Deloitte Access Economics December 2018 Infrastructure Monitor

The latest Investment Monitor report from Deloitte Access Economics (DAE) predicts infrastructure spending will peak in 2019, followed by slower growth for the sector. This follows findings that the value of Australian infrastructure projects is the lowest it has been in a decade.

In the years leading up to 2018, there was a significant increase in the value of infrastructure projects listed in the Investment Monitor database, which includes projects in the transport (roads and railways), utilities (electricity, gas and water), communications, health and education sectors.

In the December quarter, however, DAE found that the value of database projects fell by $27 billion to $679.1 billion – a 0.9 per cent decrease from the previous quarter that places the value of the database at a near decade low.

The value of definite projects (those under construction or committed) decreased by $17.9 billion over the quarter. The completion of a number of large LNG projects in previous quarters has seen the value of definite project activity fall by $86.8 billion over 2018, a 24.3 per cent decrease.

Despite planned work growing by 5.4 per cent over 2018, the value of planned projects (those under consideration or possible) decreased by $9 billion over the last quarter.

Infrastructure investment set to peak

Using project start and end dates, weighted by current project status, to estimate the future value of major projects under construction in infrastructure-related sectors, DAE created a chart showing projected infrastructure investment.

Deloitte Access Economics Infrastructure spending peak decade low

Infrastructure investment by sector

Activity is expected to continue lifting from the trough observed in 2015, reaching a peak of almost $40 billion in 2019.

A number of large projects such as the $8.3 billion Sydney Metro Northwest are scheduled to wrap up in 2019, while others such as the $4.9 billion Pacific Highway upgrade from Woolgoola to Ballina, the $3 billion NorthConnex, and the $2.1 billion Sydney CBD light rail are expected to be complete in 2020.

Adding to this, some of the largest projects currently underway are near the mid-point of their construction cycle. This includes the $16.8 billion WestConnex and the $2.9 billion first stage of the Perth METRONET.

Although the healthy project pipeline will continue to support elevated levels of infrastructure activity, DAE expects calendar year 2019 to be the peak for this cycle.

However, the analysis excludes new projects that may enter the Investment Monitor database in the coming years, any upward cost revisions, changes in scope of projects or delays to development timelines.

The factors that have supported the current surge in infrastructure spending are beginning to wane. Fewer assets are left to privatise and the slowing housing market is weighing on property tax collections.

Despite this, a number of factors suggest a more hopeful outlook.

DAE found that state governments – particularly those in New South Wales and Victoria – are spending record amounts on infrastructure.

Much of this work has been carried out by private firms, with some of these firms increasing spending on machinery and equipment in order to compete for and complete government contracts.

With the NSW election scheduled for March 2019, there is the prospect of additional projects entering the database which would add further to this forecast.

Economic backdrop

DAE partner and report lead author, Stephen Smith, said, “The backdrop of a solid domestic economy, business profits continuing to grow at healthy rates, low borrowing costs, and record state government infrastructure spending in NSW and Victoria all suggest that the times are right for a recovery in private sector investment.”

Much of the good news is concentrated in the non-mining sector, which saw an increase in business investment over the past year.

“But there is reason to be sceptical about the extent to which this positive backdrop will continue to support investment over the medium term,” Mr Smith said.

“A number of leading indicators, including the capex survey conducted by the Australian Bureau of Statistics, and the value of building approvals, remain relatively subdued.

“There are also doubts about whether the mining sector will be a driver of business investment in the short term. Despite the fact that profits have grown by almost 350 per cent in the past two years, investment in new capacity has been weak.

“A number of miners are now investing to maintain their production capacity at current levels, but this ‘sustaining investment’ is much smaller than the levels seen during the resources boom.

“Given these caveats, the recovery in business investment is likely to occur slightly slower than many have predicted.”

Construction and investment

DAE found that infrastructure emerged as a key driver of engineering construction in 2018. Significant spending has been directed towards projects in sectors such as transport, telecommunications and energy.

The public sector has played an important role in financing these developments, while an increasing share of the work is being carried out by the private sector.

Investment intentions in the mining sector have also improved somewhat, with a number of iron ore miners investing in new or expanded facilities to replace their ageing assets.

Although commercial construction activity was relatively subdued in 2018, conditions are broadly supportive of new investment. Profits are elevated, interest rates are still low and underlying demand is strong across a number of sectors.

Despite many businesses operating amid a degree of uncertainty, DAE expects commercial construction to lift over coming years, as tightening capacity utilisation strengthens the case for new investment.

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