24 July 2014 — The Productivity Commission’s report on the recent Inquiry into public infrastructure concludes there is an urgent need to overhaul processes for assessing and developing projects, with major issues including poor value for money, the need for governments to maintain partial or full funding and rising costs, partially due to the resources boom.
Missing from the Productivity Commission report, however, is any clear recommendation around addressing infrastructure sustainability. Instead, comments around environmental legislation referred to submissions from the minerals lobby and others arguing that existing regulations were too complex and costly, and failing to deliver any real environmental benefit.
The report recommended that government becomes a more “educated” client, a position echoed by executive director of the Australian Construction Industry Forum Peter Barda.
Mr Barda told The Fifth Estate the Commission’s findings around risk analysis for infrastructure projects and the current government approach to outsourcing were core to problems being encountered by contractors.
“Project sponsors decide they want to build something, but the skill base in government is so low compared to 20 years ago, it is understandable people in government want to protect themselves from the risks of design and building.
“The Commission is saying that the government has gone too far, and shifting all the risk to the private sector doesn’t work.
“The government have got to keep that patronage risk for themselves.”
Mr Barda said the reduction in engineering and construction expertise within government departments, which was a consequence of the economic rationalism of the 1980s, has resulted in a public sector with limited capacity to properly scope infrastructure projects in order to balance the risk between the public sector and the private sector.
Contractors increasingly need to invest millions of dollars in developing project designs as part of the tendering process, which then means needing to increase the contingency budget in pricing so this cost can be recouped. Unsuccessful tenderers may never recoup those costs.
The other consequence, Mr Barda said, is the training ground for engineers that used to be provided by the public works agencies is now gone, leading to a broader industry skill shortage.
“Government is not taking the role it used to of taking really bright young people and training them up,” he said.
Sell the grid
One of the puzzling aspects of the Productivity Commission report is the almost exclusive focus on road, rail and tunnel type infrastructure projects. The terms of reference did not specify only transport-related projects, yet the report and its findings do not mention many other forms of infrastructure such as hospitals, water or educational institutions.
The Commission did mention energy infrastructure, but only in terms of a recommendation that state and territory governments should privatise their government-owned electricity generation, network and retail businesses, as well as privatising major ports.
“Privatisation should be subject to appropriate processes to ensure that the public interest is protected through structural separation, regulation, sale conditions and community service obligations,” the report stated.
BIM and collaboration could help at the front end
Mr Barda said that most of the issues identified around the front-end and financing in terms of transport infrastructure apply equally to other types of infrastructure projects.
One of the Commission’s recommendations ACIF is in strong agreement with is the benefits of building information modelling for achieving better project outcomes.
“It is very important at the front end for us, the use of BIM in design and increased collaboration,” Mr Barda said.
“There was a wonderful line in the report, ‘Procurement, is it true that a good customer is hard to find?’ Clients [such as government] should invest more in the initial design. The basic approach of government has been to outsource as much as they can and put as much risk on the private sector as they can.
“Government needs to be more mindful of what’s required at the front end. They are entitled on behalf of taxpayers to get good value for money, but they won’t get the best out of BIM unless they have got a different approach to how design is put together. They need to involve the contractor’s expertise in the front end in the planning and design and building of the BIM model – have all the doers working together at the front end.
“That will cut the risk of inadequate design to the taxpayer, who is the owner and end user of infrastructure, while also eliminating the risk to contractors of designs which are unbuildable and can’t be built for the price they tendered with.”
Fundamentally, Mr Barda said, the approach of going for the cheapest price can be seen as a race to the bottom, and that the government should become a “clever client”.
Environmental regulations under fire
The Productivity Commission recommended that efforts should be made to reform and reduce social and environmental regulations, based on the available quantitative information, together with qualitative evidence from stakeholders on “the extent and causes of the cost burdens created by social and environmental regulation, [which] suggests that those burdens can be significant”.
The Commission cited submissions made by Xstrata Coal, the Minerals Council, Lend Lease, the Civil Contractors Federation and The Property Council of Australia, among others, which all critiqued the existing environmental legislation framework.
The report stated that, “In their submission, Lend Lease estimated that the costs of addressing environmental regulatory requirements have more than doubled over the last ten years, reflected in part in the significant increase in the number of approvals and assessments required. It also estimated that there has been a fourfold increase in the number of (non-blue collar) staff necessary in the design and construct stages of a project.”
The Property Council submitted that, “The duplication between the Environment Protection and Biodiversity Conversation Act 1999 and state-based environment protections is well understood and there has been no credible evidence presented that this duplication results in environmental benefits. The EPBC Act lacks clear definitions, rules, and tests which has resulted in broad and inconsistent interpretations for more than a decade. All stakeholders have suffered from a lack of certainty and consistency.”
The Minerals Council of Australia stated there is “little, if any, evidence these additional [regulatory] processes have improved environmental outcomes. The complexity of project assessment has increased in part as a result of a plethora of technical and administrative changes that seek to make minor adjustments to the law, regulatory processes, fees and charges. These changes tend to be politically reactive and considered in isolation from existing regulations. Further, the increase in regulatory processes has been compounded by the imposition of additional independent advisory panels at State and Commonwealth levels.”
The Civil Contractors Federation said, “CCF is opposed to unfeasible, unreasonable and impractical government environmental standards, specifications and the like, that impose unfair demands on contractor provisions and activities. When developing and implementing new environmental standards, specifications and regulations, government bodies must consult with industry in order to analyse the costs versus benefits to business.”
You can download the full Productivity Commission report here.
The key findings of the Commission were:
- There is an urgent need to comprehensively overhaul processes for assessing and developing public infrastructure projects
- There are numerous examples of poor value for money arising from inadequate project selection, potentially costing Australia billions of dollars
- Additional spending under the status quo will simply increase the cost to users, taxpayers, the community generally, and lead to more wasteful infrastructure
- Reliance on the notion of an infrastructure deficit, too, could encourage poor investment choices
- It is essential to reform governance and institutional arrangements for public infrastructure to promote better decision making in project selection, funding, financing and the delivery of services from new and existing infrastructure
- Well-designed user charges should be used to the fullest extent that can be economically justified. However, governments will have to continue to fully or partly fund some infrastructure projects and address equity issues
- Significant institutional and longer-term road pricing arrangements will create more direct links to road users, taking advantage of advances in vehicle technology
- Private sector involvement in infrastructure provision and/or financing delivers efficiency gains only if well designed and well implemented
- Private financing is not a “magic pudding” — ultimately users and/or taxpayers must foot the bill
- Government guarantees and tax concessions are not costless and often involve poorly understood risks
- Governments will have some capacity to fund more projects than under current fiscal and debt management practices, provided the reform package in this report is implemented to ensure the selection of projects with strong net benefits
- Data problems limit analysis and benchmarking. A coordinated and coherent data collection process will address this and improve future project selection decisions
- Nevertheless, there is evidence of recent significant increases in the costs of constructing major public infrastructure in Australia. Elevated labour costs due to the mining construction boom has been one factor, but no single input has played a decisive role in cost increases
- Until recently, labour productivity growth in the construction sector generally has been sluggish. There is no conclusive evidence that Australian levels of productivity in construction are significantly different from other developed countries
- The industrial relations environment in the construction industry remains problematic, mainly in general rather than civil construction, with the problems much greater for some sites, unions and states. Governments can use their procurement policies to drive reform, and penalties for unlawful conduct should rise
- Despite significant concentration in the market for large public infrastructure projects, the market appears to be workably competitive today, though a few simple measures would make it more so and would reduce the cost pressures facing procurers
- There is significant scope to improve public sector procurement practices and lower bid costs for tenderers, with potentially large benefits for project costs and timing