Infrastructure spending ‘can soften the blow’ of COVID-19 pandemic

The coronavirus pandemic has wreaked havoc on residential construction, with the value of home building falling by 12 per cent over the year.

Inside the construction of the M4-M5 Link tunnels in Sydney’s inner west. Picture: WestConnex

Senior construction executives have urged federal and state governments to accelerate spending on infrastructure to cushion the hit from the looming cliff in housing construction.

The chief executive of construction materials and lime producer Adbri, Nick Miller, told The Australian that due to declining activity in residential construction, his company would continue its 18-month-long shift to supplying infrastructure projects.

“It’s no secret that infrastructure spend is going to be a critical part of the economic recovery … there is a $50bn pipeline of work across Australia for road works, and another $50bn when you count rail,” he said.

“We also recognise there is an oversupply of multi-residential housing, and we were over-exposed to that, so we started to pivot across to infrastructure.”

The coronavirus pandemic has wreaked havoc on residential construction, with the value of home building declining by 12.1 per cent over the year.

Australian Bureau of Statistics data last week showed that residential construction suffered its sharpest quarterly contraction in two decades. The value of home building dropped 5.5 per cent to $16.6bn, the lowest level since 2014, and the largest one-off decline since 2000.

ANZ senior economist Catherine Birch said the current pipeline of infrastructure projects was not enough to compensate for the decline in residential housing construction.

“Residential construction has been falling since mid-2018 and before COVID-19 we were expecting it would start to turn around about now... but now, with the impact of COVID-19 on population growth, we are expecting a peak to trough decline of about 25 per cent from 2018,” Ms Birch said.

“If we look at the major public sector transport projects, they are actually going to come off a bit in 2019-20.”

Waste collection and recycling company Bingo Industries last week warned that residential construction starts were expected to fall 15 per cent over the next year, but it is tipping infrastructure activity will increase by 10 per cent.

“Why we are confident with that infrastructure forecast is because of the $100bn in projects that’s been committed to by the federal government, and the $60bn or $70bn from state governments, with a lot more to come,” Bingo chief executive Daniel Tartak said.

Listed crane hire company Boom Logistics told investors that there were “growth opportunities in infrastructure, civil engineering and rail crossing projects on the east coast”.

Data from Infrastructure Partnerships Australia shows that government spending on infrastructure peaked last financial year, and is currently forecast to fall.

Cumulative state and federal spending on infrastructure peaked in the 2020 financial year at $51.9bn and is forecast to drop to $47bn this financial year, $45bn the next and $40bn in 2022-23.

RBA governor Philip Lowe this month implored the states to commit an additional $40bn to infrastructure over the next two years, effectively doubling their existing spending.

ANZ’s Ms Birch said it was important for governments to focus on the right type of infrastructure projects.

“It’s going to be hard to fill the decline in residential construction, but we will get a better idea of the infrastructure trajectory once we see the federal budget on October 6,” she said.

“At the moment we have seen announcements at a state or local level for smaller projects and maintenance work.

“I think, given the aims at the moment, to get funding out quickly and support the construction sector, that’s really crucial because they can get off the ground really quickly, and they also tend to be more labour-intensive, and can be distributed more across the country as well.”

Infrastructure Partners Australia CEO Adrian Dwyer told The Australian that since the pandemic began governments in Australia had announced $16bn in small-scale infrastructure projects.

“The announcements have been focused on small, high-velocity projects — so that’s things like social housing, roadworks and smaller transport projects. And that’s the right thing to focus on,” Mr Dwyer said.

“If that reduction in residential construction materialises, the space where the workforce supported by it can most easily transfer are into these projects.

“There is a high degree of transferability between residential construction workforces and social housing, schools and hospital construction or refurbishment.”

Currently there is nearly $10bn of prospective infrastructure projects in the pipeline, with the bulk of these projects slated for NSW, according to Infrastructure Partners Australia figures. But there is only $2bn worth of projects that are at the so-called shovel-ready phase. with the preferred bidder announced.

But Mr Dwyer said that when the federal government handed down its budget in October, it had to strike a careful balance between getting boots on the ground and providing confidence in the economy by establishing long-term projects.

“This isn’t a 100m sprint — we will need to see two or three phases from the government,” he said.

“First we need that high-velocity spend, to keep people in work, and then over the next 12 to 18 months we need to look at maintaining the existing infrastructure pipeline, or the big things being procured now — the worst possible thing to do now would be to say ‘let’s stop doing those things’.

“And then the longer-term vision involves looking at big infrastructure projects, things like the continuation of the Metro (light rail) program in Sydney ...

“It will provide long-term confidence.”

Mr Dwyer said he believed that ultimately governments would commit to more infrastructure spending and that companies were right to pin their hopes on it.

“From a stimulus perspective, governments don’t have a great deal of options outside of doing infrastructure, and infrastructure is a very good option,” he said.

“I see no reason to have anything other than optimism that governments will focus on infrastructure. I think that should give companies confidence that there will be work in this space.”