The cost of letting politicians near infrastructure runs into the billions

Cronyism, protectionism and partisan politics are costing taxpayers billions as the cost of infrastructure mega-projects continue to rise — to the point where Australia is one of the most expensive countries in the world to build infrastructure.

The Grattan Institute’s second report on mega-projects details how politics drives the cost of big projects up, and results in a quarter of all projects having cost blowouts.

Three of the key factors in pushing up costs derive directly from our flawed political system and the partisan goals of politicians.

The first is the willingness of governments to accept unsolicited or “market-led” proposals for new infrastructure, singling out the NSW government accepting a proposal for Martin Place Station in Sydney from Macquarie Group for attention — though the report notes “about $11 billion of transport infrastructure over the past fifteen years has been commissioned through market-led proposals.

“They are particularly prominent in Victoria, where a sixth of the value of mega-project contracts has been awarded through market-led proposals.”

“Market-led proposals,” reflecting the uncompetitive nature of such proposals, are know the world over for being expensive and poor value for money for taxpayers.

Politicians also rush projects to fit with electoral timetables, meaning basic due diligence on the project and the contract are not carried out by governments with an eye on the next election. Rushed projects end up costing much more when unexpected problems are revealed, but also mean extra costs as different projects compete for resources, rather than proceeding in an orderly “pipeline” of projects that provides steady work for heavy engineering companies.

But local content rules and local preference requirements create barriers to entry that mean less competition for mega-projects, which in some cases get just one bidder, handing enormous power to that company. Local content rules lead to higher prices when local — rather than the best value for money — products are used, and governments are biased against foreign entrants.

…industry insiders claim governments show a strong preference for extensive local experience. Any requirement for extensive local experience seems poorly founded — over the past 15 years, projects with an international entrant involved performed at least as well in terms of cost during the construction phase as projects with no international firms.

Often such hurdles aren’t made explicit, with government refusing to specify how much weighting they give factors like local experience in selection criteria. On the other hand, when local firms breach local content or preference rules after they have won the contract, such rules often aren’t enforced.

These kind of observations are anathema to major party politicians, who make much of local content requirements and usually compete to outdo each other on such low-key but costly forms of protectionism.

Such barriers to entry make an uncompetitive marketplace even less competitive. According to the report, only three “Tier One” firms — capable of handling billion-dollar projects — operate in Australia, whereas there are many “Tier Two” firms that can handle projects of more than half-a-billion dollars. But the size of mega-projects has been growing, meaning it’s become harder for mid-tier firms to successfully participate.

The growth in contract size calls into question how many firms can feasibly bid for such work. Even though mid-tier firms can and do win mega-project work, they do not do the very largest contracts without partnering, typically with a tier one firm. Once contract size exceeds about $3 billion, even tier one firms tend not to undertake the largest contracts without entering into a joint venture with another tier one firm.

Infrastructure investment has always been the intersection of the most complex and challenging civil engineering, the largest government investments, and the crassest of politicking. But taxpayers don’t see the billions that they’re losing through other infrastructure that could never be funded due to cost blowouts or through higher debt — as a result of politicians controlling the levers of government money machines.