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All in the delivery: is there really a problem with how Victorians pay for infrastructure?

One of the initiatives in the Victorian government’s economic statement released late last year was a decision to change the arrangements for announcing the cost of major infrastructure projects. Until…

Criticisms of secrecy around infrastructure tendering fail to properly acknowledge the realities of costing and managing major projects.

One of the initiatives in the Victorian government’s economic statement released late last year was a decision to change the arrangements for announcing the cost of major infrastructure projects.

Until now the practice by successive governments has been to announce the estimated cost of a project before it goes to the market. The government’s intention is to now announce the cost after a tender has been finalised.

This sensible suggestion was criticised by Fairfax Media’s Josh Gordon, followed by an editorial, as an attempt to keep secret the cost of infrastructure projects and a process lacking transparency.

These criticisms fail properly to acknowledge the realities of costing and managing major projects.

The issue of the costs of public infrastructure is undeniably of significant public interest. When projects costs blow out they are legitimately the focus of media interest and criticism by the Opposition of the day.

Policymakers have several objectives to meet in designing a process for the costing and delivery of major projects. Critically they need to balance achieving best value for money for taxpayers through negotiations with private sector builders and contractors with ensuring transparency so the public can judge if the project achieved its objectives.

The new process is in the public interest because the announced cost of a project will now be one which has been actually tested in the market-place not one which has been estimated by government departments at a particular point in time.

Two examples illustrate the different aspects of the points I am making. In the mid 1990’s, after a design competition the former Kennett government announced that the Federation Square Project would cost in the order of $110 million.

By 1999, in part due to scope changes, the “cost” had increased around $290 million. This increase was criticised by the then Opposition and media as a cost blow-out. On assuming Office the Bracks Government undertook a review of the project costs and eventually determined a worst-case scenario of $410 million. In the event it came in at around $470 million.

Bracks was criticised on the same grounds that he had applied to Kennett. Even though the project did go over budget, the criticisms were a somewhat disingenuous given that Bracks was faced with the immensely difficult problem of managing the delivery of a project which was well underway and had not been properly costed in the first place.

Similar issues arose with the so-called Rectangular Stadium in the Olympic Park precinct. In 2004 prior to determining the scope of the project, the Bracks Government announced that the Stadium would cost $100 million. In 2006 after some design work had been done the cost was revised to $190 million. It was revised again in 2008 to $267.5 million when capacity was increased from 20,000 to 30,000 people. The then Opposition and the media characterised the project as a cost blow-out.

Had the Bracks government not announced the cost of the project until after the successful builder had been determined and made periodic reports on scope changes materially affect costs, the Stadium would have been seen to be delivered substantially on budget.

This issue is more than just the jockeying between Governments and Oppositions both being encouraged by often sensationalist media reporting. At its heart lies the need to provide reliable information to the public which has neither the time nor inclination to follow the details of changes in the costs of a project and no basis to understand the reasons for such changes.

Taken at face value the new process is more transparent than the one it is replacing.

It makes sense that the public should be made aware of both the scope and cost of a project after a builder has been selected rather than before. It would also be in the public interest for governments to report on any changes in project scope and associated costs involved. This could be done as part of the normal budget process or through announcements by the responsible Minister.

Combined with a rigorous assessment of departmental business cases through what is called the “Gateway process” (introduced by the Bracks government and refined by the Baillieu government), this decision should improve the robustness of decision-making regarding major infrastructure projects.

Given that the Auditor-General has the power to get access to any documents held by Departments including Cabinet submissions, a process where actual rather than estimated costs are used as the starting point for determining whether a project is on or over budget seems self-evidently reasonable. It could hardly be seen as lacking transparency.

One reason the Government has provided for this new approach is the expectation that it will lead to a more competitive bidding process. Whether this happens remains to be seen. However it is evident that, under the previous arrangements, bidders have generally ignored the costs specified in the press releases associated with initial announcements other than to see them as a “floor” price.

There are numerous areas where the public servants need to improve the skills required to manage of the delivery of infrastructure projects. Many of them have been identified in various reports by the Auditor-General. These include; the need to improve project specification, contract management, and stakeholder and community consultation processes to name just a few.

Announcing the cost of a project once it has been market-tested and hopefully providing updates on material changes as projects proceed should provide the basis of a framework for proper accountability for the delivery of infrastructure projects and should be welcomed. In any event it’s hard to see how this could be construed either as “hiding” the cost of projects or making the process “less transparent”.

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2 Comments sorted by

  1. Tim Kottek

    Freetimer

    "scope and cost of a project after a builder has been selected rather than before"

    Whys would it not be in the public interest for the scope (and only scope) of the project to be in the public domain before the tender process finishes?

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  2. frank peylaire

    Commercial Strategy

    Very interesting though the opinion omits the fundamental reasons behind initial cost estimating before projects go to market. There are plenty starting from budgeting state finances, a difficult exercise that needs be public so communities can assess the choices offered by their political leaders. Fascinating how government costs are so rarely over-estimated whilst revenue are so rarely under-estimated. At the end, gaps have to be filled and money has to flow from somewhere. Not to mention that projects Capital Expenditure blow-up is sometimes just a fraction of future operating expenditure that is left to the following governments to manage. Accountability is a good one when public finances often results from under-delivering what was over-promised. Eliminating the disclosure will for sure reduce the issue, but by eliminating the transparency instead of enforcing the accountability. We need more transparency and public debate, not less.

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