Spending restrictions on Suburban Rail Loop builders to avoid budget shock

Bidders on the first stage of the Suburban Rail Loop are being asked by the Allan government to keep their spending for the $35 billion project within tight limits until at least 2028 to ease the impact on the state’s finances.

The move to limit early spending would also allow a significant share of the early works to be covered by the Commonwealth’s promised $2.2 billion contribution.

A Suburban Rail Lop construction site in Clayton.Credit: Joe Armao

Two tunnelling contracts for the underground railway between Cheltenham and Box Hill have now been signed, with Premier Jacinta Allan essentially locking in the project to be built over the next decade.

However, questions remain over two-thirds of the project’s costs and whether they will be covered by the federal government and additional taxes from station precincts.

Three industry sources, who asked not to be identified so they could speak about confidential contract details, told The Age tenderers and successful bidders on the first SRL stages had been asked to restrict their spending as the state manages budget shocks, aims to prevent further cost overruns on the Big Build, and pays down debt that is expected to peak at $187.8 billion by the middle of 2028.

This includes two contracts to build the project’s six stations that are currently being negotiated.

The rail loop’s tunnelling agreements operate under a “pain share, gain share” model where the state will share the cost of both significant overruns and savings over the life of the work.

However, unlike a similar model on the North East Link, there are complaints payments will only be delivered as lumps of “allocated funds” rather than through regular bills paid by the state government – meaning contractors are under more pressure to stick to their assigned budgets.

One industry source said the station packages yet to be awarded may be required to keep their funding below a $400 million envelope for the next four years as the state government manages its own cash flow issues.

Under timelines outlined in tender documents, the contract for the construction of the first three stations will be signed by the end of 2025, and work on the first station, Box Hill, will begin by the middle of 2026.

The proposed Suburban Rail Loop.Credit: Supplied

The first tranche of government money, a payment of $400 million, is expected to come online in the 2025-26 financial year.

However, the national auditor-general in September warned that Victoria’s failure to submit a credible business case was holding back the release of this cash.

Victoria wants another $9.6 billion from the Commonwealth – which would take its contribution to a third of the expected $35 billion cost – but any future funding depends on an independent assessment from Infrastructure Australia.

Anthony Walker, an analyst at S&P Global Rating, said that by signing tunnelling contracts the government had ensured the rail loop would be part of its capital spending for at least the next decade.

“Victoria’s fiscal outlook will weaken if the federal government doesn’t provide the additional $9.6 billion of funding that the Victorian government expects,” he said.

“A shortfall in federal funding would increase pressure on Victoria’s rating if it pushes ahead with the project. This would reduce headroom at the AA rating level.

“We believe there is an elevated risk the SRL will cost more than government forecasts, given the size and complexities of the undertaking, concerns raised by the Victorian Auditor-General’s Office and Victorian Ombudsman in the planning and costings, and recent history of major state projects going well over budget.”

The final third of funding for the project is expected to come from taxes and charges on groups who benefit from its construction, known as value capture, the details of which are still being finalised.

The rail loop’s business and investment case floated that by 2025 Victoria would introduce an uplift charge on non-residential properties whose value is improved by the loop, and also introduce development contributions for projects around SRL stations.

It also suggested that upon completion, a car-parking levy would be introduced, similar to the congestion levy around Melbourne’s inner city.

Allan has ruled out taxes on residential properties but has suggested there are opportunities for funding similar to those of Sydney Metro and, previously, Melbourne’s City Loop.

In Sydney, value capture around Pyrmont station is expected to collect $200 per square metre of new commercial floor area created, while in 2018 the air rights above Martin Place were sold for $355 million.

Starting in the 1960s, funds were raised to help pay for Melbourne’s city loop through a citywide levy, special City of Melbourne rates on commercial properties, and a levy on railway tickets. The council levy was eventually scrapped in 1995, while the others were lowered over time.

“The Victorian and Commonwealth governments have already committed $14 billion to Suburban Rail Loop – that’s more than enough to start main works and have tunnel boring machines in the ground in 2026,” a state government spokesperson said.

“By the 2050s, Melbourne will be the same size of London today and the SRL is a key part of how we will build more homes for Victorians close to jobs, services and great public transport.”

Opposition transport infrastructure spokesman David Southwick said any caps on contractor payments were a red flag as questions remained over where total funding would come from.

“Only Labor would be so financially reckless as to sign multibillion-dollar contracts for a project without secure funding, then be forced to limit payments because of insufficient funds,” he said.

The Age revealed in August that the state had been ignoring Infrastructure Australia’s requests for more information about the project for almost two years.

On Wednesday, Department of Transport and Planning secretary Paul Younis told the Public Accounts and Estimates Committee that Victoria had been in “constant conversation with the Commonwealth about the approvals process for funding for SRL”.

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