17 minute read
Infrastructure insights | Adrian Hart, Associate Director, BIS Oxford Economics
Key points:
• Infrastructure investment cycles are impacting on capacity and capability within the industry. • Cost pressures and skills shortages are emerging as we move towards a large pipeline of work. • Stronger partnerships are needed to help manage investment cycles.
Today I want to talk to you about capacity and capability. It’s not just the capacity and capability to deliver infrastructure that we’re going to need in the future, but also the ability to operate and maintain that infrastructure. Why is this an issue? It’s because, despite increasing recognition of the problem, investment comes in cycles; and it’s not just public infrastructure, but all types of investment. Whether you’re looking at housing – where we’ve seen some pretty big cycles – mining, or business investment, these cycles in investment drive economies.
It’s no wonder that New South Wales and Victoria have been very strong performing economies; it’s because of their healthy investment cycles. Unfortunately, some of the most recent quarterly data from New South Wales and Victoria hasn’t been so strong. Partially, that’s because we’re seeing a bit of a pause in the current investment cycle.
Where does it go from here? At BIS Oxford Economics, we’re very concerned about investment and its manifestation – particularly in construction work – as it drives a lot of our economic forecasting. As economists, we see cycles everywhere. I see cycles in my football team’s performance. You know, I support Paramatta. Yes, last year we came last. We won a game recently, but we’ll lose the next game. That’s our cycle.
The construction industry has some pretty big cycles still to come. These will create big challenges for capability and capacity because in the down period, we see businesses put under extreme pressure. We see people losing jobs. We see risk and costs taken on by businesses just to survive. And it’s not a phase where we see encouraging investment in capacity and capability. The up phase of the cycle, of course, also has consequences. We see skills shortages, material shortages, rising costs, delays, project failures, loss of quality, health and safety issues, and relationship issues, such as breakdowns in trust. In summary, cycles can be quite damaging.
Now, have we seen the end of cycles? Not by a long shot. The outlook for the total construction market over the next five years in Australia shows that there are some big cycles yet to play out. We’ve got a sharp downturn in residential building over the next two years. We’ve got very strong growth coming through in non-residential building; that’s part of that social infrastructure we’ll see coming
through over the next five years, as well, particularly in education and health. We will also see another strong cycle in engineering construction. This is where that hard economic infrastructure, and the road and rail transport occur. The engineering construction cycle will be particularly tough when it peaks around 2022–2024. On the whole, the construction industry will see another substantial cycle take place in the next five years, and it’s going to put more pressure on capacity and capability to deliver.
I want to unpack that engineering story, because that’s where the biggest part of this next cycle will take place. What’s going to drive engineering construction over the next five years? Well, it’s two broad segments. One is the recovery occurring in the mining industry. Even though global economic news is poor at the moment, our miners are actually highly profitable. They’re starting to invest again, and we’re seeing some pretty big projects rolling out. We’re going to see even bigger projects in the early 2020s. The second segment is a big cycle in transport investment, which is overlaid on the mining cycle. Transport investment just continues to grow.
Right now, we are experiencing temporary easing. That’s why I mentioned the slight weakness in the New South Wales and Victorian economies in the last two quarters; I think New South Wales had 0.1 per cent growth per quarter. That’s not exciting. You may not believe it, but road construction actually fell in New South Wales over the past year. This is due to the completion of the round of projects that commenced at the end of the resources boom around 2015–2016. Now we’re segueing into the next phase of really large projects across road and rail. The current easing is merely a timing issue between the two phases, but let’s get one thing straight: activity is only going up over the next five years.
Let’s look at rail construction. This is a sector that has doubled in construction work over the past two to three years. We’ve seen activity rise from around $3.5 billion to about $7.4 billion last year. Over the next five years, we expect that
to double again. It’s going to hit close to $13 billion worth of spending in a single year by about 2023–2024. Roads activity is rising at the same time, so we’re not going to be able to just pinch resources from the roads sector to deliver our rail projects, or vice versa.
We’ve reached base camp on Everest. We are standing at the top of one cycle, with the next large cycle of infrastructure work looming ahead of us – and this is just transport. This graph looks specifically at road and rail projects over $2 billion. You will notice that many of the projects haven’t started yet, but are timed to roll out over the next five to 10 years. There are further projects yet to be included; for instance, Victoria’s Suburban Rail Loop programme. You can see that from the 2022 financial year, we will begin to see some extraordinary levels of work.
What’s important to me is that we don’t simply complete the projects and let the cycle subside; rather, we sustain the work and use the projects as a way of building skills and a legacy for the future, and drive the next wave of projects.
What we would like to see is a sustained high level of investment where it’s needed. In road construction, the number of large road projects starts to thin, but the scale increases dramatically. Projects such as the North East Link in Victoria, and the Western Harbour Tunnel and Beaches Link project in New South Wales will be projects with about a $15 billion spend. That is massive.
Meanwhile, in rail, this cycle continues to grow, with challenges created by the scale of the work to be delivered. Historically, we haven’t invested in rail, except for the miners. We haven’t been investing in rail at this kind of magnitude, and we haven’t built the capacity to deliver projects of this size. We’re trying to build skills alongside the delivery of these rail systems, but it’s going to be a challenge.
One of the key skills shortages is in tunnelling. The good news from Victoria is that it’s installing a tunnelling academy, mimicking what’s been done in the United Kingdom and other areas to address skills shortages. The tunnels themselves, at least in New South Wales, will provide valuable sandstone spoil that could be used as recycled product to help solve capacity issues in our materials markets. In Victoria, the quality of spoil may limit its re-use.
A further large cycle of maintenance is yet to take place. We’ve had an echo boom of sorts in maintenance spending, because once we build all of these assets, we of course need to maintain them. We’re continuing to build a lot more assets, and the maintenance on these over time will continue to rise.
For assets such as roads, maintenance is often a major undertaking, requiring the stripping and re-laying of asphalt and base layers. Major rehabilitation works will add to the capacity and capability challenge, as well.
Similarly, in rail we see some challenges going forward, because not only are we trying to build the assets, but we’re also needing to operate and maintain them. We recently undertook a major study for the Australasian Railway Association, looking at the skills gaps in delivering rail projects, as well as maintenance and operation. We are going to need many more people working in the rail sector by 2022–2023 compared to now. The skills gap corresponds with the major peaks in investment demand discussed previously. The maintenance demand will continue to grow; there are staggering numbers of shortages across a wide range of skill types.
When we have cycles, we tend to see them in costs, as well. We see the pressures of delivering big infrastructure projects. We tend to see cost blowouts during this up phase of the cycle. I’d like to explore a couple of infrastructure price indices, one of which is the road and bridge index, which shows particularly strong growth over the last few years – the kind of growth in construction costs that we hadn’t seen since the resources boom.
A lot of this growth was potentially driven by the oil price surge that we saw around the same time; however, we also saw increasing prices for certain skills. In some cases, there were very significant increases in materials costs – particularly in Victoria, which is a key driver of construction costs. This is easing at the moment, as we have had a bit of an easing in road construction activity. But as those charts we talked about before indicate, we’ve got a long cycle still to play out over the next five years. You don’t want to see demand pressures amplified by an oil price boom, as well. Overall, we’d anticipate that while cost growth is easing now, it’s going to be an issue, particularly in the early 2020s as we’re rolling out that big infrastructure wave.
Another area where we’ve seen movement recently – and I consider this to be a positive movement – is in the case of construction contractor margins. This index, taken from the Australian Bureau of Statistics, is the gross operating profit to sales ratio for the construction industry. It comes from its business indicators survey. At the end of the resources boom, we saw a lot of contractors willing to sacrifice margins – whether it be through taking on additional risk or bidding at very low prices to win jobs – in order to sustain themselves. You can see that the index has picked up in the last few quarters. Now, the pessimist in me – because I am an economist at the end of the day – thinks that this pick-up may be because of the residential builders that went bust, removing their very thin margins from the survey; however, I’d like to think that it’s because we’re starting to get a bit smarter about the way we collaborate and the way that we’re partnering between governments and industry, and that we’re willing to recognise that in order to build quality infrastructure, we need to have quality contractors.
BIS Oxford Economics has produced multiple reports on capacity and capability in the construction industry, commissioned by entities such as the Australasian Railway Association, Austroads and Infrastructure NSW. All the reports have very similar things in common, particularly around the solutions. Partnerships are vital. We need to continue to enhance that partnership between government, industry and the education sector if we are to solve some of the pointy skills issues that will occur over the next five years.
As for better management of project pipelines, that’s a bit of a pipedream to some degree. You’re not going to tell a state government that it can’t go ahead on this project because New South Wales is going ahead with its project; however, we can be aware of projects, state by state. More important is the longer term – planning for the finish of a project and ensuring that we don’t just tool up and skill thousands of people, and then decide that because of an economic circumstance we can’t afford to do the next project, and we’ll wait about five or six years.
I think that the smoothing of demand requires sustaining a certain level of infrastructure investment over the long term. There are many future projects that will pass through Infrastructure Australia vetting. It is essential to keep that pipeline flowing, and to utilise the legacy bill of previous projects and the skills that have been developed to drive them. It is not just skills we need, but better policies to target supply challenges in the materials markets. As I mentioned, we saw significant increases in prices for construction materials in Victoria. We need faster mechanisms to be able to get the construction materials that we need: the concrete, cement, and so forth.
There is a big role for governments to play in the way that they tackle procurement. We’ve hosted various roundtables between industry and government. A consistent message that I get is that there needs to be much greater consistency and efficiency in those procurement approaches. In particular, risk allocation that isn’t solely about putting the costs and the risk onto the construction industry. We should be looking at passing the risk to those that are best able to manage it.
We should also be looking at using procurement as a skills strategy. We should be rewarding those who come to the table with not just a good cost outcome, but also an outcome as to how they’re going to build skills in the industry. At the end of the day, it’s not just successful delivery of individual projects, it’s also about how we build a legacy of capacity and capability into the future. Achieving this ultimately means that we will have a broader value-for-money objective when we assess bids and tenders, rather than just looking at that bottom line. I’m yet to see if that’s really the way it is playing out in government. I certainly hope it does, because that’s the way we’re going to build sustainable, long-lasting and quality infrastructure into the future.
Adrian Hart – Associate Director, BIS Oxford Economics
Adrian Hart is the Associate Director, Construction and Maintenance at BIS Oxford Economics, and has a Bachelor of Economics (Hons 1) from the University of Sydney. Mr Hart has nearly 20 years of economic analysis and consulting experience with BIS Oxford Economics, focusing on the infrastructure, building, maintenance and mining industries.
Mr Hart has undertaken a wide range of consultancy projects for the public and private sectors based on his detailed understanding of construction, mining and maintenance markets, their drivers and outlooks, the range of organisations operating in this space, and the issues they face. This work includes deeper industry liaison, contractor and competitive analysis, pipeline analysis, demand and cost escalation forecasting, and capacity and capability projects for the public and private sector.
He also undertakes briefings and workshops for senior management, Board members and industry associations, and facilitates and chairs roundtables between government and industry.
Ryde balances strong growth with sustainability and livability
The City of Ryde has ambitious multifaceted plans for rapidly developing city.
Ryde Central Community Centre lobby
The City of Ryde is addressing population growth through investments in infrastructure, economic development and the area’s famed livability.
Twelve kilometres north of Sydney’s CBD, the City of Ryde is expected to grow from 116,302 residents in 2016 to 160,000 in 2031. Its attractive job market, location, connectivity and open spaces have made it one of Sydney’s fastest-growing areas.
‘We have an ambitious agenda,’ City of Ryde Mayor Councillor Jerome Laxale says. ‘We are a growing city with a rapidly rising population and a thriving economy. While this growth provides opportunities, it also presents new challenges that Council needs to meet to ensure that we continue to better the lifestyle, recreation and employment opportunities for our community.’
City of Ryde General Manager George Dedes says Council has a three-pronged infrastructure approach involving strategic leadership through extensive community consultation on projects, effective asset management that identifies current and future infrastructure needs, and effective project delivery and governance.
‘Continuing to deliver quality services is Council’s priority,’ Dedes says. ‘Our plans detail Council’s directions for the next four years, providing a path to manage growth and change, and to enhance the city’s services and livability.’
This year, Council released its Four Year Delivery Program 2019–2023 – Including One Year Operational Plan 2019/20.
‘In developing these plans, staff and councillors worked together over many months to balance the community’s expectations and priorities with the increasing demand for services and infrastructure in a responsible and fiscal manner,’ Dedes says.
Over the next four years, Council will invest $170 million in transport infrastructure and digital connectivity, $142 million in open spaces and services, $135 million in sustainability initiatives, $55 million in community services, and $16 million in economic development.
These and other Council initiatives reinforce the City of Ryde’s reputation as a smart and innovative city – and
Aerial – Putney Hill
an appealing long-term growth market for industry.
Solid foundations
The City of Ryde has several attractions. Macquarie Park, the City’s innovation hub, is Australia’s largest high-tech precinct and an economic powerhouse. Often described as Australia’s Silicon Valley, Macquarie Park ensures that the City of Ryde is a leading location for knowledge-based jobs and education, as well as a key anchor in Sydney’s global economic corridor.
Set over more than 200 hectares, the Macquarie Park Corridor includes Macquarie University; a commercial district that is the head-office location for many of Australia’s top100 companies; a hospital; hotels, restaurants and serviced apartments; and residential communities.
Based on its current growth trajectory, Macquarie Park is expected to be Australia’s fourth-largest CBD after Sydney, Melbourne and Brisbane by 2035, according to Macquarie University. The Corridor’s workforce is forecast to rise from 68,000 in 2015 to 269,000 by 2065, according to BIS Shrapnel research prepared for the New South Wales Government in 2015.
The New South Wales Government is investing in Macquarie Park infrastructure. Three of 13 newly upgraded stations on the Sydney Metro Northwest Line – Australia’s largest public transport project – are at Macquarie University, Macquarie Park and North Ryde stations.
The metro rail services, which began in May, are expected to boost commercial and retail property development as more people commute to Macquarie Park for work. A $750-million, four-tower development near the Macquarie Park station has been proposed.
In addition, in November 2017, the federal and state governments announced the construction of a $100-million interchange at Macquarie Park to smooth transitions between buses, trains and taxis while reducing local traffic congestion.
Cllr Laxale says the City of Ryde’s four-year economic development and marketing plan addresses Macquarie Park’s opportunities. ‘We will continue to focus on harnessing the enormous potential for Macquarie Park as a business hub, but also as a recreation and entertainment precinct,’ he says. A key component of this is to develop a larger night-time economy in Macquarie Park.
Other large-scale developments are underway. Chief among them is a proposed redevelopment of the Ryde Civic Centre. Extensive consultation for The New Heart of Ryde project has concluded, and Council has responded to community views with a fourfold increase in community spaces in the project and with full public ownership of the site.
In February 2019, Council released concepts of a new shopper car park and public plaza on Eastwood’s western side, increasing the available car spaces from 450 to 600. This follows a multistorey, short-stay car park that will be built on the town centre’s eastern side.
Sustainability underpins strategy
Balancing the City of Ryde’s economic development with livability initiatives is integral to its planning. The City is known for its green, open spaces and lower-density living. Part of the 372-hectare protected Lane Cove National Park provides magnificent backdrop to the City.
Council is upgrading parks, playgrounds and sporting facilities, investing in a new urban water park, and improving paths and cycleways among other initiatives to improve its open spaces. Greater activation of the City’s foreshore along the Parramatta River is also planned.
Cllr Laxale says a detailed environmental program is a feature of Council’s planning. ‘There is a desire within our community for Council to take a leading role in protecting our natural and urban environment.’
This includes a focus on climate change initiatives. Council is using renewable energy to power more services and rolling out electric vehicles among its fleet. In doing so, the City of Ryde is becoming a leading example of how cities address the challenges of population growth and economic development while becoming more livable and sustainable. ♦
