The horizontal and vertical infrastructure sectors were some of the hardest hit by COVID-19 disruptions. Relative to 2019, activity in these sectors experienced marked declines since Q2 2020. Vertical infrastructure, a sector predominantly driven by private investment, experienced the greatest decline in activity, falling by 27% in Q2 2020 relative to Q2 2019, and more recently by 19% in Q3 2021 relative to Q3 2019. The residential infrastructure sector has been alone in showing recovery since Q2 2020.

Gross Domestic Product (E), percentage change in Q2 2020 to Q3 2021, relative to the quarter in 2019

Investment in infrastructure is a key policy focus of Government but requires careful planning and delivery monitoring to achieve desired outcomes. Evidence-based decision making is critical when it comes to prioritising projects in the short-term.

Infrastructure programmes and projects are facing budget, delivery schedule and associated benefits realisation delays. This can be due to a range of factors including supply chain disruptions, a tight labour market and unprecedented cost escalation due to external factors. In addition, complexity and interrelationships for larger scale programmes of work also necessitate time consuming scoping and business case assessment work to be completed before project delivery works can commence.

Global logistics are under ongoing pressure, with conditions unlikely to normalise before the end of 2022. Logistics costs are, therefore, likely to remain elevated, and shipping reliability will remain a challenge.

The impact of the pandemic has been significant on supply chain. Shipping capacity was idled in the early stages of the pandemic. However, an unexpected surge in consumer demand in 2020, combined with idled capacity, industrial action and COVID related disruptions at key ports, has caused congestion throughout the global supply chain with consequent flow on effects for New Zealand. There is now an international shortage of containers and most available shipping capacity is in use. Schedule reliability is currently well below pre-pandemic levels, with congestion at major international ports. As a result of this situation, global container rates have increased dramatically.

The New Zealand supply chain is under pressure from global disruption to shipping, combined with congestion at local ports. Based on our engagement with port CEOs and operations managers, the general view is that conditions are unlikely to normalise for at least another 12-18 months, if not longer, keeping upwards pressure on logistics costs. Indeed, an ongoing shortage of truck drivers and increasing fuel costs in New Zealand could likely add further pressure to logistics costs. Further, New Zealand’s transition away from a zero-COVID approach will also likely cause ongoing disruption.

Even during the pandemic, the infrastructure sector was a significant contributor to the New Zealand economy. In 2021, the sector accounted for 10% of all jobs in the economy. The sector has a relatively high proportion of self-employed workers, at around 19%.² Total employment in the sector has increased since 2019 as shown in the chart below. However, access to labour and labour shortages to meet heightened demand is expected to persist. As noted by Te Waihanga recently, industry projections suggest New Zealand will have a shortfall of approximately 118,500 construction workers in 2024.³
 

There have also been construction materials shortages – with prices increasing for key inputs such as timber and steel. Rapid cost escalation, as illustrated by the product price index for non-residential buildings below, is expected to continue due to high demand and supply chain issues set to extend into 2022.

Product price index (non-residential buildings), Q4 2009 to Q2 2021

Efficient and effective investment in infrastructure should be leveraged as an opportunity to keep people employed, keep businesses afloat and to maintain the productive capacity of the economy. Illustrative steps to help accelerate infrastructure as an economic stimulus could include:

• Government further removing impediments to fast tracking infrastructure delivery, such as planning and complex procurement, looking towards optimising existing assets for ‘quick wins’, to deliver near-term national stimulus.
• Improved forward planning, including the use of technology, to help deliver infrastructure more efficiently. Better project planning and coordination will allow scarce budget dollars to be spread further (or help offset cost escalation pressures), enable improved project pipeline forecasts and enhance visibility of delivery resource requirements.
• Further facilitating access to labour resource by streamlining and clarifying border exemptions and targeted initiatives aimed at transitioning workers into infrastructure.