How wasteful spending pushes up major infrastructure costs

Centre for Independent Studies

Read the paper here.
A large amount of taxpayers’ money, state and federal, is expended on large scale infrastructure that is intended to play a crucial part in Australia’s growth and prosperity — although some of it is arguably wasteful or perhaps even pork-barrelling. And as the recent federal government Infrastructure Investment Review found in axing around 50 planned projects, some “do not demonstrate merit, lack any national strategic rationale and do not meet the Australian Government’s national investment priorities. In many cases these projects are also at high risk of further cost pressures and/or delays.”

But major infrastructure projects in Australia are often also more expensive than comparable projects in other countries, even after even after adjusting for differences in currencies and purchasing power.

While a 2014 Productivity Commission Inquiry report on public infrastructure argued that there were examples where Australia was competitive internationally, and that the systematic evidence was missing or incomplete, it noted that several commentators argued Australia performed worse than other countries. The PC, while arguing for substantial reform to our infrastructure processes, also noted there was “considerable uncertainty about many facets of construction costs. There are sometimes large and inexplicable variations in the construction costs for what appear to be similar activities, such as the cost per kilometre of rail projects.”

It is unlikely that much has improved since 2014, especially given the findings of the recent review and estimates that construction costs increased more than 25% over the five years to mid-2022.

There are several factors that contribute to the higher costs of major infrastructure in Australia. The available evidence on major infrastructure construction costs shows that there have been some recent significant increases in input costs. This particularly applies to labour and project management costs, plus contract design, complexity and poor management leading to risk offloading, cost over-runs and costly schedule over-runs. However, it is important to note that the cost of projects can also vary based on specific circumstances, project scope, and other factors.

As listed below, and explained in more detail in the subsequent sections related to costs, factors that can contribute to higher costs for Australian infrastructure projects include:

Labour and Industrial Relations: Australia generally has higher labour costs compared with many other countries. Wages, benefits, and labour regulations can contribute to higher project costs.

Lower Productivity: Productivity is hampered by the lack of a sufficiently educated, skilled and engaged workforce, an efficient work environment, innovation, efficient procurement models and ultimately trust between industry stakeholders.

Regulations and Standards: Australia has strict regulations and standards when it comes to construction, safety, and environmental considerations. Compliance with these regulations often adds to the complexity and cost of infrastructure projects.

Design Complexity: Infrastructure projects in Australia often involve complex engineering and design requirements. This can include considerations such as environmental impact, sustainability, and resilience, which may contribute to increased costs.

Project Management: Effective project management is crucial for successful infrastructure projects. Factors like inefficient planning, delays, and changes in scope can contribute to cost overruns.

Risk Offloading: Project cost is often inflated in Australia by a misguided focus on unloading risk in the early stages of a project’s development. This is often driven by the type of contract that is presented to the industry by lawyers, with the objective of minimising up-front costs and putting most of the risks on the contractors. This practice is not generally followed in other countries, which look at ‘whole of Life’ costs and benefits, resulting in a more cooperative and cheaper outcome.

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