This Report shows that major project activity in Queensland is now higher than the very low trough experienced through 2015/16 and 2016/17.
In conclusion there are downside risks to major project activity in the state in the near term, and there are significant challenges ahead if meeting the twin goals of sustainability in infrastructure provision and sustainability in the Queensland construction industry are to be achieved.
1MAJOR PROJECTS DECLINE IN 2019/20
- The likely prospect of a 24% decline in major project activity over 2019/20.
- Overall, funded work in the pipeline falls from $6.1bn in 2018/19 to $4.7bn in 2019/20 before recovering slightly the following year.
2PUBLIC AND PRIVATE INVESTMENT
- 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.
3REGIONAL 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.
- 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.
- 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 given projects already in flight.
This Report makes the following recommendations:
1INCREASE INDUSTRY COLLABORATION
Aim for a more collaborative approach between government and the construction industry, as is emerging in New South Wales and Victoria. Looming capacity and capability challenges will likely require a greater partnership approach that maximises the legacy of the infrastructure program. Rather than being incentivised to secure the lowest priced work on each and every project, procurement will increasingly need to encourage industry investment in capacity and capability, reward innovation (and hence productivity), and foster the development of critical skills needed to deliver major projects.
2INCREASE THE NUMBER OF SHOVEL READY PROJECTS
Governments should consider raising the number of “shovel ready” projects in the pipeline through early identification of infrastructure network challenges and commit to earlier evaluation of solutions and business cases. Similarly, future infrastructure requirements should be informed by a comprehensive review of the quality of the existing infrastructure stock and the development of frequently updated customer metrics that can best indicate where gaps may exist. Increasing the depth of the pipeline would improve its flexibility to help smooth cycles in major project activity – that is, allowing projects to be accelerated within the pipeline to take advantage of any emerging local industry capacity, such as seems likely to occur in 2019/20.
3SECURE COMMONWEALTH FUNDING FOR RAIL PROJECTS
Resolve Commonwealth funding contributions to passenger rail projects – the State Government’s ability to fund infrastructure growth beyond its current budget commitments is challenging. This is likely to hamper its ability to meet contributions required by the Commonwealth per national partnership agreements covering transport and road projects. Securing Commonwealth contributions towards the $5.4bn Cross River Rail project and further contributions to the Beerburrum to Nambour Rail project would liberate funds from the forward estimates to reinvest into other priorities.
4DEVELOP A FINANCING PLAN
Consider asset recycling. Other states, including New South Wales and Victoria, have already established long term plans for infrastructure development, and have made the hard decisions regarding funding and finance. With its traditionally stronger population and economic growth, Queensland needs to develop a strategic plan for funding and financing infrastructure. As noted in previous Major Project Pipeline Reports, Queensland could leverage substantial infrastructure finance through asset recycling strategies.
FINALISE A CITY SEQ DEAL
City deals provide a new approach for all levels of government to work together to plan and deliver transformative outcomes for Queensland cities and are a key mechanism of the Commonwealth Government’s Smart Cities Plan (2016). The Townsville City Deal struck in December 2016 was the first in Australia and an important start. A South East Queensland (SEQ) Regional City Deal has the potential to be the foremost City Deal in the nation involving ten separate Councils. This ‘new generation’ City Deal could provide a structured, coordinated plan for infrastructure development in south east Queensland supported by all tiers of government.
The State Government should maintain the current focus on ensuring committed funds for infrastructure delivery are spent as planned. The gap between committed and actual spending on public investment has narrowed, from a peak of $1.7bn in 2014/15 to $333m in 2017/18. This positive trend should be maintained.
IMPROVED NEEDS ANALYSIS
Better identification of infrastructure gaps. Broad economic measures and rules of thumb such as investment/GSP ratios are not ideal determinants of the existence of infrastructure gaps but can show the cyclicality and trend movements in investment over time. The lack of established benchmarks or satisfactory methods of infrastructure gap identification is problematic and perhaps should be addressed in future infrastructure Audits by Infrastructure Australia, as well as future Queensland State Infrastructure Plans.
REVIEW PACKAGING STRATEGIES
Provide a diverse range of projects by size. This Report highlights that a very high proportion of funded work in 2021/22 and 2022/23 is concentrated in projects valued over $500m. A sustainable and competitive construction industry requires diverse participation in project tenders and construction work. With this in mind, the State Government should look to review their packaging strategies to support greater participation from the sector.
BEST PRACTICE INFRASTRUCTURE PROVISIONS
On top of these recommendations, the more general rules of ‘best practice’ infrastructure provision continue to apply. Governments, particularly, will need to maintain and improve reporting systems to ensure the timely identification of any infrastructure gaps, choose the most productive projects and infrastructure solutions to address gaps, and come up with funding and financing solutions if major project activity is to be matched with Queensland’s infrastructure demands over the long term:
IDENTIFY THE GAPS
Better identification of infrastructure gaps. Broad economic measures and rules of thumb such as investment/GSP ratios are not ideal determinants of the presence of infrastructure gaps but can show the cyclicality and trend movements in investment over time. Changing behaviours and a rising population density are increasing the adaptability of cities in meeting infrastructure constraints.
REVIEW THE OPTIONS
Ensure that the best infrastructure solutions are picked. This means that the business cases for short and long-term public investment programs are based on maximising economic benefits through transparent cost benefit analysis (CBA). The creation of Building Queensland (BQ), along with the ongoing work of Infrastructure Australia evaluating business cases submitted for Commonwealth Government funding, has seen far more rigorous analysis undertaken in project evaluation and selection in Queensland than in the past.
FIND THE MONEY
Ensure there is appropriate funding and financing mechanisms in place. Sustainable investment in economic infrastructure for Queensland will involve moving more major projects from ‘unfunded’ to ‘funded’ categories in coming years, as well as potentially accelerating developments to take advantage of industry capacity and developing new projects. The high cyclicality of State government revenues create challenges here for publicly funded work as it encourages more spending on infrastructure in the good economic times (at a time when industry capacity to deliver infrastructure is more stretched and costs are higher) and then pull back on infrastructure spending in the bad economic times (when the broader economy could do with the spending boost and costs can be lower). Because of this, governments should continue to look for ways to smooth and increase project finance such as through City Deals, asset leases, market-led proposals, value capture and the judicious use of debt finance. Inevitably, sustainable financing of infrastructure over the long term will require genuine tax and expenditure reforms.
RISKS TO THE OUTLOOK
The outlook contained in this report is subject to significant upside and downside risks. Despite the cyclicality of work projected, there is still the potential for further, more volatile, cycles ahead given Queensland’s natural strengths and advantages: increasing connections with the fast growing economies of Asia, traditionally strong population growth, and high quality natural resources.
In this respect, the key risks which will affect the outlook for major project work as identified in this Report, are:
1HEALTH OF TRADING PARTNERS
The economic outlook for key trading partners, the strategic decisions they make in achieving sustainable growth, and how this will impact on the global trade of resources for which Queensland has a strong supply position, particularly coking coal, thermal coal, and gas.
The trajectory of commodity prices, particularly for coal (both thermal and coking), as well as oil prices (which can influence returns to LNG projects). Commodity price movements also impact on Queensland Government royalty revenues (as well as business taxes collected at the Commonwealth level) which can influence the future path of public infrastructure investment.
Movements in the value of the Australian dollar, which not only affect the profitability and competitiveness of resources projects but also helps drive investment in other tradeable sectors of the Queensland economy, including tourism, agriculture, education and manufacturing.
Policy decisions by State and Federal Governments, particularly with regard to the resources and energy and how this may play out in terms of encouraging private investment in resources projects and energy infrastructure.
While most of these risks are outside of the control of those operating in the construction of Major Projects, it remains important that governments and industry participants focus on what can be controlled to ensure that the Queensland construction industry and economy remains on a sustainable footing. This includes taking on the recommendations in this Report with the aim of mitigating the volatility of the boom/bust investment cycle and achieving high quality, predictable and sustainable outcomes, safe workplaces and decent working conditions. Maintaining a healthy Queensland economy depends on sustaining an innovative construction industry which is flexible in responding to the challenges ahead, and has the right mix of skills and competencies to meet future demand.