Sea changes in the competitive forces that shape infrastructure construction in Australia have resulted in a growing “hump” of projects to be delivered. The reasons for this become apparent when comparing current Major Projects forecasts with the 2015 perspective.

What’s Happened?

There has been widespread discussion throughout the Engineering and Construction industry concerning intensifying “margin squeeze” and increased delivery risk. Surprisingly, this is occurring against the backdrop of the unprecedented Government driven demand for infrastructure project services highlighted in the illustration above.

Firstly, why is reflecting on 2015 particularly relevant? Most recall this time as the tail end of the mining boom. In 2015 the effects of the drop-off in resources demand became apparent, with the associated reduction in mining industry-related expansion projects in WA and Qld. This shows up in the projects “hump” spanning 2011 to 2015 in the chart above.

In 2015 the industry was rather impatiently anticipating the commencement of new Transport Infrastructure projects on the Eastern Seaboard. Why impatiently? A looming drop-off in demand was apparent and the industry was well aware of the lead times typically required for major infrastructure projects in Australia to come to market.

What does the Data Show?

So what actually happened? To illustrate this, consider the pipeline of transport infrastructure projects from the perspective of 2015 compared with the 2019 version as shown in the charts below.

 

 

Major Road & Rail Projects 2019

2019: Acknowledgement to Deloitte Australia

2015: Acknowledgement to Deloitte Australia

 

What’s the key difference in 2019 versus the 2015 perspective?

  • In the 2015 chart a peak of $11Bn in expenditure was forecast to occur in 2019; wheras
  • In the 2019 chart infrastructure expenditure actually increased to $13Bn with a forecast peak of $19Bn to occur in 2021.

The increased forecast peak of industry expenditure in 2019 is largely driven by project timing adjustments as well as cost and scope changes for major projects that weren’t fully defined in 2015, most notably:

  • Cross River Rail (Qld)
  • Metronet Stage 1 (WA)
  • WestConnex Stages 2 and 3 (NSW)
  • Inland Rail (Vic, NSW, Qld)
  • Sydney Metro City-Southwest (NSW) – the timing of which was brought forward by the NSW Government
  • Westgate Tunnel (Vic)

The Industry has since 2015 delivered significant transport infrastructure projects, such as the remaining Pacific Highway works from Ballina to Woolgoolga (NSW), WestConnex Stage 1 (NSW) and Sydney Metro Northwest (NSW). In 2015 this appeared to be an almost unachievable outcome. The evidence illustrated (in the Macromedia chart above) infers that a significant proportion of this industry capacity was re-purposed from Mining transport projects to meet East Coast project demand.

What Does This Mean for the Industry?

Taking into consideration the 2019 forecast pipeline of work, major expansion in industry capacity will be required to meet $19Bn of peak demand.

Local industry continues to expand organically, supported by International entrants with balance sheet strength but limited additional resources. Note that International entrants typically partner with locals or acquire local companies to gain access to the local workforce.

It does appear unlikely that the local industry can expand at a rate that meets forecast demand.

The infrastructure “hump” creates additional capacity challenges in terms of supply of raw materials (sand, gravel etc) and availability of local specialist resources and skilled labour.

These concerns are noted in Macromonitor’s recent forecast update, whereby project delays and labour shortages have pushed out the anticipated peak of the transport infrastructure boom by at least an additional 12 months.

As extensive history in the industry has shown, the peak may well be further shifted by project scope creep, claims and delivery delays.

A future challenge that is likely to impact the Engineering & Construction industry is the inevitable drop-off in demand as the investment cycle moves from “build” to “maintain”. This is characteristic of the industry and is a significant driver of aggressive “feast or famine” behaviour that typically shows up during bidding for construction of major projects.

This drop-off can be offset with further investments by Federal and State Governments. However, well-developed major infrastructure projects in Australia inevitably take time to be scoped and assessed, for consultation to be undertaken and for funding and approvals to be secured.

Additional challenges arise when poorly scoped projects that have been rushed through the preliminary planning and bid stages become subject to delays and claims for variations – a subject for further exploration in a future article…..

This has significant implications for additional short-term Government investment in Infrastructure projects, should this be deemed necessary or desirable to offset the effects of the current slow-down in the wider economy.