2016 Major Projects Report Adrian Hart, BIS Shrapnel

1. 2016 Major Projects Report Adrian Hart, BIS Shrapnel

2. QMCA Major Projects Report - 2016 Presentation Outline • Key findings of the 2016 Report • The economic environment • The investment challenge • Recommendations

3. QMCA Major Projects Report - 2016 Key Findings • Queensland major project work fell 25% in 2014/15 • A further 50% fall in major project work is forecast over 2015/16, with the bottom expected in 2016/17 • Next upswing depends on public infrastructure investment … • … requiring sustainable processes and funding mechanisms • Implications for industry contractors and suppliers

4. Key Findings Major Project activity continues to contract. Funded work forecast to decline. Forecast

5. Key Findings Much weaker outlook compared to the 2015 Report Forecast

6. Key Findings Falling mining and heavy industry Major Projects the key driver… Forecast

7. Key Findings … but falling public investment has magnified the downturn Public Investment and Publicly Funded Engineering Construction, Queensland Public investment as a share of economy (or per capita) falling back towards historical lows

8. Key Findings Non mining major project work expected to improve from 2016/17 . . . Major Project Work Done by Sector (Excluding Mining & Heavy Industry) Forecast

9. Key Findings . . . shifting the regional location of work

10. Key Findings Roads activity forecast to recover strongly from here – but need funding certainty Forecast

11. Key Findings But railways and harbours major project work will fall further yet Forecast

12. Key Findings No funded major water and sewerage projects beyond 2016/17 Forecast

13. Key Findings Only the NBN and North East Gas Interconnector funded in utilities major works Forecast

14. Economy Global economic growth is struggling to get momentum Economic Growth, Annual Percent Change

15. Economy As China’s growth slows and other economies struggle

16. Economy Yet China still represents a huge opportunity for Queensland . . .

17. Economy . . . though services (and agriculture) may be the sectors which benefit . . .

18. Economy . . . as commodity prices will be too weak to underwrite new resources wave Coal, Oil and Iron Ore Prices, A$

19. Economy Queensland is effectively in a “demand recession” as investment slumps

20. QMCA Major Projects Report - 2016 Key messages • Major Project work has fallen 40% since 2012/13 peak • Another 50% decline coming through in 2015/16 alone • Stabilisation, then uptick, in work requires new funding • Governments need to commit to a long term infrastructure plan • Features of good infrastructure planning and delivery • Based on sound project selection (Building Queensland a good step) • Builds ahead of demand and targets biggest infrastructure gaps • Is flagged to industry well in advance, and is adhered to • Funded sustainably, and impervious to the economic cycle

21. QMCA Major Projects Report - 2016 Key messages • Infrastructure gaps still exist – Infrastructure Australia • Challenge now is funding infrastructure requirements • Political debate threatens to stall investment rollout • All funding alternatives should be on the table • Capital recycling • Debt financing • User pays (e.g. road pricing) • Beneficiary pays (value capture) • Budget reforms (get back to balance / separation of capex and opex)

22. QMCA Major Projects Report - 2016 Debunking the myths: Debt financing “Increasing public investment (financed by more borrowing rather than offsetting measures) would support aggregate demand and ensure against downside risks. It would also employ resources released by the mining sector, catalyse private investment, boost productivity, take advantage of record-low borrowing rates, and maintain the government’s net worth. Indeed, IMF research suggests that economies like Australia—with an output gap, accommodative monetary policy, and fiscal space—benefit most from debt-financed infrastructure investment, with the growth boost largely containing the impact on the (low) debt-to-GDP ratio.” – IMF (2015) 0-20% of GDP 20-40% of GDP 40-75% of GDP 75%+ of GDP Source: IMF Data Mapper, CIA World Factbook, CCF WA Infrastructure Report 2015

23. QMCA Major Projects Report - 2016 Debunking the myths: User pays Road Use versus Fuel Excise Revenue Source: Productivity Commission (2014), BITRE (2014), Infrastructure Australia (2016)

24. QMCA Major Projects Report - 2016 Implications • For Governments: an opportunity to implement “best practice” long term planning, funding and procuring for infrastructure investment • For industry: a tougher environment remains but opportunities will emerge in market segments and regions. Keep investing in skills, lock in lower costs where possible, and understand the changes coming through.

25. QMCA Major Projects Report - 2016 Recommendations • Expand scope of productive infrastructure investment in 2016-17 State and Federal Budgets • Promptly release of a financially sustainable long run infrastructure plan to provide industry confidence • Develop skills strategies to sustain the Queensland construction industry in face of changing demands • Ensure rigorous economic analysis is undertaken (and made available) in selecting infrastructure projects

26. QMCA Major Projects Report - 2016 Recommendations • Governments to follow through with reforms to procurement processes as outlined by PC2014 • Move towards a uniform contractual frameworks with consistent contract risk allocation • Continue to tackle risks to productivity growth in the construction industry • Budget reforms to eliminate structural deficits and separate reporting of capex and opex items