Considering the federal government’s fiscal position, last Tuesday’s budget was a remarkably positive affair for the construction industry.
To be sure, there were plenty of negatives. As expected, outside of infrastructure and, to a lesser extent, regional hospitals, funding for new projects was conspicuously absent. Also unsurprisingly, nothing was mentioned about the carbon tax. Uncertainly surrounding the tax remains.
On the macroeconomic front, upward pressure on inflation and interest rates will hurt the already struggling housing sector. According to treasury estimates, the consumer price index (CPI) is expected to rise by 2.75% during 2011/12 and 3% in 2012/13. This is putting upward pressure on interest rates, which HSBC expects rates to have risen by a further 100 basis points by mid-2012.
Moreover, whilst the outlook for mining related construction is still strong, near-term conditions in the building sector remain subdued – nothing from Tuesday changes that.
Still, the budget contained critical measures in two areas: skills shortages, arguably the most pressing area facing the industry; and infrastructure.
Also, whilst upward pressure on interest rates is still there, the deficit reduction and anticipated return to surplus is more than welcome and will go some way toward easing these pressures.
For these reasons, the overall picture is positive.
The centerpiece of the budget revolves around a $3 billion, six year skills and training program.
At the heart of the program is a $558 million National Workforce Development Fund, which will be used to contribute toward the creation of 130,000 new training places across a range of industries. Employers wishing to provide training for their staff can apply for funding to cover one-third, half or two-thirds of the cost, depending on the size of the business.
Second, a further $200 million will go toward supporting apprenticeships. One hundred million will go toward enabling apprentices to fast-track learning and achieve their qualification sooner. A further $101 million has been allocated toward a mentoring program.
Finally, starting from 2012-13, the government is offering $1.75 billion to states and territories that adopt measures to improve the transparency, responsiveness and effectiveness of their vocational education and training programs (VET).
Encouragingly, building and construction, along with aged care, has been singled out as a priority area for training initiatives.
Given the pressures facing the industry in this area, these measures are timely and critical. In the housing industry, for example, the quarterly Housing Industry Association-Austral Bricks Trades Report has shown the industry suffering from shortage of qualified tradespeople in every quarter except one for the past eight years, says HIA Chief Economist Harley Dale. The situation in resources is worse. A report last July from the National Resources Sector Employment Taskforce projected skilled labor shortages of a whopping 35,000 in the construction, mining and gas sector by 2015.
Also welcome is the boost to infrastructure through $2 billion in fresh funding and tax changes to provide more certainly with regard to large private sector infrastructure investments.
In 2011/12, infrastructure projects will receive $1 billion in new funding from the $36 billion Nation Building Economic Stimulus Plan. The bulk of this ($750 million) will be allocated to the Pacific Highway duplication project. A further $133 million will be bought forward as part of the government’s commitment to the $1.2 billion Moreton Bay Rail Link in Queensland.
In addition, a further $914 million will go to regional infrastructure projects from the $6 billion Regional Infrastructure Fund. The primary beneficiaries will be Queensland and Western Australia. Queensland will get six projects: Townsville Ring Road ($160 million), Peak Downs Highway ($120 million), Blacksoil Interchange ($54 million), Gladstone Port Access Road ($50 million), planning for the Mackay Ring Road ($10 million) and an upgrade to the intersection of the Bruce and Capricorn Highway. Western Australia will get a $480 million upgrade of road infrastructure in and around Perth Airport under the WA Gateway project.
There are still hurdles to be crossed. Pacific Highway funding is conditional upon a matching contribution from the New South Wales government. Money for the regional fund, too, is set to come out of the mining tax – which is yet to be signed into law.
Also, given the scale of the transport construction sector (the value of work done amounted to $23.143 billion last year) an injection of just under $2 billion, whilst welcome, is not in itself sufficient to ensure strong levels of overall sector activity.
Still, the overall direction of these commitments is encouraging.
Private sector investment in infrastructure (and hence large-scale civil construction) will also receive a boost from two important tax changes.
First, tax losses on designated infrastructure projects will be exempt from two tests which limit the ability of investors to recoup them in later years once profits are derived from the project. This is important since under the current situation, fears of failing either of the tests involved act deterrent to large scale private infrastructure investment.
The second change aims to address investor concerns about tax losses incurred early in projects declining in value by the time the project makes sufficient profits for the losses to be recouped. The government plans to ‘preserve’ the value of losses incurred on designated projects by ‘uplifting’ them at the government bond rate.