The Australian road construction sector is expected to hit record levels of activity over the next two years, according to industry analyst and economic forecaster, BIS Oxford Economics.
Their latest report ‘Road Construction in Australia 2018 to 2032’ reveals that this strong growth will be driven by substantial public investment in highways and arterials projects.
However, it would be difficult to sustain this growth beyond FY18/19 with rail projects getting prioritised by federal and state governments in addition to rising costs eating into roads funding.
Adrian Hart, associate director of construction, maintenance and mining at BIS Oxford Economics says that the 27 percent real increase in publicly-funded road construction since FY15 is driven by high levels of federal government roads funding, combined with rising state government investment in substantial infrastructure projects.
Post-FY18, this growth is only expected to level off without any significant decline.
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.
The higher demand for both skilled and unskilled labour will see a corresponding rise in construction sector wages, particularly in the eastern states.
Hart also points to the rising road construction costs, which were relatively stable in recent years due to falling oil prices, low wages growth and tight contractor margins. The December quarter ABS data shows that costs are now rising at the fastest pace since the mining boom.
Large projects in the Eastern states such as the WestConnex, NorthConnex and Pacific Highway upgrades in NSW, and the Gateway Motorway and upgrades to the Bruce and Warrego Highways in Queensland are driving the growth in roads spending. Going forward, the Western Distributor and the recently announced North East Link in Victoria will sustain the momentum.
State governments across Australia are focussing on a growing pipeline of rail projects including Inland Rail, and urban rail projects in Sydney, Perth, Melbourne, Brisbane and Canberra. Funding that would have otherwise gone into building road infrastructure is expected to be directed towards rail.
Key findings of the Road Construction in Australia 2018-2032 report (dollar values quoted in FY16 prices):
Peak in FY18
National road construction activity will reach a historical high of over $20 billion in FY18, a 15 percent increase on FY17. Post FY19, the emergence of large private toll road projects will ensure that total construction levels remain high by historical standards.
Growth in the roads sector has been mainly driven by 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, which will be offset by a decline in private subdivision road construction that will continue through to FY20.
New South Wales and Queensland lead the road construction growth story. However, the upswing in Queensland is expected to end in this financial year (peaking at $4.5 billion) while New South Wales will peak at almost $8.5 billion in FY19.
Victoria is headed towards a significant upswing for the next 5-6 years driven by private toll roads projects.
Costs: Road construction costs that have accelerated over the past year, particularly in the ‘high-demand’ states are expected to increase further with more activity expected; the construction cost is forecast to increase above the rate of general inflation, exceeding three percent per year nationally over the next two years.
Large projects involving underground work, tunnelling expertise and equipment could face cost pressures.