CHALLENGES, RISKS AND OPPORTUNITIES

Within this year’s pipeline there are a number of challenges, and risks but also opportunities.

THIS REPORT’S OUTLOOK FOR FALLING MAJOR PROJECT ACTIVITY IN 2019/20 – AND LOW LEVELS OF FUNDED WORK EXTENDING INTO 2020/21 – REPRESENTS A RISK TO SUSTAINING STRONGER GROWTH IN THE QUEENSLAND ECONOMY

MAJOR PROJECTS DECLINE IN 2019/20

Overall, funded work in the pipeline falls from $6.1bn in 2018/19 to $4.6bn in 2019/20 before recovering slightly in 2020/21 with a 24% decline in major project activity over 2019/20. Figure 38 (over leaf) compares last year’s MPPR five-year outlook to the present forecast (note 2017/18 is now historical rather than forecast, and 2022/23 is added to this year’s pipeline). As per the 2018 MPPR, we include all major engineering construction projects in Queensland above $50m, as well as significant programs of work in utilities and mining.11

PUBLIC AND PRIVATE INVESTMENT

Queensland’s historical economic performance is heavily influenced by large, long investment cycles – with major projects funded by both the public and private sector playing an important role. Over the past decade, the resources investment boom and bust (and the public investment it helped finance) drove a boom and bust in the Queensland economy. More recently, however, Queensland’s economic performance has been driven by other investment cycles across residential building as well as infrastructure (both publicly and privately funded).

While investment has picked up in Queensland in recent years, the outlook for growth in investment, employment and the broader economy is not exactly spectacular over the remainder of the decade.

REGIONAL PIPELINE VOLATILITY

There are vast differences in how major project activity will play out by region, by sector and by project size through the forecast period. For many regions and sectors, volatility in the pipeline is set to increase, placing pressure on construction industry contractors and suppliers. The Toowoomba region will transition between the Toowoomba Second Range Crossing (road) and Inland Rail (rail) projects. There is also a strong cycle of work ahead in the Brisbane region that will require careful management. Meanwhile, other regions in the north and the west of the state have very high shares of unfunded work in their pipelines, adding to uncertainty for contractors and industry suppliers.

SKILLS SHORTAGES

Queensland still faces significant competition for construction skills from other states – particularly New South Wales and Victoria. The infrastructure investment program in other east coast states is unlikely to slow down significantly given projects already underway. To the contrary, there may be an upside to the Commonwealth Government’s current Infrastructure Investment Program, to ward off the negative impact of the slowdown in residential building or guard against potential external shocks. This may drive even stronger demand for major project skills.

ADANI’S CARMICHAEL COAL DEVELOPMENT ACCOUNTS FOR $1.6BN OR 6% OF THE FUNDED MAJOR PROJECTS PIPELINE

MAJOR PROJECTS DECLINE IN 2019/20

OPPORTUNITY

As forecast in the previous Report, major project work is expected to rise slightly in the current financial year (2018/19). Funded work for 2018/19 is currently on a par with total work in 2017/18, with overall growth in activity in 2018/19 now dependent on several currently unfunded projects proceeding.

OPPORTUNITY AND CHALLENGE

The total value of projects in the pipeline has remained relatively steady. This year, the major projects pipeline is valued at $41.3bn, compared to $39.9bn in the 2018 pipeline. Importantly, however, the total value of work in the pipeline (funded and unfunded) is lower in 2019/20 and 2020/21 compared to the projections in last year’s MPPR, driven by falling construction value estimates / scope on existing projects, as well as the removal of highly unlikely projects from the list. Sustaining the project pipeline above $40bn is mainly due to the $8.3bn in work (funded and unfunded) projected for 2022/23 – $2.1bn or 34% above the $6.2bn work for 2017/18. We note, however, that only $4.8bn of major project work for 2022/23 is currently classified as funded.

OPPORTUNITY

The value of funded work in the pipeline has risen to $27.6bn, up from $23.8bn last year. A significant component of this increase is the inclusion of Adani’s smaller scale Carmichael coal development as funded in the 2019 pipeline (totalling $1.6bn in activity to 2022/23) which remains subject to commercial, regulatory and political risk. The other key contributor is rail, where funded work in the final year of the projection (2022/23) remains very high, supported by the Inland Rail packages.

CHALLENGE

A setback in major project work is expected in 2019/20. The total value of major project work in the pipeline for 2019/20 is $6.5bn, down on the $6.6bn estimated for 2018/19. Funded work in 2019/20 currently rests at $4.6bn, 24% lower than the estimate for 2018/19, representing significant downside risk. The decline in funded work for 2019/20 is being driven by both public and private sectors. Funded roads and bridges work in 2019/20 is 44% lower than 2018/19 as several large projects – including the Gateway Upgrade North, Toowoomba Range Second Crossing and the Logan Motorway Enhancement – reach completion and are not replaced by similar sized new projects.

Telecoms (NBN) activity is also projected to be lower, while privately funded electricity (renewables) and mining activity is also expected to fall from previous levels. By contrast, funded work in rail, harbours, water, sewerage and defence is expected to move higher.

RISK

A higher level of major projects activity since 2016/17 has had a broader, stimulatory effect on the Queensland economy but the setback projected in 2019/20, along with weaker growth in broader investment and consumer spending, is likely to contribute to a slowing in state economic growth. Major project work of the type presented in this report is a key contributor to public and private investment, which is an important driver of the Queensland economy. While very large falls in major project work in 2014/15 and 2015/16 drove a decline in Queensland State Final Demand (SFD), a rise in major project activity in 2017/18 was a key driver of stronger growth in both SFD and the broader economy in that year. In this respect, this report’s outlook for falling major project activity in 2019/20 – and low levels of funded work extending into 2020/21 – represents a risk to sustaining stronger growth in the Queensland economy.

CHALLENGE

The pipeline also highlights a significant shift in the mix of projects by value through the next five years, which is likely to have implications for the competitiveness and sustainability of the construction industry. In 2018/19, 19% of project specific funded work (i.e. excluding programmed works) is on projects valued at $50m to $200m, whilst another 22% is based on projects valued at $200m to $500m in value. However, by 2021/22, these shares fall to 6% and 5% respectively, meaning that 89% of major funded project work in 2021/22 is based on projects valued over $500m, with this share rising to 94% in 2022/23, as shown in Figure 39.

RISK

While more complex, larger projects are perhaps more likely to attract earlier indications of funding to ensure timely delivery, the falling share of funded projects in the $50m to $200m range, particularly, is a cause for concern considering that these projects tend to support a large number of highly competitive construction contractors which form the backbone for the industry.

CHALLENGE

Major project activity has risen in recent years (following the post resources slump) – helping to drive a turnaround in Queensland State Final Demand and employment – but is likely to suffer a significant setback in 2019/20 unless funding for new projects is secured. Major project activity – mirroring the broader Queensland economy – has been through a large resources-driven cycle over the past decade. However, the last two years has seen a recovery in major project work, led by new investments in roads and telecommunications (predominantly funded by the public sector), and electricity and mining (mostly funded by the private sector). Maintaining this momentum is the core challenge facing Queensland. Funded work in the pipeline for the four growth sectors just mentioned – roads, telecommunications, electricity and mining – falls away 45% in 2019/20, and continues to fall in aggregate through the subsequent four years. While other sectors offer growth in funded work from here – particularly rail, but also water, sewerage and defence – this growth is not enough to offset the severity of the decline in other asset classes.

FIGURE 38: MAJOR PROJECT WORK DONE FORECAST: 2019 VERSUS 2018

FIGURE 39: FUNDED PIPELINE BY SIZE OF PROJECT $BILLION, CONSTANT 2015/16 PRICES

FIGURE 40: TRANSPORT AND UTILITIES ENGINEERING CONSTRUCTION BY STATE: 1986-2018 $BILLION, CONSTANT 2015/16 PRICES

PUBLIC AND PRIVATE INVESTMENT

RISK

A high and rising share of unfunded work in the pipeline over time remains a downside risk to major project work. While unfunded work represents just 7% of total activity in 2018/19, this share rises sharply to 40% by 2020/21 and 44% by 2022/23. Excluding the large (and mostly funded) rail segment, the share of unfunded work rises to 57% by 2021/22 and 64% by 2022/23. Sectors with the highest share of unfunded work by 2022/23 include mining and heavy industry (75%), water and sewerage (68%) and, perhaps surprisingly, roads and bridges (52%). While commercial risk for the private sector tends to drive a high share of unfunded work in the resources sector, the high and rising proportion of unfunded work in water and roads by 2022/23 is mainly a public sector phenomenon.

OPPORTUNITY

In this environment, sustaining or growing current levels of major project work into the future will require securing funding and finance for existing unfunded projects, or originating, developing and funding new projects that are currently not in the pipeline at all. The 2019 pipeline shows that, despite falling from last year, there is still a substantial volume ($13.8bn) of unfunded work which may yet be tapped. Well over half of this unfunded total are projects championed by the private sector, including $6.8bn in resources-related investment and $2.3bn in electricity – overwhelmingly renewable generation projects of the kind which has helped drive the current rise in work.

OPPORTUNITY AND RISK

While private investment decisions are heavily influenced by commercial factors, there is much that governments at all levels can do to encourage private projects, such as creating a stable policy environment, setting clear and fair policy targets and regulations, and supporting transparent regulatory and approvals processes. Ultimately, increasing certainty in the way government deals with industry can go a long way to fostering future private investment although, in the case of resources projects particularly, much still depends on global factors outside of direct government control.

CHALLENGE AND OPPORTUNITY

The pipeline also includes $4.2bn in unfunded public sector projects through the next five years, including $2bn in unfunded road and rail projects, and $1.4bn in unfunded water projects. This is down from the $4.7bn in unfunded work in last year’s pipeline, with the bulk of unfunded work lying in the latter two years of the pipeline projection.

For these projects, it makes sense that governments apply a robust cost-benefit framework in assessing whether these projects should proceed – and, where the projects fail on this criteria, be ready to consider alternative solutions. By definition, only projects that offer positive net economic benefits can possibly help bridge any perceived ‘infrastructure gap’.12

Even so, the pipeline shows that even if all currently unfunded projects were to proceed in 2019/20, major project activity may still end up below the level of 2018/19. However, if all unfunded work were to proceed in subsequent years also, major project work could increase by as much as 70% (exceeding $11bn) by 2021/22. This potential volatility suggests that there is still a challenge ahead if government and industry wish to maintain a relatively stable (instead of highly cyclical) project pipeline which delivers infrastructure in a timely way to meet demand whilst also allowing the construction industry to sustainably build capacity and capability without driving significant cost increases as seen during the resources boom.

In particular, governments should be prepared to be flexible in the delivery of the public sector pipeline, bringing forward projects with positive net economic benefits during periods of pipeline weakness or having the discretion to shift delivery timelines on other projects when these may clash with a surge in major project work. In turn, pipeline flexibility requires pipeline depth (i.e. having projects which can be called upon in weak times) and having the financial capability to fund and deliver. This suggests that project origination – i.e. the generation of actual project opportunities – along with employing appropriate funding and financing mechanisms, remain core challenges.

OPPORTUNITY AND RISK

Public infrastructure investment amongst Australia’s east coast states has surged in recent years. The most significant infrastructure investments undertaken by New South Wales and Victoria have focused on urban solutions to unlock greater efficiencies and productivity in Sydney and Melbourne, mirroring concerns from Infrastructure Australia that more investment here was required to avoid an emerging infrastructure gap.13

Combined with the Commonwealth Government’s own large Infrastructure Investment Program (IIP) and its interest in revolutionising east coast freight links (through the $10bn+ Inland Rail project) as well as another direct equity investment in building the Western Sydney Airport, the infrastructure construction boom along Australia’s east coast is unlikely to subside substantially anytime soon – despite near term pipeline risks in Queensland – and dominates the outlook for major transport project construction nationally. Indeed, risks are emerging on the upside to the Commonwealth Government’s current IIP and equity infrastructure investments plan.

Expectations of a slowing national economy this financial year and next as residential building activity continues to cool, along with a potential change of Federal Government that may favour increasing public investment rather than cutting taxes as a method of stimulus, could yet lengthen the current upswing in publicly-funded infrastructure construction nationally despite the winding down in NBN-related work.14

Negative global shocks affecting growth in key trading partners, particularly China, could also have the Federal Government reaching for the fiscal stimulus lever. Having ‘shovel ready’ projects available (i.e. that have been properly planned and assessed through rigorous cost benefit analysis) would be vital for an investment driven stimulus program to work and it would be likely that those states with a certified pipeline of productive projects available would be the most to benefit.

CHALLENGE AND OPPORTUNITY

Queensland’s historical economic performance is heavily influenced by large, long investment cycles – with major projects funded by both the public and private sector playing an important role.15 Over the past decade, the resources investment boom and bust (and the public investment it helped finance) drove a boom and bust in the Queensland economy. More recently, however, Queensland’s economic performance has been driven by other investment cycles across residential building as well as infrastructure (both publicly and privately funded).

While investment has picked up in Queensland in recent years, the outlook for growth in investment, employment and the broader economy is not exactly spectacular over the remainder of the decade.

Public investment growth has been very weak or negative over 2016/17 and 2017/18, and is anticipated to move lower again over 2018/19 and 2019/20 before recovering – in line with the outlook for publicly funded major project activity in this report. Private investment, meanwhile, while rising 5.2% in 2017/18, is expected to slow in line with housing activity and private non-dwelling building. Consequently, economic growth (as captured by Gross State Product or GSP) is expected to slow back below 3% by the end of the decade according to the State Budget, compared to average growth rate exceeding 4% prior to the resources boom – with deleterious consequences for growth in employment and incomes.

CHALLENGE AND OPPORTUNITY

While the share of public sector investment in total engineering construction is lower in Queensland than in other states such as Victoria and New South Wales due to higher private sector funded mining-related activities, publicly funded projects play a major role in driving the state’s economic growth.

Sustained investment in productive infrastructure will remain a critical component of Queensland’s broader economic strategy to ensure cities and regional centres offer competitive benefits and help keep cost of living (and cost of business) pressures contained.

It also means investing in critical infrastructure for new growth regions – which are benefiting from the lower post-boom Australian dollar – to ‘crowd in’ private business investment decisions.

According to the pipeline, the public sector will continue to play a significant role in funding and developing many categories of infrastructure over the coming five years. Over the five years to 2022/23, public sector funded major project work (whether currently funded or not) makes up 56% of the total pipeline value (up from 50% two years ago), but the share is much higher in the transport, water and sewerage, and defence segments of activity.

Interestingly, the pipeline does provide some indication of the level of new funding commitments required to keep annual activity on major projects on a sustained or upward trajectory. According to the pipeline, funded work for 2018/19 is now matching total activity for 2017/18, with some small upside if the remaining unfunded projects in 2018/19 were to achieve funding and proceed.

However, the challenge will be sustaining major project work in 2019/20 and 2020/21, where funded work dips substantially. Currently, the pipeline shows that a further $1.4bn in activity on major projects is still required on top of currently funded work to sustain funded 2018/19 levels of activity into 2019/20.

While this represents an improvement on the even larger funding gap highlighted in last year’s report, this is still a very substantial challenge. By 2020/21, the additional funding requirement is still $900m.

The main issue is that while there is $1.8bn in unfunded major project work in the pipeline in 2019/20 and $3.4bn in 2020/21 – only $425m and $755m of this represents public infrastructure projects. The bulk of unfunded work in these years is held by the private sector in resources and electricity (renewable generation) projects. If these projects do not achieve funding (through either unsatisfactory global economic conditions or, in the case of renewable generation, failures in Australian climate and energy policy that restrict development), there is simply not enough public sector major project work currently available to fill the gap.

While publicly funded activity has risen in recent years, this gap in public sector major project work has been known for some time and was highlighted in last year’s MPPR. Not having enough “shovel ready” projects available over the next two years – while funded work increases significantly in 2021/22 on the back of major rail projects – represents a significant public sector failure which puts the stability of the pipeline at risk and opens up cyclical challenges for industry.

REGIONAL PIPELINE VOLATILITY

OPPORTUNITY AND RISK

The regional analysis presented in this report highlights differences in the outlook in major project work across the state. Unsurprisingly, given the concentration of population in south east Queensland, around half of all funded work in the pipeline is focused here. Brisbane itself is expected to see the strongest growth in work. Meanwhile, more of the riskier, unfunded projects lie in central, northern and western regions of the state, as these regions tend to be relatively more prominent with regards to investment in mining and large water projects (such as dams) that are more typically unfunded in the pipeline.

CHALLENGE AND OPPORTUNITY

The large differences in the outlook for funded major project work by region suggest that governments and industry should give serious consideration to location in guiding new investment or funding decisions.

In 2019/20, the biggest declines in funded work occur in the Ipswich-ToowoombaLogan and Outback regions, with falls also anticipated in Brisbane, the Sunshine Coast and Darling Downs-Maranoa.

While Brisbane activity is on the increase again in 2020/21, the same cannot be said for the Ipswich-ToowoombaLogan and Darling DownsMaranoa (where funded major project work will not recover until the rollout of Inland Rail in the early 2020s) or the Outback region (where there is no funded work at all in the pipeline beyond 2018/19). Furthermore, while funded major project work booms in Brisbane in the early 2020s, for most other regions it begins to decline significantly.

At the very least, falling activity in a region may indicate an emerging surplus in local industry capacity and capability which could be put to use on new works – potentially offering better value for money procurement and delivery – whilst also helping smooth local investment cycles.

SKILLS SHORTAGES

CHALLENGE

While economic infrastructure investment16 in Queensland is now higher than the trough in 2014/15, Queensland lags New South Wales and Victoria in terms of funding and delivering infrastructure investment as shown in Figure 40 (refer to page 71). As New South Wales and Victoria are likely to continue to ramp up or sustain infrastructure investment over the next five years, Queensland may face challenges in competitively procuring construction services for major projects. To minimise risks of project delays, failures and rising construction costs, Queensland needs to apply a longer-term approach to planning for capacity and capability in the construction industry. Such a plan should cover:

  • future workforce requirements and skills
  • planning for required construction materials, and
  • meeting critical transport and logistics challenges as major projects reach the construction phase
CHALLENGE

It is in this heated east coast major project environment that the Queensland Government will be rolling out its own $43bn capital works budget over the coming four years, placing further pressure on skills and resources. Even Western Australia is likely to put increasing pressure on key ‘in demand’ skill sets as infrastructure and miningrelated construction rises in that state in coming years, following a long period of decline.

While more research will need to be undertaken to identify Queensland’s specific needs, various skills demand and ‘workforce gap’ analyses recently undertaken for New South Wales17, as well as the road18 and rail19 industries, indicate that the greatest skills risks will revolve around key ‘on site’ occupations including onsite engineers and surveyors, site supervisors and construction managers, concreters, form workers and steel fixers, mechanical and electrical trades, tunnellers and truck drivers.
Challenge

CHALLENGE

For the rail industry, there will also be a substantial pull on skills required in manufacturing in support of local content (again, including electrical and mechanical trades) as well as longer term operations and maintenance skills as new lines are commissioned. This is on top of the emerging construction skills task as over $8.6bn in funded rail major project work is rolled out in Queensland through the period to 2022/23 as part of a $44bn program of works nationally.

The major projects workforce analysis presented earlier in this report also highlights potential skills constraints that may present a risk to the pipeline. Overall, total major project activity (funded and unfunded) in the pipeline is projected to raise workforce demand by 32%, with the strongest increases likely to be in rail: an additional 6,400 FTE direct construction positions required for the mostly funded rail pipeline.

QUEENSLAND NEEDS TO APPLY A LONGERTERM APPROACH TO PLANNING FOR CAPACITY AND CAPABILITY IN THE CONSTRUCTION INDUSTRY

GOLD COAST SEAWAY OUTFALL TUNNEL

THE 2019 PIPELINE SHOWS THAT, DESPITE FALLING FROM LAST YEAR, THERE IS STILL A SUBSTANTIAL VOLUME ($13.3 BILLION) OF UNFUNDED WORK WHICH MAY YET BE TAPPED

CHALLENGES AND RISKS- FURTHER ANALYSIS

COLLABORATION BETWEEN INDUSTRY AND GOVERNMENT REMAINS THE KEY TO MEETING CAPACITY AND CAPABILITY RISKS

In an environment where strong east coast demand for infrastructure construction is likely to be sustained or even increase further, coupled with potential limits on public finance, it remains sensible for governments and industry to seek collaborative solutions to project delivery challenges to ensure value for money.

Capacity and capability risks have been recognised by infrastructure agencies in NSW and Victoria. Recent work undertaken by BIS Oxford Economics for Infrastructure NSW20, for example, points towards several strategies that help reduce risks and leave a positive legacy of infrastructure investment:

  • The provision of a clear and coherent long term project pipeline to give industry the best possible chance of responding, rather than separate pipelines by governments and the private sector – this is a key feature of this report.
  • Maintain workforce development initiatives that mandate participation on eligible projects by apprentices and/or trainees and through other workforce training
  • Develop and maintain a plan for construction materials, so that the demand and supply balance for scarce quarry products can be quantified, mapped, emerging gaps identified quickly, and strategies put into place to accelerate the development of new supply sources and related logistics where appropriate.
  • Search continually for improvements in procurement that encourage industry participation, innovation and investment in capacity and capability. In particularly, processes should be reformed if they:
  • create long term risks to industry sustainability and costs by inadvertently encouraging contractors to take risks on quality
  • take up scarce resources through the tendering process
  • do not provide a sustainable risk/ margins balance that will encourage firms to invest in skilled staff
  • do not encourage the participation of the full spectrum of resources across the construction industry, across all tiers, and
  • do not encourage innovation or the use of new technologies, ranging from Building Information Modelling (BIM), new resourcesaving materials or construction techniques, or appropriate skills development.

Procurement reform requires a more collaborative approach to be adopted between industry and government to encourage maximum participation and investment in capacity and capability; and appropriately manage risks to ensure value for money.
Such approaches – as embodied in the NSW Government’s recently released 10 Point Commitment for the Construction Industry21 – are increasingly becoming the seen as “best practice” in this space. Key points of the plan include:

  1. Procure and manage projects in a more collaborative way
  2. Adopt partnershipbased approaches to risk allocation
  3. Standardise contracts and procurement methods
  4. Develop and promote a transparent pipeline of projects
  5. Reduce the cost of bidding
  6. Establish a consistent Government policy on bid cost contributions
  7. Monitor and reward high performance
  8. Improve the security and timeliness of contract payments
  9. Improve skills and training
  10. Increase industry diversity

While it remains to be seen whether the high ideals of the 10 Point Commitment effectively filter down from the executive level to the working procurement departments within government agencies, the likely risks from capability and capacity pressures over the coming five years suggests that similar plans should be considered by other state governments such as Queensland.

The market for major infrastructure projects is, after all, a national one where decisions by Tier One contractors whether to bid on particular projects are taken on a national rather than State basis.
In this environment, the Queensland Government should be looking at what it now needs to do to achieve value for money procurement and a sustainable construction industry.

PUT POLICIES AND PLANS IN PLACE

Overall, sustaining growth in the Queensland economy requires putting into place plans and policies that will encourage and sustain both private and public investment in the state over the long term.

Queensland’s long-term economic strategy should concentrate on leveraging from (or improving) core (or potential) strengths. For Queensland, this includes its vast natural resource wealth, its close proximity to Australia’s largest trading partners, its iconic Australian tourism destinations and enviable lifestyle benefits. State Government strategy should continue to focus on boosting programs to create more jobs and attract businesses and enable Queensland’s economy to transition to be more balanced, innovative and productive.

ACCELERATE CURRENTLY UNFUNDED PUBLIC PROJECTS

Decisions to fund, or accelerate, the development of currently unfunded public sector projects will assist in stabilising major project work over the next two years – but will not be a complete solution. Ideally, governments at the State and Federal level should also be investigating new projects that will be required to meet Queensland’s infrastructure challenges in the coming decade – and be prepared to accelerate these in periods of pipeline weakness.

FIGURE 41: MIX OF MAJOR PROJECT WORK DONE BY FUNDING SOURCE: SECTORS AND TOTAL: 2018/19-2022/23

Due to Commence 2019/20:

  • Townsville Port Expansion Project – Outer Harbour Expansion (berths 14+15) – $200m
  • Nullinga Dam – $323m
  • Somerset Dam Upgrade – $600m

Due to Commence 2020/21

  • Yamanto to Ebenezer Upgrade – $340m
  • Hope Island Road (Oxley Drive) road duplication – Stage 4 – $136m
  • Pacific Motorway; Section (C) Daisy Hill to Logan Motorway – $250m
  • Sarina to Cairns – Saltwater Creek Upgrade – $103m
  • Townsville Ring Road Stage 5 – $180m
  • Gold Coast Light Rail Stage 3 – $500m
  • North Coast Line Capacity Upgrade (Brisbane to Cairns) – $116m
  • Wyralong Dam WTP Stage 1 – $200m
  • Paradise Dam Spillway Improvement Project – $200m
  • Burdekin Falls – hydroelectric power station (50MW) – $200m

A further $1.3bn and $1.2bn in unfunded public sector major project work is in the pipeline for 2021/22 and 2022/23 respectively, which may be able to be accelerated if weak major project conditions persist in coming years, include:

  • Centenary Hwy Bus Lanes – Ipswich Mwy to Toowong – $400m
  • Centenary Hwy Bridge Duplication – $150m
  • Rockhampton Ring Road – $950m
  • Ipswich Rail Line – DarraRedbank 3rd track – $218m
  • Sunshine Coast Light Rail – $500m
  • Urannah Dam – $250m

BRISBANE AIRPORT INTERNATIONAL APRON EXPANSION

GOVERNMENTS NEED TO SPEND AS COMMITTED

This analysis assumes that all funded work proceeds as planned: that governments actually spend what they have committed to funding in Budgets. Here, the State Government’s performance shows some improvement in recent years, with the gap between actual and committed funding on public infrastructure – referred to as purchases of non-financial assets – from that year’s Budget falling from around $1.5bn in both 2014/15 and 2015/16, to $333m in 2017/18, according to latest data from the 2018 Mid-Year Fiscal and Economic Review (MYFER) and shown in Figure 42.

While public investment is projected to rise according to MYFER, it is important to note that this also includes spending on social infrastructure (e.g. hospitals, schools and other nonresidential building projects) as well as purchases of equipment (e.g. rollingstock for railways lines, IT and office equipment) and intangibles (e.g. software systems) not considered in this report. Realising this growth outcome, in any case, means continuing to close the gap between actual and committed expenditure.

ENCOURAGING PRIVATE INVESTMENT WILL ALSO BE IMPORTANT

While public infrastructure investment is important, it is not an end in itself. The core aim of public infrastructure investment – and Queensland’s broader economic strategy – should be to boost productivity and competitiveness which will also help stimulate local private investment decisions.

As shown in Figure 43 (over the page), the bulk of currently unfunded major project activity, year by year, is actually related to private sector projects.

FIGURE 42: PURCHASES OF NON-FINANCIAL ASSETS, $BILLION NON-FINANCIAL PUBLIC SECTOR, QUEENSLAND

ENCOURAGING PRIVATE INVESTMENT WILL ALSO BE IMPORTANT

While public infrastructure investment is important, it is not an end in itself. The core aim of public infrastructure investment – and Queensland’s broader economic strategy – should be to boost productivity and competitiveness which will also help stimulate local private investment decisions.

As shown in Figure 43 (over the page), the bulk of currently unfunded major project activity, year by year, is actually related to private sector projects.

Therefore, another path to avoiding a future slump in major project work requires governments doing what they can to provide the right conditions for these projects to proceed (while recognising that there may also be broader constraints, such as the state of global commodity markets).

The public sector only makes up a very small part of the total Queensland economy (around 25 per cent in expenditure terms) and this is not expected to change substantially in the future. Consequently, achieving long term economic goals will depend crucially on how the public sector can develop policies to stimulate private decisions on where to invest and live.

Beyond public investment itself, State and Federal Governments should also be looking at ways to encourage the return of private investment (by far the bigger part of the investment ‘pie’) and re-establish the positive growth mindset. While supporting market-led proposals is an important plank here, the overall record of success for getting these projects to the construction phase is not strong. Meanwhile, the Northern Australia Infrastructure Facility (NAIF) was also supposed to encourage private sector projects but few projects have materialised from this initiative.

Boosting private sector investment can also be achieved through good public investment choices which ‘crowd in’ private investment (e.g. building better transport links which encourage broad regional investment by the private sector, or investing in lower cost energy to attract industry and other business). Perhaps more importantly, governments should also set clearer messages about future policy to give the private sector confidence to invest. Unfortunately, the record here has not been consistent, with arguments over energy policy, mining, financing, and tax and spend policies likely to have had a negative impact on business confidence.

FIGURE 43: FUTURE UNFUNDED WORK DONE PROFILE: PUBLIC VERSUS PRIVATE SECTOR, $BILLIONS

FIGURE 44: QUEENSLAND PUBLIC INVESTMENT: 1986-2018

QUEENSLAND NEEDS TO APPLY A LONGERTERM APPROACH TO PLANNING FOR CAPACITY AND CAPABILITY IN THE CONSTRUCTION INDUSTRY

ENSURING SUSTAINABLE INVESTMENT IN ECONOMIC INFRASTRUCTURE

Queensland is currently relying heavily on new Commonwealth and private sector funding to drive the upswing in major project work from the 2014/15 trough. Through the next five years to 2022/23, nearly one third of proposed major project work remains unfunded, presenting risks to the sustainability of the project pipeline. For the public sector, only around $3.7bn of the $23bn pipeline of work is unfunded. However, as noted, there is simply not enough projects in the pipeline to sustain major project work over the next two years.

This raises important questions:

  • Is Queensland investing in economic infrastructure at an appropriate level – and is the risk of falling major project work over the next two years an indication that an infrastructure gap is reemerging?
  • Are there funding and financing constraints that may prevent Queensland from maintaining an appropriate level of economic infrastructure investment in future?

With regards to the first question, identifying underinvestment in infrastructure and ‘infrastructure gaps’ in practice is very difficult. While various organisations have attempted to quantify the size of the infrastructure gap in Australia – with estimates typically ranging in the hundreds of billions of dollars – they are invariably based on methodologies which are not publicly available, or ‘rules of thumb’ (e.g. share of infrastructure spending to GDP) that are not adequately explained or tested.22 Ideally, specific quality or service indicators such as engineering ‘report cards’23, rising congestion costs, increasing travel times, or number of blackouts for example tend to indicate when infrastructure gaps may be present – but of themselves do not necessarily provide optimal solutions to the infrastructure problem at hand: whether it requires substantial new investment at all, or the quantum of investment required.

Indeed, Terrill and Batrouney (2018) show that Australian cities have already been “remarkably adaptive” in dealing with strong increases in population, potentially reducing the need for infrastructure investment as a solution.24 Growing population density within cities – and changing behaviours by commuters in where to live and how to travel – means that infrastructure spending does not necessarily need to keep pace with population growth. And rather than requiring “mega” infrastructure solutions, governments should also consider a range of other policies that can help cities adapt to growing populations, including abolishing stamp duties on homes, revisiting zoning laws, introduce demand management policies such as road user charging, and consider smaller projects (including maintenance) with high net benefits. With these caveats in mind, it is worth comparing Queensland’s recent infrastructure investment performance over time, and against other states.

Figure 44 shows the path of public investment in Queensland over the past 32 years, with investment in economic infrastructure reflected in the engineering construction share. This shows a rising trend (in volume terms) over time, with a significant “catch up” cycle in the 2000s as the state invested in large water systems and networks to battle the Millennium Drought and used surging royalty revenue to “catch up” on transport infrastructure spending.25 On a population basis, public investment in economic infrastructure in 2017/18 was back to its 30-year average, following a dip below this average between 2014 and 2016. While publicly funded engineering construction is still well below the 2008/09 peak, on this basis it seems to be not at critically low levels yet, though there is still a concern that this may drop back in coming years. As a share of GSP, however, public investment continues a trend decline and, as at 2017/18, reached a record low.

The difference in recent behaviour between public engineering construction as a share of population and public investment as a share of GSP measures may be caused by several factors including:

  • The broader public investment measure includes investment in social building, equipment and intangibles, which may not be keeping pace with economic growth, or
  • The development of highly capital-intensive industries in Queensland, such as mining, gas extracting and processing, and energy, which now deliver substantially higher levels of economic production whilst driving weak (or even negative) employment growth in their operations phase. This may suggest that a lower level of public investment is required to meet a given level of GSP, other things being equal.

Figure 45 shows the share of transport and utilities engineering construction (public and privately funded) to GSP in Queensland has wavered between 2.5-4.5% of GSP over the past 32 years, considerably higher than other states, likely reflecting its stronger rate of population growth, its typically wider distances, and relatively high resources investment intensity which also drives infrastructure investment. Interestingly, it is also well above Western Australia – Australia’s other key resources state.

As per Figure 44 (page 82), there is a trend weakening in this ratio during the 1990s before a stronger phase of investment in the 2000s. Again, as per Figure 44 (page 82), there is a significant weakening again between 2014 and 2016, before a recent recovery which places activity close to the long run average as a share of GSP. Unsurprisingly, the “investment premium” between the Queensland transport and utilities construction to GSP ratio and that for New South Wales and Victoria has narrowed in recent years given the large rollout of infrastructure investment in the other east coast states, from an average of 1.1% that existed prior to 2008, to 0.7% over the past decade.

Meanwhile, comparing Queensland against international ‘norms’ for public investment is challenging given that different countries often use different definitions of both the ‘public sector’ and ‘public investment’, and there can also be sharp differences in outcomes across countries given differing stages of economic development, population growth and a range of other factors including the use of the private sector to deliver ‘traditional’ public sector investment.

Recent analysis by the International Monetary Fund shows that, across advanced economies, average public investment as a ratio of GDP has decreased from 5% in the 1960s to just over 3% in 2012, and was in the 4% range through the mid-1980s.26 The decline is fairly consistent over the period.

In Queensland, public investment as a share of GSP has fallen from around 7% in the 1980s to around 4% by 2018 but was still very high (around 6.9%) in 2012 due to the surge in public investment that commenced in 2006 which delivered major water security schemes, hospitals and major road projects. Overall, between 1986 and 2018, public investment as a share of GDP in Queensland has averaged around 6% though it had fallen away in more recent years. Publicly funded engineering construction in Queensland as a share of GSP also shows the same downward trend – from 3.4% in the late 1980s, to 2.3% currently (and rising from a trough of 1.9% in 2015/16). Overall, the trend of declining public investment as a share of GDP in Queensland mirrors that seen for advanced economies globally, with any discrepancies likely explained by timing of local public investment cycles and the impact of (private sector led, and highly capital intensive) resources and mining investment.

Research suggests that following strong investment between 2006 and 2012, it is difficult to argue convincingly that Queensland has a major “infrastructure deficit” and the Building Queensland Pipeline and Business Case Framework is providing improved assurance that Queensland is investing in the right projects. However, the lack of established benchmarks or satisfactory methods of infrastructure pipeline assessment may be problematic and perhaps could be addressed in future infrastructure Audits by Infrastructure Australia, as well as future Queensland State Infrastructure Plans.

Overall, this analysis suggests that Queensland economic infrastructure spending is just keeping pace with historical norms, but risks remain if activity were to fall away from here; that is, if projects in the pipeline do not proceed. Ideally, a more nuanced analysis of infrastructure gaps in Queensland would be better informed by regular and timely data on the quality of services which infrastructure provides – for example, commute times in major cities, the number of faults reported, or capacity constraints in the provision of utilities services across water, electricity, gas and telecommunications – as well as the structural quality of the infrastructure itself through regular engineering reports to assess how much stock needs to be replaced or renewed.

FIGURE 45: QUEENSLAND TRANSPORT AND UTILITIES CONSTRUCTION AS SHARE OF GSP: 1986-2018

FIGURE 46: PUBLIC SECTOR NET DEBT AS A SHARE OF GSP

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BCC FERRY TERMINAL

AT A BROADER LEVEL, THE DEBT LEVELS OF AUSTRALIA’S MAJOR STATES ARE STILL CONSIDERED LOW BY INTERNATIONAL STANDARDS

While some data is available publicly (for example, commuting times and distances data can be sourced from analysis by the Bureau of Infrastructure, Transport and Regional Economics as well as the Census) there can be lag in the availability of data. In some cases, such as independent analyses of asset quality such as that undertaken in the past by Engineers Australia, there can be a very long time between reviews. This suggests that governments should collect and publish detailed data on asset and service quality frequently to provide a better basis for assessing the existence or risk of future infrastructure gaps emerging – and what the most appropriate solutions may be.

SUSTAINABLY FUNDING PUBLIC INFRASTRUCTURE

Ideally, the availability of funding and finance for sustainable productive infrastructure investment should not derail investment itself – and exploring innovating funding mechanisms remain critical to the outlook for the pipeline and the Queensland economy.

Despite its weakened postboom financial position, the Queensland Government still has important funding levers available to it. Indeed, recent State Budgets and the 2018 MYFER show that the State Government will be increasing its use of debt finance to help deliver its $43.6bn capital program over the next four years, with net debt27 rising from $34.2bn in 2017/18 to $51.5bn in 2021/22.28

As noted in previous MPPRs, the use of debt finance for long lived infrastructure projects makes sense on both economic efficiency and intergenerational equity grounds, so long as the projects funded are shown to be productive through rigorous cost benefit analysis. And from a financial perspective, the Queensland economy (and more importantly, revenue generation to the State Government) has improved at a rate better than anticipated in recent years. This has helped bring down the public sector net debt to GSP ratio from a peak of 13% in 2013/14 to 10% in 2017/18 – as shown in Figure 46 – and has afforded the State Government the headroom to increase debt to finance productive infrastructure investment

The debt to revenue ratio for the general government sector in Queensland has also fallen substantially, from a peak of 91% in 2012/13 to 54% in 2017/18.29 Indeed, over the next four years, Queensland’s public sector net debt/GSP ratio is not anticipated to rise back to the 2013/14 peak – even allowing for reduced royalty revenues – and remains in the ‘middle range’ of indebtedness amongst Australia’s five largest states.

Figure 46 shows that Queensland is not alone in using debt to fund infrastructure investment, with Victoria and New South Wales, particularly, using debt now or in the future to deliver large infrastructure investment programs. Western Australia, by contrast, is looking to reduce net debt as a share of GSP in coming years, which suggests there will be constraints to future State borrowing for public infrastructure. At a broader level, the debt levels of Australia’s major states are still considered low by international standards, with the net debt to GDP ratio for Australia (19%) comparing favourably to similar advanced economies including Canada (27%), the United Kingdom (78%), the United States (82%) and France (87%), but above Sweden (9%), New Zealand (5%) and Denmark (16%).30

However, it remains important that debt is used only to fund capital rather than recurrent expenses, and that provision is made when raising borrowing levels for likely increases in interest rates as monetary policies normalise in the United States and other countries following looser monetary policy settings in the wake of the global financial crisis.

Apart from debt, Queensland still retains significant options in raising finance for higher levels of infrastructure investment. Crucially, asset recycling has not been used to the same degree in Queensland as it has in other states and this remains a potential source of finance for future infrastructure projects, so long as there is effective post-sale regulation of privatised assets to ensure prices remain competitive. Introducing tolling on major roads (possibly to manage peak demands) or more fundamental reform such as a broad-based road user charge, could also help fund future infrastructure projects – as well as potentially pushing out the need for reinvesting in roads networks. And there are other funding options too, as detailed in previous MPPRs, including expanding the number of City Deals (bringing all levels of government to the table for a region), value capture, and implementing genuine tax and expenditure reforms.

Finally, with the notable exception of the Cross River Rail project, Queensland has been able to extract funding from the Commonwealth Government in recent years in helping to fund major public sector projects. The next Federal election (required to take place by May 2019 at the latest) will no doubt see many promises of further Commonwealth infrastructure funding assistance for Queensland, particularly if there is evidence that these projects are productive and have a positive net benefit under rigorous analysis.

However, Queensland will only be able to take advantage of any increases in Commonwealth infrastructure funding if it has a store of such “shovel ready” projects available. With only one ‘High Priority’ project out of 9 on Infrastructure Australia’s current (February 2019) Infrastructure Priority List (Brisbane Metro), and only two ‘Priority’ projects out of 10 (Beerburrum to Nambour Rail Upgrade, and the Inland Rail project), Queensland has few major projects which have been positively evaluated by Infrastructure Australia. A further 15 projects are listed as Initiatives (including Cross River Rail), meaning that they are still being assessed. This compares to 103 projects nationally.

CRUCIALLY, ASSET RECYCLING HAS NOT BEEN USED TO THE SAME DEGREE IN QUEENSLAND AS IT HAS IN OTHER STATES AND THIS REMAINS A POTENTIAL SOURCE OF FINANCE FOR FUTURE INFRASTRUCTURE PROJECTS

LEGACY WAY

With the next Federal election on the horizon, securing Commonwealth contributions towards the $5.4bn Cross River Rail project and further contributions to the Beerburrum to Nambour Rail project would liberate significant state capital from the forward estimates to reinvest into other priorities.

Currently, Infrastructure Australia is evaluating the business cases for two projects on the Pacific Motorway which were submitted in January 2019 – the $1.03bn Varsity Lakes to Tugun and the $749m Eight Miles Plains to Daisy Hill sections. These are both listed as funded (announced) in the current MPP, but successful evaluation by Infrastructure Australia could also see a greater share of Federal Funding attracted to these projects.

11 Programmed work includes estimates of the rollout of the National Broadband Network – Australia’s largest single infrastructure project – as well as works in water, sewerage and upstream oil and gas development to feed Queensland’s LNG processing trains.
12 Terrill, M. and B. Coates (2016) “Budget Explainer: does Australia really have an infrastructure deficit?”, The Conversation, April 28th.
13 Infrastructure Australia (2016) Infrastructure Plan.
14 Jericho, G. (2019) “How the drop-off in construction gives Labor an election spending blueprint”, Guardian Australia, January 17th, https://www.theguardian.com/business/grogonomics/2019/jan/17/how-the-drop-off-in-construction-gives-labor-an-election-spending-blueprint?CMP=Share_iOSApp_Other
15 Investment in economics represents the addition to capital stock or productive capacity. It mostly consists of the construction of buildings and structures and purchases of plant and equipment, but also includes growth in livestock, minerals exploration and intellectual property. This is a very different meaning from finance, where investment refers to the purchase or creation of an asset with the expectation of generating financial returns.
16 That is, investment in non-building infrastructure such as transport and utilities.
17 BIS Oxford Economics (2018a) NSW Construction Delivery Assessment: Capacity and Capability, for Infrastructure NSW and available online: https://insw-sis.visualise.today/documents/about/NSW_Construction_Delivery_Assessment_Capability_and_Capacity.pdf
18 BIS Oxford Economics (2018b) Roads Workforce Capability 2017-2027, Austroads, https://www.onlinepublications.austroads.com.au/items/AP-R574-18
19 BIS Oxford Economics (2018c), Australasian Railways Association Skills Capability Study, Skills Crisis: A Call to Action. https://ara.net.au/ara-skills-capability-study
20 BIS Oxford Economics (2018a), p116-117.21 NSW Government (2018) NSW Government Action Plan: A ten point commitment to the construction sector, view 2/11/18 http://www.infrastructure.nsw.gov.au/media/1649/10-point-commitment-to-the-construction-industry-final-002.pdf
21 NSW Government (2018) NSW Government Action Plan: A ten point commitment to the construction sector, view 2/11/18 http://www.infrastructure.nsw.gov.au/media/1649/10-point-commitment-to-the-construction-industry-final-002.pdf
22 See, for example, Terrill, M. and B. Coates (2016) for a discussion of such studies.
23 Such as those formerly produced by Engineers Australia – the last Engineers Report card for Queensland was produced in 2010.
24 Terrill, M. and H. Batrouney (2018) Remarkably adaptive: Australian cities in a time of growth, Grattan Institute, October 2018.
25 There was also during this time substantial private investment in road transport infrastructure in Brisbane, including the Clem Jones Tunnel and Airport Link.

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