Annual growth in engineering construction costs, activity and commodity prices (source: BIS Shrapnel)
Annual growth in engineering construction costs, activity and commodity prices (source: BIS Shrapnel)

Business research and forecasting company, BIS Shrapnel, released a brief report on infrastructure costs yesterday that’s one of the most interesting analyses I’ve seen in a while.

The report, Is the window closing for lower cost infrastructure investment?, claims the rapid escalation in infrastructure costs of the last ten years has now given way to weaker cost growth and lower tender prices, consequently providing more “bang for the infrastructure buck”.

With the slump in mining investment (and associated fall in commodity prices) the heat has come out of construction cost growth… (A) falling number of new engineering construction projects combined with the entry of several new international construction companies has meant that firms are tendering more aggressively for work.

The report says quoted tender prices are now up to 50% below those experienced during the boom days. It cites a highway project in Qld listed earlier this year with an estimated cost of $384 million that was ultimately contracted for $160 million.

If it’s all it promises to be, this is very good news. It comes after almost ten years of ludicrously high infrastructure costs. For example, Brisbane’s proposed Cross River Rail is estimated to cost in the vicinity of $5.4 Billion for 10.1 km of double track (5.9 km in tunnel) and five stations. The 9 km Melbourne Metro tunnel with five new stations is estimated to cost $10.9 Billion.

These costs compare unfavourably with earlier projects like the Sydney-Airport rail tunnel and the Perth-Mandurah rail line; in today’s dollars they each cost circa $1.2 Billion.

Sydney’s airport line was built in time for the 2000 Olympic Games and consists of 10 km of tunnel and five stations. The 71 km Mandurah line opened in late 2007; it’s got an underground station in the CBD, a kilometre of tunnel, two river crossings and nine stations, eight with expansive parking.

The new environment might help explain why the Victorian Government earlier this year contracted to build the so-called SkyRail project for the surprisingly low price of $1.6 Billion. That’s still a big sum, but it requires constructing 8 km of elevated double track over the busiest rail line in Melbourne, five new stations, upgraded signalling and power supply, and extensive landscaping.

BIS Shrapnel argues that this is the time for government to expand investment in infrastructure dramatically.

In a world awash with capital looking for a home, interest rates at record lows, underutilised capacity in our construction industry and known infrastructure gaps still needing to be addressed, it makes sense to increase infrastructure investment.

The report says “the sum total of new infrastructure commitments in the Federal Budget is, at best, uninspiring”. Labor’s promised $10 billion “concrete bank” is good so long as productive projects are chosen, but “if anything there is scope to do much more than this without impinging on the Federal Government’s AAA credit ratings”.The report notes that even the conservative International Monetary Fund has urged Australia to borrow more in order to build infrastructure.

Coincidentally, The Australian yesterday quoted a number of finance industry figures pointing out that losing Australia’s triple-A credit rating – (we’re one of only ten countries that are rated triple-A by all three major rating agencies) – would be unlikely to have a material impact on the economy. The paper quotes Mike Hirst, chief executive of Bendigo and Adelaide Bank:

If the credit rating drops from triple-A to AA+ I don’t think the impact on funding costs for Australian banks is going to be anything… In the 10 years to 2007 losing the rating would have been more important than it is today… If low interest rates and low commodity prices are not a signal to invest, then I don’t know what is. It’s the best opportunity we’ve had in the last 40 years and we should take the opportunity to build the infrastructure that the country needs for the next 50 years.

NSW Treasurer Gladys Berejiklian appears to be wasting no time spending up. While she could do more if she wasn’t so tied to maintaining the State’s credit rating, here’s what she told Parliament when she delivered the state’s 2016-17 budget yesterday:

Overall, infrastructure expenditure in 2016-17 in health will increase by 14 per cent on this year, education by 37 per cent, transport and roads by 16 per cent, police by 59 per cent and TAFE by 76 per cent.

This all sounds wonderful – and it is – but as ever there are a number of cautions. First, BIS Shrapnel warns that the window for governments to invest in lower cost infrastructure might not last due to changing economic conditions.

Our analysis suggests a very real risk that construction costs for infrastructure projects will pick up again later this decade – that is, the window for “lower cost” infrastructure development will gradually close.

Second, there’s a risk governments and lobby groups will rush headlong into funding bad projects while circumstances are favourable, continuing the historical pattern of political convenience trumping rational assessment e.g. any project is good if its rail; any project is good if it’s a motorway. High Speed Rail is the most prominent of the boondoggles – it’s far and away the biggest – but it’s hardly the only one (see Is the High Speed Rail bandwagon slowing?).

Third, the more favourable environment for construction doesn’t mean Australia’s big metropolitan areas can solve the challenges of growth simply by building rail and roads. It doesn’t mean they can build their way out of congestion or magically replicate central Paris. The mode shift from even a $10 Billion project like the Melbourne Metro rail tunnel is extraordinarily small.

Very difficult political actions – like rationing use of road space and increasing housing supply in established areas – will remain as necessary and pressing as ever.