Construction’s road to recovery
The fate of Australia’s building and construction industry appears to be in the balance. Will it end up in the doldrums or become the cornerstone on which Australia’s economic revival is built?
The nation’s construction industry was given a lifeline during the COVID-19 crisis when Prime Minister Scott Morrison declared construction an “essential service”. Unlike in other countries, including New Zealand, local worksites didn’t shut down due to health and safety concerns. At every opportunity since, federal and state governments have pledged large-scale investment in the construction sector, which makes up 9 percent of Australia’s GDP and generates more than $360 billion in revenue, according to the Australian Industry and Skills Committee.
Stephen Natoli, a partner at legal services firm Holding Redlich, says construction is likely to be one of the key industries to kickstart the economy when we begin to emerge from the devastating impact of COVID-19.
“How the construction industry fares during this time of uncertainty could dictate how quickly the economy recovers,” he says. “Keeping construction workers safe and construction companies’ financial position healthy is critical for the overall recovery of the economy.”
The country’s peak construction group, the Australian Construction Industry Forum (ACIF), is urging federal and state governments to avoid committing to large-scale projects with overly long lead times. Instead, it advocates pursuing more targeted measures that create lasting assets and widespread employment opportunities.
The ACIF has identified three approaches it believes could increase building and construction activity by $66 billion over the next five years:
- Residential building: development of a significant nationwide program of building social and affordable housing options.
- Non-commercial non-residential building: more health and aged care facilities to address increased demands in the post COVID-19 world.
- Engineering construction: bring forward key infrastructure delivery projects and programs in telecommunications, electricity and water, and sewerage. Also expand investment plans picking up major road and rail projects that have been reviewed and approved by independent bodies such as Infrastructure Australia.
“This scenario involves a search for where building and construction activity could be encouraged to assist the building of a bigger, longer and stronger bridge to recovery,” says the ACIF in its May Australian Construction Industry Update Report.
In a recent government submission, the ACIF says it would like “much of the spending to go to small and medium-sized enterprises” with “a focus on Australian-made products in construction”. It would also like to see “a pull-forward of ‘inspect, test, repair and maintenance’ work on government buildings, across all relevant trades”.
The ACIF identifies education and healthcare as two sectors with the potential to lead the non-residential building recovery. “Experience with the COVID-19 pandemic suggests that some [educational] facilities need to be expanded or reconfigured to meet future demand while also enhancing safety,” it says in its May report. “Student accommodation options may need to be enhanced to permit effective social isolation for students arriving from overseas.
“The bridge-to-recovery scenario features expansion and reconfiguration of Australia’s healthcare and aged-care facilities as a key response to the challenges posed by the COVID-19 pandemic. This is projected to lead to 5.3 per cent growth in building activity in 2020 and 20.3 per cent growth in 2021, bringing the value of work done to $6.4 billion.”
The Victoria Government has already announced a construction program worth $2.7 billion that will mainly consist of projects that can be started within three to six months. It includes maintenance and upgrades of public housing, road maintenance, train stations and education facilities.
Although the ACIF forecasts a large fall in residential construction activity, the early anecdotal evidence indicated COVID-19 was having a limited impact on the sector. Andrew Scott, Head of Industrials Research at Morgan Stanley, believes it has shown “a remarkable level of resilience throughout this extraordinary time”.
Potential construction potholes
An immediate concern for those completing existing projects is sourcing construction materials, especially from Asian countries. Australia spends $6 billion a year on these materials, and the ACIF says 60 per cent come from China. A recent report from industry research group IBISWorld noted “disruptions in labour supply, and equipment and materials supply chains would likely delay projects” but was still confident that “building construction is expected to be largely unaffected by the [COVID-19] outbreak”.
Although supply-chain issues aren’t likely to have a lasting impact on local projects, this situation comes with an upside for Australian-based companies making construction materials – demand has skyrocketed since the beginning of the pandemic.
Sarah Slattery, Managing Director of quantity surveying firm Slattery, says one of her biggest concerns is what happens next. She asks: “Will government stimulus be enough to keep the industry in work? The fast-tracking of planning approvals is a good initiative, but government stimulus depends on timing and whether other sectors can provide the shortfall on normal turnover levels. We are concerned that some developers may not commit to constructing large-scale developments now.”
Slattery believes the real pain for contractors and subcontractors may be in six to 12 months “when existing projects are finishing and there are a lack of new projects coming out to tender”.
Benefits of a construction-led recovery
There’s another important way increased construction activity will benefit Australia’s economy – and society: it provides enormous employment opportunities across the country. That’s why leveraging the power of the Australian construction industry is crucial, says Martin Loosemore, Professor of Construction Management at the University of Technology Sydney.
“It is labour-intensive and it directly employs about 9 per cent of Australia’s labour force (indirectly many more),” says Loosemore. “It is also Australia’s largest employer of young people, with 43 per cent of employees being aged 15-23 compared to 38 per cent across all other sectors.”
Loosemore says construction’s ‘multiplier effect’ is significant – every $1 million spent could generate $2.9 million in the broader economy. It also provides valuable work opportunities in Australia’s most remote and marginalised communities.
Perhaps against the odds, the post COVID-19 prospects for the construction industry – and all that depend on it – are brighter than anyone might have anticipated.