State of Opportunity

The following is the executive summary of the 2016 Major Projects Report, compiled by the Queensland Major Contractors Association and Construction Skills Queensland.

This is the eighth Major Projects Report, with earlier Reports published between 2006 and 2015. During this period, Queensland has experienced a substantial boom and bust cycle in construction activity and Major Project work.

Now, with falling commodity prices continuing to put new resources projects on hold and government funding for public infrastructure projects constrained, the outlook for Major Project work remains highly uncertain and volatile. The aim of this Report is to cut through some of this uncertainty by building a profile of Major Project work and demand for construction labour based on the completion of existing projects coupled with the most likely potential projects proceeding. The Report provides forecasts for the five years to the year ended June 2020. Along the way, the Report discusses the key drivers of Major Project activity, their outlooks, and the implications of the outlook for Queensland.

As detailed within this Report, falling public and private investment in Queensland has driven a sharp decline in Major Project work which has already impacted heavily on the Queensland economy, and especially those businesses operated by Queensland construction contractors and suppliers.

This is the key challenge now facing the Major Project market in Queensland as well as the broader Queensland economy, given the strong economic multipliers inherent in construction activity. The collapse in construction work done is affecting construction employment. From a peak of over 240,000 persons employed in the Queensland construction industry in early 2013, employment has slumped to approximately 204,000 persons as at the end of calendar 2015. On major projects, the decline has been even more severe, with employment (and work done) already down around 50% from the 2012/13 peak. Further declines in construction employment are expected over the next few years, presenting challenges for the sustainability of the construction industry in Queensland.

While infrastructure investment is not an end in itself, it provides a boost to employment and economic activity in the short term (during the construction phase) and can boost both productivity and productive capacity in the long term (during the operations phase), increasing the Queensland economy’s potential “speed limit” into the future.

Despite nearly a decade of increased infrastructure investment, servicing both the resources industry and the broader Queensland economy, infrastructure gaps remain and will worsen over coming decades unless solutions are found. Existing policy norms and funding settings have failed to deliver sustainable, long run growth in Queensland infrastructure investment to meet demand. Unless addressed, the result will be a return to an overall widening in Queensland’s infrastructure deficit which will further impact on state productivity and economic performance.

However, the next few years not only presents an infrastructure challenge to Queensland, but also an opportunity. In particular, the Queensland economy is expected to benefit from new drivers of growth through tourism and trade that will boost demand for infrastructure.

Taking full advantage of this opportunity requires implementing better processes and funding/financing mechanisms to support timely and sustainable infrastructure development and investment. This includes better project selection based on transparent cost-benefit analyses, keeping an open mind on the range of funding mechanisms available and having industry, government and the workforce working together on solutions to improve efficiency and productivity in the construction industry so that the best can be made of funds available.

In this regard, the challenge for Queensland is not the choice whether to increase investment in infrastructure or not, but rather which infrastructure choices to make, how these choices will be funded, and in what ways the industry can boost productivity to get the best value for the funding available.

However, the next few years not only presents an infrastructure challenge to Queensland, but also an opportunity.

KEY FINDINGS

With the boom in Major Project work now turned to bust, Queensland faces a new series of challenges and opportunities. The aim of this Report is to provide a reasoned and thoughtful perspective on the outlook for major engineering construction activity in Queensland, the workforce resourcing requirements this necessitates for contractors and government agencies, and the implications for the industry as a result of these findings.

Consequently, the Report focuses on major engineering construction projects – funded and unfunded – defined as those exceeding $100 million. A complete list of Major Projects considered for this analysis, and the explicit assumptions for each project regarding work done and construction workforces employed each year, are provided in the Appendix at the end of this Report.

In summary, the key findings from the 2016 Major Projects Report are as follows:

• Major Project work done in 2014/15 fell substantially and is now down 50% from the 2012/13 peak of $18.7 billion (see Figure A). Similarly, the estimated workforce on major engineering construction projects (over $100 million in value) has fallen by a collective 52% from a record 23,500 positions in 2012/13. Despite the widely publicised decline in mining and heavy industry investment, non-mining investment also weakened significantly in 2014/15 as public finances remained stretched.
• The sharp contraction in Major Project work is forecast to continue into 2015/16, before reaching a trough in 2016/17, with a much lower profile of work projected through the forecast period than in the 2015 Report (see Figure B). While the decline in 2014/15 was challenging, the fall in 2015/16 will be twice as steep, with Major Project work done expected to slump 50% in this financial year alone to just $5.3 billion. In aggregate, Major Project work done is forecast to decline nearly 75% from the 2012/13 peak to a trough of $4.4 billion in 2016/17.
• Most engineering segments are expected to contribute to declining activity, but mining and heavy industry construction will continue to dominate the overall contraction of activity going forward. In terms of the construction workforce, mining and heavy industry Major Project work alone is anticipated to shed over 11,000 full time workers over the next five years to 2020.
• An upswing in Major Project work is expected from 2017/18, but growth will plateau from 2018/19. However, even this recovery is predicated on currently unfunded projects proceeding, including large public sector road and rail projects, as well as another (much smaller) round of resources investment. As such, the outlook is highly susceptible to risk.
• The expected trough in activity will be well below the 2012/13 peak and, though equivalent to levels of work occurring in the mid-2000s, future Major Project work may not be enough to meet future infrastructure demands. The experience of the past two years illustrates that the twin booms of mining and public investment over the past decade was an unusual phenomenon that, in terms of scale, are unlikely to be repeated soon. Even so, public investment (and Major Project work) will need to rise again in future to meet projected infrastructure demands.
• With other states such as New South Wales ramping up infrastructure investment, challenges will remain in procuring construction services. Queensland needs to apply a longer-term approach to planning for the future workforce in a way that links workforce planning and skills development to both current and future activity. We need to remain vigilant about workforce development, skills acquisition, attracting new entrants and retaining skilled workers particularly during periods of cyclical weakness. The process of workforce planning needs to be linked to infrastructure planning so that Queensland has the right skills available at the right time to deliver Major Projects.
• Public infrastructure investment will be a key driver of growth in Major Project work from 2016/17. While public infrastructure investment is expected to weaken in aggregate during 2014/15 and 2015/16, a pickup is expected from 2016/17, led by transport projects, particularly roads and railways. This has implications for both contractors and governments to ensure that projects are selected and financed on sensible criteria, and that procurement reforms are delivered to ensure the projects are delivered as efficiently as possible.
• There will be significant shifts in the regional location of Major Projects and labour demand over the next five years (Figure C). This not just reflects investment in different types of infrastructure than the recent past (such as regional airports and ports, water storages, public transport and freight) but also very different regional investment profiles where the investment will take place (focusing on tourism regions, urban centres, agricultural areas and key transport hubs). In particular, Major Project work is expected to pick up strongly (and be more focused) in South East Queensland and Northern Queensland.

CHALLENGES & RECOMMENDATIONS

Investment is the key driver of growth in domestic demand and employment in the Queensland economy. It was the boom in resources investment and public investment in infrastructure which underwrote growth in the Queensland economy during the 2000s, and it is the absence of investment growth which is now responsible for the state’s economic weakness. Consequently, a return to stronger growth in domestic demand (and employment) in Queensland requires new investment drivers.

Much higher levels of infrastructure investment over much of the past decade have narrowed, but not eliminated, Queensland’s infrastructure deficit. While non-mining private sector investment, spurred by a lower dollar and weaker growth in domestic costs, is expected to recover through the next few years, the bulk of the “heavy lifting” in terms of infrastructure investment will fall to the public sector. With this comes the responsibility that public infrastructure investment is undertaken wisely, efficiently and transparently targets infrastructure gaps. It should also complement these next “waves” of growth in industries that are expected to grow strongly from here, including tourism, education, agriculture and manufacturing.

Adopting sensible public infrastructure investment plans and processes entails:

• Choosing projects with the greatest net economic benefits
• Finding sustainable mechanisms to fund infrastructure provision for the long term
• Ensuring efficient processes are in place for the procurement of services.

Meanwhile, industry, governments and the workforce should work together to promote policies which:

• Support private infrastructure investment
• Streamline procurement processes
• Improve industry competitiveness and flexibility
• Invest in skills and competencies.

Maintaining a healthy Queensland economy depends on sustaining an innovative construction industry which is flexible in responding to the challenges ahead…

In this regard, the development of Building Queensland to provide independent expert advice is a vital first step. Regardless of how infrastructure is funded and financed, it is important for Queenslanders to understand, first and foremost, which infrastructure projects provide the best “bang for the buck” in terms of its net economic benefits and how the new projects will mesh with existing infrastructure to boost productivity over the long term.

But much more needs to be done, particularly in the debates surrounding infrastructure funding, which is the most significant barrier to sustainable infrastructure investment. Here, it is important that an eclectic approach is adopted, with no solutions barred from consideration including capital recycling (asset sales or long term leases to the private sector), wholesale reform of tax and expenditure policies (which frees up resources for infrastructure funding) or utilising debt finance. In regards to the latter, there are powerful equity and efficiency grounds for increasing the use of debt to support infrastructure development over the long term, and avoiding the boom/bust cycle of Investment based on funding mechanisms linked to the economic cycle.

During 2015, increasing debt funding for infrastructure investment in Australia has been specifically championed by both the International Monetary Fund (IMF) and the Reserve Bank of Australia. Policies should be put in place between the Queensland and Federal Governments to take better advantage of record low interest rates, excess industry capacity and falling construction costs by utilising debt finance for productive infrastructure investment.

In this context, this Report makes the following recommendations:

• Given the projected weakness in domestic demand and employment growth in Queensland as it continues to transition from the resources investment boom, that the State and Federal Governments expand the scope of productivity-enhancing public infrastructure provision in Queensland in their 2016-17 Budgets.
• Steep losses in employment in the Queensland civil construction sector, combined with rising demand for skilled labour to support infrastructure development in New South Wales and Victoria, require industry and Government to work together to develop a workforce planning response that ensures this critical sector of the economy has a sustainable workforce that can deliver Queensland’s future infrastructure requirements.
• Both the State and Federal Governments also need to develop a consistent, financially sustainable long term infrastructure investment program that meets long run growth in demand for infrastructure services, is resilient to the political and economic cycle, and provides industry confidence and certainty. This requires a plan which avoids boom/ bust construction cycles as well as an eclectic approach to funding solutions, encompassing debt, tax and expenditure reforms as well as private sector involvement where benefits exceed costs through capital recycling, direct investment through unsolicited proposals and the use of PPPs.
• Both short term and long term public investment programs should be based on maximising economic benefits through transparent Cost Benefit Analysis (CBA).
• To maximise efficiencies in public infrastructure provision and reduce costs, both the State and Federal Governments should follow through with reforms to the public infrastructure procurement process, as outlined by the Productivity Commission’s review in 2014.
• Industry, governments and the workforce should continue to work together to tackle risks to productivity within the construction industry.
• Both State and Federal Governments to continue to make concerted efforts to eliminate structural deficits in Budgets through wholesale tax and expenditure reforms, providing greater fiscal headroom for investment in necessary and productive infrastructure.

The completion of the LNG investment boom will be the key driver of this switch and will see South East Queensland once again reign supreme.

RISKS TO THE OUTLOOK

The outlook contained in this Report is subject to significant upside and downside risks. Despite the reasonably flat profile of work projected, there is still the potential for further, more volatile, cycles ahead given Queensland’s natural strengths and advantages: increasing connections with the fast growing economies of Asia, strong population growth, and high quality natural resources.

Picking the timing and strength of the next upturn in Major Project work remains difficult to forecast, as many of the Major Projects identified in this Report are currently unfunded. In this respect, the key risks which will affect the Major Project outlook as identified in this Report, are:

• The economic outlook for key trading partners, the strategic decisions they make in achieving sustainable growth, and how this will impact on the global trade of resources for which Queensland has a strong supply position, particularly coking coal, thermal coal, and gas.
• The trajectory of commodity prices, particularly for coal (both thermal and coking), as well as oil prices (which can influence returns to LNG projects).
• Movements in the value of the Australian dollar, which not only affect the profitability and competitiveness of resources projects but also helps drive investment in other tradeables sectors of the Queensland economy, including tourism, agriculture, education and manufacturing.
• Decisions by State and Federal Governments in tackling debts and deficits, and how this may play out in terms of funding public infrastructure projects through the forecast period.

While most of these risks are outside of the control of those operating in the construction of Major Projects, it remains important that governments and industry participants focus on what can be controlled to ensure that the industry and economy remains on a sustainable footing. This includes taking on the recommendations in this Report with the long term aim of mitigating the volatility of the boom/bust investment cycle and achieving high quality, predictable and sustainable outcomes, safe workplaces and decent working conditions.

Maintaining a healthy Queensland economy depends on sustaining an innovative construction industry which is flexible in responding to the challenges ahead, and has the right mix of skills and competencies to meet future demand.

QUEENSLAND MAJOR PROJECTS

Mining & Heavy Industry

Mining and heavy industry Major Project work has experienced a period of unprecedented expansion between 2010/11 to 2012/13, increasing collectively by over 200% to reach a new peak of $13.6 billion (Figure 1.8). From a Major Project workforce perspective, the number employed in Queensland’s mining and heavy industry space doubled over the same period to 14,000 persons. Queensland’s LNG projects were the key driver of growth (although as mentioned, many of these positions may have been effectively offshored) while coal projects (now completed), such as the Broadmeadow, Caval Ridge, Daunia and Grosvenor coking coal mines, also sustained a high level of work.

Major Project work done shifted back towards $10 billion in 2013/14, before falling to $8.6 billion in 2014/15. Measured labour demand followed a very similar path to work done, to 8,500 persons. The rapid acceleration and subsequent demise of mining and heavy industry work done has been predominantly driven by the once in a generation CSG-LNG driven boom around Gladstone.

Given the completion of these projects, further declines in work done and workforce demand are forecast in subsequent years, with funded activity dipping below 2010/11 levels in 2015/16 and 2016/17, as current projects move to completion. Altogether, we are forecasting an 87% decline in Major Project work for the mining and heavy industry sector, from $13.6 billion during the 2012/13 peak to just $1.75 billion for 2016/17.

Thereafter, investment is forecast to move higher as the next round of mineral and coal projects gets underway alongside Rio Tinto’s Amrun (South of Embley) project.

However, assuming Queensland can meet challenges on costs and competitiveness, and is supported by strengthening global demand, a range of mining and heavy industry projects that are currently unfunded could feasibly come back late in the forecast period. Most of these are coal projects (in the Bowen and Galilee Basins), but there are also other resource developments such as the Paradise phosphate project and ethanol projects in North Queensland which may see more certainty with the passing of State Government bio-fuel legislation in December 2015.

Regarding LNG, it has been assumed no new expansions will take place given recent declines in oil prices and associated spot LNG cargo prices. Nonetheless, ongoing development of CSG fields over the operational life of LNG facilities (at least two decades) will require continual investment in related field infrastructure, including roads, pipelines and gas facilities, and water. Again, while not as significant as downstream infrastructure projects, in aggregate, they will lift the volume of sector activity compared to pre-CSG times.

Queensland Regional Focus

Significant shifts in Major Project work and employment are expected at the regional level over the forecast period. While Major Project activity will be declining in aggregate terms, a greater share of this work is expected to be focused in the Surat Basin, Northern Queensland and South East Queensland over the next two to three years.

The completion of the LNG investment boom will be the key driver of this switch and will see South East Queensland once again reign supreme. This recovery is dependent on investment decisions by State and Federal Governments, particularly regarding new transport infrastructure. Rising residential and commercial building activity (not considered as major engineering projects for this Report) are also adding to construction labour demand in South East Queensland, and this trend is expected to continue during the forecast period.

The initial shift of labour and capital to Gladstone and the Surat Basin, in a very concentrated period of time, presented a number of challenges to local communities and projects. The construction workforce more than doubled to meet the construction schedule of the LNG projects.

With the completion of major LNG projects in Gladstone, the workforce shift that took place will reverse with other regions such as South East Queensland and Northern Queensland picking up the slack.

While the pace of this change will be slower than that which occurred in Gladstone, remote regions such as Northern Queensland, will have their own challenges to overcome. The regional towns that will inevitably service projects in these regions will undertake a number of social and economic changes. This will require detailed planning by Federal, State and Local Governments in conjunction with project proponents in order to maintain harmonious and sustainable communities.

As history has proven, the South East Queensland region has experience in handling significant shifts in Major Project work and employment such as those forecasts in this Report. However, the current forecast upswing will occur at a time when other Australian states and cities (particularly Sydney), as well as other global cities, will also be undergoing increasing levels of Major Project investment. This will likely see competition for skilled labour and plant and equipment intensify, which will create a challenging period for procurement in Queensland.

To read the full report, visit www.qmca.com.au.