Australia plans to spend a record $120bn into infrastructure over the next decade(1). However, while this is a much-needed investment to help correct decades of under-spending in the sector, there is a huge risk of large-scale infrastructure projects going over budget—just as 34% of similar projects have in the past 15 years(2).
The good news is that financial and execution risks can be mitigated with effective controls and a focus on a culture of continuous improvement to positively impact readiness, productivity, claims and contingencies. The result is safer and better projects that could potentially save taxpayers billions of dollars.
Since the tail end of the mining-related construction boom in 2016, infrastructure construction in Australia has increased at a frenetic pace. The construction is driven by unprecedented public spending, with the largest portions spent in New South Wales and Victoria.
This boom will provide a material boost to the economy, but there is a high risk of critical failure in delivering these projects. In fact, we estimate that implementation challenges could cause half of these major projects to overrun their budgets, costing taxpayers as much as $40bn over the next eight years.
Dwindling resources and project breakdowns
The federal government plays a key role in catalysing and funding infrastructure spend but has no part to play in either master planning or driving projects to completion. This lack of central planning and coordination creates price bubbles, skills shortages and high levels of risk – all of which contribute to our poor national track record of large-scale infrastructure projects: 34% of such projects have had significant budget overruns in the past 15 years.
The large number of projects being delivered concurrently will create competition within the limited pool of specialised project management resources. Combined with recent changes to the availability of 457 visas and the implications of COVID-19, this will heighten competition to levels we have not previously experienced.
Delayed delivery and damaged credibility
These cost and schedule overruns will have direct capital impacts and, perhaps more importantly, delay the delivery of publicly promised economic benefits. This diminishes community utility and convenience with local businesses often hit hardest due to lost revenue from reduced traffic and accessibility, at a time when fiscal stimulus is more important than ever. The Sydney light rail program is a particularly acute case.
Fiscal stimuli from infrastructure is projected to be 2.5x the investment. However, overruns cut that figure nearly in half, representing a loss of economic opportunities worth $23-$48 billion over the next decade(2).
It’s not too late to avoid economic loss
Government-sponsored projects often involve more stakeholders and complexity compared to privately delivered projects. However, by proactively taking measures now to establish the right systems, tools and processes, the risk of budget overruns can be significantly reduced.
Six steps towards success
1. Set up success with smart contracting strategy
Traditional contracts usually focus on establishing price and deliverables rather than building alignment and driving project performance. This approach can lead to hostile confrontation – as evidenced by the acrimonious standoff for the Melbourne Metro Tunnel project(3).
Projects are more likely to be delivered on time and within budget when mutually beneficial contracting strategies are developed that focus on mutually reducing risk and position both the project and contractors to be successful.
For example, a contract can provide stipulations for incorporating systems and tools that incentivise and reward contractors who deliver high-level performances. Mutually beneficial contracts typically increase infield productivity as contractors and subcontractors are aligned and working toward a common goal.
2. Reduce drag at transition points
Significant time and value are often lost at transition points, such as moving from design to construction, then again moving from construction to operations. Maintaining a laser-like focus on the readiness of key work packages and the rate of work on these packages helps deliver a smooth and effective transition.
This can be achieved by establishing disciplines and systems that drive thorough and proactive planning. When done well, sources of delays and overruns can be mitigated early.
3. Drive performance with strong project management
Silos can be broken down and roadblocks removed when a dedicated team works directly with contractors and stakeholders to manage a critical project path. This is useful for ensuring all core work packages and sub-contractors remain on target and able to meet and exceed their performance targets.
4. Establish performance transparency (single source of truth)
In managing a diverse set of project teams, it is crucial to have a forward-looking single source of truth. This makes performance transparent and ensures that cascaded targets show progress.
Visual boards should be supported by regular planning and progress reviews to quickly identify tasks that are falling behind. This gives teams the best chance to recover and deliver the next milestone on time.
These focused forums encourage teams to actively challenge the status quo throughout the entire process while also providing execution assurance to internal and external stakeholders.
5. Identify where there are gaps
Competition for talent and construction capacity is expected to continue, bringing the risk of unfilled roles and gaps in capability. Because of this, it is critical to understand the need to fill gaps in your project or adjust your plans.
Furthermore, project leaders should act as coaches to help their managers understand their roles and achieve success. This requires a fundamental shift from managing progress simply to meet contractual requirements to reinforcing an understanding of broader project goals.
6. Protect your project against the impacts of COVID-19
Refer to our website for the latest advice.
Now is the time to take action
The upcoming tsunami of capital investment presents substantial risks to establishing crucial infrastructure and economic opportunities. You can mitigate these risks by selecting appropriate structures, partners and disciplines to challenge and manage these projects. Use the provided tips to ensure mutually beneficial results for contractors, governmental stakeholders and Australian taxpayers.
References
[1] Government News, 2020
(2) Partners in Performance analysis, 2020
(3) ABC News, 2020
About the authors
Aldous Mitchell
Director and Global Public Sector lead
Aldous Mitchell has 20 years’ experience in policy, organisational effectiveness and operational improvement. He has advised Governments across Australia, New Zealand, the USA, Europe, Asia and the Middle East, including in infrastructure, transport, justice, human services, defence, law enforcement, housing and health.
Csaba Jancsovics
Partner, large scale transformations
Csaba Jancsovics has 15 years’ experience working as a business improvement/strategy consultant. Csaba worked with major international players from a number of industries including telecoms, food manufacturing, transportation, electricity and gas, and financial services.
This article was originally published in The Mandarin: https://www.themandarin.com.au/124383-australia-infrastructure-spend-risk/
