Victoria’s construction pipeline should be ‘more realistic’ in future

Treasurer Tim Pallas concedes Victoria’s capital works program may need to be “more realistic” to cope with challenges in the construction industry and avoid debt blowouts.

Pallas issued the warning as he released the mid-financial-year budget update, projecting the state would return to the black in 2026 with the expected surplus upgraded to $894 million.

Treasurer Tim Pallas.Credit: Nine

“Not for existing projects, but for new projects, we’ll have to have more realistic assessments around the industry’s capacity to deal with projects and the timelines by which they can deliver them,” he said.

Infrastructure Australia on Monday urged the federal and state governments to consider delaying the $13 billion Melbourne Airport rail project over potential cost blowouts and low patronage.

The Victorian Auditor-General’s Office has also warned the state government that if major projects continued exceeding their budgets, “further additional unplanned debt will occur or the announced capital program may need to be curtailed”.

Pallas said cost overruns were “relatively modest”, adding an average 4 per cent to total costs last year, worth $5.8 billion, considering the price of materials increased 20 per cent or more and workers were in short supply.

Most of last year’s blowouts were from the West Gate Tunnel toll road, which has almost doubled in price to nearly $10 billion, and will eventually be paid for by private firms.

Pallas acknowledged the increases were not “inconsequential numbers”.

“For future projects, we have to look at the capability of the industry to absorb the volume of work that we’re doing,” the treasurer said.

“We will continue to monitor and manage our capital works program with a weather eye to the capacity of the industry to get new projects away.”

Victoria is investing an average $21.6 billion a year in infrastructure over the next four years, with $184 billion in capital works projects already under construction or commencing this year.

The Age has been surveying readers to help inform coverage of next month’s state election as part of the Victoria’s Agenda approach. Readers expressed concern about project mismanagement leading to cost overruns and adding to net-debt projections.

One reader, Suzanne, aged 65-74, said the state could save billions by managing projects properly, while Peggy, aged 45-54, said nobody seemed to care that projects were blowing out so badly.

The Metro Tunnel project is likely to be $240 million more expensive than planned this year because of financial impacts from the COVID-19 pandemic, the budget update said, having already exceeded its cost forecast by more than $2.5 billion.

The price tag of the Suburban Rail Loop is also likely to increase. The government in 2018 claimed it would cost a total of $50 billion, but the Parliamentary Budget Office said the first two stages could cost $125 billion. Labor has rejected that analysis.

Opposition Leader Matthew Guy said Premier Daniel Andrews was a “financial vandal”, while he said the Coalition had been “fairly modest” in its announcements.

“We only committed to policies that are modest, reasonable and sensible,” Guy said.

He has committed to auditing all projects valued at more than $100 million to minimise waste if elected, a policy recommended by the Grattan Institute and the Victorian Auditor-General’s Office.

The Coalition would shelve the Suburban Rail Loop if elected to divert the cash into health.

Pallas said auditing every major project “would mean cuts and closures that would hurt Victorian families and put our whole economic recovery at risk”.

Marion Terrill, transport and cities director at the Grattan Institute, said major projects were those most likely to breach their estimated cost.

She said major projects should be avoided unless the need had been clearly identified by an independent body.

Victoria’s budget position is expected to be $1.8 billion worse than projected this financial year, on track for a $9.7 billion deficit in 2022-23, despite higher than expected payroll and land taxes. Pallas said that was partly due to $500 million worth of flood recovery support.

He said the budget update confirmed the government’s staged plan to get the budget on track was working, after massive spending to insulate Victoria from the pandemic, and accused the opposition of planning cuts.

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