ASX construction giants under fire over cost blowouts, lack of competition

Why the Macquarie (ASX: MQG) share price and other Australian construction giants are under fire in a report from the Grattan Institute.

Man in hard hat rolling his eyes at a falling ASX share price. builder

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Macquarie Group Ltd (ASX: MQG), Transurban Group (ASX: TCL) and other Australian construction giants are in the spotlight over a new Grattan Institute report, criticising cost blowouts and a lack of competition within the industry.

The Macquarie share price is down 2.9% today to $149 per share, adding to a loss of 4.15% this month, while Transurban shares have fallen 3.5% today and 2.9% over the past month.

Who's benefitting from the infrastructure boom?

The Australian policy think tank's report centred on Macquarie's "inadequate development" of the Sydney Metro City and Southwest project.

The cost of the rail network upgrade has ballooned by more than half a billion dollars from its original contract of $2.7 billion, despite Macquarie winning the contract after submitting an unsolicited proposal to the NSW state government.

Macquarie's construction of Sydney Martin Place train station alone has risen by more than $200 million "with no justification provided in central documentation".

Meanwhile, Melbourne's West Gate tunnel construction, awarded to Transurban, has been delayed by two years, with no revelation of who's forking the bill for continued setbacks.

Queensland's 2018 rail upgrades for the state's New Generation Rollingstock trains also cost an additional $361 million in refitting to meet the nation's disability access requirements.

In their latest state budgets, Queensland, Victoria and NSW set aside more than $400 billion for infrastructure projects, with the federal government adding another $110 billion.

Grattan argued that state government spending sprees on infrastructure contracts have been overshadowing a lack of financial prudence in protecting against cost overruns.

Grattan calls for international competition

Australian government spending on rail projects is in the top quarter of OECD countries: 26% higher than in Canada, 29% higher than Japan.

Grattan argued that unsolicited proposals for construction projects should be subject to greater scepticism, given construction contracts have been skewed towards Australian companies:

It's common for governments to end up paying firms more than the amount publicly claimed when the contracts were signed, yet we rarely find out the legal basis of the claim, or how the size of the additional payment was arrived at.

Few firms have the technical and financial capability to win contracts worth $1 billion or more. So it's crucial that international firms can enter the Australian market, bringing global innovation and know-how.

In selecting a successful bidder, governments should not weight local experience any more heavily than is justified to provide infrastructure at the lowest long-term cost.

It also argues that governments should be willing to enforce original project budgets. 

When they sign a contract, they should show by their actions that they will not pay additional amounts for risks that contractors have agreed to take on.

In response, the Australian Constructors Association called many of the claims questionable while highlighting the benefits of creating greater efficiencies within the sector.

The ACA highlighted the need to focus on greater issues in construction: from a higher representation of women in its workforce to more focus on preventing construction worker suicide.

It said it always "advocates for maximising local content wherever commercially practical in a competitive bid process" and backed the efficacy of 'market-led proposals' such as Macquarie's Martin Place project.

The Grattan Institute's latest report on the cost of Australian infrastructure provides some useful recommendations that unfortunately are overshadowed by poorly supported claims that further damage an already fragile construction industry.

If we could just halve the gap in productivity growth between the construction industry and other industries over the past 30 years, we could construct an extra $15 billion of infrastructure every year for the same level of expenditure and employ an extra 15,000 people. That is equivalent to constructing another three Western Sydney Airports every single year.

Construction share price snapshot

So, is the Australian construction and industrials industry "fragile"?

You may think that record government infrastructure spending is good news for the biggest construction companies on the S&P/ASX 200 Index (ASX: XJO)? Think again.

Some ASX infrastructure and construction giants have performed relatively poorly, despite record spending and the ASX hitting its highest value over the past few weeks. Take Transurban and Decmil (ASX: DCG), for example. Their share price has fallen a respective 2.7% and 44% over the past 12 months.

And despite Australia's infrastructure boom, it's slightly more challenging to track the overall sector performance due to the diversification of many of its companies and the lack of a construction index on the ASX. Some companies are still performing well.

Recent losses in the Macquarie Group share price are possibly a result of controversial reports around its business handling of Nuix Ltd (ASX NXL), but it's still up 42% over the past 12 months.

Meanwhile, strong performers like Boral Limited (ASX: BLD) shares are up 13% this month and 162% over the past 12 months. The SRG Global (ASX: SRG) share price is also up by 113% over the past year. 

Lucas Radbourne-Pugh has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. recommends Nuix Pty Ltd. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. The Motley Fool Australia owns shares of Transurban Group. The Motley Fool Australia has recommended Nuix Pty Ltd. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Industrials Shares

A man holds his hand under his chin as he concentrates on his laptop screen and reads about the ANZ share price
Industrials Shares

Up 20% this year, does Macquarie rate Downer shares a buy, hold or sell?

Here’s the broker’s latest stance on the stock.

Read more »

Woman on a tablet waiting in for her flight in an airport and looking through a window.
Industrials Shares

How much upside does Macquarie expect for Auckland International Airport shares?

The airport recently lowered its fees for airlines.

Read more »

a happy plumber smiles while repairing bathroom fittings in a home.
Industrials Shares

After crashing 17% last Friday, does Macquarie rate Reece shares a buy?

Should investors buy in the dip?

Read more »

Piggybank with an army helmet and a drone next to it, symbolising a rising DroneShield share price.
Industrials Shares

5 ASX defence shares that have surged 40% to 307% in just one year

Analysts say the defence investment theme should not be ignored.

Read more »

A middle aged man holds a plumbing plunger in one hand and a piece of toilet pipe in the other with an exasperated look on his face.
Industrials Shares

Guess which ASX 200 industrials stock is sinking today on latest trading update

Softening market conditions see investors head for the door.

Read more »

American soldier in military uniform using laptop for drone controlling.
Industrials Shares

Why this soaring ASX defence stock could rise 17%

Bell Potter has good things to say about this growing company.

Read more »

American soldier in military uniform using laptop for drone controlling.
Share Market News

ASX defence shares lift amid NATO Summit decision to turbocharge spending to 5% GDP

The North Atlantic Treaty Organization (NATO) has also signed a 'milestone' agreement with Australia.

Read more »

A woman sits at her computer with her hand to her mouth and a contemplative smile on her face as she reads about the performance of Allkem shares on her computer
Industrials Shares

Following its investor day, does Macquarie rate Fletcher Building shares a buy, hold or sell?

The New Zealand-based building and construction company updated its loss forecast at its investor day on 24 June.

Read more »