical manner, cutting capital programs when hit with economic weakness.
We think there is a substantial risk the same could be true of the Federal Government with AusLink 2 if economic conditions deteriorate.”