High mining royalties may provide a windfall for the state government, but a portion of the cash will likely be needed to fund rising infrastructure project costs.
A booming economy will bring big dividends for the Western Australian government as it sets about preparing a budget for the 2023 financial year.
But with the benefits of a boom will come some costs.
Earlier this week, Prime Minister Scott Morrison announced almost $1 billion in additional funding for infrastructure projects under way around the state.
What was overlooked, however, was the potential implication for the state government’s budget as project costs rise (see below).
Billions
Shadow minister for Metronet Tjorn Sibma said he expected the Metronet rail projects to cost $7.5 billion, up from about $3 billion before the 2017 state election.
Mr Sibma also questioned the level of operating subsidies needed for the network once all the projects were completed, and said it could be $2 billion a year.
A spokesperson for Transport Minister Rita Saffioti said the $3 billion forecast had not included the Forrestfield Airport Rail Link, which was already under way at the time.
She said that $3 billion figure had included 10 projects, with 15 projects now in the pipeline with Metronet branding.
The 2017 estimates were Treasury costings, the spokesperson said.
“There have been some significant external shocks, including the COVID-19 worldwide pandemic and other world events that have impacted key supply chains and material costs, (for example the) steel price has increased by 50 per cent over the past year,” she said.
The government had also secured $3.7 billion from the Commonwealth, and welcomed the boost this week, the spokesperson said.
Some Metronet projects are planned but not yet funded.
One example is extensions of platforms on the Fremantle, Armadale and Midland rail lines as B-Series rail cars are shifted to those routes.
The B-Series cars will be replaced on the Joondalup and Mandurah lines by the C-Series, with the first of those rolling off the production line in Bellevue in recent days.
Project cost rises
A series of increases have been revealed in recent months, and the projects on Mr Morrison’s list appear to only add to the challenge.
When the 2017 state election was under way, the estimated cost of the Byford rail extension was $291 million.
The Yanchep line was to be $386 million, with a 2021 operational date.
Changes to scope and a white hot construction market mean Metronet projects are likely to cost even more than the state government’s most recent estimates.
Prime Minister Scott Morrison pledged $440 million for the Yanchep extension earlier this week, an increase of $90 million.
The state government did not comment on whether it would be matching the new funding level, but a spokesperson for the federal government indicated that projects in metropolitan areas were usually funded on a 50:50 split.
That means when the WA budget is released in May, the total price tag for Yanchep could be as much as $880 million, half federally funded and half by the state.
On a similar basis, the $485 million Commonwealth contribution to the Thornlie-Cockburn Link implies a total cost of $970 million.
The federal Department of Infrastructure, Transport, Regional Development and Communications has an even higher cost estimate publicly available: $986 million.
It was initially expected to cost $474 million.
The new scope includes the Rangers Road project, costing $100 million, a spokesperson for Ms Saffioti said.
The rail extension from Armadale to Byford is now expected to cost $885 million, according to the federal government.
That project was expanded to include elevated rail.
Business News reported earlier this year that the Victoria Park-Canning Level Crossing Removal project was estimated to cost nearly $1.1 billion.
It had been forecast at $415 million in 2020, although the plan was also upgraded to include an elevated rail line, and expanded from three level crossings to six.
At the state budget in September last year, the government had set aside $1.4 billion for four projects where tenders had not been finalised, including the level crossing removal and the Byford extension.
Those two projects alone are set to cost $2 billion.
A spokesperson for Ms Saffioti said commercial negotiations were ongoing and it was too early to finalise a cost.
A new price tag for the Morley to Ellenbrook line has not been published, but federal infrastructure department numbers show the Commonwealth expects its share to cost $625 million, implying a $1.25 billion overall cost.
That’s some distance away from the $863 million forecast five years ago, and is higher than the most recent state budget estimate of $1.1 billion; although a spokesperson for Ms Saffioti said today that the projection was still $1.1 billion, with a $400 million contingency.
Business News has previously reported that related projects bring the line’s total cost to $1.3 billion, however.
The cost of Midland station was reported to have doubled to more than $300 million.
There will also be pressure on road projects.
The federal contribution for the Bunbury Outer Ring Road will be $1 billion, up 80 per cent from initial forecasts.
Tonkin Highway stage three extensions got an extra $200 million, for a federal contribution of $600 million.
When former Prime Minister Malcolm Turnbull and Premier Mark McGowan signed a deal in April 2018, which included that project, the indicative estimated cost was $505 million, with $253 million in federal funding.
It’s difficult to determine the precise budget impact for the state government for this series of projects, but the direction is clear.
Up.
Cost and benefit
A press release from independent agency Infrastructure Australia this week indicated 61 per cent of the infrastructure projects in the federal budget that met its assessment threshold had either been assessed or added to the priority list.
Among the examples were the Bunbury Outer Ring Road, where a total benefit of $964 million had been estimated.
When the Thornlie-Cockburn Link was assessed, benefits were $969 million.
Those benefits would include environmental impact, social impact, reduced traffic, and faster travel times; although there is some debate whether the agency captures every possible benefit clearly.
To Mr Sibma‘s point, there will also be operating costs for the state government over the life of the Metronet projects.
Benefits from the inner Armadale line level crossing removal project were to be $314 million, while the Byford extension would bring $306 million of benefit.
Those two already had negative benefit to cost ratios, as reported by Business News last year.
The more costs on other projects rise, however, the more the value they generate for society will be reduced.
The Bunbury Outer Ring Road, for example, would tip into negative territory.
Procurement models
The state government has moved towards an alliance procurement model in recent years, away from design and construct.
One stated benefit of the model has been that it spreads risk between the proponent (the state government) and contractors.
That is beneficial to contractors in an overheated market, although it potentially means the government is wearing more of the pain.
Contractors are already under big pressure from rising material costs and lack of workers.
That was most visible with the collapses of WBHO Infrastructure, Pindan and Jaxon in the past nine months.
Civil Contractors Federation WA chief executive Andy Graham said the industry benefited from the alliance approach.
Cost escalation was happening across all contract types, Mr Graham said.
“(The) more collaborative approach in alliance contracts sees revised costs more easily recognised, whereas with ‘hard dollar’ design and construct, and construct-only contracts, the contractor potentially wears the escalation,” he said.
“The contractual mechanisms to deal with escalation vary considerably but what’s crucial with all contracts is that the client acts reasonably.”
Mr Graham said CCF had asked the director general of the Department of Transport to instruct project managers to be open to negotiating a fair outcome regardless of what the contract says.
“We’ve also asked for the immediate inclusion of a ‘supply relief event’ clause in all contracts, to provide a clearer mechanism for dealing with escalation,” he said.
“Action is essential because ongoing escalation of key materials prices, plus recent rises in fuel costs, is risking contractors’ financial sustainability.”
Grattan Institute transport and cities program director Marion Terrill said it was not clear that the use of alliance contracting had led to higher costs.
Nonetheless, Ms Terrill said there had been a trend away from alliance contracting on the east coast in recent years.
But she disputed that design and construct contracts had an unacceptable risk allocation for contractors.
A report Ms Terrill coauthored in 2021 said that governments needed to worry less about industry profitability and do more to deliver services at the lowest long term cost for the community.
Another problem was bundling contracts together, Ms Terrill told Business News.
“Bundling (projects) with different types of risks together is not a recipe for (low costs),” she said.
Rushing also leads to higher costs, Ms Terrill said.
To this point, the state and federal governments both sought to accelerate projects as Australia came out of the pandemic to create work.
Mega projects of more than $1 billion generally would have more risks, were more complex, were more likely to have cost rises, and generally had proportionally bigger cost increases, she said.
