COVID-19 and the infrastructure outlook

Even before the latest round of COVID-19-related lockdowns, Australia’s major public infrastructure task for 2021-22 looked ambitious.

Public sector engineering construction increased in the second quarter of 2021, but third-quarter activity has suffered from construction shutdowns in Greater Sydney and Melbourne, bans on projects and worker movement in NSW local government areas (LGAs) of concern, and ongoing restrictions around worker numbers and movement on construction sites in locked down areas. 

According to ANZ Research’s latest Australian Major Projects report, Australia’s sizeable public-sector backed major project pipeline is underpinned by several mega-projects, concentrated in road and rail. The report looks at the investment pipeline for projects $A100 million or above, across key infrastructure and commercial property sectors.

Governments are planning a sharp increase in overall infrastructure investment in 2021-22, but actual activity could again undershoot budget estimates, particularly given the latest lockdowns in Sydney and Melbourne.

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Escalation

Australia’s capacity to realise its ambitious pipeline of major public-sector backed project investment has been a key concern for ANZ Research for some years now, given the risks of delays and substantial cost escalations.

The number, scale, complexity and concentration of mega-projects in the pipeline is a big reason for this.

Concentrated in Sydney and Melbourne, these are mainly road and rail projects. They draw massive volumes of materials and equipment, and require a large skilled and often specialised workforce. They also carry a higher level of risk which can discourage firms from bidding on projects.

Adding to the demand side pressures is an unusually synchronised and substantial upswing in planned public-sector backed infrastructure investment across all states and territories, as well as competition from other sectors, such as electricity, mining and residential construction.

On the supply side, many countries are using infrastructure investment to support the economic recovery from the pandemic, which is increasing competition for the limited global pool of workers, materials and equipment.

Even when Australia reopens its international borders, this will make it harder to attract the skilled and experienced workers needed. Global supply chains are also facing recurrent disruptions from COVID-19 outbreaks, and these are unlikely to disappear imminently.

Outstanding

The amount of work yet to be done (ie outstanding work for commenced projects) is already extremely high, particularly in road and rail, and the mega-projects yet to get underway will boost that figure even further. There are already signs of pressure, even before activity really starts to pick up.

Governments are aware of the risks to the delivery schedules and cost profiles of their infrastructure programs, and are trying to address them. For example, following a review of industry capacity, the WA government has reallocated $A2.6 billion of infrastructure project spending from 2020-21 and 2021-22 into later years, while the Victorian government has implemented an extractive resources strategy and increased investment in skills.

Infrastructure Australia, an independent statutory body, has recommended more transparency in pipeline development and scheduling of projects and better coordination across all levels of government and industry in order to allocate resources for optimal use, reduce the risks of delays and cost escalations and minimise low-productivity practices. This would deliver a better return on investment for the Australian public.

Some of the cyclical and structural changes triggered by the pandemic – particularly the popularity of working from home – have likely shifted the balance of costs and benefits for many projects underway and in planning. Some may need to be reassessed to ensure they will meet current and future needs and are the optimal use of funding and physical resources.

Catherine Birch is a Senior Economist at ANZ

This story is an edited excerpt from the Australian Major Projects September 2021 Report, published September 16 2021. Click HERE to read the full document.