Friday, June 14, 2024

‘Not worth the paper they’re written on’: Major project business cases slammed amid blowouts

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On the same day, an updated state budget forecast predicted Victoria’s debt would rise to $177.8 billion by 2027 – a $6.4 billion increase on the May budget forecast. Victorian taxpayers already live in the most indebted state in the nation.

The North East Link will connect the Eastern Freeway to the M80 Ring Road through Bulleen, including 6.5 kilometres of tunnels, and will widen the Eastern Freeway to 20 lanes in places.

William McDougall, pictured here in 2019, worked on most of the major transport construction projects in Victoria since the late 1990s.Credit: Jason South

The latest blowout follows a similar trajectory for the Metro Tunnel, which has risen from $10.9 billion to $14 billion, and the West Gate Tunnel, which has risen from $6.7 billion to $10.8 billion.

But McDougall noted that the cost increases for those projects came after tunnelling work began, and that many projects that involve tunnelling run into trouble because of uncertainty around ground conditions.

“The important difference with North East Link, and increasingly the Suburban Rail Loop, is that the cost overruns we’re now seeing are before any construction has actually started,” he said.

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“So unless the contracts for North East link put all the risk of that onto the builder, the contractor, which I doubt that they do, the chances are we’re in for even more cost overruns.”

McDougall said this was a particular concern for the North East link after changes in scope announced this month added more tunnelling.

The state government on Friday said all packages of work on the project, including those still out to market, were included in the $26.1 billion cost.

“North East Link has been a line on a map for more than 60 years; it’s our most urgently needed road project and we’re delivering it,” a spokesman said.

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The government has insisted it has been upfront that the project would cost more than $15.8 billion after it announced the larger tunnel length in 2021, and with it, a higher-than-expected $11.1 billion cost for the primary contract.

“I indicated very clearly then [2021] that this was a project that was experiencing cost pressures, and we’ve been clear on that in that period of time,” Premier Jacinta Allan said last Friday.

“The final figure can only be finally known once the contracts have been signed and that has only just happened.”

In 2018, the North East Link business case found the project would create 10,300 jobs during construction, get truck traffic off local streets, and deliver $12.5 billion in gross state product to our economy and $1.30 to the Victorian economy for every dollar invested.

But McDougall said the business case “wildly” overstated the benefits of the project, and understated the negative environmental impacts (including the embedded emissions from its construction) and the likelihood of cost blowouts.

The business case used what is known as a ‘P50 cost’, meaning there was a 50 per cent likelihood the project would be delivered inside the estimated project cost – an estimate that some say is overly generous given the usual pattern of infrastructure projects.

“If there had been more allowance for the project cost blowing out, the benefit ratio would have come down significantly,” said McDougall.

Last Friday, Major Road Project Victoria chief executive Duncan Elliott fielded questions at the same press conference where the premier announced the North East Link’s new price tag.

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When asked how the $1.30 cost-benefit ratio would be affected by the blowout, he would not provide an updated figure.

Instead, he stressed that the figure did not capture the environmental and other benefits from changes in project scope since 2018, including a longer tunnel. “None of us could have foreseen in the business case how prices have changed.”

Elliott said the long-term standard for cost escalations in business cases was about four per cent a year. The government’s modelling reports that price hikes over the last few years had been closer to 19 per cent, but Elliott said this figure was so unlikely it wouldn’t have been accepted if someone had asked for it to be used in the business case at the time.

Nicholas McGowan, Liberal upper house MP for the north-eastern metropolitan region and deputy chair of the Public Accounts and Estimates Committee (PAEC), said the North East Link project probably never stacked up, even less so now given the cost blowout as the construction industry struggled to keep up with infrastructure and housing demands and the soaring cost of materials.

“This must be the most costly road in the history of mankind,” said McGowan. “It cost less to send man to the moon than to get someone 10 kilometres from Bundoora to Bulleen.”

“This must be the most costly road in the history of mankind,” said MP Nicholas McGowan of the North East Link project.

“This must be the most costly road in the history of mankind,” said MP Nicholas McGowan of the North East Link project.

He said that, in particular, the 2018 business case did not factor in the real, negative environmental impacts of the project.

If a thorough business case was now run on the project, it would produce a negative cost-benefit ratio and the project would not proceed, he said. “Unfortunately, the genie is out of the bottle, and it can’t be stopped.”

McGowan said both sides of politics needed to review how business cases are conducted for major infrastructure projects “and be much more honest about costs, likely cost increases and environmental impacts”.

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Like McDougall, he also warned the project may yet blow out further beyond $26 billion.

As part of its $11.1 billion contract to build the North East Link’s tunnel, Treasurer Tim Pallas has provided a guarantee to help cover the cost of further blowouts. This model is known as “pain share, gain share”, in which both sides agree jointly to fund additional price hikes on the condition they share their accounting with each other.

The government has estimated it could pay as much as $689.8 million as part of this guarantee throughout the life of the project. This figure is already counted within the road’s $26.1 billion price tag.

This suggests that any blowout beyond the $689.8 million is not covered by the guarantee.

Last Friday Pallas said 60 per cent of the additional costs of the North East Link had come from the increased scope of the project.

“About 60 per cent of that increase was a deliberate decision by government to improve and enhance the asset,” he said.

The opposition has also slammed the government over the lack of transparency around the North East link.

In the November PAEC hearings, McGowan quizzed the government about the budget of the project, but Elliott responded that the budget remained at $15.8 billion. This figure was not updated until the latest contracts were signed.

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“I would not expect the government to reveal details of confidential discussions with an ASX-listed company, but it should at least have acknowledged that discussions were under way and that the cost of the project was being reviewed.”

Sources familiar with conversations between the government and contractors – speaking anonymously because the negotiations are confidential – told The Age cost overruns had been clear as early as July. Two new North East Link contracts, worth $5.7 billion and $3.8 billion, were meant to be signed mid-year, but were only signed last week after months of haggling.

Three sources aware of conversations with the government said at one point the total cost of the project was heading towards $30 billion. They said this prompted months of discussions about ways to reduce costs.

One source said a key issue in the process had been the expansion of its scope, in which elements were added to the project despite not being initially canvassed. Some of this was driven by changes required by the Environmental Effects Statement (EES).

In response to the EES process, the government agreed to extend the tunnel north by two kilometres. The government also agreed to consider alternative designs for interchanges on Lower Plenty Road, Manningham Road and Bulleen Road, which were not part of the reference design first exhibited to the public. The project was also asked to consider adopting alternative routes for hauling soil to avoid pressure on Rosanna Road.

In total, there were 110 environmental performance requirements that builders on the project must not breach.

“The remaining 40 per cent thereabouts [of additional North East Link costs] was effectively attributable to EES reporting obligations, and as you can appreciate, making sure the state was delivering the infrastructure the community wanted, and the increase in commodities prices,” said Pallas.

The Greens have backed calls for a rethink on the assessment of infrastructure projects. North-Eastern metropolitan upper house MP Aiv Puglielli slammed the North East Link as “a great scar through the middle of a community”.

“What was an expensive tollway disaster is now a colossally expensive tollway disaster.”

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