Public Sector Construction Projects are Lighting up the Sky 2

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Monday, August 15th, 2016
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It comes as little surprise that a decline in business investment, led by a reduction in mining-related engineering construction expenditure, is providing some headwinds to the Australian economy.

This scenario was telegraphed well in advance, so if you are surprised by this, then you must have missed out on all economic and construction-related news for the best part of three years. The key point is – the downturn does get hyped up in the media sometimes.

It was hoped that a resurgence in non-mining related business investment would fill the void left by the contraction in mining-related activity. However, the reality is that mining investment became such a huge driver of economic growth that other sectors could never realistically be expected to fill the void completely. Cinderella’s foot won’t fill an Ian Thorpe-sized work boot.

I should emphasise that non-mining sectors are not universally underperforming. In fact many are ticking along at a relatively steady rate of growth and a few are shouldering more than their fair share of the load. Residential building, primarily in the east coast capital cities, is a prime example.

While trying to stimulate private sector business investment, the RBA’s decision to cut interest rates to record lows in recent years drew vast swathes of households and investors into the housing market. The boom in the residential property market has seen a jump in the number of transactions, both residential and non-residential properties, which has sent a tax revenue windfall to state governments via stamp duty collection.

I’m aware that outside of New South Wales and Victoria, this story doesn’t exactly seem to add up in recent years. I’m also aware, though, that 57 per cent of Australia’s population live in these two states, so market dynamics and cycles have an obvious impact on revenue.

The windfall is most evident in the budget papers prepared by the New South Wales Treasury. In early 2014, when the state Treasurer handed down the budget for 2014/15, Treasury projected stamp duty revenue would total $6.95 billion, which represented an improvement over the previous year of only 0.8 per cent. However, the latest figures show that NSW hauled in close to $8 billion which is almost $1.3 billion, or 22 per cent, more than they had initially expected.

Furthermore, an almost identical scenario played out in the budget the following year. The 2015/16 budget showed stamp duty receipts were projected to increase to $7.84 billion in that year. However, the budget for this year shows they actually received $8.89 billion – another billion dollar windfall!

Critiquing the validity of Treasury projections was passé the moment it became the favourite sport for opposition politicians. However, at this point it is worth noting that the Treasury’s projections show the stamp duty bonanza is expected to continue.

Irrespective of whether the projections turn out to be accurate, hitting the stamp duty jackpot two years in a row combined with an optimistic outlook for the future has given the state government the confidence to invest in some big ticket infrastructure projects. Conditions in property markets have also been kind to stamp duty revenue in Victoria (and Queensland) and both these states have also reignited their focus on infrastructure investment.

At the top of the list for New South Wales is the $11.5 billion WestConnex project which is in the early stages of construction. Funding is also ongoing for the Sydney Metro and Pacific Highway upgrades, while $338 million has been committed for roads to support the eventual airport at Badgerys Creek. Health projects are also in line for a boost – for example the redevelopment of Gosford Hospital has been given the green light, along with the additional funding for the work at Westmead and St George hospitals.

The Victorian government has also committed funding to a number of major transport infrastructure projects. The Andrews government continues with their rail investment theme after the Melbourne Metro Rail project played a pivotal role in forming government. The project to remove level crossings around the state is ongoing and this year’s budget has also committed $1.9 billion to improving metropolitan public transport infrastructure and $1.3 billion for rail projects across regional Victoria. The needs of road users haven’t been totally ignored with the government committing $1.5 billion over the next four years to keep the Western Distributor project moving.

Given the large amount of work done on coal mining and LNG projects in Queensland over the last decade, the reduction in engineering construction investment over the last couple of years has been felt more acutely than in the neighbouring states to the south. Public investment in infrastructure will never get close to the vast amount spent on the LNG projects, but something is better than nothing.

Queensland has committed to funding the Gateway North motorway upgrades and the Toowoomba bypass. It remains highly likely that Townsville will get a new sports stadium sometime soon. In addition, the state government has committed funding to progress the Cross River Rail project, although actual construction is probably still some years off.

Looking around the rest of the country, there are a handful of other notable new public infrastructure projects that have been committed to. These include the Northern Connector road project in Adelaide, defence infrastructure upgrades in the Northern Territory, and a number of capital expenditure programmes in the WA educational sector.

In addition to the individual state projects, the roll-out of the national broadband network is also set to accelerate over the next two years, which will add to the amount of public infrastructure expenditure in all states during this period.

Outside of residential building, many other parts of the private sector are yet to demonstrate a strong inclination to invest. The recovery in non-residential building is still finding its feet and the contraction in private sector engineering construction activity is still likely to have some way to go yet.

At this point in time, public sector capital investment will be an important driver of economic activity. Furthermore, if it’s done well, it can provide a spark to reignite private sector spirits.

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  1. Barry b

    Great article Dr. Dale – the time for government to engage in much-needed spending on infrastructure in Australia is right now, as the mining boom wanes.

  2. Jeff Evans

    One of the challanges in delivering public sector investment will be not only to choose the projects which deliver the best value for money but also to unlock private sector capital to the maximum possible extent. In this light, it is pleasing that we are now having serious conversations about value capture.