Federal Budget to drive 30 percent rise in public infrastructure construction: BIS

The 2017 Federal Budget is expected to provide a shot in the arm for Australia’s $80 billion civil construction market, offsetting further declines in resources-related work, according to forecaster BIS Oxford Economics (BIS).

The total measured work done in the sector would fall to $79.5 billion through 2016/17, down 16 percent on the previous year and 41 percent off the 2012/13 peak of $135 billion, BIS said at the launch of its civil construction report, Engineering Construction in Australia 2017 – 2031. 

However, public sector-funded engineering construction to set to rise to more than $35 billion by 2018/19, almost 30 percent above its 2015/16 level, BIS said based on an analysis of current government spending programmes.

The government plans to spend $75 billion on development and upgrade of infrastructure, which includes a potential buy-out of the Snowy Hydro scheme from the states. Also included is a $20 billion rail line upgrade.

The surge in public sector-funded construction would offset further falls expected in privately funded engineering construction – particularly in the LNG-heavy oil and gas segment – keeping total engineering construction activity in the $75-80 billion per annum range.

“The boom in public infrastructure construction is exciting news as it helps drive a sizeable upswing in non-resources civil construction activity,” BIS senior manager of Infrastructure and Mining Adrian Hart said.

While state and territory governments provide the principal funding for infrastructure investment, the federal government plays an increasingly vital role in supporting state infrastructure programmes and funding nation-building infrastructure.

“This is evident in the sizeable investment plans presented in the 2017/18 Budget, including the ‘off Budget’ commitments to Inland Rail, the construction of Sydney’s second airport, and the ongoing rollout of the NBN,” Hart said.

The increasing use of ‘off Budget’ vehicles by the Federal Government for funding and delivering major infrastructure assets under-reports the true impact of Federal Government infrastructure spending in the Budget – particularly the reported National Partnership Payments to the State and Territory Governments which includes the $75 billion Infrastructure Investment Program (IIP) and Infrastructure Growth Package, he said.

“On first blush, the outlook for Federal infrastructure contributions to the States to 2020/21 is on a declining trend after 2017/18, with lower levels of funding for 2015/16 and 2016/17 compared to the previous Budget,” Hart said.

"However, Federal funding is now higher in the out-years compared to last year, and this does not take into account the sizeable equity contributions required to construct Inland Rail and the Western Sydney Airport, and complete the rollout of the NBN." 

Longer term risks remain to public infrastructure investment

However, there may be risks to longer term public infrastructure funding if the economy turn out weaker than expected by the federal government through the next four years, cautioned BIS.

“The economic forecasts presented in the 2017/18 Federal Budget are certainly rosier than ours,” said Dr Sarah Hunter, head of Australia Macroeconomics, BIS Oxford Economics. 

“Our main concerns are around the projected growth rate of household income and expenditure, which determine income tax and GST revenues. As these account for almost two thirds of total revenues, any miss on these projections will keep the budget in deficit beyond FY 2020/21. Without other spending cuts or tax rises, our forecasts suggest the budget will remain in deficit until at least the mid-2020s.”

In any case, BIS forecasts a downturn in public sector-funded engineering construction work in the early 2020s as a major program of road works, as well as the rollout of the NBN, winds down across the country.

“It will be hard for State and Federal governments to sustain these higher levels of public infrastructure investment in the long term,” said Hart. “Governments must continue to implement sensible tax and expenditure reforms to ensure sustainable funding for infrastructure, as well as maintaining a long term pipeline of productive projects, if a sharper downturn in publicly funded work is to be avoided.”