Some more WA delusion today, right from the top, at the AFR’s infrastructure summit:
Back to today’s proceedings, and first up is Dr Mike Nahan, the treasurer of the great state of Western Australia.
He says business investment in WA has well and truly peaked as the bulk of the LNG construction work is done. He says it’s heading down from around $56 billion this year to around $45 billion.
The state has also been undertaking a very large public investment program.
Nahan shows a graph of where engineering construction dollars have gone – mining and LNG dominate. He makes the point that this sets up the state for the future.
“The future of WA is good because much of this investment has been made in low cost iron and LNG production that will go on for 30 or 40 years.”
What is this fine gent smoking? The $45 billion business investment outlook is fiction. It comes from the WA Budget:
Dr Nahan expects that somehow by 2018 business investment is expected to remain at an astounding $45.7 billion. Gorgon, Wheatstone, Roy Hill, Sino Iron and all of the iron ore mines will be finished. RIO and BHP will still be costing out and the juniors all dead. But somehow and some way business investment is going to remain at outright boom levels in a permanently high plateau. The Budget itself explains it:
Falls in commodity prices (particularly iron ore and oil) have reduced the likelihood of existing planned (but yet to commence) projects proceeding in the short to medium-term and are limiting the probability of an emergence of any significant new resource investment projects.
Confidence in the business sector remains subdued, with companies (particularly in the resources sector) focusing on improving cost efficiency, maximising output from existing production, and reducing planned capital expenditure for existing projects. Non-resources investment is projected to remain relatively weak across the budget period, in line with projections for softer domestic economic activity.
A significant lift in the Perth CBD office vacancy rate is also expected to limit future growth in office construction across the metropolitan region.
Offsetting this to some extent, are a range of commercial projects in the investment pipeline, particularly in the retail sector, with a number of large shopping centre expansions and new developments planned over coming years.
Overall, business investment is expected to return to its long-run average share of GSP (around 16%) by 2018-19. This magnitude of decline is not unexpected after investment increased for 11 consecutive years (excluding a small 3.3% decline following the Global Financial Crisis (GFC) in 2009-10). This included nine years of double digit growth and one year (2011-12) when investment increased by 46.3%. Despite this downward trend, business investment in Western Australia is still expected to be $45.7 billion in 2018-19, around the same level recorded in 2009-10.
$45.7 billion dollars worth of shopping malls. They are going stretch from Kalgoorlie to Karratha.
Now, Dr Nahan has steepened the capex cliff by $10 billion or so from last year but he is being seriously outpaced by the commodities bust. The absurdity of this forecast is made plain by quick reference to the BREE outlook for major projects across Australia:
By 2018, there is zero committed projects. Likely projects for all of Australia is only $40 billion. Given the glut in everything, and the BREE penchant for the bright side, very few of these will happen either.
But, you say, Dr Nahan’s forecast will be met by “rebalancing” to services and the shopping malls.
Let’s add a quick chart on the breakdown of the history of WA business investment to gauge that likelihood:
WA capex is it totally dominated by mining and energy. Always has been. There is no rebalancing coming.
So, if mining and energy are going to shrink back to 2003/5 levels by 2018 as MB expects, the forecast for total business investment should be in the vicinity of $20 billion or less. $25 billion if we’re being exceedingly generous. $30 billion if we throw in a major project (that isn’t coming) free of charge!
So why is Dr Nahan at a national infrastructure conference up-selling his state instead of mounting a major campaign for Federal or PPP funding to drive huge new public works?
Without it, WA is headed for the bust of a lifetime.
