A new report released by the Grattan Institute has urged Australian governments to only sign infrastructure contracts that they are prepared to enforce, after finding that around 25% of projects cost taxpayers more than the government expected when construction began.
The report, written by Marion Terrill, Owain Emslie, and Lachlan Fox, has argued that Australia needs more competition, smarter procurement, and greater transparency to address the high costs of infrastructure projects.
The report explores the pre-contract and construction phases of government ‘megaprojects’ — infrastructure projects that are worth at least $1 billion — and makes recommendations to help governments procure transport infrastructure at the lowest long-term cost for a given quality standard.
Australia spends more on transport infrastructure than the global average, the paper found. It has warned of a government culture of ‘caving in to contractor demands’ and paying big bucks months or years after a contract was signed, noting that around a quarter of projects end up costing taxpayers more than governments initially promised.
The NSW government, for example, awarded the construction contract for Martin Place Station in Sydney to Macquarie Group, in response to an unsolicited proposal from Macquarie. While the original contract was worth $416 million, the actual cost has risen by more than $200 million for no apparent reason, the report noted.
The project also impacted the Sydney Metro City and Southwest project, blowing out what was a $2.7 billion contract by more than half a billion dollars.
To keep costs down, the report has recommended that governments only sign contracts that they are prepared to enforce.
“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,” it said.
The paper has called on the Bureau of Infrastructure and Transport Research Economics to regularly update a benchmarking series of road and rail construction costs. Meanwhile, the commonwealth Department of Infrastructure, Regional Development and Communications should explore ways that similar countries overseas build high-quality transport infrastructure more cheaply, and state and territory governments should collaborate to minimise costly bottlenecks on major infrastructure construction.
Fostering competition can also help deliver quality infrastructure at a sharp price. However, competition gets thinner as projects get bigger, the report noted.
“Few firms have the technical and financial capability to win contracts worth $1 billion or more. So it’s crucial that international firms can enter the Australian market, bringing global innovation and know-how,” it said.
To make it easier for international firms to win contracts, governments have been discouraged from giving ‘undue priority’ to domestic experience.
“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,” the report said.
Governments should also avoid market-led or unsolicited proposals for projects, and award all infrastructure contracts through an open tender process.
Regularly publishing key tender and contract information can help governments ‘ward off the risk of cartels and collusion’, the report said.
“Transparency during and after the tender process makes collusion less likely, and makes detection of any collusive behaviour more likely,” it said.
“Transparency also limits opportunities for collusion between government agents and bidders, because it enables stakeholders to monitor the decisions of government officials.”
State governments should publish a central register of all projects larger than $500 million, on a comparable basis across projects and jurisdictions, the report recommended. The register should also publish a range of details for all contracts larger than $50 million.
State auditors-general have also been encouraged to provide an expert panel governing renegotiation of major public construction projects.
The report has urged governments to avoid rushing to market, as rushing can exacerbate risks. It has recommended the governments scope projects properly, and procure systematically.
“Governments should do sufficient discovery of site conditions before going to market, and certify to potential bidders what they have discovered,” it said.
“State governments should develop and use a systematic approach to determining an optimal bundling of work packages for large projects, including when to disaggregate bundles that include both complex and straightforward activities. Governments should adopt a systematic approach to selecting the contract type for each work package.”