Public infrastructure investment: choppy waters

The National Broadband Network (NBN) rollout is nearing completion, Sydney’s Metro Northwest was completed early (and $A1 billion under budget), and the Victorian Government has allocated a much lower spend on the Melbourne Metro in its 2019-20 budget. With several road projects completed or nearing completion, there is a gap before the next wave of major road projects commences.

"Public infrastructure investment isn’t providing additional stimulus to the economy, just as growth is slowing."

Federal, state and territory governments have been talking up their record pipelines of transport infrastructure investment. Indeed, the estimated capital expenditure (capex) of publicly-backed major road and rail projects almost doubled between 2015-16 and 2017-18 and rose a further 8 per cent in 2018-19. However, current estimates point to a 15 per cent fall in 2019-20.

2020-21 should be more positive as North East Link begins in Victoria and work escalates on Inland Rail through the eastern states and Cross River Rail through central Brisbane.

Stepping back, these numbers mean public infrastructure investment isn’t providing additional stimulus to the economy, just as growth is slowing. Although the public sector contributed 1.3 percentage points of the 1.4 per cent year-on-year rise in gross domestic product (GDP) to June 2019, almost all was due to public consumption rather than public investment.

Boost needed

ANZ Research does not expect governments, at either the federal or state level, to commit to bringing forward major infrastructure projects or significant additional infrastructure spending in the near term.

This is despite calls from the RBA Governor Philip Lowe to boost infrastructure investment, providing fiscal stimulus to support easing monetary policy. Lowe cites the short-term benefits of supporting the construction industry and boosting employment together with positive flow-on effects as well as the longer-term benefit of improving productivity.

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Of course, most of the infrastructure undertaken in Australia is funded by the states rather than the federal government.

While it would be difficult for them to commit to any additional major projects in the short-term - especially when the dip in 2019-20 mainly reflects timing lags between the completion of projects and the ramp up of new ones - smaller projects or maintenance works are realistic alternatives.

These could also be distributed more evenly across the country, creating jobs and stimulating spending in smaller cities and regional areas.

Population growth = driving force

Australia’s population growth has been consistently higher than most other developed countries, with much of the gain concentrated in Melbourne and Sydney.

This will continue, with the Australian Bureau of Statistics (ABS) estimating around 55 per cent of national population growth between 2019 and 2024 (1-1.3 million more people) will be in the two cities. As such, most infrastructure spending and the largest projects are centred in Melbourne and Sydney.

In its 2019 audit, Infrastructure Australia argued record levels of infrastructure investment need to become the “new normal” to avoid increased congestion and reduced living standards and productivity. However, this need is already coming up against reports of shortages of skilled labour, material and equipment, particularly given the number of mega projects in the pipeline.

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Mega projects underpin capex

With much of the low-hanging fruit already picked, infrastructure projects have tended to become more complex and costlier. This has given rise to an escalating number of mega projects - costing $A1 billion or more - in the pipeline.

The largest public-sector-backed mega project, the $A52 billion NBN, is on schedule for completion in 2020. Having contributed more than $A8 billion per year to capex at its peak, this will clearly detract from the forward pipeline. However, other projects have lined up to fill the gap.

As mentioned, though, a timing mismatch means there will be a downturn in public infrastructure in 2019-20.

The largest new public project in the forecast horizon, Sydney Metro West, is currently

costed at $A20 billion but some estimates are tracking as high as $A25 billion. Also expected to get underway in the early-2020s are Melbourne’s $A15.6 billion North East Link as well as Sydney’s Western Harbour Tunnel and Beaches Link, although so far only $A165 million has been committed for planning for the latter. Further out, the Victorian Government’s planned Suburban Rail Loop is currently estimated at around $A50 billion but may not be completed until 2050.

The spate of record infrastructure programs across the states raises questions over how the funding will be raised, particularly given the recent plunge in stamp duty revenue.

Debt is cheap and will likely stay cheap for a long time. However, with net government debt forecast to rise across the major states, Moody’s has flagged credit risks. Asset recycling appears to be one of the more likely options. New South Wales is considering possibilities including selling the remaining half of WestConnex and a long-term lease of Forestry Corporation.

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Catherine Birch is Senior Economist at ANZ