Victorian budget 2021: Project cost blowouts dig a $3.8bn hole

A $3.8bn blowout to major projects including the Metro and West Gate tunnels has delivered a substantial hit to the Andrews government budget.

Massively over-budget … construction on the Melbourne West Gate Tunnel project in Yarraville. Picture: Aaron Francis

A $3.8bn blowout to major projects including the Metro and West Gate tunnels has delivered a substantial hit to the Andrews government budget.

The bulk of the overrun has been fuelled by delays and soaring expenditure on Victoria’s 117 projects valued at more than $100m, with more than a quarter of them behind schedule.

The government is facing a significant challenge in reining in costs, with major concerns emerging about increasing labour and material expenses.

Treasurer Tim Pallas conceded on Thursday that a massive infrastructure program by states including NSW and Queensland was “putting heat” into the market and driving up prices.

“There is no substitute for ambition when it comes to growing our economy and yes, we have been pretty clear, as a government — we are going to make that investment, and the continuing investment,” Mr Pallas said.

“When it comes to capital investment, when it comes to building the architecture of our community, there is the Andrews Labor government, and there is daylight after it.

“Those challenges (costs) will continue as we continue to invest more and more.”

The budget follows last month’s auditor-general’s report that concluded the Andrews ­government has a “tendency to underestimate costs and over-estimate benefits” of major projects.

Auditor-General Andrew Greaves warned the government’s ten­dency to underquote “can have consequences for Victorians, such as delays in ­obtaining needed infrastructure or increased costs”.

The watchdog found that the level crossing removal project had blown out from up to $6bn to more than $8bn.

The $11bn Metro Rail tunnel had blown out by $2.74bn, North East Link was originally planned to cost $10bn and was revised up to $15bn, while the West Gate Tunnel was now expected to cost more than $6bn.

Mr Pallas indicated the government was taking a firm line on Transurban’s West Gate Tunnel, which is running more than a year behind schedule and battling billion-dollar cost overruns.

“Our position is that as a ­government we have a fixed-price contract and we expect the contractors, Transurban, to follow the terms of that contract,” the Treasurer said.

He said the government would work closely with contractors to manage the “escalation in price and risk” around the multibillion-dollar projects. “We need to have a flexible approach as to the way risk is managed based on each and every project,” he added.

The budget papers reveal the full extent of the government’s so-called “Big Build” which is estimated to average $22.5bn a year over the next four years. This is more than four times the 10-year average to 2014-15, they state.

“Delivering a capital investment program of this scale is unprecedented and will benefit Vic­torians during the economic re­co­very period for years to come.”

The building splurge is credited in the budget with being a key driver of the employment of more than 243,000 people in the six months to March this year.

“The budget invests in priority infrastructure that will drive economic recovery and support increased private sector productivity and long-term competitiveness,” the budget states.