Citing volatility across the construction industry, the Australian government recently announced that it would be delaying several multi-billion dollar “mega projects” across the state of New South Wales (NSW).
Large-scale transportation projects such as the Beaches Link motorway and the Parramatta rail line will be postponed, delaying much-anticipated relief for the region’s rapidly growing population of commuters.
The state government’s decision to delay projects stems from the continued disruptions in the global construction industry caused by the pandemic. The industry’s capacity has reduced significantly after factories closed, workers went home, and materials grew scarce.
Despite reduced capacity, demand for construction services actually increased in many countries and industry sectors during the pandemic.
For instance, in the United States, the residential housing market exploded last year, with the demand for new houses spiking by nearly 60% as many transitioned to a work-from-home lifestyle.
In Australia, many state governments initially attempted to combat a pandemic-related recession by accelerating plans for transportation and infrastructure projects, aiming to prop up the industry and fuel economic growth.
“Volatility in cost of materials, equipment, and the shortages in skilled labour means it’s really not the right season to commence more mega projects immediately,” said NSW Infrastructure and Cities Minister Rob Stokes.
The NSW government’s plans for its infrastructure mega projects remain on the books, but it has decided that moving forward in a severely inflated market would be reckless.
The government has been burned recently as project costs ballooned. Due to labor shortages and price increases, one metro rail line project ended up $2.2 billion AUD (~$1.7 billion USD) over budget, and the cost of a motorway grew by an unexpected $400 million AUD (~$300 million USD).
State government officials aren’t opposed to the spending itself, but they are concerned about adding demand to an already overheated industry.
“This is actually not a problem with money—this is a problem with market capacity,” said Stokes.
The Australian state government’s approach contrasts with policies in the United States. While the NSW government is openly hesitant about pouring more money into the industry and creating further demand, the US federal government has cleared the way for major stimulus for the construction industry in the coming years.
The House’s $1 trillion infrastructure spending bill, which was passed late last year, will create thousands of public projects across the country with the aim of modernizing the country’s infrastructure, providing new revenue streams for contractors, and creating millions of jobs.
How these contrasting policies will affect contractors remains to be seen. On one hand, the NSW government’s plan to delay mega projects may stifle opportunities for contractors, but it could also help stabilize material prices as supply is allowed to catch back up.
On the other hand, the US infrastructure stimulus bill will certainly generate revenue streams and opportunities for contractors, but it has the potential to actually make industry problems worse by continuing to boost demand in a supply-constrained market.
“The principal challenge for contractors remains a lack of sufficiently skilled labor, a structural issue that will not go away soon and a circumstance contractors have dealt with for years,” said Anirban Basu, Chief Economist of the Associated Builders and Contractors.
The NSW government’s decision comes in the wake of the collapse of two major Australian construction firms Condev and Probuild. Just weeks ago, Condev failed to secure a $25 million AUD (~$18.7M USD) bailout from developers and was forced to shut its doors despite having almost $1 billion AUD (~$750M) in projects.
According to subcontractors working with the firms, the contractors were operating on razor-thin margins and were overcome by pandemic-related disruptions and natural disasters.