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Infrastructure pipeline under pressure

The government-led boom in infrastructure investment has pushed the value of definite project investment in Australia (work that is either underway or committed) within a hair of the all-time high recorded in late 2014, according to Deloitte Access Economics’ latest Investment Monitor report.

In 2014, it was the mining industry driving investment. This time around, the public sector has done the heavy lifting. Transport projects account for 55% of the total value of definite investment in the Investment Monitor database in the September quarter.

Yet the pipeline is coming under pressure. Cost overruns and capacity constraints have forced governments to reassess the feasiblity of planned projects. Tighter fiscal conditions at the state level and heightened uncertainty around federal funding are the latest headwinds to weigh on the transport pipeline.

The outcomes from the federal government’s strategic review of the $120 billion Infrastructure Investment Program (IIP) are yet to be finalised. But the transition to a more sustainable project pipeline is likely to require a change in scope or timing for a number of announced projects, while other projects are at risk of being shelved altogether.

Australia’s two largest state economies, New South Wales and Victoria, made an outsized contribution to infrastructure investment in recent years. But both have now trimmed their capital works programs in a sign that fiscal pressures are starting to mount. The Victorian Government has shaved 8% ($6.8 billion) off its four-year infrastructure investment program, while the New South Wales Government has trimmed its four-year infrastructure budget by 3% ($2.8 billion).

Not all states are facing the same fiscal headwinds. Those that have ridden the wave of elevated commodity prices over the past two years, such as Queensland and Western Australia, have continued to add to the infrastructure pipeline.

Overall, the value of definite infrastructure projects in the Investment Monitor database grew by 1.6% in the September quarter. But the value of definite projects in the transport industry, which was the main driver of the recent infrastructure investment boom, fell back slightly and appears to have peaked in the December quarter of 2022.

Chart 1: Value of definite project investment in the Investment Monitor database

Source: Deloitte Access Economics

The total value of all commercial construction and engineering projects in the database (including both definite and planned projects) grew by 1.0% (or $9 billion) in September quarter, but growth is increasingly being driven by upward cost revisions rather than new projects. The $6 billion worth of new projects added to the database in the quarter was the lowest level recorded since September 2021 and only just enough to offset $5 billion worth of completions and deletions.

Overall, the value of definite projects in the database increased by $6.0 billion in the quarter to a total of $445.1 billion. The value of planned projects (those that are under consideration or possible) increased by $3.7 billion to $510.1 billion.

Business investment is expected to grow by a substantial 6.2% in 2023. But a slowing economy, higher interest rates, shrinking profits and subdued business confidence are starting to take a toll and lending to businesses is flatlining. Deloitte Access Economics expects growth in business investment to slow sharply to 1.3% in 2024 before recovering throughout 2025 as the economic backdrop improves.

This newsletter was distributed on 2nd November 2023. 

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