BIS Shrapnel Warns Against Infrastructure Delays

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By Chris Shaw

This week’s update by Fortescue Metals ((FMG)) shows cost blowouts remain a major issue for mining projects, but as BIS Shrapnel notes in its latest annual Road Construction and Road Maintenance in Australia reports a similar trend is also in place in the public construction sector.

As group economist Damon Roast notes, “An increasing number of major public projects have experienced cost blow-outs, but as the competition for resources increases between strong sectors of the economy, we feel there is a greater chance of some projects being delayed”.

The group suggests this is most likely to occur in Brisbane and South East Queensland, as in this region the timetable for roadworks remains very congested while the competition for resources is greater than in other regions. It points out any delays will only exacerbate the current labour shortage given many skilled workers are approaching retirement age.

One change the group notes is Federal government spending on roadworks was previously done to boost the economy at times of weakness but in recent years has become pro-cyclical as the current Auslink program was initially scheduled to be worth $7.7 billion but is now set to be closer to $10 billion, while Auslink 2 has set aside almost $17 billion in road and rail projects from 2009/10.

If the economy slows down during this second phase the group suggests the Government at the time will then face a choice between maintaining a budget surplus (as both political parties have promised) or continue to implement investment programs, which would require borrowing and therefore additional debt.

Given a history of cutting investment projects during periods of economic weakness the BIS Shrapnel view is something similar could again occur if the economy was to weaken in coming years.

While the downside risks in coming years have increased the group expects activity in the engineering construction sector will remain strong for a further three years, though during this period there will be increasing divergence in activity levels across the different sectors of road construction and on a state-to-state basis.

Figures for 2006/07 reflect this, the group noting total road activity fell slightly in the period as construction activity grew but maintenance fell for the seventh consecutive year thanks to lower government spending.

This trend should change slightly in the years ahead as the group expects the privately funded sector to experience a slowdown thanks to the completion of toll roads and further weakness in the housing market, while publicly funded operations should enjoy a boost after years of under-funding.

Overall the group forecasts publicly funded roads activity will rise five per cent between 2007/08 and 2009/10, while privately funded activity is expected to fall a further 14 per cent.

Most of the growth will come from highway projects in major urban areas in South East Queensland and Adelaide especially, but also from ongoing work on the Pacific and Hume Highways in New South Wales.

On a state-by-state basis South Australia and Queensland should enjoy the greatest gains over the next three years, the group estimating increases of 26% and 19% respectively through to 2010. While New South Wales should enjoy a 2% increase, Victoria and Western Australia should record falls of 27% and 15% respectively on the group’s estimates.

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