Tunnel Vision

Victoria’s infrastructure boom is being driven without regard to value, need or the inevitable fiscal reckoning, argue IPA Executive General Manager Scott Hargreaves and IPA Director of Research Daniel Wild in the Autumn 2020 edition of the IPA Review 

The current frenzy of infrastructure spending in the greater Melbourne region is darkening the fiscal outlook for the State of Victoria, and all Australians have reason to be concerned.

Certainly the scale and short-term effects of the construction program are apparent to anyone who has recently seen the Melbourne skyline or driven around the city and its surrounding suburbs, as the panoply of cranes dominates the view; and detours, high-vis vests and traffic snarls are prevalent at ground level.

To give a sense of scale, based on official estimates there are currently some 150 major transport projects being constructed or scheduled to be constructed with a total estimated investment value of $74 billion.

North-East Link is a road project connecting two major arterials: the Metropolitan Ring Road with the Eastern Freeway, with an estimated cost of $15.6 billion and a scheduled completion date of 2027. Then there is the removal of 75 trainline level crossings—where train lines cross roads, requiring traffic to stop while trains pass—by 2025, at a cost of $13 billion.

The Metro Tunnel—a new train line snaking underneath Melbourne’s CBD, with five new underground stations—has been underway for five years, with an official cost estimate of $11 billion and scheduled completion date of 2025.

The West Gate Tunnel—an underground road project led by toll-road operator Transurban, providing commuters west of the city with an additional route to the West Gate Bridge to get into the city—is estimated to cost $6.3 billion, with an official completion date of 2022 (more on that below).

There’s a shopping list of $2.6 billion in the years to 2024 for new trains across the metro and regional train networks, and a further $2.8 billion on metropolitan rail infrastructure by 2025. But those costs and timelines are just estimates. Already the usual cost blow-outs and time delays associated with government infrastructure are occurring.

Take but three examples. The original design of the Metro Tunnel project was already expensive, compared with similar international projects. While the tunnel would deliver 9km of rail at a cost of $11 billion, the UK Cross Rail is expected to cost around three times as much but deliver about 11 times the rail length.

And it is about to get much more expensive, with a report by the Victorian Auditor-General’s Office released in June 2019 finding there had been a 31 per cent cost blow-out on the early works construction alone. Early works only includes preparatory works such as the relocation of power, draining, and gas services, and construction of access shafts. Further cost over-runs have been reported, including The Age reporting in December 2019 that the Cross Yarra Partnership—the consortium building the tunnel—had “threatened to quit the project entirely unless the government agrees to help pay for up to $3 billion in blown out costs”.

The removal of level crossings at major intersections cost about $80 million each five years ago, but now costs an astonishing $250- 300 million each time. That is around twice the cost of the new 6-star Accor Hotel at the Chadstone shopping mecca. The Andrews Government gave Transurban the green light to commence the West Gate Tunnel project in 2015, controversially extending the life of the company’s toll road concession. However the tunnelling scheduled to commence in June 2019 has not even started. The project participants and the Government have been unable to agree on the process for removal of soil contaminated with the harmful industrial chemical PFAS, and Transurban is threatening to terminate the contract with the government. As of writing, the project remains at a standstill—making it almost certain the 2022 deadline will not be met.

Readers in other states may protest that their own Governments are on a similar path, and indeed these stories also need to be told. The Sydney light trail project’s $4 billion cost blow-out comes to mind. As does the Royal Adelaide Hospital, which at the time of construction was the world’s sixth most expensive building. But Victoria must watch out because the Andrews Government continues to commit to new projects without regards to value for money, and the State has a history of boom/bust cycles which drag down not only the local economy but also the rest of Australia.

HISTORY REPEATS

As a colony and a State, Victoria has endured three great economic crises: in the 1890s after the land boom, in the 1930s when the stock market crash and economic collapse left it struggling to service borrowings, and in the 1990s in the aftermath of the Cain-Kirner government (1982-1992) spending splurge and financial mismanagement when the State Bank of Victoria had to be sold and there were severe credit ratings downgrades. In each case, much of the debt burden could be directly attributed to capital expenditure and operating subsidies for public transport networks.

The Bracks-Brumby Government of 1999- 2010 showed the Victorian ALP can govern in a fiscally responsible manner, but that is not the pattern of the Andrews Government (2014-) and history is now repeating itself.

The pattern of fiscal failure and economic collapse is currently masked because prudent fiscal management and privatisation during the period 1992-2014 saw debt reined in and the public sector kept within its bounds. The Kennett government (1992-1999) initially restored the finances with privatisation of public utilities with proceeds used to pay down government debt. In more recent years, privatisations such as that of the $5 billion Port of Melbourne sale have simply provided short-term cash to feed into the bottomless pit of infrastructure spending, with the demand to fund even more spending driving dubious propositions such as privatising drivers’ licences.

As a result, Victorian state debt is now forecast to increase to $92.6 billion by 2023, compared with $62.9 billion as of 2019. It is conceivable the debt will be triple the $33 billion in 2014, when Daniel Andrews became Premier.

At the same time there is a dramatic increase in operating expenses, driven first by an explosion in the number and remuneration of public servants, and second through the increased operating subsidies necessary to service the additional transport infrastructure. The Auditor-General found that over just the past five years the total public service wage bill (growth in the number of public servants plus growth to public servant remuneration) has increased by 40 per cent, from $19.0 billion in 2013-14 to $26.6 billion in 2018-19.

It must be understood the state already heavily subsidises the operational side of public transport, as the system is dominated by heavy rail and the extensive tram network. Both are heavily unionised, fight against alternative transport modes, and resist efficiencies seen elsewhere in the world. The ticket cost to passengers for each trip on a train, bus, or tram are just a fraction of the full operational cost.

“It costs a fortune for us to bring people into the CBD,” warned Peter Seamer, former chief of the Victorian Planning Authority and author of Breaking Point – The Future of Australian Cities (2019). “In both Victoria and NSW we subsidise all public transport to the tune of 78 cents in the dollar, which doesn’t take into account the capital subsidy.”

So, the bigger the public transport network, the bigger the commitment the state government is making to increased operational subsidies. Right now the State of Victoria, which only raises on its own account around $40 billion per year, is spending upwards of $1 billion more than it earns every month.

YES, BUT HOW?

The proximate cause of the infrastructure splurge is rapid population growth in Victoria underpinned by a massive number of overseas migrant arrivals (net migration of 85,100 in the year ending 30 June 2018, ABS records show), strong migration from other states, an incredible number of temporary migrants, as well as hundreds of thousands of international students. Net Overseas Migration (NOM) to Australia has surged since the early-2000s and is currently around three times the long-run historical average.

The average annual net NOM to Australia was around 75,000 from Federation until 2005, with a total population growth of around 175,000 people. Since then NOM has increased to around 215,000 people per year, with annual population growth around 370,000.

On top of this has been a sharp, unplanned, and unmanaged growth in temporary migration. Australia currently hosts the world’s second-highest number of temporary migrants: second only to the United States, with a population 15 times larger than Australia.

The 2.3 million temporary visas currently on issue—equivalent to 11 per cent of Australia’s population—is up from 1.7 million just five years ago. Around 30 per cent of those are student visas. And in 2016 (the most recent available data at state level) there were 386,707 temporary migrant visas on issue in Victoria, which was 26 per cent of the national total. Added to this is strong internal domestic migration from other states. Over the past five years NSW has had net outward migration of 77,000, compared with Victoria’s net inward domestic migration of 73,000.

Together this means Victoria’s population has grown by almost 1.2 million over just the past five years. That’s close to Adelaide’s entire population. Victoria has by far the fastest growing population in Australia. The most recent ABS figures show Victoria’s population grew around two per cent over the past year, compared with a 1.5 per cent national average; 1.4 per cent in NSW, and 1.7 per cent in Qld.

This rapid population transformation has three consequences. First, the Victorian economy has become heavily dependent on population growth. Education of foreign students is now Victoria’s biggest export valued at $12.5 billion in 2019, accounting for 20 per cent of all exports. The turmoil in the sector in the wake of the Coronavirus (COVID-19) outbreak shows how dependent the university sector is on international students, and Chinese students in particular.

Second, there is a large and growing gap between Victoria’s headline economic growth figures (which are strong) and the per capita figures (which are weak). Over the past five years growth in Victoria’s annual Gross State Product (GSP) has averaged 3.6 per cent, compared with just one per cent growth per capita. So while Victoria has the highest GSP headline growth, it is just the fourth highest out of the six states for per capita growth.

Third, travel times have exploded and congestion has become much worse. The 2019 Global Urban Mobility Index assessment of 38 leading cities found Melbourne has significantly worse traffic congestion than even New York and Toronto.

There is a broader public policy question as to whether the benefits of immigration are still evident when the rate is increased to such a high level, but meanwhile infrastructure must be built and the government must be involved in some way—whether directly or through private-public partnerships (PPPs).

Sadly, the public debate has devolved into jockeying for position about who can most be seen as the champion of infrastructure investment; be it political parties, different levels of government, business organisations, or industry super funds who see opportunity for (underwritten) low-risk/high-return investments. The debate has obscured the reality that with such massive immigration growth no amount of infrastructure investment can shift the dial for key metrics such as the share of public transport costs for commuter trips; nor can congestion ever be solved by a succession of costly catch-up projects.

Currently the Federal Government has been drawn into the Andrews Government’s strategy to fund an airport rail link, which once again will be largely reliant on heavy rail and tunnels (the most expensive solution). The Federal Government appears set to provide up to $5 billion of taxpayers’ funds for a sub-par solution.

NOT PRETTY

The political economy—that is, the incentives and aims—of building infrastructure in Victoria is not pretty. A state Labor government dominated by unions, vested interests, and archaic delivery models inevitably means the infrastructure being built—particularly in transport—is fantastically expensive and will create an unsustainable debt burden without actually delivering what Victoria needs.

Value for money is not a relevant consideration. The ALP in its current configuration appears more than ever a creature of the unions which have experienced a boon from government infrastructure projects, particularly the CFMMEU. IPA Director of Policy Gideon Rozner’s 2017 research report The Impact of the Prohibitive Cost of Building in Victoria found Enterprise Bargaining Agreements (EBAs) in the construction sector have resulted in Melbourne’s labour costs per square metre being second only to New York. A labourer in Melbourne costs $55 per square metre, compared with $49 in Toronto, $41 in Munich, $36 in Amsterdam, $35 in London, and $100 in New York.

The report also found construction industry EBAs can add up to 30 per cent to construction costs, and there is no reason to suggest the relativities have improved since that 2017 study was undertaken.

Thanks to local media, Victorians are incredulous at the deals which mean the “lollipop” traffic controllers receive $105,000 a year to turn a stop sign on the Metro Tunnel; an entry-level labourer with three months experience receives a $143,199 annual wage on the CityLink Tulla Widening project; while labourers earn $110,000 working a 36- hour week on the West Gate Tunnel.

In addition, much of the cost of infrastructure is pushed out into the future. The Victorian government has not raised taxes anywhere near the extent required to pay for its infrastructure spending. Instead, it has accrued substantial debt which will need to be paid back by future generations.

But, at least for now, commuters are happy seeing roads being built which they surmise will cut their travel times without incurring any direct cost. And the cost is pushed out to the other states through Australia’s fractured system of federation. According to the 2019-20 Victorian Budget, some 52 per cent of the government’s revenue is funded by the Commonwealth with 28 per cent coming from the GST and 24 per cent from other grants.

This means the Victorian government has no skin in the game for more than half of its revenue stream. This political and economic dynamic is made worse by the Commonwealth electing to throw good money after bad to help fund specific infrastructure projects in Victoria.

Not only is this bad economics; it is bad politics. Why the Coalition Commonwealth government thinks that it is a good strategy to fund state infrastructure for which the Andrews Labor government receives all the credit from voters is a question only it can answer.

If state governments were required to fully fund all of their expected expenditure— or at least all of their infrastructure—at least this would place a further constraint on reckless spending with little regard to value for money.

THE LOOP SAYS IT ALL

The proposed Suburban Rail Loop is the exemplar of the extent to which Victoria is broken. In 2019 the Victorian government blithely committed to building a 90km underground heavy rail Suburban Loop Line, with no published studies or identified funding sources. At the time the headline cost figure of $50 billion was presented as emblematic of the Government’s vision rather than a deep cause for concern.

The lack of regard to considerations of value for money was evident from the outset. It was simply assumed the solution was heavy rail, that it must be underground, and that automation (driverless trains) should be ruled out despite its adoptions on modern rail networks all over the world. In other words, the loop announcement rules out a range of alternatives that could be better value for money. Usually, one would determine the transport needs of the state and put out to the market different ways of meeting those needs without prejudicing the result.

The objective could be, for example, to cut travel times by 10 per cent, to get 100,000 trucks off suburban roads, or to link main arterial roads together so motorists can avoid lengthy detours through the city and inner suburban roads. The opportunity costs of a massive investment such as the rail loop are the hundreds of alternative projects to which the funds could have been applied for a superior outcome.

The financing requirements for a project on this scale is leading the Government into unchartered territory. Alone among the Australian States, and against the wishes of the Federal Government, the Andrews Government has committed to the Chinese Government’s One Belt, One Road scheme, which is just one aspect of China’s broader geo-political strategy of expanding its global influence. Under the CCP’s scheme China provides funding for infrastructure around the world, and in return they can receive an ownership stake and access to the key construction and related contracts.

Internationally, some results have been problematic. For example, construction of the Hambantota Port in Sri Lanka which opened in 2010 was largely enabled through loans from China. However, the Sri Lankan government was unable to service its debt so Sri Lanka leased the port to the Chinese government in exchange for $1.4 billion being provided to the Sri Lankan government to pay back the debt. Nevertheless, according to a Herald Sun report, The Belt and Road “framework agreement” struck with China’s National Development and Reform Commission commits Victoria to the “joint development of the Belt and Road Initiative”.

The myriad implications will only be revealed over time. At the same Belt and Road forum in Beijing at which the Premier made this announcement, it was revealed Monash University, based in Melbourne’s southeastern suburb of Clayton, was entering into a $10 million agreement with the State-owned Commercial Aircraft Corporation of China, Ltd. (Comac) in which the latter would establish a R&D facility on the campus. Monash University—which in usual times has a large number of students from China— would have its own train station at Clayton on the Suburban Rail Loop.

It is time for key stakeholders to take stock of what is happening in Victoria. Instead of providing blank cheques for further projects such as the rail link to the airport, the Federal Government should be compiling and publishing benchmarking information to reveal the true costs of projects being undertaken in Victoria.

Citizens, the Auditor-General and parliamentarians must grapple with the fiscal crisis that will soon engulf Victoria if spending and cost blowouts continue at the expected rates, with all that means for future debt and taxes.

Presenting a true picture of Victoria is in the interest of all Australians.