“Resource projects are 40% more costly in Australia than the United States, building hospitals cost 62% more, schools 26% more and airports a staggering 90% more.” – The Nationals’ leader Warren Truss, speech at an Infrastructure Partnerships Australia symposium, 25 July.
Is it more expensive to build infrastructure projects in Australia than elsewhere in the world?
Infrastructure Australia (IA), a peak government advisory body on infrastructure policy, certainly believes it is more expensive to build here. In commissioned research from earlier this year, it found Australian projects to be 40% more expensive than in the United States, requiring 30-35% more labour input.
The Business Council of Australia echoes this view, and its findings are picked up in Warren Truss’s speech above.
If it is more expensive, the key questions are how much more expensive, and why?
How much more does it cost?
When assessing Truss’s claim, it’s important to note that cost difference depends heavily on what you choose to compare. The BCA report, on which Truss’s claim is based, has two main components.
First there is the reference to differences in resource projects costs, which the report says are 40% higher in Australia. However, this figure compares Australia and the US Gulf coast. The Gulf Coast is one of the lower cost regions in the US and a choice of a different region (for instance, the US north-east) or a different country (such as Japan) would almost certainly result in different estimates.
The BCA also cites figures on the comparative costs of hospitals, schools and airports from the Turner & Townsend 2012 construction price survey. Selected comparisons from that report indicate that by the square metre, general hospitals in Australia cost 61% more than in the US, while primary and secondary schools cost 26% more and airport terminals cost 90% more.
However, this report converts Australian dollars into US dollars to allow for comparability. The period in which costs are measured was one in which the high Australian dollar made Australian costs look higher in comparison to the US. Now that the Aussie dollar is weakening, Australian construction costs will look less expensive in US dollar terms.
This exchange rate adjustment is a pitfall of international cost comparisons generally and is not a true indicator of underlying differences in real cost structure.
Regional variation is another factor that affects cost differential estimates. The Turner Townsend construction report takes data that tends to be concentrated in urban areas. In Australia, this will consist of the main capital cities and costs across those cities are fairly similar, plus or minus 10% in most cases.
But in the US, costs in say, Houston, can be half as much as in a city like New York. A national average taken across US cities will therefore look quite a bit lower than a similar average taken across Australia. This too will tend to make Australia look more expensive generally on a national basis.
There are further complications. Infrastructure projects are generally custom-built to suit local environments and needs. While it is possible to easily compare the cost of manufacturing a particular type of car across different locations, “roads” or “airports” or even “hospitals” are not typically standardised investments.
It is not obvious, for example, whether Sydney Airport should cost more or less to build than Munich Airport. Although both serve roughly the same number of annual passengers, their local operating conditions and placement within the air traffic control network are quite different. It is certainly plausible to make broad comparisons about cost differentials in infrastructure, but they almost always will come with significant qualifications.
Why does it cost more?
The law firm Clayton Utz makes the point that much infrastructure in Australia is in or around urban areas – where most Australians live. Labour, materials and other building costs are almost always more costly in cities and this is certainly one reason it is more expensive to build here than in some other areas.
Australia is also very distant from global sources of materials and supply and this, too, drives up costs. Australia’s relative isolation means internal labour, capital (finance), and services markets tend to be less competitive than in countries like the United States, making building here more expensive.
A key issue, of course, is how much infrastructure cost differentials are due to government policies. Infrastructure Australia claims that much of the additional cost of projects here is due to bad project governance and procurement, something that is clearly driven by policy.
Labour practices, business taxation and regulation (including environmental “green tape” and other “red tape”) are other government-driven factors that would increase costs. But as noted above, cost estimates require nuance and the causes of high costs are complex, not all equally prone to policy choices.
International comparisons of infrastructure costs are notoriously difficult. The basis for Warren Truss’s claim shows there’s not enough data to make a bullet-proof conclusion about relative costs since there are quite a few confounding factors (like exchange rates). The cause of any price difference is also more complex than government policy.
The author has provided a fair review of Truss’s statement. The article confirms that Truss and the Business Council of Australia have made distorted claims about the costs of infrastructure projects compared with selected countries, particularly the United States.
Broadly speaking, infrastructure costs in the US may be higher, but it’s worth noting the pay and conditions for construction workers in the United States are well below those of Australian workers. - Patrick Troy.