Economy
Australians Pay Too Much for Major Road and Rail Projects
Australians pay too much for major road and rail projects according to a new paper by The Grattan Institute.
The main reason is that governments don’t drive a hard bargain on contracts with the big construction firms.
The Institute believes that governments procuring transport infrastructure should focus on one principle: delivering services at the lowest long-term cost to taxpayers, for a given quality standard. To achieve this in Australia, we need more competition, smarter procurement, and greater transparency.
Australia’s transport infrastructure costs are above the global average. There is a government culture of caving in to contractor demands and paying sometimes hundreds of millions of dollars to settle a problem a few months or years after a contract is signed. Even after construction has begun, about 25 per cent of projects end up costing taxpayers more than governments promised when the contract was signed.
Governments should only sign contracts that they are prepared to enforce. All infrastructure contracts should be awarded through an open tender process. And governments should investigate how similar countries overseas manage to build high-quality transport infrastructure more cheaply.
To get quality infrastructure at a sharp price, competition is fundamental. With more megaprojects, contracts have grown too; megaproject contracts have been 38 per cent bigger in the most recent seven years than they were in the preceding seven years. With larger contracts, competition inevitably thins. Few firms have the technical and financial capability to win contracts worth $1 billion or more.
The Institute views it as crucial that international firms can enter the Australian market, bringing global innovation and know-how. Australian governments should not give undue priority to domestic experience or the comfort of dealing with familiar firms, and they should avoid market-led or unsolicited proposals for projects.
Governments should do more to ward off the risk of cartels and collusion, by routinely and transparently publishing key tender and contract information.
Procurement practices need to catch up with the reality of gigantic contracts. Rather than following fashion or giving undue weight to industry preferences, governments should be systematic in how they break up megaprojects into manageable contracts.
Problems often crystallise around site conditions: contamination, geology, and utilities. Instead of rushing projects to market, governments should understand and certify these risks so that bidders can price them more accurately. More certainty in scope and site conditions would facilitate use of fixed-price contracts. Collaborative contracts such as alliances, where parties share the upside and downside risks, should be reserved for projects where key elements are genuinely unknowable in advance.
Governments should only sign contracts that they are prepared to enforce. All infrastructure contracts should be awarded through an open tender process. And governments should investigate how similar countries overseas manage to build high-quality transport infrastructure more cheaply.
Industry claims that it’s hard to turn a profit and that the future of local firms is in jeopardy are overblown. Governments should remember that dismantling industry protection since the 1980s has resulted in large increases in Australians’ standard of living.
Governments must ensure the interests of the community prevail over the concerns of the engineering construction industry
Key recommendations:
- Pay more attention to costs
- Improve transparency
- Foster greater competition
- Scope projects properly, and procure systematically