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Macroeconomics threaten Western Australia infrastructure projects

An “undercurrent of uncertainty” dogs major infrastructure projects planned in Western Australia as a result of the state’s exposure to macroeconomic factors, despite the state posting a record operating surplus in the last financial year, an expert has warned.

Perth-based David Ulbrick of Pinsent Masons, the law firm behind Out-Law, said that the state’s healthy finances and substantial infrastructure expenditure plans, as outlined in the newly published state budget for Western Australia for 2021-22, are intertwined with the price of iron ore, which the state exports, predominantly to China to support steel production. He said labour shortages also present a risk to the timely construction of infrastructure to support economic recovery from the Covid-19 crisis.

Ulbrick said that the price of iron ore was “artificially high” until very recently and that it was realistic that those high prices would not return in the near future as Australia’s mining industry faces up to the prospect of increased competition, as Brazil comes back online and the ever present threat  of the Simandou project in Guinea, where China is considering sourcing iron ore more cheaply, reaching start up.

Ulbrick also highlighted the fact that some of the Western Australian government’s infrastructure plans have been deferred to account for labour shortages in the construction sector. While he said this move was welcome, he said the problem would be unlikely to improve significantly while the state remains under Covid-19 restrictions.

“While travel in and out of Australia, and within the country, remains restricted, industry’s ability to help the economy ‘build its way out’ of the pandemic is artificially constrained,” Ulbrick said.  “We need to be able to bring skilled workers into the state if we are to remain competitive on the world stage.” 

“While there is a buoyant mood in the streets of Perth as we continue to live a nearly Covid-free existence, there is an undercurrent of uncertainty at the same time. We will, at some stage, be forced to emerge from our social and economic oasis and I fear that if we do not call the shots on when that happens the powerful forces of global macroeconomics will,” he said.

According to Western Australian government, it recorded a surplus of AUS$5.6 billion ($4.1bn) for the 2021-22 financial year. Its forecast expenditure on infrastructure over the next four years is AUS$30.7bn ($22.7bn). Much of the money will be spent on road and rail projects, as well utilities, health and education infrastructure.

Funding pledged for specific projects include AUS$5.7bn ($4.2bn) for 15 projects to expand the MetroNet rail system, which builds on a pledge made by the governing Labour party prior to its re-election earlier this year. A further AUS$1.8bn ($1.3bn) has been set aside for the construction of the new Women and Babies Hospital in Nedlands, and almost AUS$490m ($362m) will go towards the development of Westport project, including in relation to land acquisition.

The government also confirmed that it has set aside AUS$1.4bn ($1bn) to help fund Perth’s next desalination plant, which is to be powered by renewable energy, although it said a final investment decision on the project would be taken at a later date.

Hydrogen specialist George Varma, also of Pinsent Masons in Perth, said the Western Australian government’s further pledge of AUS$61.5m ($45m) to support the development of hydrogen projects was also welcome and continues the drive across the country to transition to a low carbon economy using technologies like hydrogen.

Included in the hydrogen financing package is a new AUS$50m ($37m) fund “to stimulate local demand for renewable hydrogen in transport and industrial settings and to drive investment into renewable hydrogen”.

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