EXECUTIVE SUMMARY

Welcome to the third Queensland Major Projects Pipeline Report (the Report) developed by the Queensland Major Contractors Association (QMCA) and the Infrastructure Association of Queensland (IAQ).

COMING UP WITH NEW FUNDING AND FINANCING SOLUTIONS WILL REMAIN CRITICAL IF GROWTH IN MAJOR PROJECT ACTIVITIES IS TO BE SUSTAINED INTO THE FUTURE

This annual Report has become the key barometer of current and future major project activity in Queensland.

It provides a comprehensive list of major project work together with the predicted level of construction activity based on both the completion of existing projects and the likelihood of potential projects proceeding. A complete list of major projects considered for this analysis, and the explicit assumptions for each project regarding work done, are provided at the end of this report. The report is therefore a useful source of data to inform infrastructure policy and guide the timing of investment decisions.

The Report this year contains mixed news. While last year’s call for increasing the volume of funded work in the pipeline has been answered, there is still not enough funded work to avoid a decline in major project activity in 2019/20. And while the overall size of the pipeline is roughly the same as last year, much more of the pipeline is weighted towards the latter years of the forecast – and much of this remains unfunded.

Other familiar challenges remain: the appropriate identification of infrastructure initiatives, choosing the most productive projects, and coming up with funding and financing solutions will remain critical if growth in major project activity is to be sustained into the future. There are also challenges regarding industry capacity and capability to deliver major projects in Queensland, given substantial infrastructure investment programs underway in New South Wales and Victoria.

In this year’s Report there is a focus on the regional implications of the pipeline. Eleven separate analyses are provided representing diverse regions of the state, with commentary on the outlook for each region. This regional analysis shows that there are significant winners and losers in terms of major project activity over the next five years, with some regions set for substantial volatility in work. Industry and government can use these regional profiles to better plan for the coming phase of major project work – and also use the analysis to see where any emerging latent industry capacity may be tapped.

The Report also provides data and forecasts for the broader economic environment in which major project activity is taking place: for Queensland, Australia and the global economy.

THERE IS GREATER CERTAINTY OF MAJOR PROJECTS BEING DELIVERED BY THE PUBLIC SECTOR, WHICH NOW ACCOUNTS FOR 70% (OR $19.3BN) OF FUNDED WORK

BY 2021/22, 89% OF MAJOR FUNDED PROJECT WORK IS IN PROJECTS WITH A VALUE OF OVER $500M

KEY FINDINGS

In the 5 years between 2018/19 and 2022/23, the major projects pipeline is valued at $41.3bn. This compares with $39.9bn identified in the 2018 Report between 2017/18 to 2021/22. However, there is a lower level of total work (funded and unfunded) in both 2019/20 and 2020/21 than previously forecast (see Figure A).

Funded work for 2018/19 is currently on a par with total work in 2017/18 – just over $6 billion – with any slight growth in activity dependent on several projects securing funding commitments and mobilising in the second half of this financial year.

Queensland is now higher than the trough in 2014/15 but lags New South Wales and Victoria in terms of funding and delivering infrastructure. With investment in these States set to be sustained at very high levels, Queensland may face challenges in competitively procuring construction services for major projects.

The share of overall total pipeline value is slightly weighted towards the public sector (56%) – with Inland Rail (Commonwealth funded) and Cross River Rail (State funded) notable contributors to Engineering activity in the Report period (see Figure B).

A decline in major project work is expected in 2019/20, before recovering in 2020/21. Funded roads and bridges work in 2019/20 is 44% lower than 2018/19 as several very large projects reach completion and are not replaced by similar sized new projects. Declines are also expected in electricity (renewables), telecommunications and mining.

2021/22 is predicted to be the strongest year of major project activity since 2014/15 – with a 67% increase from the current 2018/19 financial year, subject to funding commitments.

According to BIS Oxford Economics, a higher level of major projects activity since 2016/17 has had a broader, stimulatory effect on the Queensland economy. However, any setback in major project work, alongside weaker growth in broader investment and consumer spending, is likely to contribute to a slowing in state economic growth in 2019/20.

$27.6 billion (67%) of the pipeline value is funded, whilst $13.3 billion (33%) is unfunded. Unfunded projects represent between 39% to 42% of the pipeline value in 2020/21, 2021/22 and 2022/23, introducing a normal level of uncertainty associated with positive business case development and financial investment decisions.

Growing mega-project concentration may have significant implications for industry competitiveness and sustainability. In 2018/19, 19% of project work is in projects valued at $50 million to $100 million, whilst another 22% is in projects valued at between $200 million to $500 million. However, by 2021/22, 89% of major funded project work is in projects valued over $500 m.

There is greater certainty of major projects being delivered by the public sector, which now accounts for 70% (or $19.3 billion) of funded work. Whilst there are notable private sector projects and sustaining capital program’s in delivery, the prospects for major greenfield mine and rail infrastructure development in regional areas such as the Galilee Basin remains difficult to predict.

Around half of all funded work in the pipeline is unsurprisingly focused in south east Queensland. Meanwhile, more of the riskier, unfunded projects lie in central, northern and western regions of the state, as these regions tend to be weighted to investment in mining and large water projects (such as dams) that are typically unfunded.

FIGURE A: COMPARISON OF MAJOR PROJECT ACTIVITY: 2019 VERSUS 2018

FIGURE B: FUNDING MIX BY ASSET CLASS, 2019-2023, $MILLIONS, ALL PROJECTS

FIGURE C: FUNDED MAJOR PROJECT OUTLOOK BY SECTOR: 2018/19 TO 2022/23

WHILE THE OVERALL SIZE OF THE PIPELINE IS ROUGHLY THE SAME AS LAST YEAR, MUCH MORE OF THE PIPELINE IS WEIGHTED TOWARDS THE LATTER YEARS OF THE FORECAST – AND MUCH OF THIS REMAINS UNFUNDED

toowomba

TOOWOOMBA SECOND RANGE CROSSING

THERE IS CONSIDERABLE OPPORTUNITY FOR THE DEVELOPMENT OF WATER PROJECTS IN QUEENSLAND TO SUPPORT REGIONAL COMMUNITIES, AGRICULTURE AND INDUSTRY

CHALLENGES

The key finding of this Report is that in 2017/18 and 2018/19, major project activity has risen out of the trough experienced between 2015/16 and 2016/17 – helping to drive a turnaround in Queensland State Final Demand and employment. But major project work is likely to suffer a setback of around $1.4bn in 2019/20 (23%), unless funding for new projects is secured. For the setback not to occur in full, currently unfunded projects such as Nullinga Dam, the Paradise Dam Spillway Improvement, Pacific Motorway Section C and Gold Coast Light Rail Stage 3 require investment decisions and procurement.

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 renewable energy generation 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 sectors of roads, telecommunications, electricity and mining – falls away by 45% in 2019/20, and continues to fall in aggregate through the subsequent 4 years. While other sectors offer replacement growth in funded work – particularly rail, but also water, sewerage and defence – this growth is not enough to offset the severity of the decline.

In this environment, sustaining or growing current levels of major project work into the future will require securing funding and finance for identified unfunded projects, and originating, developing and funding new projects that are currently not identified in the pipeline at all.

There is considerable opportunity for the development of water projects in Queensland to support regional communities, agriculture and industry. Meanwhile, there are many potential private sector funded renewable energy major projects which did not make the list this year, but could originate in future years. However, this will require stable environmental and energy policies at both the Commonwealth and State level.

FIGURE C: FUNDED MAJOR PROJECT OUTLOOK BY SECTOR: 2018/19 TO 2022/23

FIGURE D: FUNDED MAJOR PROJECT OUTLOOK BY REGION: 2019/20 TO 2022/23

KEY CHALLENGES IDENTIFIED IN THIS YEAR’S REPORT INCLUDE:

MAJOR PROJECT DECLINE IN 2019/20

The prospect of a 24% decline in major project activity over 2019/20 based on current funded work – with regards to both total investment in economic infrastructure and related major project construction activity. Overall, funded work in the pipeline falls from $6.1bn in 2018/19 to $4.6bn in 2019/20 before recovering slightly the following year.

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.

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.

IN THE 5 YEARS BETWEEN 2018/19 AND 2022/23, THE MAJOR PROJECTS PIPELINE IS VALUED AT $41.3BN

RECOMMENDATIONS

IN MEETING THESE PIPELINE CHALLENGES, 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 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 CONTRIBUTION TO 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 FUNDING 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.

5FINALISE A SEQ CITY 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.

6CAPITAL EXPENDITURE

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.

7IMPROVED 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.

8REVIEW 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.

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