Metro Tunnel blowout to cost taxpayers extra $840 million

The cost of the Metro Tunnel rail project has blown out for taxpayers by another $837 million, pushing the total bill beyond $15 billion.

Transport Infrastructure Minister Danny Pearson said on Thursday that the state had reached a deal with the project’s builders to cover ballooning construction costs.

The Metro Tunnel construction site at Federation Square. Credit: Joe Armao

Victorian taxpayers will fork out $837 million, while the Cross Yarra Partnerships (CYP) consortium will cover a similar amount.

The increase brings the total cost of the project to the state to $13.48 billion, compared with $10.9 billion when first announced in 2016. But the total cost of the project is even higher, as much as $15.6 billion, with the remainder borne by the builder, CYP.

The CYP consortium previously matched an extra government payment of $1.37 billion. If CYP matches the extra $837 million tipped in by the government yesterday, the revised price tag for the tunnel will be about $15.6 billion.

Pearson said the government could not have predicted the significant material and labour-cost inflation caused by COVID-19 and the war in Ukraine when it first budgeted for the project in 2016.

“What we’ve seen across the world is that there’s been that pressure on projects,” he said.

Travelling through Melbourne’s Metro Tunnel.Credit: The Age

“We’ve seen a 22 per cent increase in building and material and labor costs since 2021. It is just costing more to build anything, anywhere in the world.

“Nobody could have foreseen these events.”

While Pearson attributed the cost blowout to global inflation headwinds, The Age revealed in August that construction of two of the project’s CBD stations – Library and Town Hall – was behind schedule due to “a range of factors, including industrial relations”.

Construction delays were “putting pressure on testing and commissioning activities”, according to a leaked government report, with further funding possibly required “to the extent that these challenges and risks crystallise time and cost impacts”.

Pearson said up to $745 million of the $837 million would be paid to CYP, but that would be tied to delivery targets, with the government insisting the tunnel must open next year.

“If those milestones are not met, there will be penalties applied as a result,” he said.

The remaining will go towards the government’s Victorian Infrastructure Delivery Authority, which is overseeing the project.

The announcement confirms a report by The Age in August revealing that the government had offered CYP up to $888 million in additional payments if the project could open to passengers by June 29, 2025.

Pearson would not guarantee against further cost blowouts, but said he was certain the extra money would help it be completed on time.

“I cannot guarantee that there won’t be a one-in-100-year event next year. I cannot guarantee there won’t be another pandemic debt next year,” he said.

“Now we’ve got an investment … which will ensure that the project has resources that it needs to get on and deliver this project for 2025, 12 months ahead of schedule.”

Opposition transport infrastructure spokesman David Southwick said the government was blaming everybody but themselves for the blowout.

“Where is the almost $1 billion worth of taxpayer money coming from?” he said.

“Who knows how much this project is going to cost by the time the ribbon is cut.”

Southwick said the revelation raised fresh questions about the price tag for the first stage of the Suburban Rail Loop, which had not yet changed over the past two years as other major projects had reported increases to their total cost.

“This is a project that was promised [at] $34.5 billion, it hasn’t changed that number for almost two years.”

In August, a report to the state’s Infrastructure Development Committee was leaked to The Age, revealing construction delays, potential compensation claims and plans to dump elements of the project to cut ballooning costs.

An unresolved issue detailed in the report was the long-running problem of electromagnetic interference from the underground rail line affecting sensitive medical and research equipment.

Planners had warned since 2015 about the challenge of managing the interference from trains with sensitive magnetic resonance machines planned for a hospital precinct.

In May, the government announced it would abandon plans to build the Arden hospital precinct – the site of another new Metro Tunnel station – because of the electromagnetic interference.

Those issues have already cost $128 million in capital works and $36 million in extra operating costs to relocate sensitive scanning equipment from Peter MacCallum, the Royal Women’s Hospital and the Royal Melbourne Hospital to East Melbourne.

In June, the Victorian Auditor-General’s Office released a report warning that the builders would not meet the September 2024 completion date outlined in their contract — which is distinct from the tunnel opening – with a new schedule showing it could be finished by June 2025.

But the new timeline exposed the project to cost blowouts, the audit said.

“The state will need to pay more to address remaining issues and finish the project,” it said.

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