QLDMPP Update October 2020

Introduction and Summary


Economies across the globe are dealing with a unique downturn unprecedented in speed and magnitude.

In Queensland, the complex “COVID-19 recession” has driven a sharp increase in unemployment, particularly in regional areas, as well as widening public sector deficits and debt. Growing the Queensland economy out of debt will require the deft maneuvering of many levers.

One vital lever is infrastructure. Economic enabling infrastructure now plays an even more vital role to support and create jobs. The Queensland government needs to prioritise investment in productive infrastructure, that will catalyse further investments from the private sector.

This update of the 2020 Queensland Major Projects Pipeline (QLDMPP), reveals that more funded investment is required if major project activity is to increase sustainably over the next four years.

The Queensland Government’s Economic Recovery Plan – built on the foundation of a 4-year $51.8 billion infrastructure program – provides a starting point. However, this update of the 2020 QLDMPP shows that major project activity fell more than expected in 2019/20 and, despite some positive news from the 2020/21 Federal Budget released in October, activity in 2020/21 will not reach the levels forecast in March 2020. Increasing uncertainty and the realisation of risks associated with COVID-19 has seen anemic private sector funded activity in the pipeline decline a further $200 million in the last six months. COVID-19 has also introduced a more cyclical element to the QLDMPP with some of the projects deferred in the near term potentially contributing to activity later on.

Regional challenges remain in this update. Growth in funded major project work over the next two years remains focused in South East Queensland (Greater Brisbane, Sunshine Coast, Gold Coast and Ipswich-Toowoomba-Logan), with funded activity (and associated major project employment) more than doubling over the next two years. By contrast, funded major project work (and related major project employment) outside of SEQ declines through each of the next four years.

Pursuing environmental sustainability objectives is a positive for the QLDMPP and the broader Queensland economy. While the costs of climate change are high, Queensland also has tremendous opportunities to grow new jobs and industries that target new green industries.  The QLDMPP itself contains a large number of further energy projects that, while unfunded now, could serve to meet both economic and environmental goals.

In providing a map of future investment opportunities, challenges and solutions, the major projects industry stands ready to work with government and the broader community to deliver a stronger and more sustainable Queensland.


Economic Update


Coronavirus pandemic has created major global socioeconomic disruptions & uncertainty

The original QLDMPP 2020 report released in March highlighted the risk to the outlook from the then emerging coronavirus threat, with BIS Oxford Economics amongst the first to call a decline in global GDP. The pandemic has had an even larger negative impact than expected earlier this year and has come to dominate the economic narrative globally and within Australia. It has led to major global socioeconomic disruptions, including national lockdowns, and has driven governments and central banks to rollout major stimulus and support packages. The unprecedented nature of both the pandemic and the response, and the speed at which governments and individuals are reacting, create a higher than normal level of uncertainty to the forecasts in this update.

 

Global, national and state economies in simultaneous recession

The global economy was showing signs of stabilisation toward the end of 2019. But the coronavirus outbreak has seen a number of advanced and emerging economies plunged into recession. Most notably, the US economy officially entered recession in July 2020 despite aggressive fiscal and monetary policy responses. Oxford Economics is forecasting a significant contraction for the US economy in 2020. Similarly, in the Eurozone, restrictions on movement of citizens has seen large falls in consumer spending, business investment and industrial activity, and severe recessions are occurring in 2020 in most countries. The Chinese economy is a little ahead of others in the process toward recovery. Industrial activity appears to be recovering, although this process has been more protracted than expected. Trade disruptions and large increases in unemployment are expected to weigh on the economic recovery over 2021 and 2022, even assuming dissemination of a vaccine.

The Australian economy is also in recession. GDP shrank by 0.3% in the March quarter 2020, and COVID-19 related restrictions have seen a 7% contraction in Q2 – the largest quarterly fall in output on record. Household consumption led the decline, subtracting 6.7% pts from growth in the quarter. The weakness was concentrated in services (down 17.6% q/q), which have borne the brunt of trading and travel restrictions; goods purchases fell only 2.8% q/q.

The collapse in population growth wrought by the pandemic is expected to have medium to longer term consequences for investment (including construction) and the broader economy. BIS Oxford Economics now expects that Australia’s population will be 600,000 lower by June 2024 than that projected pre-COVID-19 as net overseas migration collapses and natural increase also slows sharply. Apart from the impact on consumption, this will drive significantly weaker residential and non-residential building activity. Business and dwelling investment has already dropped back, and their immediate prospects are very weak. The Australian economy is now expected to contract around 4-5% in 2020, before recovering to grow by a modest 2% in 2021.

Despite massive public sector support measures, it will take several years before the Australian economy achieves pre-COVID-19 levels of activity.

Fig 1: Change in State Final Demand (SFD), June Quarter 2020 and 2019/20

Queensland’s economy is broadly mirroring the national economy. The mining sector is providing some support, where activity is being underpinned by the recovery in China’s economy. Consumer spending has switched from services towards retailers, with retail turnover rebounding sharply, despite rising levels of household savings. But elsewhere, activity has fallen sharply. Queensland’s large tourism sector is struggling under the weight of international and domestic travel restrictions, and despite the relaxation of restrictions concerns about the virus appear to be lingering, with restaurant dining numbers still significantly lower than a year ago. The drag on the state economy from these sectors will be added to by an expected downturn in business investment, with firms expected to put many projects on pause (or worse, abandon them completely) due to weak demand.

As in the other states, the impact on the labour market in Queensland has been severe, with 174,000 jobs lost since February. With many parts of the state dependent on tourism income, the ongoing restrictions on travel and the drag on household incomes (domestically and globally) will put a drag on the recovery – an initial spurt in employment growth is likely, but it will take some time for a full recovery to materialise.

Queensland’s domestic economy, measured by State Final Demand (SFD), fell -5.9% in the June 2020 quarter, but this was a better outcome than New South Wales and Victoria (and the national average). Over the next 3 years, the Queensland economy is expected to outpace the national economy, in part due to relatively stronger growth in the construction sector and downstream industries and also because the mining sector will continue to increase output, notwithstanding some weakness from the coal sector. A stronger agricultural sector should contribute to exports and output. As activity in the larger states begins to strengthen later, the Queensland economy will tend to track national demand and output from around 2023/24. However, higher population growth – expected to be remain 0.2% higher than the national average – should see the state economy grow a little faster than the Australian average after 2024/25


Queensland Construction Industry Update


While COVID-19 (and the economically restrictive policies to suppress its spread) has had a sharp impact on employment and consumption, there has also been an impact on Queensland’s broader construction sector, with the building construction sector likely to be significantly impacted with a downturn in demand across retail, commercial and residential sectors.

A return to stronger population growth post-pandemic may lead to a recovery in broader employment and consumption spending in Queensland, but lingering uncertainty, weaker longer term fundamentals and funding challenges are now anticipated to see a weaker profile for investment. In turn, this drives a weaker construction outlook than forecast in the 2020 QLDMPP released in March.

Fig 2: Construction Industry Work Done, $Billion, 2018/19 Constant Prices

Overall, 2019/20 construction work done was approximately $2.1bn lower than previously forecast, and the ‘gap’ between previous and current forecasts for construction work is expected to widen to nearly $8 billion by 2022/23.

 

Residential building

The downturn in new housing starts extended into 2019/20 to an estimated 29,205 dwellings – representing Queensland’s weakest result since 2011/12. However, with Queensland having contained the virus, and with the support of numerous State and Federal; government stimulus measures coupled with lower interest rates, the state is expected to lead the next residential upturn. The harsher impact of the virus on regional tourism economies in Queensland is expected to drive an uneven recovery in housing construction, with the value of work done remaining $2-3 billion weaker than forecast earlier in the year pre-COVID-19.

 

Non-residential building

COVID-19 is expected to weigh on private investment with commercial and industrial building work remaining weak until 2021/22. Public spending should stay supportive with work commencing on projects spanning correctional facilities, education, hospitals and transport. While this is anticipated to be enough to see total non-residential work increase again by 2021/22, activity is still expected to remain $1-2 billion lower each year than previously forecast as COVID-19 impacts investment and building activity across a number of commercial and industrial segments, notably offices, retail and accommodation.

 

Engineering construction

COVID-19 is also impacting economic infrastructure investment decisions and hence the outlook for engineering construction activity in Queensland. Both public and private investment has fallen in Queensland over the March and June quarters of 2020, contributing to weaker than expected engineering construction activity. The decline in publicly funded work was more or less expected, predominantly due to the known gap in the timing of road projects and the winding down of the NBN rollout (as forecast in previous QLDMPPs). However, private sector funded work has also fallen as oil and gas work has slowed in response to the sharp shock to energy demand and oil prices, other mining projects and utilities projects have been delayed and as subdivision works have slowed. While the near term outlook for publicly funded activity is more positive – driven by investment in new transport and utilities infrastructure – weaker private investment and uncertainty over funding remains a risk for overall growth in civil work.

Queensland Major Projects Pipeline Update and Key Messages


The Queensland Major Projects Pipeline (QLDMPP) includes engineering construction projects in excess of $50 million and is developed by BIS Oxford Economics in coordination with QMCA and IAQ member input.

This year there has been greater than usual difficulties in providing a mid-year update of the pipeline given the six month delay in the delivery of the Commonwealth Budget, the absence of a Queensland State Budget and higher than usual levels of uncertainty surrounding the outlook for private sector funded projects.

Overall, this uncertainty and the realisation of risks associated with COVID-19 as described above has seen the estimated value of engineering construction work in the pipeline between 2019/20-2023/24 fall from $50.6bn to $49.7bn, and there is a weakening in near term activity when compared to the March 2020 outlook.

Covid-19 has also introduced a more cyclical element with some of the projects deferred in the near term potentially contributing to activity later on.

Fig 3: Disparity between public and private funded projects

Overall, the public sector is expected to do more of the ‘heavy lifting’ in terms of driving major project activity and employment than envisaged in the March 2020 QLDMPP (which was already very public sector focused). The 2020/21 Federal Budget: Economic Recovery Plan for Australia, released on the 6th October 2020, provides $1.3 billion in funding for major transport projects in Queensland including:

  • $750 million for Stage 1 of the Coomera Connector (Coomera to Nerang)
  • $112 million for the Centenary Bridge Upgrade in Brisbane
  • $76 million for Stage 2 of the Riverway Drive Upgrade between Allambie Lane and Dunlop Street in Townsville, and
  • $42 million for the Mt Lindesay Highway Upgrade between Johanna Street and South Street in Jimboomba

Consequently, these major projects in the QLDMPP have been upgraded to being fully funded. Furthermore, the Federal Budget also committed funding for several large national infrastructure programs including $3.5 billion for upgrading NBN infrastructure, an additional $2 billion for road safety upgrades, an additional $1 billion to support local councils’ immediate upgrades of local roads, footpaths and street lighting, and an additional $2 billion in water infrastructure funding through the National Water Infrastructure Development Fund. While individual projects under the roads programs are unlikely to pass the $50 million threshold to be considered major projects (and hence inclusion in the QLDMPP), the announced national NBN infrastructure upgrade and the boost to the National Water Infrastructure Development Fund provides upside to the QLPMPP. These programs will be monitored closely and projects updated in the 2021 QLPMPP as Queensland’s share of funding becomes clearer.

As a result of these developments, funded public sector work in this pipeline has increased by $500 million to $20.3 billion — mainly through increased transport projects, although public unfunded work has fallen by around $150m, mainly reflecting water and sewerage works.

Fig 4: Revised Outlook for Major Project Work – March 2020 Vs October 2020

Fig 5: Major Projects Pipeline – October 2020

While funded work in the pipeline over the five years to 2023/24 has increased overall between March and October 2020, principal pipeline challenges remain. In particular, despite a pickup in 2021/22 (driven mainly by large rail and road projects in South East Queensland), funded activity remains on a flat or declining trend overall. The challenge of bringing projects through the pipeline – from unfunded to funded – remains.

Fig 6: Funded and Total Major Project Pipelines as at October 2020

Unfunded work in the pipeline is currently $1.3 billion lower than previously forecast in March 2020, with deferments or the removal of private sector funded projects playing a significant role. More concerningly, there are also much greater downside risks for remaining private sector funded projects even where they have not been deferred or removed from the pipeline. Overall, estimated unfunded work in the QLDMPP has fallen from $23.2bn to $21.9bn over the past six months, with regional resources projects causing the greatest difference. The more uncertain outlook for large resources projects is, in turn, leading to a weaker and more uncertain outlook for regional work and employment.

Fig 7: Funded projects by region and Public vs Private funding as at October 2020

As highlighted in the March 2020 QLDMPP, while a relatively high proportion of public sector work is funded (compared to the private sector), this is much more heavily concentrated in Greater Brisbane and more broadly across South East Queensland. By contrast, investment in resources, large water projects (such as dams) and electricity generation projects are more prominent in Central, Northern and Outback Queensland regions, however these remain mostly unfunded.

With COVID-19 decimating Queensland’s tourism regions, particularly, the QLDMPP highlights the need for increasing investment broadly across the state. This update to the QLDMPP shows that growth in funded major project work over the next two years remains focused in South East Queensland (Greater Brisbane, Sunshine Coast, Gold Coast and Ipswich-Toowoomba-Logan), with funded activity more than doubling over the next two years to over $4 billion. By contrast, funded major project work outside of SEQ declines through each of the next four years.

Major project employment mirrors the activity outlook in the QLDMPP

The movement in funded work impacts directly on estimated funded major project employment. While transport-related investment in roads and rail is driving a higher major project employment outcome by 2021/22, employment in 2020/21 is impacted by a significant drop in employment associated with the construction of utilities and resources projects. A recovery in 2021/22 sees total funded major project employment rise to 13,800 persons, but from there funded employment declines to 10,600 persons in 2022/23 and then just 6,900 persons in 2023/24 as the next round of projects move towards completion. By contrast, potential employment on unfunded projects rises sharply in every year with the exception of 2023/24, reaching a peak of 12,200 persons in 2022/23.

Fig 8: Employment impacts of pipeline activity in Queensland

The decline in employment on funded major projects is most noticeable outside of SEQ. Unlike SEQ, these regions have a much greater share of unfunded projects in their pipeline, which tend to be more focused on non-transport segments – particularly resources, water and energy projects. As existing major projects in these regions move to completion, they are not being replaced sufficiently with new funded major works. Consequently, funded employment on major project activity outside of SEQ falls in every year of the outlook. From nearly 10,000 estimated to have been in employment on major projects in 2019/20, only 6,800 funded positions are expected to remain by 2021/22, with further significant declines in 2022/23 and 2023/24. By contrast, led by very large publicly funded investments in road and rail, funded major project employment in SEQ doubles to nearly 7,000 persons by 2021/22 before easing in subsequent years.

Fig 9: Employment impacts of pipeline activity in SEQ

Fig 10: Employment impacts of pipeline activity in outside of SEQ


Policy Implications


Queensland, as other Australian states, is currently dealing with an economic downturn unprecedented in speed and magnitude.

While much of the impact on the major projects industry is still to play out, COVID-19 and the health response in dealing with the health crisis has already caused a substantial contraction in economic activity in Queensland. Much of the contraction to date has been driven by sharp increases in unemployment and associated lower consumption spending, but there has also been an impact on the broader construction industry as those sectors most closely related to population growth and the movement of people (tourism and accommodation, education, commercial and industrial building, and housing) have already seen significant declines in new spending and investment.

In this environment, and in developing plans to stimulate economic growth in Queensland, investment in productive economic infrastructure by both the public and private sectors takes on even more critical importance.

This update of the QLDMPP, which encompasses such investment projects, reveals that more funded investment is required if major project activity is to increase, sustainably, over the next four years to 2023/24.

This, in turn, requires accelerating funding for currently unfunded infrastructure projects, but also bringing more productive infrastructure projects to the table. Over the past decade, the QLDMPP has consistently championed the importance of maintaining a deep pipeline of productive infrastructure projects to provide sustainable economic, financial and environmental outcomes for all Queenslanders. While the scale of the current pandemic was not envisaged, a deep pipeline can assist in reducing the volatility in social and economic outcomes from negative external shocks.

The weak economic environment is impacting private investment decisions and increases the pressure on governments to sustain and grow investment in economic infrastructure. This updated QLDMPP highlights the importance of the public sector in that it is funding nearly three quarters of the total funded pipeline, with transport projects playing a critical role.

However COVID-19 is also driving a substantial collapse in revenues for both the Queensland and Commonwealth Governments. In combination with high transfer and support payments, and rising infrastructure demands, the result is a sharp increase in public sector debt. The Queensland Government’s COVID-19 Fiscal and Economic Review, released in September 2020, shows that the state’s non-financial public sector net debt has risen from $34.9 billion in 2018/2019 to an estimated $50.9 billion in 2019/20 and is forecast to reach $63.7 billion in 2020/21. [2]

[2] The State of Queensland (Queensland Treasury) COVID-19 Fiscal and Economic Review, September 2020, p32.

Using debt to fund productive infrastructure has been recommended by the Reserve Bank of Australia, given the record low cost of borrowing and the importance of stimulating the production side of the economy . If history is any guide, however, future governments will want to ensure public debt is on a sustainable path and so may make decisions to reduce recurrent and capital spending once private demand shows signs of a self-sustaining recovery. It is important that such decisions ensure a mechanism remains in place for sustaining funding for infrastructure over the longer term. This is likely to require substantial tax and expenditure policy reforms so public infrastructure funding is not captive to pro-cyclical funding sources or, as in the past, does not keep up with growth in infrastructure demands.

The extent to which all tiers of government are able to leverage the private sector to help fund and finance productive infrastructure will also be an important part of the solution to sustaining infrastructure investment. Here, governments will need to increase the role of public private sector partnerships (PPPs) and continue to support projects which will stimulate further private investment and ongoing economic activity. In the QLDMPP, there are a number of such enabling projects that can have significant ‘knock-on’ impacts, such as CopperString 2.0, but also various projects across the water (storages), telecommunications (NBN), energy (renewables, hydrogen) and transport (road, rail and ports) sectors that will help boost private sector activity.

Mirroring the themes of the 2020 QLDMPP released in March, it is important that appropriate infrastructure is chosen and delivered in the right way that leads to sustainable outcomes for infrastructure users, industry, procurers, the broader community and the environment.

An emerging issue is examining how COVID-19 is likely to change infrastructure user behaviours post-pandemic, and hence the type and location of infrastructure we are likely to require in future. For example, studies are suggesting that COVID-19 is impacting views on traditional working arrangements longer term, with workers and business owners expecting more flexibility in working from home arrangements post-pandemic. [3] In turn, this is likely to impact the type and level of transport infrastructure we need, the location of work and where people may choose to live. Persistent changes in behaviour wrought by the pandemic may also slow or reverse the trend of increasing urbanisation in cities, for example, as more people take advantage of cheaper housing and greater access to local amenities in regional areas. This has important ramifications for tracking and delivering on regional infrastructure demands.

[3] Hensher, D. et al (2020) The impact of COVID‐19 on cost outlays for car and public transport commuting ‐ the case of the Greater Sydney Metropolitan Area after three months of restrictions, Institute of Transport and Logistics Studies (ITLS), the University of Sydney Business School, Sydney NSW Australia. This is by no means the only significant behavioural change, with COVID-19 also likely to impact the longer term frequency of domestic air travel, retailing, demand for telecommunications services and commercial space requirements amongst other effects.

Finally, ensuring environmental sustainability in the major projects pipeline will remain critical because the risks and costs to the Queensland economy from climate change will only worsen if not adequately addressed. While the impacts of COVID-19 will eventually recede (as it has in previous global pandemics), climate change impacts will remain. The good news for Queensland is that while the costs of climate change are high, the state also has tremendous opportunities to grow new jobs and industries that target climate change mitigation. With Queensland’s quality natural resources, the state led the recent boom in renewable energy generation projects that helped Australia reach its 2020 Renewable Energy Target. The QLDMPP itself contains a large number of further energy projects that, while unfunded now, could serve to meet both economic and environmental goals.

Overall, this 2020 QLDMPP Update highlights that Queensland faces significant economic and social challenges now, and in coming years. In providing a map of future investment opportunities, challenges and solutions, the major projects industry stands ready to work with government and the broader community to deliver a stronger and more sustainable Queensland.


Appendix: Updated Regional Pipeline Outlooks


Brisbane

Gold Coast

Sunshine Coast

Ipswich, Toowoomba, Logan

Darling Downs – Maranoa

Fitzroy

Outback

Widebay

Townsville

Cairns

Mackay – Isaac