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Worse than worst case: Keen pollies, poor planning blow billions on infrastructure

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The sad reality of our major road infrastructure projects is that most of them run wildly over budget, wasting billions of dollars through poor planning and funding decisions. A sadder reality is that governments appear unable to learn from past mistakes.

Tucked away in the Productivity Commission's five-yearly review last month were the sorts of figures that would have heads rolling in a rational world – a wild disconnect between what politicians rush to announce and what we end up paying.

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Victorian transport project costs the numbers

Multibillion-dollar revisions to Victoria's three biggest transport projects has pushed the price tag for the government's transport infrastructure agenda above $45 billion.

As previously reported, the PC reckons there's $20 billion a year to be picked up by using our road transport system more efficiently.?And there are billions of dollars to be saved by not repeating East West Link/WestConnex/West Gate Tunnel mistakes.

My colleague Ross Gittins reckons the first of the commission's five-yearly reports will go down as one for the ages, a major step in our economic thinking, a shift from bald economic rationalism to economics that are focussed on the benefit of people.

The AFR's Laura Tingle made observations on the potential political impact, the PC providing a philosophy that would enable the coalition to play in the same arena as Labor?- if it has the nous to use it.

But while the PC can point the way to a better future, it relies on governments to actually do something about it, to adopt the proffered policy and act on it.

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For example, take?the report's section on "better functioning towns and cities" to improve the public infrastructure. Aside from the big GDP-enhancer already mentioned, the PC's recommendations include:

"It is essential that governments ensure that proposed projects are subject to benefit-cost evaluations, and that these as well as evaluations of alternative proposals for meeting objectives are available for public scrutiny before decisions are made.

"The institutional and governance recommendations of the Productivity Commission's 2014 Public Infrastructure Inquiry remain valid and should be implemented by all governments as a priority. The 2014 Report has a dedicated chapter on how to do it."

Yes, there's the PC again raging between the lines, having tried to tell governments three years ago how to stop blowing billions with nowt to show for it.

The econocrats might have had in mind Peter Martin's fine reporting in July on the NSW Government's strange preferencing of road over rail for improved Wollongong transport, but there are plenty of case studies.

There are several other recommendations that add up to keeping politicians away from big things that they'd like to cut ribbons for and being very rational about what's worth funding, how it's funded, comparing alternatives, relating charges to spending and giving the users of infrastructure a clear say.

Just to spell that out, the average cost blowout for major projects over the past 15 years has been 26 per cent. That's astounding

"The potential benefits from better decision-making are substantial," says the report. "The Grattan Institute suggests that, over the past 15 years, approximately 30 per cent of transport infrastructure projects valued over $20 million were announced before a funding commitment had been made. These projects accounted for about three quarters of the total value of cost overruns.

"Overall, governments spent $28 billion more on transport infrastructure than announced. Based on current levels of investment, a 10 per cent reduction in the cost of delivering infrastructure would amount to an annual saving of approximately $2.9 billion."

Instead, Victoria's East West Link predictably gets a mention:

"The example of the East West Link, which involved substantial waste of taxpayer funds, further highlights the problems that arise from unilateral decision-making regardless of costs or benefits. Governments should not lock in contracts to bind future governments unless there are considerable savings in doing so, that are assured to offset any risks. And conversely, governments should not cancel a project without devising an exit strategy that minimises resulting costs."

The PC report acknowledges there have been some efforts made by governments to be less stupid and irresponsible since its 2014 report, but the jury remains out on the effectiveness of the initiatives.

"Despite these changes, there have been continuing instances of poor, very costly, decisions. Observers have noted that the current WestConnex (Sydney) and West Gate Tunnel (Melbourne) projects have cost estimates significantly lower than experience would indicate.

Worse than the 'worst case' scenarios

"The difference in cost estimates between the median and 'worst case' scenarios for both WestConnex and West Gate Tunnel projects was 6 per cent whereas the average actual difference across all projects completed in the past 15 years was 26 per cent. Providing reliable cost estimates is crucial in the project selection process.

"On corridor preservation, the Australian Logistics Council has expressed concern about the degree of urban encroachment on transport corridors and thus on future freight supply capacity. Overall, there has been little change in infrastructure planning, management and governance arrangements, and hence the underlying concerns raised in relation to the quality of infrastructure decisions in the 2014 report remain."

Just to spell that out, the average cost blowout for major projects over the past 15 years has been 26 per cent. That's astounding. But, magically, the NSW and Victorian governments now pretend the worst case cost overrun for their banner projects is a mere six per cent.

For WestConnex alone, given the lack of planning for evolving issues, 26 per cent might end up being optimistic.

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