It costs more to construct major infrastructure projects in Australia than in many other places around the world. Murray LeClair discusses why.
Melbourne is the world’s 14th most expensive place to build, with New York in first place, followed by Hong Kong, Geneva, London, and Macau. Despite this high cost, infrastructure spending, particularly on Australia’s vast road networks, is forecast to rise in 2018.
A recent BIS report predicted road infrastructure spending will increase by 15% in 2018, but experts say this level of spending may not continue in the long-term, as rising costs and other budgetary pressures drive federal and state governments to invest more in high-profile rail projects.
But why are infrastructure project costs so high in Australia?
Compared to the rest of the world, Australia is relatively isolated. The majority of raw materials have to be imported and there is not much competition to complete large-scale construction projects, so prices remain high. The bottom has fallen out of the mining industry in recent years, causing economic growth to slow down. The cost of importing raw materials from countries like China has also risen, which weighs heavily on construction projects. A strong Australian dollar is hampering outside investment in major infrastructure projects. Day trading forex trends indicate that the AUD is likely to remain buoyant for the foreseeable future.
Steel Prices
China has relatively low production costs compared to Australia, so their prices are cheaper. Australia has its own homegrown steel industry, but it has struggled to compete with lower-priced Chinese steel. Australian steelmaker Arrium went into voluntary administration in 2016 with $4 billion in debts. A recapitalisation plan was rejected by the company’s financial backers and with more than 10,000 jobs at stake, the company’s future looked shaky. In 2017, the business and its subsidiaries were acquired by GFG Alliance. Arrium was renamed SIMEC Mining and OneSteel became Liberty OneSteel.
Cheap Imports
The Australian Government has been trying to address problems caused by cheap imports. It has implemented “anti-dumping” measures, which apply to steel products imported from 14 countries, including China. Import duties of up to 53% will apply to certain steel products from China, which should help Australian companies stay more competitive.
Huge Cost Overruns
A report released by the Grattan Institute in 2016 revealed that many major infrastructure projects have reported huge cost overruns of more than $28 billion. The study, which examined 836 infrastructure projects built since 2000 and valued at more than $20 million, found that while most stayed on or around budget, some 17% were significantly over budget. The worst offenders were the Hunter Expressway in NSW and the Forrest Highway in WA. Both of these high-profile projects cost four times more than the original estimate.
Asset Renewal
The decline of the mining industry has coincided with a phase of asset renewal. This has resulted in escalated costs for major infrastructure projects. There are several reasons for this, including changes to technical, planning, and safety standards. With the rising costs comes increased risk, so many large-scale projects fail commercial bid risk analysis. Projects that do get the green light are at risk of cost overruns.
Some experts blame the government for pushing ahead with expensive infrastructure projects instead of looking more closely at long-term planning options. With projects that won’t reach completion for 10-15 years, it is far better to examine the risks more closely before announcements are made for short-term political gain.
Rail is the Future
What’s becoming increasingly clear is that, despite soaring costs, rail projects are one of the few areas where federal and state governments are happy to invest, and the next round of major infrastructure spending is likely to focus on rail. The Western Australian Government was the second state to direct money towards rail projects in 2017.
With governments keen to cut congestion in cities and create exciting new employment opportunities, rail is the future.
There always seem to be money for roads…