However, the report states that this level of growth is unlikely to be sustained beyond FY18, as federal and state governments turn their focus to rail projects over the coming years, and as rising costs to deliver projects begin to bite into roads funding.
The Road Construction in Australia 2018 to 2032 report says that after FY18, national levels of road construction should stabilise and remain relatively consistent over the next five years. However, the national numbers hide significant variations in the construction cycle between the states.
According to Adrian Hart, BIS Oxford Economics associate director of construction, maintenance and mining, the recent growth in activity has primarily come from major projects underway in NSW and Queensland, and as activity in these states begins to drop off from FY19, a growing pipeline of work in Victoria is expected to pick up the slack.
“High levels of federal government roads funding, combined with rising state government investment in substantial infrastructure projects – in some cases turbocharged by asset leases – has driven a 27% real increase in publicly-funded road construction since FY15,” Hart said.
“The roads sector has been at the front end of the recovery in public infrastructure investment, particularly in NSW. However, the next round of infrastructure projects is more focused on rail.
“Combined with rising costs and other competing demands on state governments, we expect there to be little room for further increases in real roads construction spending after FY18.”
Although BIS Oxford Economics does not see room for further growth in road construction beyond FY18, it does not expect activity to decline significantly either. Rather, a consistent high level of activity over the next five years is expected to see sustained cost pressures to the industry.
Increased demand for both skilled and unskilled labour will see construction sector wages growth start to pick-up, particularly in the eastern states. Recent oil price rises will affect the industry, as will higher prices for other materials as suppliers work hard to meet demand.
“Road construction prices – as proxied by the ABS Road and Bridge Index – were relatively stable in recent years due to falling oil prices, low wages growth and tight contractor margins,” Hart said.
“However, more recent data shows that costs have now started to rise alongside construction activity.
“While road and bridge construction costs fell in FY16, December quarter ABS data shows that costs are now rising at the fastest pace since the mining boom, and we expect costs growth to accelerate further through FY18.”
The recent growth in roads spending has been underpinned by large projects in the eastern states, most notably WestConnex, NorthConnex and Pacific Highway upgrades in NSW, and the Gateway Motorway and upgrades to the Bruce and Warrego Highways in Queensland.
Looking forward, the Western Distributor and recently announced North East Link is Victoria will ensure roads construction stays at a high level.
In contrast, a growing pipeline of rail projects looks to be the primary focus for government across Australia. Last year saw the new Western Australian Labor government follow its Victorian colleagues by cancelling a planned road in favour of directing funding towards rail projects.
Major rail projects expected to ramp up over the next five years include Inland Rail, and urban rail projects in Sydney, Perth, Melbourne, Brisbane and Canberra.
Key findings of the outlook from the report include:
- Peak in FY18
National road construction activity is expected to reach a historical high of over $20 billion in FY18 – a 15% increase on FY17. FY18 will represent the end of an upswing in road construction driven by public investment. However, as public investment drops off slightly after FY19, the emergence of large private toll road projects will ensure that total construction levels remain high by historical standards.
- By sector
The growth of recent years is largely attributable to highways and arterials construction, with support from a new round of private toll road projects. Highways and arterials construction is expected to peak in FY19 at just over $11 billion. The growth in highways and arterials has been partly offset by a decline in private subdivision road construction. This decline in subdivision roads is expected to continue through to FY20 in line with forecast falls in detached housing construction.
- By state
Much of the recent growth has occurred in NSW and Queensland. The upswing in Queensland is expected to end in this financial year – peaking at $4.5 billion, and in FY19 for NSW – peaking at almost $8.5 billion. The company expects Victoria, where road construction has been relatively stable in recent years, to embark on a significant upswing for the next 5-6 years driven by private toll roads projects, namely the West Gate Tunnel project and the North East Link.
- Costs
Over the past year, road construction costs have accelerated, particularly in the ‘high-demand’ states. With further high levels of activity expected, further construction cost increases above the rate of general inflation is forecast, exceeding 3% per year nationally over the next two years, representing the fastest rate of cost growth since the mining investment boom. Could pressures could be particularly acute for large projects involving tunnelling expertise and equipment, with the large volume of projects requiring underground work likely to strain industry capacity.