Budget overruns on major Australian government transport projects in the past 15 years total $28 billion, with premature project announcements largely to blame.

This is according to a new report from the Grattan Institute, which looks at 836 projects valued at $20 million or more. In an Australian-first, the study analyses cost overruns from the first funding promise, rather than from the formal funding commitment.

 The report lists Western Australia’s Forest Highway (Peel deviation) as a prime example of a project that suffered from a premature cost announcement. Premature announcements are often made in the run-up to an election when a politician promises to build a road, bridge or rail line without a concrete funding commitment.

 The Western Australian Liberal government promised to build the Peel deviation from Perth to Bunbury during the 2001 election campaign, pricing the project at $136 million. The completed project had a 406% overrun – even discounting changes in the highway’s scope (a 20% increase in length and an additional $40 million in improved materials), the project still had an overrun of 368%.

Report author Marion Terrill says analysing the whole cost lifecycle of the project is a valid approach; once announced, 80% of projects end up being built.  

“Normally these studies of cost overruns look at what happens during the contract period, or from the first funding commitment. That is relevant and interesting, particularly if you’re interested in contract compliance,” Terrill says.

“But when a politician promises to build something for a particular cost, they treat it as binding and the public treat it as binding. 

“All main political parties have committed to the sound planning of infrastructure, and to making decisions with broad social benefit, yet in practice, they continue to promise projects that Infrastructure Australia has not evaluated or has already found to be not worth building.”

The report finds cost-benefit analyses appear to sometimes be retrofitted to justify premature commitments.

Terrill says while only 32% of projects were announced early, these projects accounted for 74% of the value of cost overruns during the past 15 years.

It’s unsurprising that politically-motivated announcements prior to formal budget commitments tend to be optimistic. However, the report also finds “premature cost announcements appear to haunt projects throughout their lives”. 

“Projects announced early tend to perform worse than average against their cost estimates, not only in the early stages but also later in the project’s life. After formal budget commitments, the costs of projects with early cost announcements project typically increase by a further 26%. This suggests that overly optimistic initial cost estimates are rarely adequately adjusted straight away – reliable project cost estimates may only eventuate half way through construction,” the report states.

Additional findings

Terrill says most projects don’t overrun their budgets, but when they do it can be “spectacular”.

“We found 90% of overruns are attributable to around 17% of projects. So in other words, a small number of projects are having massive budgetary implications,” she explains.

And, the scarcity of Australian studies of cost overruns has led to an erroneous belief that Australia has a good track record with cost overruns compared to other countries.  

The report also asserts politicians are not held accountable for poorly founded cost promises once projects are completed.

“Infrastructure Australia, according to the law that establishes it, is supposed to evaluate whether projects met targets set before or during delivery and to promote public awareness of its monitoring role, in part by publishing information on its website. This does not happen. Nor do state governments, including their infrastructure bodies, publish information about how well projects performed against their estimated costs and benefits. Post-implementation reviews seldom take place or are made public when they do,” the report states.

Terrill also says the ‘worst case scenario’ costings for projects are overly optimistic, meaning the chance of a project going drastically over budget is increased.  

“You get two cost estimates for these projects; one is a median cost estimate, known as a P50, and the other is a worst case cost scenario, known as a P90. Looking over all the projects for the past 15 years, we’ve worked out how much higher the worst case number should be, which is about 21%. But when you look at all of these projects and small projects, typically the difference between them is 6% or 7%,” she says. 

The report also finds underruns did not balance out overruns.

Recommendations

The report makes a series of seven recommendations aimed at addressing overruns in high-value transport projects, including the publication of post-completion data.

“After a project’s been completed, we never get a report on how it went. The implication of not publishing it is that firstly there’s no accountability to the public, but secondly those people who are estimated future projects can’t learn from experience,” Terrill explains.

Recommendation 1: Evaluate before spending

Recommendation 2: Publish evaluations of new infrastructure commitments

Recommendation 3: Publish post-completion data

Recommendation 4: Special legislation for big projects over $1 billion

Recommendation 5: Improve risk measurement guidance

Recommendation 6: Compile Australian database of completed projects

Recommendation 7: Hold the project contingency in a portfolio pool

The full report can be viewed here.