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Billions of dollars extra of taxpayers money is being blown on infrastructure megaprojects because state governments are too weak at driving a hard bargain.

That's the conclusion of a new report by think tank the Grattan Institute which concluded that at least $1.4bn had been overspent on just three recent megaprojects due to failures in competition and bureaucratic bungling that could have been avoided.

That's separate to the billions more that mega projects go over by for a multitude of other reasons.

"Taxpayers are left to pick up the tab," when major projects go south, said the Grattan Institute transport and cities program director Marion Terrill who authored the report entitled Megabang for Megabucks: Driving a Harder Bargain on Megaprojects.

In some case it effectively amounted to "corporate welfare" from taxpayers to huge multinational companies, said the paper.

Sydney's new light rail and under construction Metro railway line have seen expensive cost overruns that were largely avoidable if governments had done their job properly. Melbourne's West Gate tunnel is also looking at ballooning costs for issues that could have been resolved before contracts were signed.

However, it's an infrastructure project in Queensland which has had the most mindblowing cost blow out. The state government had to pay $361 million extra to alter a new train fleet it signed off on, because it fell foul of the state's own laws.

The dig for Sydney’s new Metro at Martin Place station. Station costs have risen by almost half a billion dollars. Picture: NCA NewsWire / Dylan Coker
The dig for Sydney’s new Metro at Martin Place station. Station costs have risen by almost half a billion dollars. Picture: NCA NewsWire / Dylan Coker

Lack of competition

Often the reason for budget blowouts is often systemic.

"About 25 per cent of projects end up costing taxpayers more than the government expected when construction started," said the report.

"Australia's transport infrastructure costs are above the global average, and there is a culture of caving in to contractor demands and paying sometimes hundreds of millions of dollars to settle a problem a few months or years after a contract is signed."

A key issue was the rising number of megaprojects - which was defined as those costing more than $1 billion - and the few companies that can carry out such large works. Megaprojects, some costing in the tens of billions, have been on the rise due to low interest rates and lucrative government assets sell offs.

Megaprojects are on the rise. Picture: Grattan Institute.
Megaprojects are on the rise. Picture: Grattan Institute.

The report said there were essentially only three companies with the capacity to build large megaprojects on their own: Chinese owned John Holland, CPB Contractors which is majority owned by the German Hochtief group and Spain's Acciona. The concern was with many more megaprojects, there may be little incentive for the few firms who can compete to be razor sharp with costs.

"With larger contracts, competition inevitably thins. Few firms have the technical and financial capability to win contracts worth $1 billion or more."

State governments also have a habit of picking firms with local experience over international entrants further reducing competition. Only New South Wales appeared to have any kind of enthusiasm for using international firms for some major projects.

Costlier projects also tend to cost more in over runs. The average cost over run for a megaproject was $627 million in 2020 while projects in the $350m-$1bn projected cost bracket over ran by a lower average of $134m.

Blowouts on megaprojects cost far more that smaller projects. Picture: Grattan Institute.
Blowouts on megaprojects cost far more that smaller projects. Picture: Grattan Institute.

Sydney's new CBD and south east light rail cost half a billion dollars more than expected when lead contractor Acciona took the NSW Government to court after it accused authorities of failing to provide it with proper information on the amount of work that would be needed to move power cables so it could build the tram lines.

After a lot of noise from the government, it eventually settled the dispute by paying $576 million extra in compensation.

A failure by government bodies to factor in the cost of moving utilities led the Sydney’s light rail budget to blow out. Picture: NCA NewsWire / Steven Saphore
A failure by government bodies to factor in the cost of moving utilities led the Sydney’s light rail budget to blow out. Picture: NCA NewsWire / Steven Saphore

State government bungles

State governments can be too fussy with infrastructure demanding "bespoke" designs rather than off the shelf solutions, the paper said. In contrast, some similar overseas projects have cost far less because governments are less picky.

States can also be drawn to flashy projects dreamt up by big firms and then subsequently not putting that proposal out to tender to see if there was a cheaper way of doing it.

Melbourne's West Gate Tunnel project was awarded to Transurban after the firm approached the Victorian Government with a proposal. However an Auditor-General's report questioned whether the project should have been put out to tender. The project is now running late and costs are rising.

In 2018, a contract for Sydney's new Martin Place Metro station was awarded without a tender. The costs have now risen by $200 million "without justification," the report said. Knock on effects to the underground tunnels has increased the cost of the new station by more than $450 million.

The Sydney Morning Herald has reported that the Martin Place works has added to a total budget blow out of the entire City and Southwest Metro by $4bn above it's original $16.8bn estimated price tag.

Queensland Rail’s New Generation Rollingstock led to a catalogue of errors.
Queensland Rail’s New Generation Rollingstock led to a catalogue of errors.

Queensland's new train bodge job

Megaprojects are plagued by habit of being announced by eager politicians before they had been properly examined.

"State governments often rush projects to market, so they can announce and start them before the next election. But in the rush, governments don't always identify or mitigate expensive problems," the report said.

Queensland's "New Generation Rolling stock" debacle was an example of rushing to market without all crossing all the Ts and dotting all the Is. In a stunning display of ineptitude, the fancy new trains were ordered to a specification determined by the Queensland Government that breached Queensland's own laws.

The trains did not meet disability access legislation with the ludicrous result that a wheelchair user might not be able to squeeze between the seats to get to the supposedly disabled loos, which were in fact inaccessible for some disabled passengers.

The $4.4bn trains were essentially illegal with the state paying $361m to rectify the bodge job.

Cost overruns that could have been avoided, the report detailed, on the Sydney light rail, Martin Place station and Queensland trains has added up to $1.4bn. And that's just three projects.

Melbourne’s West Gate Tunnel project was awarded without going to tender. Picture: Tony Gough
Melbourne’s West Gate Tunnel project was awarded without going to tender. Picture: Tony Gough

"Our governments are getting major projects wrong, and taxpayers are left to pick up the tab," said Ms Terrill.

"Our report shows how Australia can build better".

Solutions included breaking down megaprojects into smaller parcels which would enable more companies to bid for work. Consortiums of companies could also band together to bid for bigger works.

"Even if only a handful of firms or consortia bid on a particular project, the prospect that other firms could bid, or could enter the market for future work, dampens the enthusiasm of the few actual bidders to propose too high a price," the report said.

It also said governments should not give "undue priority to domestic experience or the comfort of dealing with familiar firms", and should always put project on the open market.

Less bespoke designs would also drive down costs.

All the big new infrastructure projects may be worth it in the end, but they are costing millions more to build than necessary.

Originally published as Billions wasted in megaproject bungles



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