‘Tidal wave’ of infrastructure puts building capacity under strain and risks stalling recovery from pandemic

Infrastructure Australia warns governments are not match fit to deliver a $225 billion investment pipeline.

The blunt message from Infrastructure Australia is governments must lift their policy game. Picture: NCA NewsWire / David Crosling

Australia lacks the skills, planning and construction capacity to deliver a $225 billion taxpayer-funded infrastructure “tidal wave”, putting economic recovery at risk and increasing the likelihood of project delays and housing cost blowouts, the Morrison government’s infrastructure adviser has warned.

An independent review of a 2016 policy blueprint lists serial missteps by governments and neglect on the most pressing reforms, such as using funding incentives to drive best practice, raising construction productivity, developing regional plans and ­assessing completed projects.

The blunt message from Infrastructure Australia is governments must lift their policy game, work with industry to better price risks, achieve value for money for taxpayers, and stimulate competition in a sector dominated by a few large local players, otherwise productivity will sag and costs rise inexorably.

IA chief of policy and research Peter Colacino said public spending in Australia on major projects in 2023 alone would be larger than the GDP of more than half the countries in the world.

“Following the global financial crisis, our capacity to deliver economic stimulus was capped by the capacity of the market to deliver,” he said.

“So too in 2021, our ability to respond to the Covid-19 pandemic is capped by the ability of the infrastructure sector – and the building sector – to respond to stimulus.

“We need to work harder to attract global investment and talent. If we are not able to efficiently deliver the increased infrastructure pipeline, there will be knock-ons to other building and construction sectors – such as residential and commercial – with impacts on access to materials and project cost.

“It will be important to shift the tidal wave of investment to a rising tide, ensuring investment is well staged and co-ordinated.

“If not, costs of projects will increase and cost blow-outs could occur.”

Mr Colacino highlighted last week’s Victorian budget, which showed cost escalation could be as high as $25 billion over four years. This blow-out is more than the cost of the entire WestConnex program and five times the infrastructure budget of Tasmania.

According to documents released under Freedom of Information laws, the Reserve Bank has found red-hot construction activity here and overseas has led to a shortage of key building mat­erials, including steel, timber, concrete, bricks and roof tiles.

“Strong demand for new detached housing is also putting pressure on subcontractor availability and rates. This has caused construction delays and large increases in input costs, which are beginning to flow through to ­prices for detached housing,” the RBA noted last month in a document about its liaison program.

The Grattan Institute’s transport and cities program director, Marion Terrill, said building costs in Australia were 26 per cent higher than Canada, 29 per cent higher than Japan, and more than three times more expensive than Spain.

“To get high quality infrastructure at a sharper price, governments should foster competition as much as possible by breaking down mega projects into sizes where more firms have the expertise and balance sheet to take on the work, and make sure inter­national firms don’t face undue barriers to entering the Australian market and winning work,” Ms Terrill said.

“Perhaps the most important thing governments should do is stop rushing to market, which means projects often aren’t fully specified and scoped, and the risks aren’t well understood.

“A quick political win can often mean a long, slow, unnecessary budget sink.”

Australian Constructors Association chief executive Jon ­Davies said governments had not been “too soft” in negotiations.

“The opposite is true, with delivery agencies often making multiple calls for best and final offers that compel contractors to price and accept unpriceable risk that ultimately results in contractual claims where the only winners are the lawyers,” Mr Davies said.

“Government and industry need to collaborate to ensure project objectives are clear, information provided is accurate and can be relied upon, the right delivery models are adopted, risk is appropriately managed, and waste is reduced through productivity-­enhancing processes and technology such as digital engineering,” he said.

As well, Mr Davies said Canberra needed to take “a more active role in incentivising the states to adopt best practice procurement and delivery”.

“The processes state governments use predominantly favour lowest price over best value,” he said. “They work to political deadlines rather than construction schedules. They assume risk can be transferred with no comeback and promote a focus on winning short-term commercial battles rather than developing long-term partnerships that foster innovation and improved outcomes. Project cost and time overruns are commonplace.”

The review of the 2016 Australian Infrastructure Plan by consultant EY found that of 78 reform proposals, almost one-third of those deemed high or moderate priority had achieved only a low level of progress.

EY said these pressing issues – such as establishing reform incentives, regional infrastructure plans, post-completion reviews and a skills plan – would need to be addressed by this year’s infrastructure plan, expected in coming months.

While Canberra used (and then wound up) an asset recycling initiative, city deals and on-road trials for heavy vehicle road user charging, “there has been no sustained and holistic approach to the provision of reform incentives,” EY concluded.

Infrastructure Partnerships Australia chief executive Adrian Dwyer said the nation “needs a renewed focus on productivity-­enhancing reform if we want to sprint rather than limp out of Covid-19.

“While the federal government cranked the handle on infrastructure investment again this year, increasing funding for infrastructure is not the same as reform,” said Mr Dwyer, who added Canberra “should use its financial fire power to support a comprehensive state-led reform agenda.

“If we can get the right smarts on risk allocation, timing and market engagement, we can ensure any new money pumped into infrastructure stimulus gets out the door quickly and efficiently.”