Infrastructure megaprojects “are too slow to be effective stimulus” and should be a last resort: Grattan Institute

Governments should avoid turning to major infrastructure projects to stimulate the post-pandemic economy and should instead focus on upgrading and improving existing infrastructure, according to a new paper from the Grattan Institute.

In a report published on Monday, authors Marion Terrill, Owain Emslie, and Greg Moran argued that megaprojects — projects costing $1 billion or more — should be a last resort, not a first resort.

The paper noted that during the past five years, Australian governments have seen the value of an average road or rail project being built increase from $430 million to $1.1 billion.

The value of transport infrastructure under construction reached $125 billion for the first time before COVID-19 hit Australia, with nine projects currently worth at least $5 billion under construction.

In response to multiple jurisdictions pumping money into projects as part of their COVID-19 recovery plans — and the 2020 federal budget upping the transport spend to one-and-a-half times the usual level — the Grattan Institute has warned that cost overruns are more likely and larger when projects are bigger.

“Australian governments are fast-tracking their transport projects, hoping for an infrastructure-led recovery from the pandemic-induced recession. But those ‘infrastructure pipelines’ are constipated by megaprojects that are too slow to be effective stimulus and prone to mammoth cost overruns,” the report said.

There’s already a cost overrun of $24 billion on six current projects, the think tank found. This includes Inland Rail, which was costed at $4.4 billion in 2010 and is now estimated to cost $9.9 billion; Melbourne’s North East Link, which was costed at $6 billion in 2008 and is now expected to cost $15.8 billion; and the Sydney Metro City & Southwest, costed at $11 billion in 2015 with the latest estimate being $15.5 billion.

The Grattan Institute has analysed all projects valued at $20 million or more and built over the past 20 years. It found the actual costs exceeded the promised costs by 21%, with Australian governments having spent $34 billion more on transport infrastructure than they initially promised over the past two decades.

More than one-third of overruns since 2001 came from seven big projects, and 80% of the cost overruns came from just 14% of projects.

“That 14% exceeded their originally promised cost by more than half. Some overruns are the size of a megaproject themselves: for $1 billion-plus projects with an overrun, that overrun averaged more than $1 billion,” the report said.

The paper noted that projects announced before governments were prepared to formally commit to them have been particularly risky.

“Only one-third of projects are announced prematurely, but they account for more than three-quarters of the cost overruns. Premature announcements would be no problem if Australia had a robust process for cancelling the duds, but most projects, once announced, are seen through to completion,” it said.

The Grattan Institute has urged governments to reconsider any major projects that have been announced or that are under construction, particularly those announced without a business case.

“Spending big on transport projects makes little sense, because even before the pandemic, the Prime Minister, Treasurer, and state infrastructure ministers were worried that there weren’t enough workers, materials, and machinery for the massive construction workload,” the report said.

“When there are already bottlenecks, racing to build projects dreamt up before the pandemic just pushes up prices. Governments would get bigger bang for taxpayer buck by instead spending more on upgrading existing infrastructure, and on social infrastructure such as aged care and mental health care.”

The think tank has made eight recommendations, including for state transport and infrastructure departments to “devote more resources to identifying modest-sized transport infrastructure proposals with higher net benefits than very large projects”.

“Smaller projects generally have higher benefit-cost ratios. They are more robust to a range of future scenarios, such as the fall in population growth caused by the pandemic response. Keeping options open, particularly in a time of high uncertainty, is a smart strategy,” the paper said.

“Rather than reaching for the heroic and the iconic megaproject, governments should focus on upgrading and improving existing infrastructure.”

The report also recommended that state and federal auditors-general conduct an immediate stocktake of any transport infrastructure projects in progress. For each project valued at $100 million or more, the auditors-general should report on a number of details, including the announced cost at close of contract, the expected total cost, and more.

Other recommendations called on governments to refine the legislated role of their infrastructure advisory bodies, and to publish post-completion reviews of all projects costing more than $100 million.

This article was first published by The Mandarin.