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. Governments should act now to set current projects on a sounder basis, and take steps to avoid ending up here again.
The era of megaprojects has arrived. It's 10 years since Australia's first transport infrastructure project worth at least $5 billion; now there are nine such projects under construction. Before the pandemic, the value of transport infrastructure under construction for Australian governments reached $125 billion for the first time, and two thirds of that work was on projects worth $5 billion or more. Billion-dollar projects are no longer unusual. The 2020 Commonwealth Budget upped the transport spend to one-and-a-half times the usual level.
Megaprojects are already breaking records for cost overruns. There's an overrun so far of $24 billion on just six current projects. Inland Rail was costed at $4.4 billion in 2010; it's now estimated to cost $9.9 billion. Melbourne's North East Link was costed at $6 billion in 2008; it's now expected to cost $15.8 billion, even though the Victorian Government selected the cheapest route. The Sydney Metro City & Southwest was costed at $11 billion in 2015; this year the NSW Government announced the latest estimate was $15.5 billion.
Even before the megaprojects era, cost overruns were a megaproblem. Over the past two decades, Australian governments spent $34 billion more on transport infrastructure than they first told us they would. Grattan Institute's analysis of all projects valued at $20 million or more and built over the past 20 years shows that the actual costs exceeded the promised costs by 21 per cent.
Big projects are particularly risky. More than one third of overruns since 2001 came from just seven big projects. Eighty per cent of the cost overruns came from just 14 per cent of projects; that 14 per cent 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.
Projects announced before governments are prepared to formally commit are also 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.
Right now, governments are focused on creating jobs and stimulating the economy by spending money quickly. But 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. 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.
Governments should rethink major projects that have been promised or are under construction, particularly those announced without a business case. Governments should continuously disclose to Parliament material changes to expected costs and benefits, as listed companies do to the stock exchange. To avoid ending up here again in future, governments should collect data on and learn lessons from past projects. Megaprojects should be a last, not a first resort.