How predictable: another megaproject has suffered another cost blowout

The West Gate Tunnel project has blown out by a further $3.3 billion, and we taxpayers are being asked to help pick up the tab for what’s become a $10 billion project – so far.

Nobody seems all that surprised. Cost blowouts on projects like this are all too common and all too predictable. A key question now is whether the state government sticks to its refusal to bail the project out.

The West Gate Tunnel started out as a $5.5 billion project, when the new Andrews government in April 2016 signed an in-principle agreement with Transurban for a 5 km toll road linking the West Gate Freeway at Yarraville with the Port of Melbourne and CityLink at Docklands. It was a market-led proposal – Transurban put the plan to the government, not the other way around.

But soon, the expected cost increased to $6.7 billion, and the benefit-to-cost ratio fell from a skinny 1.1 to a line-ball 1.0. A three-way dispute – between the government, Transurban, and its chosen builders – over soil contamination mired the project in delays, exacerbated by problems arising from the need to relocate utilities.

So why is this week’s further cost blowout so predictable? The number one reason is that the project is so big.

Bigger projects are more complex, and they tend to overrun not only by more in dollar terms, but by a bigger percentage as well. Grattan Institute research shows that transport projects in Australia initially expected to cost a billion dollars or more exceed that initial cost nearly half the time, and when they do so, it’s by an average of 30 per cent.

Even after contracts are signed, it’s common for governments to spend more than they told taxpayers they would. During the construction phase, billion-dollar projects have cost blowouts 28 per cent of the time, and the typical size of that blowout is more than $600 million.

A cost blowout is also predictable whenever a project is announced prematurely – that is, before it has the regulatory or financial approvals that constitute a technical commitment, and that are needed before it can actually proceed. The West Gate Tunnel was announced in-principle at first, with a cost estimate that turned out to be preliminary.

There would be no problem with such premature announcements if Victoria had a robust process for cancelling those projects that, on closer examination, turned out not to be worth building, or not the best option available. But we don’t have such a process – once a project is announced, it usually ends up being built. More than 80 per cent of projects worth $20 million or more, across the country and over the past two decades, have ended up being seen through to completion.

From the start, the West Gate Tunnel has been questionable. In agreeing to a market-led proposal, the government bypassed competition, engaging with a monopoly provider during as well as after the contract negotiation. Market-led proposals are particularly prevalent in Victoria, where a sixth of the value of contracts on projects worth more than a billion dollars has been awarded through market-led proposals.

But market-led proposals come at a cost. Accepting such proposals for toll roads “generally leads to higher costs to taxpayers, drivers, or both”, according to Rod Sims, Chairman of the Australian Competition and Consumer Commission. A World Bank review of market-led proposals in Australia and 14 other countries found that “allowing a proponent to develop the project creates significant challenges in ensuring competition and … value for money”, and often leads to “poorly structured deals”.

People may feel that cost blowouts are an unfortunate but unavoidable consequence of big new infrastructure projects, a necessary evil in the service of free-flowing traffic in a large city that’s still growing. But governments have choices about how to respond to population and congestion pressures.

The first resort should be making better use of the infrastructure we already have, by dealing with the maintenance backlog, modestly upgrading existing arterial roads, railway stations, key intersections, and road surfaces. And offering cheaper travel on public transport in off-peak times. And imposing congestion charges on drivers using the busiest roads at the busiest times.

We can all hope that the Victorian government is true to its word that it’s up to Transurban to sort this mess out without more recourse to taxpayers’ money. But the West Gate Tunnel saga is a cautionary tale.

Governments can vastly reduce the risk of predictable and embarrassing cost blowouts if they discipline themselves not to announce projects prematurely; if they avoid market-led proposals like the plague; and above all, if instead of reaching for the heroic and iconic, they treat megaprojects as a last, not a first resort.