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Patients, pupils, prisoners, provinces and poverty

Patients, pupils, prisoners, provinces and poverty

By RMBA chief executive David Kelly

 

The headline might keep readers guessing about what my column is about. It may surprise some, but it is about the budget the Government delivered last month.

What I find interesting are the big picture numbers mentioned in the Budget. GDP is expected to peak to 3.6% next year and then fall to around 2.5% in 2022.

Slow growth in migration numbers is expected to contribute to the decline. Net migration is expected to drop from 68,000 to 22,000 over that period.

This may well have an impact on the construction workforce. It underlines why it will be important to get the skills and training system right in New Zealand, but the Government will also need to be mindful of keeping migration pathways open for the skills that the sector urgently needs.

I am no accountant by any stretch of the imagination, but scratching beneath the surface reveals many budget initiatives that will involve the construction community.

We knew from the mid-year budget update last December that $2 billion would be allocated for KiwiBuild. A further $100 million has been set aside to set up KiwiBuild and the Affordable Housing Authority in the next two years.

 

The five Ps

This is consistent with the overall theme of the Budget which is shaped around five Ps: patients, pupils, prisoners, provinces and poverty.

$1 billion in capital expenditure is earmarked for education and health. This is likely to be invested in upgrading existing facilities, and building schools and hospitals.

Nearly $1 billion in capital and operating expenditure has been allocated in the budget for public housing and addressing homelessness.

And in Christchurch nearly $300 million in capital expenditure has been identified for initiatives in the red zone, and possibly a multi-purpose stadium.

A similar amount of $300 million has been set aside to maintain and fund additional capacity in the prison network.

 

Infrastructure needed

To enable any of this to happen there needs to be the infrastructure. The Budget, while big on supporting the regions, does appear light on infrastructure.

Capital expenditure for infrastructure is mainly for rail, but $300 million is earmarked for the Crown Infrastructure Partners to invest in water and roading infrastructure to support housing supply.

Looking at these figures you get a good appreciation of just how central the construction sector will be in making these Budget initiatives a reality.

This spending will happen over several years. It is new spending, so is on top of the $40 to 42 billion building activity forecast annually in New Zealand over the next four years.

I hope spending is managed evenly across those years to help iron out the highly cyclical nature of the construction industry.

It is critical that all this construction activity is not heaped on the industry at one time.

 

Terms and conditions critical

Another critical issue will be what terms and conditions are agreed to with contractors when signing them up for projects.

If we want to avoid a repeat of what has been happening in New Zealand for the past 18 months, it is important to take an equitable view on who should carry the risk with large projects.

People who attended the Commercial Project Awards last month would have heard Building and Construction Minister Jenny Salesa talk about work the Government was doing to rebalance allocation of risk in contracts.

It is difficult to think of a finer setting for the Minister to talk about the issue. The projects that were showcased demonstrated what can be done if principal, designers, engineers and contractors all work together.

 

Sector must stop undervaluing itself 

Brian McGuinness put it quite eloquently when accepting an award — that the sector must stop undervaluing itself. I could not agree more.

Major contractors will need to reflect carefully on how much risk they can take on. Part of the problem is that the current tendering process encourages this “race to the bottom” mentality which, ultimately, can undermine the prospects for the delivery of a successful build.

I am all for probity, but this needs to be tempered with pragmatism about who is best to take on the risk.

At the end of the day there are no winners when buildings and projects that the community are counting on are constantly pushed out.

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