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By Niall McSweeney, Senior Director APAC | 24 August, 2020

Infrastructure is one of the great “economic multipliers”. Each $1 investment in infrastructure delivers around $4 in GDP increases over the life of an asset.

For now, economic stimulus efforts are rightly focusing on the impacts of coronavirus (COVID-19), the next big question is how we can optimise future expenditure to stimulate our economy and deliver assets that build our nation?

Master Builders Australia says nearly 73% of builders and tradespeople will run out of new work in the coming months. Nearly 400,000 building and construction businesses, and the jobs of 1.2 million Australians, are under threat.

Almost $300 billion was already committed to infrastructure before the COVID-19 crisis emerged. Both state and federal governments have announced an additional $15 billion for projects since the beginning of the pandemic, but opinion remains divided on the economic effectiveness of infrastructure spending.

Historically, state governments have had a chronic, systemic problem when delivering infrastructure projects, with most experiencing significant cost and time overruns. It should be no surprise, then, that state governments are apprehensive about accelerating existing delivery methodology.

So how can we balance the best bang for buck with the need for speed?

While the coronavirus crisis may be unprecedented, spending on infrastructure to support Australia’s economy is not new. National infrastructure expenditure was the centrepiece of Australia’s response to the global financial crisis. The $16.2 billion Building the Education Revolution (BER) scheme funded around 24,000 infrastructure projects in 9,500 schools.

After the program’s value for money was questioned, the 2010 BER Implementation Taskforce was established. The Taskforce, which included an Altus Group director, concluded that projects were delivered at a relatively minor and acceptable premium of around 5%.

The delivery of small school hall projects is clearly different to national infrastructure. However, some of the BER lessons and principles can still be applied at scale to address existing problems and the additional challenges of the accelerated delivery of national infrastructure projects. The three biggest considerations are:

  1. Risk profile: The party that is best placed to assess and manage a risk should be the party that contractually holds the risk. States mistakenly believe that potential cost and program problems can be solved by amending industry-standard contracts so contractors hold an inappropriately high-risk profile. Examples of risks that it may not be appropriate to transfer include planning and consent approvals, environmental issues, stakeholder management and patronage risk.  A clear understanding of stakeholders’ capabilities and willingness to actively manage risk, along with the allocation and pricing of these risks should be established from the outset. A culture of forward-thinking risk management is crucial for all stakeholders.

 

  1. Budgets and program: Some infrastructure projects appear to proceed on unrealistic budgets. Part of this problem is the risk transfer process. In other cases, unrealistic completion dates are set to meet politically-driven deadlines. Agencies mistakenly believe that these dates are underwritten by damages for late delivery, but tenderers either directly cost the damages into bids or seek extensions of time (with costs). As we head into a time of continued market uncertainty, the ability to complete projects on time and on budget is increasingly at risk.

 

  1. Partnerships: Genuine cooperation and collaboration are required to accelerate stimulus projects – and communities will need to play a role as consultation and approval processes are fast-tracked. The Covid-19 crisis could be the catalyst to shift entrenched mindsets and adversarial positions. We are already seeing this at work in the collaboration between unions, industry and government to keep construction sites open.

 

As we navigate the challenges of Covid-19, spending on infrastructure can help Australia’s economy bounce back. We also have a golden opportunity to reinvent our approach to infrastructure delivery in Australia – and that will have a multiplying effect that will last for many decades.

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