Cancelling the Games is a grown-up decision

Tuesday’s announcement seemed to come out of nowhere. Premier Andrews had announced in April last year that regional Victoria would host the 2026 Games, centred on Geelong, Bendigo, Ballarat, Gippsland, and Shepparton, at a cost of $2.6 billion. He’d said it would provide a massive boost to growth. But now he says the cost of transport and infrastructure for the Games has since blown out to as much as $7 billion – or even more – without any corresponding increase in benefits.

The decision to cancel is consistent with a new theme in public infrastructure. First we saw the NSW government announce last June that it would indefinitely delay three megaprojects, on the advice of its independent advisory body, Infrastructure NSW. Then, in May this year, Victoria put on ice two of its megaprojects, the Airport Rail Link and Geelong Fast Rail. Around the same time, the federal Infrastructure Minister Catherine King announced a snap review of the entire 10-year $120 billion federally-funded pipeline.

These decisions to delay or mothball come against a backdrop of mounting public debt, and capacity constraints in the construction industry. Victoria’s debt is expected to exceed $160 billion by the time the Games would have been held, far more than any other state’s. The engineering construction industry has been facing soaring demand for skilled workers and key materials for several years now, to the point where it’s nominating hyper-escalation of construction costs as the biggest challenge the industry faces. With so much competition for scarce resources, now is a particularly expensive time to build.

There’s also an unspoken backdrop to Premier Andrews’ announcement: cost overruns on international sporting events are entirely normal. If the Olympic Games are any guide, we should run a mile: all Olympics, without exceptions, have cost overruns, and the average cost overrun is higher for Olympics than for any other type of megaproject.

A big part of the reason for cost overruns on Olympic Games is that it’s so hard to back out; the only city ever to reverse its decision to host was Denver, in 1972. Nor can you delay the start date. This is how a government gets stuck and ends up throwing good money after bad. Premier Andrews’ decision this week has been difficult, but he hasn’t fallen into this trap.

And his reasons are sound. The benefits to the community just aren’t big enough to justify the costs. This should always be the criterion for assessing whether a project or an investment is worthwhile. Of course, it’s not that the Games would not have benefited athletes, sports fans, regional host cities, and businesses – but not enough to justify a price tag of $7 billion plus.

All too often, projects that fail on the criterion of net benefits to the community are still funded by taxpayers. The West Gate Tunnel, for instance, was agreed with an expected benefit of $1.10 for every dollar spent – but that was back when the project was only going to cost $5.5 billion, not the $7.4 billion taxpayers are now up for. The Inland Rail freight line from Melbourne to Brisbane is another case in point; it, too, was expected to yield $1.10 in benefits for every dollar spent, back when the cost was expected to be $9.9 billion. Now the costs have blown out to an unknown figure of at least $31 billion, but the benefits have not. 

Critics of the Victorian Premier’s decision, and there are plenty, are calling it a humiliation, a betrayal, a fiasco. But this is wrong-headed. It is surely better, if you find yourself in a hole, to stop digging. Just look at how quickly other Australian states have been ruling out a rescue job – ‘ruinously expensive’, according to the WA Premier; ‘not a priority’ for the NSW Premier; ‘costs would outweigh economic benefit’ for South Australia.

So let’s go the next step, Premier. You cancelled the East West Link back in 2014 because the benefits weren’t enough to justify the costs, and you’ve cancelled the Commonwealth Games for the same reason. You’ve mothballed Melbourne Airport Rail and Geelong Fast Rail, because this is such an expensive time to build, and Victoria doesn’t have the money. There’s really just one more biggie, where the benefits are expected to be only 60-to-70 cents for every dollar spent, according to the Parliamentary Budget Office, or 51 cents, according to the Auditor-General. Isn’t it time to cancel Melbourne’s Suburban Rail Loop?