A black swan event like COVID-19 and the rhythms of the political cycle may control when major projects go ahead. This just-in-time mentality needs to change, says Graham Burke, Chair of the New Zealand Construction Industry Council, and the government needs shovel-ready work for whenever the economy demands it.
WE ARE LIVING in extraordinary times with COVID-19 changing how we live and do business. In construction, we have come off the top of peak building demand across all sectors, brought to an instant halt in March with the COVID Alert Level 4 lockdown and an uncertain future for the next 2–3 years.
Construction confidence has fallen
Burgeoning markets for international tourism, and overseas students and record immigration have fuelled construction demand with deficits in housing, infrastructure and accommodation. Closing our borders, however, has led to the cancellation of many significant construction projects and an uncertain forward pipeline as commercial confidence has fallen.
As a small export-led economy, we are susceptible to international macroeconomics, and construction in particular is subject to sharp boom-bust cycles, but does it have to be that way? We are a relatively wealthy country with a stable government and abundant sources of energy and water, so why are we so vulnerable?
The coffers are well placed. Despite the incredible amounts spent to support the economy, our national debt to GDP ratio will still peak at levels less than some of our international partners before COVID-19.
Scramble to find projects
The government scrambled to find shovel ready projects and increased spending on housing and other amenities. This will go some way to counter the drop in construction spend and lift the bottom of the cycle, but why was there such a mad scramble to find these projects when New Zealand has such a large infrastructure deficit?
For decades, our public and private infrastructure has suffered from a just-enough and just-in-time mentality. We have seen infrastructure such as hospitals built that struggle to meet demand at completion, and KiwiBuild was an example of government trying to increase housing stock when the market was already at maximum capacity.
The situation is exacerbated by the 3-year election cycle and politicising infrastructure spend – turning the funding tap on and off depending on political appetite.
Government must have a long-term view and be ready to take advantage of times of excess construction supply by having projects that are shovel ready and using them to fill the lows in the economic cycles.
Further, there is an opportunity to boost private sector spending by acting as guarantor for privately held assets of public benefit, such as universities and airports. It is sickening to think the Auckland runway and terminal extensions are being put off until they are back at maximum capacity. Surely there is a way to fund the expansion to take advantage of excess construction capacity at a time when traffic levels are lower?
Industry must keep up with training
The construction sector must also play its part in reducing the worst effects of the boom-bust cycle. For decades, the biggest issue faced by most construction businesses has been skills shortages.
The first casualty in a slowdown is training, which, combined with reduced head counts, leads to an exacerbated skills deficit when business picks up. Government initiatives such as Apprentice Boost and Mana for Mahi will assist employers to continue to train and improve the capability and capacity of their business through the downturn and reap the rewards when we have the inevitable bounce back.
Businesses that have invested in their balance sheets during the good times can sustain themselves through the tough times and prepare for the upturn.
A longer-term vision from both government and business would be a very positive legacy of the COVID-19 crisis.
Articles are correct at the time of publication but may have since become outdated.