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Major Transport Projects – Wave, Tsunami or Higher Tide?

Posted byAdrian Hart with contributions from Ronal Kumar

Thursday, 23 February 2017

Australia is on the cusp of an upswing in transport related engineering construction over the three years to FY19, led by an unprecedented amount of work on major projects (projects with over $2 billion in construction work done). But is it just another cycle or does it signify the start of a higher plane of infrastructure investment?

“A picture is worth a thousand words”, or so says an old English idiom.

Recently, a client asked us at BIS Oxford Economics to produce a report looking at issues facing the Australian construction industry. We were asked not to focus on demand side issues (i.e. the amount of construction activity projected), but rather, issues on the supply side (i.e. how well can industry respond?). Any data or forecasts pertaining to demand were to be put in an Appendix in the back of the report – to provide context for the preceding discussion, but not to dominate it.

We duly placed a variant of this chart in the back:

Soon after, the client returned with a message. They had presented the report findings internally, but despite the thousands of words written in the report, all anyone really wanted to talk about was “that wave chart”. Could we please take it out of the Appendix and place it upfront in the report with an explanation as to what, exactly, was going on?

We duly did so. Here, we simply note that this chart tracks our estimates and forecasts of construction work done on major Australian transport infrastructure projects with a construction value of more than A$2 billion. Construction values are lower than total project values as they exclude non-construction costs, notably property acquisitions. This definition just excludes the CBD and South East Light Rail (CSELR) project in Sydney (which currently has a total project value of $2.1 billion), as well as the Forrestfield-Airport Rail Link in Perth (which has a construction value of $1.17 billion). Many other major projects exist below the A$2 billion threshold, of course.

We have produced a range of these charts for different clients covering a range of sectors, states, project sizes and methods of construction (e.g. major tunnel projects). Similar charts from our presentations have been photographed, Photoshopped and are often doing the rounds unofficially (and unsourced) on social media platforms such as LinkedIn or in trade magazines. By publishing this chart on this blog (and updating it on a regular basis), we hope to provide a more “official” outlook for the path of major project construction work done.

Charts like this are only possible because of the highly granular way in which we at BIS Oxford Economics understand the engineering construction industry. We build our analyses and forecasts from the ground up, project by project, program by program, particularly in the short to medium term (next 1-3 years). Indeed, in the short term, this is the only sensible way to understand the outlook. No econometric model will spontaneously produce the strong outlook for road projects in Australia based on macroeconomic data, just as it could not produce the boom (and bust) in oil and gas construction work done during the recent resources cycle. You can only understand the shape and magnitude of these cycles when you understand the projects that underpin them.

While Commonwealth and State Government agencies are getting better at producing longer term infrastructure plans, longer term forecasts typically require a mixture of bottom up and top down methodologies. This is because the visibility of major projects deteriorates over time, and so eventually all major project work will eventually trend lower. Consequently, focusing on major projects alone tends to show a “wave” or “tsunami”, but the reality may be, in some jurisdictions and sectors, a rising tide of work.

Indeed, major project activity will not necessarily be weaker in the long term. Consequently, our longer term forecasts for road construction and engineering construction – as detailed in our Road Construction in Australia and Engineering Construction in Australia report services – use a mixture of project information as well as macroeconomic analysis which models the ability and willingness of the public and private sectors to invest in new projects.

So what are the key messages from our major transport projects chart?

A strong ramp up in $2bn+ major project work is expected over the next three years, and sustained at high levels for at least the next six years. This presents contractors and industry suppliers with a number of business opportunities, but also challenges and risks.

NSW is leading the charge, but will be joined eventually by Victoria and Queensland. By FY18, the major projects transport construction market will be super-hot.

Roads will be the initial driver, but major projects are also looming in rail, which will sustain the transport major projects pipeline beyond FY19.

In terms of land transport (roads and rail) infrastructure development, the major project pipeline exceeds the value of work experienced during the peak phases of the resources boom (2006 to 2013), and much will be focused in our capital cities, particularly Sydney and Melbourne. However, it should be remembered that there was a much higher level of engineering construction overall during the resources boom (i.e. including the construction of mines and processing facilities).

Without new projects rolled out in the early to mid-2020s, transport major project work will inevitably decline.

Again, we stress this is not the outlook for the industry as a whole – the major project ‘tsunami’ may yet morph into a higher tide of transport infrastructure investment. The industry outlook, by segment, sector and state is contained in our recently released Road Construction in Australia and imminent Engineering Construction in Australia reports. But the outlook for transport major projects paints an interesting picture, nonetheless.

What we do

BIS Shrapnel forecasts engineering construction activity across Australia, covering the transport, utilities and mining sectors. This is useful not just for construction contractors, but also materials and equipment suppliers, skills councils and stakeholders, and government agencies. As part of our studies into these markets, we regularly publish granular project lists, as well as detailed data, forecasts and analysis.