22 minute read
INFRASTRUCTURE
Infrastructure is among the most important sectors in the Australian economy, contributing more than 10% in gross value added, and accounting for a substantial share of employment.
Australia ranks as a world leader in infrastructure development, driving innovation and scale, although a rapid increase in population coupled with significant changes in the mobility landscape are forcing the infrastructure sector to dig deep.
There are two main sectors in the infrastructure industry:
1.Railways 2.Roads
Infrastructure investment in Australia has been predominantly driven by Rail development, targeted to both passenger lines to aid in the management of a rapidly growing population. It has also targeted freight management of a rapidly growing population. It has also targeted freight transport, which intends to increase Australia’s productive capacity and support stronger efficiency for ase Australia’s productive capacity and support stronger efficiency for Australian businesses.
In NSW alone from 2020 onwards, the Berejiklian government has pledged to continue its support for state the e Berejiklian government has pledged d to continue its support for state rail infrastructure development, by allocating $3.2billion until 2024 for the upgrades of Transport NSW’s y allocating $3.2billion u t ntil l 2024 for r the upgrades of f Transport NSW’s passenger train fleet, and $6.4billion over the same time period to accelerate the construction of Metro on over the same time period to accelera ate the constru uction of Metro West, connecting the west to the city via additional transport channels. This will connect with the new e city via additional transport channels. This will connect wit th the new Metro railway servicing the North West, whilst also supporting Sydney’s new light rail presence in the city West, whilst also supporting Sydney ’ s new light rail presence in the cit i y and Parramatta, which expresses the government’s masterplan to extend the Central Business District the government’s masterplan to extend the Central Busi s ness s Distric ct outside the 2000 postcode.
Nationwide, rail transport projects such as the new Metro, Cross River Rail, and Maryborough track s such as the new Metro, Cross River Rail, and Maryborough h tra r ck upgrades in Brisbane, Metronet project development and the Forest-Field Airport Link in Peth and the project development and the Forest-Field Airport Link in Pe Peth t and the e Melbourne Metro Tunnels reflect a new paradigm in Australian infrastructure investment and construction a new paradigm in Australian infrastructure investment and con nst s ructio on –placing stronger importance of future proofing transportation networks, and ensuring people and f future proofing transportation networks, and ensuring peo e ple and businesses are reliably connected with each other in a way which is fast, accessible and efficient. with each other in a way which is fast, accessible and ef ffi f cient. .
In Australia, the two largest ASX listed construction firms, st ASX listed construction firms, Lend Lease and Lend Lease and CIMIC group,CIMIC group, are the dominant players in rail construction: n rail construction:
Currently, Lend Lease is involved in olved in the construction of the Melbourne lbourne Metro, valued at $11billion, as well as well as Victorian Regional Rail Link, Greta Greta Freight train support facility facility construction and Martin Place Metro. Metro.
CIMIC and their construction CIMIC and their constr ructi t on subsidiary, CPB Contractors, are subsidiary, CPB Contra r ctors, are Australia’s rail specialists and have Australia ’ s rail specialists and ha ave directed the construction of directed the construction o of Canberra Light Rail ($675m), the Canberra Light Rail ($ $675m m), ) the North West Rail Link and the Sydney North West Rail Link and d the Syd y ne n y Metro City and Southwest Projects, Metro City and Southwest Projec cts, under a Public Private Partnership under a Public Private Partnershi ip p (PPP) valued at over $1.375billion. (PPP) valued at over $1. .375bil llion o .
Rail is largely resistant to private ownership and is largely operated and owned by state and territory governments. Rail infrastructure remains a significant public budgetary burden due to the drastic outlay of expenditure before any revenue begins to be accrued. The limited transparency or reliability of usage projections discourages privatisation/long term asset leases, where these concerns are predominantly held for passenger rail projects – It is extremely difficult to project public usage patterns at constant transport costs for firms to deem acquisition financially liable. This is key for Australia’s future in national high speed rail connections. The mammoth cost and extended time frame for construction, projected to be above 50 years, has discouraged private investment and forced the public sector to focus on improving current rail infrastructure, whilst making concentrated, isolated improvements in capital cities to ensure Australia’s rail infrastructure is aligned with current/future technologies and population demands. 53,000,000 by 2100. Current living is incompatible progressive rail development, using the most
Population Growth
Key drivers of the rail sector under broader infrastructure development, much like the rest of the sectors, is centred around population growth. Australia’s relatively small habitable areas have freight applications, moving more than 1.3 billion
created congested capital cities with a concentration of people which will serve as an aggregate supply barrier to future productive capacity. Rail is being driven forward as the most viable solution to alleviate capital city population concerns and allow for efficient, quick connections between spacious rural areas, scheduled for future real estate ‘redevelopment’ with current city centres, vital for current employment, entertainment and quality education.
The Perth MetroRail and Metronet rail infrastructure project intends to connect the Western capital to Southern Western Australia to help disperse the population. This is in accordance with the University of QA’s Australian Urban Design Research plan, which forecasts Perth’s population to grow to 6,000,000 by 2060, with prospective public and social concerns, and appropriate technology, will ensure future high quality of life whilst providing integral economic opportunities for now and the future.
A Deloitte Access Economics Value of Rail report states public rail passenger demands will increase by 19% by 2026. Expanding populations thus also leads to stronger resource and freight demands, which is expected to grow by 26% over the same period. This is especially true as the government will search to exploit its comparative advantage in resource exports, utilising existing freight infrastructure as an intermediary to transport commodities internationally. Currently, more than 70% of current rail is being utilised in and Australia’s population to double to
tonnes for material per year. Past sustained economic growth in Australia have induced rapid growth in freight task, and both Australia’s 2050 roadmap under the 2010 Intergenerational report and COVID resurrection are reliant on consumption and export growth, which depend on rail to execute.
Key Projects ojects
From 2000-2015, roads have received 75% more ived 75 5% more funding by state and federal governments. Heavy rnments. Heavy rail has now surpassed government roads rnment roads expenditure from 2018-2020, largely through ly through regional Victoria rail improvements alongside ments alongside the Murray Basin and Gippsland lines psland lines -
Australia’s food bowl
Construction of the Moorebank Intermodal ank Intermodal
Terminal (NSW) between the Moorebank he Moorebank
South West industrial centre and Port Botany, nd Port Botany, in an effort to alleviate urban congestion and congestion and improve national freight connectivity ctivity
Development of the Inland Rail Project, a Rail Project, a freight corridor connecting all three major all three major eastern cost cities.
Informed by population growth, the emergence he emergence of Western Sydney as the new infrastructure w infrastructure development ‘hotspot’ in NSW has facilitated has facilitated accelerated rail infrastructure, predominately to edominately to accompany the new Badgerys Creek ‘Western Creek ‘Western Sydney Airport’, constructed under a CIMIC and er a CIMIC and Lend Lease Group Joint venture. Fuelled by the Fuelled by the Integrated Future Transport Strategy for NSW, tegy for NSW, 50% of the top 10 regional infrastructure projects ucture projects are concentrated in rail. Private and public sector d public sector infrastructure investment in the west has he west has catalysed real estate, commercial and mmercial and community development opportunities. This will unities. This will provide unrecognised economic benefits, whilst benefits, whilst alleviating Sydney congestion, paired with the aired with the creation of regional CBD areas in Parramatta, in Parramatta, Liverpool and Blacktown. planned – in July 2020, Treasurer Frydenberg announced Australia’s population growth is announced Australias population growth is expected to slow to 0.6%, comparable to rates expected to slow to 0.6%, comparable to rates during 1917 – the height of WWI. during 1917 – the height of WWI.
“Population growth has been integral to 29 years “Population growth has been integral to 29 years of consecutive economic growth”, and equally, of f consecutive economic growth”, and equally, infrastructure development. A slowing population infrastructure devel lopment. . A A slowing po p pulation may concede that Australia’s National Rail may concede that Austr ralia’s Nat a io onal l Rail Industry Plan, contributing $100b in rail Industry Plan, contributing $100b b in n rai a l investment through to 2030, may be overinvestment through to 2030, ma ay y be overestimated or better allocated to demanding estimated or better allocated to demanding sectors such as healthcare and emerging sectors such as healthcare and eme erg ging services, serving a risk to the Rail sector services, serving a risk to the e Rail i sec ctor holistically. holistically.
Similar to population expansion, stronger Similar to population expa ans n i ion, n stronge er demand in e-commerce and rapid changes in demand in e-commerce and rap a id changes in consumer behaviour will drive Australia’s freight consumer behaviour will drive A Austra alia’s freigh ht rail infrastructure programs, in an effort to rail infrastructure programs, in n an effort to support economic productivity and national support economic productivit ty y and na n tion nal a supply chains. These supply chains are supply chains. These suppl ly ch ha ain ns are r inextricably intertwined with Australia’s economic inextricably intertwined with Australia ’ s ec co onom mic c competitiveness and aggregate supply and competitiveness and aggrega ate su upp ply l and n determine the efficiency with which Australian determine the efficiency with which Austra ali ian goods/services are exported to overseas goods/services are exported to overseas markets and equally, how international goods are markets and equally, how internation o al goods are e imported - vital for domestic businesses and imported - vital for domestic c businesses e and consumers. Ultimately, consumers are more consumers. Ultimately, consumers are mo ore empowered in how they consume through eempowered in how they consume throu ugh h e ecommerce platforms. Between 2011 and 2031, the commerce platforms. Between 2011 1 and 2031 1, th he total domestic freight task 80%, largely because total domestic freight task 80 0% %, largely bec e au use 80% of Australians shop online and 10% of all 80% of Australians shop online and 10% of f all goods and services and driven by online retail–goods and services and driven by online e re et tail l–An industry which will grow to $35.2 billion in An industry which will grow to $35.2 bi illion o in 2021. 2021.
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e-Commerce & merce & Accessibility cont. lity cont.
Governments have responded to future capacity fu f ture capacity constraints with its National Rail Industry Plan, in ndustry Plan, in close liaison with Infrastructure Australia, to e Australia, to ensure the nation exploits the economic the economic opportunity presented by more efficient transport ficient transport methods, which can contribute up to 14.5% of up to 14.5% of GDP, whilst alleviating major city supply chain y supply chain congestion, a $53 billion leakage by 2031. y 2031.
Technology ology
Rail infrastructure development is leading the is leading the shift to the future through its integration of integration of technology – reducing costs, increasing ts, increasing efficiency and developing reliability. Metro North ty. Metro North West’s utilisation of automated trains, unmanned ains, unmanned platforms and quick peak hour services have services have been effective in driving Australian rail forward, an rail forward, whilst presenting the possibilities for the national for the national freight and passenger network. North West Metro rth West Metro has also been a driver by embodying the mbodying the successes of new rail infrastructure in Australia, ure in Australia, giving confidence for future investment and the stment and the implementations of new technologies. gies.
Similarly, rail infrastructure improvement is mprovement is constantly locked in the discourse of policy urse of policy makers and developers through the hopes for the hopes for ‘bullet trains’ to connect Australia’s major capital s major capital cities. The attractiveness of such a project is that a project is that it could create significant employment employment opportunities and economic stimulus in the short lus in the short to medium term, whilst reaping the longer-term e longer-term benefits of faster transit in a more environmentally conscious manner. These environmentally conscious manner. These benefits also extend away from major cities benefits also extend away from major cities toward rural townships, by increasing local toward rural townships, by increasing local populations and strengthening regional populations s and strengthening regional economies. However, despite the limited economies. However, desp pite the limited feasibility of fast rail due to two dominant factors feasibility of fast t rail due u to two domi m na n nt factors - The Extended project construction time, - The Extended proje ect construction time, projected to take a minimum 45 years, the limited projected to take a minimum 45 yea e rs, the limi m ted usable population of Australia and the proposal’s usable population of Australia and the proposa s l’ l s sheer cost ($114b for a complete . However, Fast sheer cost ($114b for a complete e . How o ever r, Fast t rail has kickstarted improvements to existing rail has kickstarted improvement ts to exist ting networks. This has been via the establishment of networks. This has been via the esta t bl b ishm men nt t o of the National Faster Rail Agency, which aims to the National Faster Rail Agency y, whi h ch ai ims to o deliver propositions for faster rail, whilst also deliver propositions for faster rail, whil t st also aiding the development of stronger infrastructure aiding the development of strong ger infrast s ructure in the sector. in the sector.
Population Population
e-Commerce e-Commerce
Technology Technology
The decades of underinvestment in rail innovation over the last decade, and the sudden resurgence of rail n rail innovation over the last t decade, and the sudden resurgence of rail infrastructure investment under the Morrison and various state governments has plunged the sector into a e Morrison and d var rious state governments has plunged the sector into a real risk that there is insufficient skilled labour nationwide to partake in design, engineering, procurement killed labour nationwide to partake i in design, engineering, pr p ocurement and construction phases. Rail is especially regarded as the ‘dark art’ in construction, due to its notorious specially regarded as the ‘dark art’ in constructi ion, due to its notorious difficulty in construction and demand for specialised labour. Resources also extend to land – there is mand for specialised labour. Resources also extend to land d – ther re is decreasing space for new transport projects in urban areas. Deloitte Access Economics, ‘the Value of Rail’ rt projects in urban areas. Deloitte Access Economics, ‘the Value e of Rail’ professes that not only will Australia need to continue “constantly upgrading and refreshing” rail stralia need to continue “constantly upgrading and refreshing g ” rail l infrastructure, but also make “more efficient use of existing infrastructure”. e efficient use of existing infrastructure”.
Risks around technological development are focussed on the emergence of automated transport systems pment are focussed on the emergence of automated tr ranspor rt t syst s em ms which have the capacity for immense structural change in the way freight and passengers move. Rail can nse structural change in the way freight and passenger rs move. Ra R il can benefit from exciting developments by increasing its efficiency, reducing costs and maximising safety nts by increasing its efficiency, reducing costs and m maximi m sing n safet ty through intelligent autonomous systems. However, adaptation costs and duration times are key – a slow ystems. However, adaptation costs and duration times are key – a slow response to emerging technology may see road transport favoured and jeopardise the successes of y may see road transport favoured and jeopardise th he suc cce c sses of Australia’s rail sector. Equally, automated systems are also certain to increase passenger public transport omated systems are also certain to increase passenger public c tra ansp po ort demand, which may place unfactored stresses on new and existing infrastructure. red stresses on new and existing infrastructure.
Basic economic theory rules there are unlimited desires, but only a limited set of resources to fulfill these are unlimited desires, but only a limited set of resourc ces to o fulfil i l l these desires. A risk to rail infrastructure investment moving forward is the Federal and state government’s re investment moving forward is the Federal and sta ate gove ern nme ent n ’s contribution to nation building infrastructure projects. In NSW alone, the Metro City and Southwest project astructure projects. In NSW alone, the Metro City and Southwes st pro oject will cost up to $12.5 billion, and in early February, the state government announced a $4.3billion cost in early February, the state government announced a $4.3billi l on cost blowout on the central CBD metro project under construction. Whilst rail is vital to future economic tro project under construction. Whilst rail is vital to o future econ o om mic progress and current employment levels, putting 200,000 people in active work and contributing $26 nt levels, putting 200,000 people in active work and d contribu uting $26 billion to the economy, other infrastructure developments may appear more pressing. As more businesses structure developments may appear more pressing. As more busi ine ess se es shift to online concentrated models and employment from home becomes more prevalent, the Federal els and employment from home becomes more prevalen e t, the Fe ed deral government has highlighted active improvements to the National Broadband Network and stronger ve improvements to the National Broadband Netw work and d str t on ng ger healthcare systems with stronger capabilities as immediate priorities. The Government has recently r capabilities as immediate priorities. The Government has re ece en ntly l expanded its Australian Regional Connectivity Program to $53million in 2020 alone, aiming to improve Connectivity Program to $53million in 2020 alone, aiming to impr rove local telecommunications infrastructure, whilst unprecedented aged care reforms, costing billions, is at ucture, whilst unprecedented aged care reforms, costing billion ns, is at the forefront of national politics. Thus, it is an active risk that the $100 billion pledged until 2030 is all the hus, it is an active risk that the $100 billion pledged until 2030 is s all l th he funding Australia rail will receive to boost its infrastructure and services efficiency. o boost its infrastructure and services efficiency.
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Net debt-to-equity:
infrastructure assets are usually confidently funded by financial institutions because they generate cash flows which reliably fund interest repayments on construction debt. However, because there are stronger concerns that infrastructure firms are accumulating excessive debt to undertake construction in a competitive development industry, the net-debt-to-equity (gearing ratio) will be important in reflecting a firms debt to equity position. However most firms prefer to use ‘net debt to net debt plus equity’ ratio, which shows the % of assets funded by debt borrowings – above 30% is a concerning metric
Interest cover:
this ratio is important in indicating debt accumulation, by reflecting how many times a business can pay its interest costs with operating cash flow. The higher the number, the stronger the firm’s debt position.
Profit margins:
a ratio vital to any effective business or industry – profits in rail development tend to be high, but not as high as other sectors due to costly and constant maintenance services, however benefits from is monopolistic pricing power over users, especially passengers..
Roads are essential to the layperson’s livelihoods. They connect suburban, urban and rural areas and serve as the driver of commerce. It is no surprise that roads are frequently of discussion in the financial industry. As a key component of the infrastructure sector, business involvement in roads can be broadly divided into three groups, which are:
1.Companies involved in the construction of roads and bridges (e.g. State of NSW, CIMIC) 2.Companies who maintain the efficiency roads, including operating tolls on private roads (e.g.
Transurban) 3.Companies who use the road primarily for the purpose of freight transport (e.g. Linfox, Toll Holdings)
There are 877,000 kilometres of road in the Australian road network
More than 500,000 Australians have full-time employment relating exclusively to the use of roads
Road infrastructure is used for 87% of in-house transport, accounting for $83b to GDP (BITRE, 2016)
Public Sector Involvement
Government investment is a key driver for demand for road and bridge construction. Sources include large grants from Federal Road Projects, such as the National Highway Upgrade Program and Western Sydney Infrastructure Plan, and similar grants from state and territory funds. Deterioration of existing roads will require maintenance, repair and alteration work – this is funded significantly by local governments. In general, large-scale, multi-year projects have given the industry stability in its life cycle.
Housing g Construction tionuctio tio
PRoad construction and usage has a high has a highge hha correlation with population growth. As the wth. As thegroow Australian population grows, urban sprawl is ban sprawl iss, urrb expected, which creates demand for demand fores d construction of new roads. However, this is also ever, this is alsoHowwe contingent on the types of housing of housingypess preferences; since there has been a recent been a recenthas b trend in demand for high-density apartments sity apartments-denns instead of new home construction, road struction, roadcons construction demand may dwindle.Population ndle.Populationy dwwin growth will also increase the demand for road emand for roadhe dde freight transport by increasing freight volumes. reight volumes.ing fr Higher volume usage of road freight transport eight transportoad fre has also increased the demand for road and for roaddemma maintenance as heavy vehicles cause more s cause morehiclees damage to road networks.
Private Spending
Private investment into road construction and maintenance has increased under BOOT (build, own, operate, transfer) schemes between the government and corporations, also known as public-private partnerships (PPP). Investment is highly correlated with major public projects, such as WestConnex in Sydney and the West West Gate Tunnel Project in Victoria.
A key toll road operator is Transurban, which operator is Transurban, whicholl road operad operato , which has been a driver for private involvement, with a driver for private involvement, withas been a den a driv olvement, key acquisitions such as the Cross City Tunnel, y acquisitions such as the Cross City Tunnel,key a el, nel,key acq ssC M7 Airport Link and Queensland Motorways M7 Airport Link and Queensland MotorwrwaysorwaM over the past decade. Investment in operation over the past decade. Investment in ooperatio op is largely reliant on traffic forecasts, and is is largely reliant on traffic forecaasts, acasliant o affected by increasing congestion on non-toll affected by increasing congestioon on ony incre roads. roads.
Cost of Cost ost Crude Oil Crude e Oil e O
Crude oil is used as fuel for vehicles which use Crude oil is used as fuel for vehicles whichh usech usil is us the road, and as such affects both demand for the road, and as such affects both demand for ford, and a toll roads and the profit margins of the freight toll roads and the profit margins of the freight and the transportation industry. Fuel price is a doubletransportation industry. Fuel price is a doubleon indu edged sword for toll roads – while low crude edged sword for toll roads – while low crude d for tol oil price can potentially increase usage of toll oil price can potentially increase usage of toll otential roads, high fuel may encourage motorists to roads, high fuel may encourage motorists to ma seek toll roads as they afford a shorter journey. seek toll roads as they afford a shorter journey. Nonetheless, high crude oil prices may affect Nonetheless, high crude oil prices may affect demand for public transport and other major demand for public transport and other major markets of toll roads, thereby impacting the markets of toll roads, thereby impacting the imp road industry. road industry.
