Solving Australia’s over-budget infrastructure projects: The Grattan Institute

According to a report released by the Grattan Institute, taxpayers within Australia pay too much for infrastructure projects.

With Australian transport infrastructure costs sitting above global average, the report titled ‘Megabang for megabucks: driving a harder bargain on megaprojects’, blames “caving to contractors’ demands after contracts are signed” as a key reason.

The report found that roughly 25 per cent of projects in Australia ended up costing more than what was initially signed between the government and contractor, with projects becoming more costly as they progresses.

To change this, the report writers, Marion Terrill, Owain Emslie, and Lachlan Fox, suggests to shift the focus from the profitability of the construction industry towards giving the lowest long-term cost to taxpayers with quality standard in mind.

The report proposes that “to achieve this in Australia, we need more competition, smarter procurement, and greater transparency.”

Competition
To create quality infrastructure, the report also suggests that greater competition is key.

In the last seven years, megaproject contracts have grown by 38 per cent. With larger projects narrowing competition, few local firms have the technical and financial ability to win these $1 billion contracts.

For this reason, the report states that allowing international firms to compete is crucial to diversify competition, with the added benefit of bringing global know-how and innovation to Australian markets.

Giving priority to domestic experience or ‘familiar firms’, the report warns, leads to stagnation with risks for collusions and cartels.

“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,” states the Grattan Report. “Governments should publish weightings of the criteria used to select the winning bid for a contract.”

Transparency
The report proposes that through routinely and transparently publishing tender and contact information, Australian infrastructure contracts are more accessible by the international market.

“All states should publish a central register of all projects larger than $500 million, on a comparable basis across projects and jurisdictions,” the report states.

According to the report, all projects larger than $50 million should be published within three months with information on the contract value, the tender process and on any bidders, who submitted expressions of interest. Shortlisted bidders as well as any changes along the way should also be posted.

The report also stated that auditors-general should act as an expert panel that govern renegotiation of major public construction projects.

Project scope

Breaking up megaprojects into systematic, manageable contracts, adds the report, will avoid problems around site conditions such as contamination, geology and utilities.

The report states that a systematic approach should be created for optimising work packages for large projects and for selecting the contract type for each work package.

“Governments should do sufficient discovery of site conditions before going to market, and certify to potential bidders what they have discovered,” states the report.

Pay attention to costs

The report suggests that state governments often rush projects to the market for election reasons, but in doing so, often don’t identify expensive project problems.

“Governments should only sign contracts that they are prepared to enforce,” states the report. “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.”

Government should, instead, spend more time understanding and certifying these risks so that bidders can price projects more accurately. Solution such as collaborative contracts in which parties share the risks and rewards, as well as fixed price contracts are suggested.

By breaking megaproject’s into bundles, issues can be easily identified early on, with better suited incentives given for the given job.

Government’s role

Government bodies also have a role to play. The report suggests that The Bureau of Infrastructure and Transport Research Economics should make a routine, long-term commitment to update benchmarking costs for road and rail construction.

“The Commonwealth Department of Infrastructure, Regional Development and Communications should report to the Transport and Infrastructure Council within one year on the means by which similar countries overseas build high-quality transport infrastructure more cheaply,” states the report.

The report suggests for governments to coordinate schedules across states to avoid bottlenecks on projects and to align rules for local content with overarching federal government procurement principles.

Responding to fears for the future of local firms, the report states, “governments should remember that dismantling industry protection since the 1980s has resulted in large increases in Australians’ standard of living.”

By doing so, the government is putting prioritisation on Australia’s communities, over the construction industry.