Adrian Hart | Senior Economist and Senior Manager Infrastructure and Mining Unit, BIS Shrapnel

Adrian Hart

As Australia’s economy transitions away from resources-led investment, we can expect an increase in non-mining investment in our capital cities, according to BIS Shrapnel’s Adrian Hart.

I’m going to talk about what is going on in the infrastructure market right now, and some of the developments that have happened recently in terms of funding and financing.

Working with Infrastructure Partnerships Australia on the Australian Infrastructure Metric gives us a very good understanding of the state of play in terms of how much infrastructure is actually being delivered. When you read the Australian Bureau of Statistics (ABS) data, it’s very surprising to see some of the figures that get bandied around with regard to what you think is ‘infrastructure’, when that may not necessarily be the case. So the

When you read the Australian Bureau of Statistics (ABS) data, it’s very surprising to see some of the figures that get bandied around with regard to what you think is ‘infrastructure’, when that may not necessarily be the case

Adrian Hart

Australian Infrastructure Metric is actually a very good sanity check on what’s going on in the infrastructure market quarter by quarter.

Then I want to discuss what the infrastructure outlook is, and go through a few of the risks and challenges that result from this outlook.

In the total construction market in Australia over the last couple of decades, we’ve had a tremendous increase in the overall volume of construction work; however, it’s been highly unbalanced.

Throughout the 1990s, you could say we were underinvesting in infrastructure. Engineering construction spend as a proportion of Gross Domestic Product (GDP) was between one and three per cent.

The 1990s were a period of budgetary consolidation and economic efficiency – trying to squeeze the best use out of our assets. But at the same time, we didn’t really build the assets we needed, so we quickly ran into capacity constraints in the late 1990s and early 2000s that required quite substantial investment in new infrastructure.

During the 2000s, we had several factors that drove infrastructure. We started off with the housing boom (from 1997 right up to about 2004–05) and this created a number of infrastructure requirements around the housing market.

During the 1990s, we also saw the development of a lot of private sector avenues in terms of attracting finance and building infrastructure, and that continued right up until the global financial crisis (GFC) hit in 2008. Then, suddenly, it became harder to find finance in that way to fund infrastructure.

Also driving the infrastructure and construction markets during this period was a virtuous cycle in the Australian economy that saw a lot of taxation revenues (driven through the simultaneous mining boom) being recycled into infrastructure. We saw the development of the AusLink land transport program from 2004, which later became the Nation Building Program, and suddenly we started to find funding mechanisms for infrastructure that worked.

The other interesting thing about the past decade has been the substantial increase in engineering construction. Engineering construction is everything that is built in Australia that isn’t a building (residential or non-residential). You might think that we’re doing a pretty good job and that we’ve managed to boost the amount of infrastructure that is being built – and by a substantial margin.

Adrian Hart

But when you dig deeper and analyse a lot of this infrastructure spend, you realise that more and more of it has, in fact, been driven by booming mining investment and not necessarily investment in our cities.

What we’ve seen over the past five years is a movement or a rebalancing of investment away from cities and into mining regions to service the mining boom. As the mining construction boom peaks and starts to fall back, we get a mining production boom, but at the same time, we need to rebalance some of our investment thinking back to our cities again.

That’s where looking at the Australian Infrastructure Metric can be very useful, because it’s analysing and quantifying the volume of work won each quarter by our contractors.

The other thing about the ABS statistics is that engineering construction also includes offshore fabricated components. So when we’re talking about big LNG projects being built in the resources space, you might have to add several billion dollars each quarter for all the imported fabricated components that go into those. Consequently, the ABS engineering construction data is not a great indicator of the health of the local construction industry and the contractors industry, which is much better achieved by looking at the Australian Infrastructure Metric.

There’s a big gap between work done and work commenced that has opened up since 2010–11. We’ve been living off past projects, and we’ve seen a dearth of new projects coming through the pipeline.

But looking at the downward trend in the Australian Infrastructure Metric that we’ve been calculating and surveying since 2010, we’re still bouncing around the bottom in terms of winning work for infrastructure, and it’s really important that we nail down some of these infrastructure projects, because we have substantially underinvested in the past.

A look at non-mine infrastructure work won shows you that it’s coming back from a low base. Last quarter showed a bump, but we believe it’s only temporary. Some of the most recent data that’s coming through indicates that maybe it was just a blip, and we’re still bouncing around the bottom.

It’s a similar story, too, for transport infrastructure, which saw a boom after the GFC, but, really, was probably higher before that. Since then, governments have been trying to pull back, and maintain and improve their budget bottom lines; as a consequence of that, there’s been less and less infrastructure investment.

So where do we go from here? Our view is that when we add up the building, non-building, and engineering construction markets in Australia, it’s a downward trend for the construction industry. But within that downward trend, there will be new growth in sectors and in regions. For the engineering

Adrian Hart

construction market, which is the most significant market for civil infrastructure, it’s actually dominated a lot by the downturn in mining-related investment.

What we will see over the next five years is a switch away from mining-related construction projects as the mining boom slowly tails off, but a pick-up in non-mining investment – particularly, in our capital cities where we haven’t been keeping pace with infrastructure needs.

To give you an example, in terms of the outlook for road construction in Australia, we’ve seen a substantial boom, but that really has been a catch-up from a relative lack of investment right through the 1980s and 1990s.

However, while we’re in a downturn at the moment, there is a substantial new pipeline of road infrastructure projects.

The scale and size of the projects that are currently being planned is huge.

Not all of this can be funded by the private sector, and it can’t all come out of general recurrent government spending, either, so it’s really important that we continue these dialogues around funding and financing, because from here, infrastructure becomes harder and more expensive.

In rail and harbours work, what we’re seeing is this switch taking place between non-mine-related and mine-related projects. So overall, they balance each other out. We are sustaining high levels of work in rail and ports, but we will see more city-based rail projects and more freight-based port projects – not necessarily just relating to coal and iron ore, which have been sustaining those increases over the past few years.

In terms of the utilities, electricity-related construction will come back for a range of reasons. Water and sewerage works are also easing from the drought-driven increases that we had in the past. Certainly, this was a very generational degree of infrastructure spend in building desalination plants and recycled water grids that we do not expect to see replicated in the near future.

Meanwhile, telecommunications expenditure will continue to rise as the National Broadband Network (NBN) continues to roll out. We have a new Federal Government with a different style of NBN plan, of fibre to the node instead of fibre to the premises. Within that, there is still substantial construction work required to roll out this new telecommunications highway over the next four to five years, and that’s one of the strongest growth markets in the engineering construction space, and our infrastructure space.

It’s been really good to see that this degree of innovation is getting new infrastructure projects off the ground. But what’s also important is that we don’t forget the maintenance side.

We need funding to develop these assets, and the development cost is huge.

One thing that probably hasn’t been focused on is that every asset that we build has to be maintained, and already we have a substantial infrastructure maintenance backlog in Australia.

We need the Federal Government’s taxation review to better identify funding sources, so that we can not only build infrastructure for today, but also make sure it’s maintained for tomorrow.

The other issue is that of maintaining this sensible project package pipeline. It’s important in those states that are going to see an increase in infrastructure spend that we try to roll out these packages and maintain the skills and contractor base in these states.

Providing the right infrastructure mix is also very important. I believe very fervently that we will need all types of infrastructure over the next four to five years – and longer – to meet our requirements over that period.

We don’t want to pigeonhole ourselves by saying we will fund roads over rail; we’ve got to take a more holistic view of the infrastructure market and work out the solutions that are best in each market. One size certainly doesn’t fit all in each market individually.

The other issue is: once we get to the construction phase, how do we avoid those past mistakes? How do we avoid the scoping issues that we might have had in the past? How do we handle risk better than we did in the past?

On that issue, while engineering construction in aggregate might be declining, the actual infrastructure that goes into non-mining applications will be rising from 2015–16, and quite significantly.

While for some states the aggregate spend is falling, for New South Wales it’s a different story. Engineering construction in New South Wales is facing a boom over the next five years – and that has to be considered if you’re in the planning stages of these projects.

New South Wales will start surpassing Queensland levels of investment in engineering construction over the next couple of years as the mining and resources boom winds down.

Adrian Hart

Finally, I’d like to point out that, even within New South Wales, Sydney itself is going to be the hotspot (see graph below). In terms of total construction, Sydney will be a little bit above the New South Wales trend because of a lot of the housing that is required – and a lot of the non-residential building projects, like Barangaroo and the Convention Centre.

More particularly, these big civil projects, these big infrastructure projects in road and rail – like WestConnex, the M1–M2, the CBD and South East Light Rail and the North West Rail Link – mean that we are facing a substantial boom in civil construction work in Sydney.

And while that is going to create challenges as we go to and from work and have to get around a few building construction sites, for those involved in developing these projects, we’ve really got to consider whether we have the resourcing right – have we met and ticked all the boxes?

Because in the past, when we’ve seen these sorts of issues arise, we have run into issues on costs and resourcing.

So we hope it will be front of mind of those planning these projects that we try to get it right this time, and we don’t repeat mistakes of the past.

Adrian Hart, Senior Economist and Senior Manager, Infrastructure and Mining Unit, BIS Shrapnel

Adrian Hart is a Senior Economist with BIS Shrapnel, and Senior Manager of the company’s Infrastructure and Mining Unit. BIS Shrapnel is the leading provider of market research, industry analysis and forecasting services in Australia, and a construction sector specialist.

Adrian joined BIS Shrapnel in the late 1990s, and has worked across both Economics and Infrastructure and Mining Units within the company. In 2007, he became Senior Manager of the Infrastructure and Mining Unit. The Unit undertakes analysis and forecasts for the civil infrastructure construction, mining and maintenance markets across Australia.

Apart from managing a range of regular outlook reports for the civil construction and mining industries, Adrian is also widely involved with privately commissioned research studies and consulting exercises. This includes the analysis of construction costs and development of escalation forecasts, workforce capability analyses, unique BIS Shrapnel estimates and forecasts of activity across all detailed civil construction subcategories, and the development of demand forecasting models for companies with links to the construction and mining industries.

Adrian also undertakes presentations and workshops with senior management of organisations operating in the engineering construction, maintenance and mining sectors, discussing the outlook and implications of BIS Shrapnel analyses and forecasts for business planning and strategy.

WORKPLACE HEALTH AND SAFETY

Health and safety in the workplace is an important consideration for both private enterprise and government organisations. Recent amendments to health and safety regulations aim to further reduce serious accidents and consequently improve productivity. But are these reforms addressing this complex and multi-faceted issue?

Evidence suggests the reforms are succeeding, with reductions in injuries over the past few years. According to the Australian Bureau of Statistics, serious workplace injuries have declined by over 15 per cent since 2003; however, Safe Work Australia estimates that workplace injuries continue to affect Australia’s annual gross domestic product (GDP) by as much as $57.5 billion annually – or 5.9 per cent of our total economy.

So what else can we do to reduce workplace accidents? One key component is obviously workplace safety training, but another largely ignored factor is the safety of the equipment being used every day by workers. While the use of personal protection equipment (PPE) such as reflective vests and protective eyewear has skyrocketed in recent years, the utilisation of tools that include safety features has been somewhat limited.

Many companies pride themselves on providing products with leadership in safety. Most would be familiar with the automotive industry and its initiatives to improve occupancy safety. The Australian New Car Assessment Program (ANCAP) provides a safety ratings system for new cars marketed in Australia. The ANCAP rating has become a key consideration for Australian consumers when making a purchasing decision on a new vehicle. Automotive manufacturers pride themselves on achieving additional ANCAP ‘stars’, and their continued innovation has made today’s automobiles safer than ever.

One company that is heavily involved in the automotive industry, and specifically safety features, is German firm Bosch GMBH. Bosch is the leading producer of automotive components worldwide, and has been a key developer of features often taken for granted, such as anti-lock braking systems (ABS). Bosch is currently developing the next generation of safety features, such as collision avoidance and reversing control systems.

Another division of Bosch that has become a market leader in safety within its industry is its Power Tools and Accessories Division. One specific power tool the Bosch brand has become synonymous with is the angle grinder. Angle grinders are used to grind, shape and cut various metals, but they are also commonly used on applications such as the grinding and cutting of masonry surfaces. Due to their wide range of uses, angle grinders are used by most tradespeople quite commonly. While these tools are extremely versatile, they are extremely dangerous when used incorrectly.

Utilising its expertise in automotive technology, and specifically ABS, Bosch Power Tools developed the ‘Kickback Stop’ feature for its angle grinders. This industry-leading safety feature protects the user from the ‘kickback’ phenomenon. Kickback occurs during cutting applications when the disc jams. The Kickback Stop is an electrical system that immediately cuts off the power to the machine when a jam is detected. This will significantly reduce the force transferred to the user and thus avoid any serious shoulder, elbow and wrist injuries. Additional features on the Bosch Safety Angle Grinder range include Dead Man Switches, Twist Proof and Multi-Position Guards, ReStart Protection and Vibration Control.

While safety features are extremely important, any angle grinder is useless without the cutting and grinding discs they are designed to function with. The Bosch heritage of producing quality angle grinders has recently seen a new addition, with the launch of an Australian-specific range of cutting and grinding discs. These quality Bosch products comply with and exceed all Australian and European quality and safety standards, which include speed and burst tests. Combined with the safety features on Bosch Angle Grinders, they ensure the highest levels of safety possible for end users.

The next time you purchase an angle grinder or cutting and grinding discs, ask yourself this question: do they meet the safety standards you desire?