Citing volatility in the construction industry, the Australian government recently announced it would delay several multi-billion dollar “mega projects” in the state of New South Wales (NSW).
Large-scale transport projects such as the Beaches Link highway and the Parramatta rail line will be postponed, delaying long-awaited relief for the region’s rapidly growing commuter population.
The state government’s decision to delay the projects stems from the continued disruptions to the global construction industry caused by the pandemic. Industry capacity has declined significantly after factories closed, workers returned home and materials became scarce.
Despite reduced capacity, demand for construction services has actually increased in many countries and industry sectors during the pandemic.
For example, in the United States, the residential housing market boomed last year as demand for new homes soared nearly 60% as many shifted to a work-from-home lifestyle.
In Australia, many state governments initially tried to fight a pandemic-related recession by accelerating plans for transport and infrastructure projects, aimed at supporting industry and fueling economic growth.
But pandemic-related global supply issues and labor shortages have created a bottleneck, and rising demand in both countries has sent the price of building materials skyrocketing. .
See the latest prices for building materials in the United States
“The volatility in the cost of materials, equipment and the shortage of skilled labor means that this is really not the right season to start more mega-projects immediately,” said the Minister of Infrastructure and of the Towns of NSW, Rob Stokes.
The NSW government’s plans for its infrastructure megaprojects remain on the books, but it decided it would be unwise to go ahead in a heavily inflated market.
The government was burned recently as project costs soared. Due to labor shortages and price increases, a metro line project went over budget by 2.2 billion Australian dollars (~1.7 billion US dollars), and the cost of a highway increased by 400 million Australian dollars (~ 300 million US dollars).
State government officials aren’t opposed to the spending itself, but they fear adding demand to an already overheated industry.
“It’s actually not a money issue, it’s a market capacity issue,” Stokes said.
The approach of the Australian state government contrasts with the policies of the United States. While the New South Wales government is openly reluctant to pump more money into the industry and create additional demand, the US federal government has paved the way for major stimulus measures for the construction industry. in the years to come.
The House’s $1 trillion infrastructure spending bill, which passed late last year, will create thousands of public projects across the country to modernize infrastructure country, to provide new sources of income for entrepreneurs and to create millions of jobs.
It remains to be seen how these contrasting policies will affect entrepreneurs. On the one hand, the NSW government’s plan to delay megaprojects may stifle opportunities for contractors, but it could also help stabilize material prices as supply is allowed to catch up.
On the other hand, the infrastructure stimulus bill in the United States will certainly generate revenue streams and opportunities for entrepreneurs, but it has the potential to compound the problems of the industry by continuing to stimulate the demand in a market where supply is limited.
“The main challenge for entrepreneurs remains the lack of sufficiently skilled labor, a structural problem that is not going away anytime soon and a situation that entrepreneurs have been facing for years,” said Anirban Basu, an economist in head of Associated Builders and Contractors.
The NSW government’s decision comes following the collapse of two major Australian construction companies Condev and Probuild. Just a few weeks ago, Condev failed to secure a $25 million Australian (~US$18.7 million) bailout from developers and was forced to shut down despite nearly A$1 billion (~$750 million) worth of projects.
According to contractors working with the companies, contractors were operating on extremely thin margins and were overwhelmed by pandemic-related disruptions and natural disasters.