What does the Federal Budget mean for infrastructure?

While the primary focus of the Federal Budget is on direct support for households, businesses and key services, it identifies infrastructure as playing an important role in supporting Australia’s recovery from COVID-19.  

With an additional $15.2 billion commitment for infrastructure, the Budget is notable for what it includes, what it does not, and the importance of upcoming state and territory budgets in providing a fuller picture of the pipeline and opportunities.

Here we summarise our key takeaways.

Budget focus

With a focus on getting through the COVID-19 pandemic and securing Australia’s economic recovery, key Budget measures centre around direct support for households and businesses, and critical investment in services such as health and aged care.

Infrastructure is not the main event in the Budget, but is identified as playing an important supporting role in setting Australia up for the future.

New infrastructure commitments

The Budget includes significant new commitments to infrastructure. It commits $15.2 billion over 10 years to road, rail and community infrastructure projects. This builds on the Commonwealth Government’s previously announced $110 billion 10-year infrastructure program.

Highlights include:

• $2 billion for the Great Western Highway Upgrade in New South Wales;
  
  
• $2.6 billion for the North-South Corridor roadway in South Australia;
  
  
• $2 billion for the Melbourne Intermodal Terminal to improve the rail freight network and take trucks off roads;
  
  
• $130 million funding for each of Stage 2A of Canberra Light Rail and Stage 3 of Gold Coast Light Rail, and $379 million for METRONET in Western Australia; and
  
  
• $2.5 billion for water infrastructure.

Transport the winner

Continuing a trend, transport projects are the clear winner. Allocations to road and rail over the next four years far exceed allocations to other forms of infrastructure.

Early-stage funding for projects on Infrastructure Australia’s ‘Infrastructure Priority List’ is also heavily weighted to transport projects.

Capacity constraints will need to be managed

The $15.2 billion of new commitments are identified as supporting 30,000 direct and indirect jobs across the life of the projects. While welcome, it brings in to sharp focus existing capacity constraints experienced by the sector and exacerbated by COVID-19.

The Treasurer has indicated an intention to streamline visas to target highly-skilled individuals but this will only be part of the solution.  

Communication of the pipeline and co-ordination will be required to manage the risk of skills shortages to project cost and delivery.

Housing gets a mention but more work to do

The Budget includes measures aimed at purchasers of affordable housing.[1] It does not identify any new measures to increase the supply of social and affordable rental accommodation.  

This may reflect a view that demand for housing is unlikely to increase as significantly as projected prior to COVID-19 due to a significant decrease in population growth.[2] However, it also arises in a context where:

• there are approximately 148,500 Australian households on the waiting list for public housing;[3] and
  
  
• the National Rental Affordability Scheme (NRAS), a scheme that gives financial incentives to housing providers to provide affordable rental accommodation, will wind down by 30 June 2026.

State/local government and the community housing sector will need to continue to work with each other and the private sector to find new ways of increasing rental supply. New initiatives will need to maximise the potential contributions of each sector (land, management expertise, grant funding, technical/financial capability and rental revenues (including rental subsidies)).

This may give rise to complexity and a need for greater administrative and commercial capability within participants. It may also challenge deeply held views about the retention of state-owned assets. Not least, new arrangements may test the capacity of the National Housing Finance and Investment Corporation (NHFIC) to provide low cost financing to novel or complex arrangements.

Social infrastructure the loser

Social infrastructure is also not a focus of this Budget, despite supply (particularly in health) lagging demographic and population changes. Individual social infrastructure assets (health, recreation, education, justice, green space) may be smaller in scale than economic infrastructure.  However, these assets together provide significant benefits to community experience, the environment and the economy.[4] During development, they may also stimulate different tiers of the construction industry to larger scale projects.  

Given the heavy commitment of both Commonwealth and state governments to transport projects, it seems unlikely that there will be any significant growth in social infrastructure projects in Australia in the short to medium term.

Conditional allocations for state projects

The Budget has provided funding for both ‘shovel-ready’ and large scale, long-term projects to the states on a ‘use it or lose it’ basis to encourage the efficient translation of funding to construction works.  

On large scale projects, funding is provided to the states on a ‘contingent basis’. This means that the States must match the Commonwealth’s contribution, which may pose a barrier to the development of low-priority projects or projects where there is disagreement as to whether/how the project is to be delivered.

In some cases, such as the proposed $2 billion contribution for the Melbourne Intermodal Terminal, it is unclear just how real the funding commitments are. Although there is committed funding for the business case for the Melbourne Intermodal Terminal, the funding for project delivery does not appear to be reflected in the forward estimates.

No asset recycling 2.0

While identified pre-Budget as a potential means of supporting infrastructure development, the Commonwealth Government has not rebooted its ‘asset recycling program’.

To recap, the asset recycling program introduced in 2014 (but since ended) incentivised state and territory governments to sell public assets and apply the proceeds to new infrastructure by offering a Commonwealth financial contribution to the new infrastructure.

In the context of COVID-19, and the pressure on state and territory finances, further privatisations have been identified as a means of accessing private capital (from super funds in particular) and applying it towards the cost of new infrastructure.

Of course, it remains open to state and territory governments to pursue that course.  NSW is selling its remaining stake in Westconnex. Victoria intends to offer the private sector a long-term concession over motor vehicle registration and licensing revenue.

Role of the states and territories

Which takes us to the role of state and territory governments, as the Federal Budget is only ever part of the infrastructure picture.

State and territory governments will have their own agendas and will need to co-fund or green light many of the initiatives highlighted in the Budget.  

And while they will, to a degree, be constrained by the increased levels of debt they have taken on to respond to COVID-19, the Budget provides some relief. GST payments to the states and territories are expected to be $26 billion more over four years than previously forecast.

Upcoming state and territory budgets (starting with Victoria on 20 May) will help present a fuller picture of how they intend to use it and the broader infrastructure pipeline and opportunities.