The crippling cost of Sydney infrastructure projects

By Leith van Onselen

I have noted previously that one of the key reasons why Australia’s high population growth (immigration) is lowering the living standards of existing residents is because of the strain that it places on infrastructure, which inevitably leads to more congestion on roads, public transport, as well as more expensive housing.

Basic math (and commonsense) suggests that if you double the nation’s population, you need to at least double the stock of infrastructure to ensure that living standards are not eroded (other things equal).

In practice, however, the solution is not that simple. In already built-up cities like Sydney, which also happen to be the major magnet for new migrants (see next chart), the cost of retrofitting new infrastructure to accommodate greater population densities can become prohibitively expensive because of the need for land buy-backs, tunnelling, as well as disruptions to existing infrastructure.

In the case of Sydney, we have already witnessed these diseconomies of scale with the North West Rail Link, which is expected to cost an astounding $8.3 billion, as well as with the WestConnex road project – the $17 billion 33 kilometre motorway under construction that is more expensive per kilometre than the Chanel Tunnel.

Not only are these projects hideously expensive, but they often create major indigestion for Sydney residents during the construction phase. Moreover, in the case of WestConnex, existing free public roads like the state-owned M4 (that have already been paid off) will be tolled to help fund the project, raising costs for residents.

In fact, the cost of such projects is so great that the Grattan Institute estimated that “unprecedented infrastructure spending by states and territories” since the escalation of population growth from 2004 is “largely responsible for a $106 billion decline in their finances since 2006“, and that “after a threefold increase in capital spending over the last 10 years, states are paying 3 per cent more of their revenues in interest and depreciation”.

Today, the hideous complexity and costs associated with the WestConnex road project have been further uncovered by The SMH, which reports that the private sector has steered clear from bidding to build the interchange at Rozelle in Sydney’s inner west because of the complexity:

The government insists the setback in finding a builder of the underground spaghetti junction will not alter its plans for construction of the entire 33-kilometre toll road, to be completed by 2023, or the sale of a 51 per cent stake in the project next year…

The underground interchange at Rozelle will be complex to build because it will be up to 65 metres deep, and comprise three levels of tunnels and scores of entrances and exits, including a link to the proposed but as yet unfunded Western Harbour Tunnel.

The Greens’ transport spokeswoman Mehreen Faruqi said she was not surprised companies were hesitant to bid for the interchange, because it was “bizarre and virtually unbuildable” under its present design…

$17 billion. Three levels of deep tunnels. These are the types of expensive and complicated projects required to retrofit already built-out cities like Sydney to cater for rampant population growth. And the costs are borne by existing residents – either through higher taxes or expensive tolls.

Let’s get real for a moment: it is the federal government’s mass immigration program that is primarily responsible for the 87,000 people per year projected increase in Sydney’s population to 6.4 million over the next 20-years, which would effectively add another Perth to the city’s population:

Blind Freddy can see that running a high immigration program requires massive investment and costs a lot, and that these costs are made worse by the diseconomies of scale discussed above. The huge infrastructure costs also force unpopular asset sales, increased debt borrowings and austerity – none of which is a desirable outcome.

Clearly, the most obvious and least cost policy solution to mitigate Sydney’s infrastructure woes is to significantly dial back Australia’s immigration program and forestall the need for costly new infrastructure projects in the first place. Because under current mass immigration settings, expensive solutions like WestConnex will be required over and over again as rapid population growth continually outstrips the supply of transport infrastructure.

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Comments

  1. Just wait till we’ve imported enough 3rd worlders that it’ll be ok to build it 20m in the air, with no concern for footpaths or other amenities! Bonus, the CFMEU will have its back broken!

    Then the prices will plummet.

    • I wonder if we could break up acquisition/disruption costs with wage costs?

      It would also be interesting to somehow overlay project costs with total population growth or total population. Hard to compare like for like projects but this is one chart that could really be the smoking gun for the population denialists.

      • I’m an project estimator, worked on bits of the road tunnels, a few power stations, even have some railway rolling stock experience.
        The problem I see is that the NSW Goverment is not prepared to break these large projects up into smaller workpackages which tier 2 or even tier 3 contractors can directly bid on. They will try to wrap the whole thing up as one massive workpackage, when you do that the get the usual suspect Aussie tier 1 EPC’s forming consortium typically 2-3 consortium’s will bid, and the project directors, bid managers etc know people in the opposing camps and project directors on the government side. Engineering becomes “gold plated”. It’s bloody hard (impossible) for a specialist overseas contractor (say a tunnel or bridge designer) to sole tender and challenge construction methodology and costs unless they can find a local EPC to join with. So in effect, you have only 2-3 specialist overseas (usually all European) engineering contractors bidding when you could get 5-6 (possibly more) if that specialist package was taken out of the massive work pack and awarded as a separate work pack. Samsung would not have got a look in with the NSW Government on the WestConnex had not they teamed up with CPB.
        For rail projects NSW actually might see manufacturing start up again of rolling stock if the NSW Goverment broke their lovely Design-Build-Maintain tenders into two work packages, package #1Design and Build and package #2 Maintain. The former package allows more in international tenders (some of whom would entertain local content) and the later package allows tier #2 and #3 contractors to tender on the maintenance side. Of course by doing that you are cutting out the big Aussie tier 1 EPC’s who are definitely not interested in local manufacturing.

      • Thanks Thallus.

        Makes you think the good old public utility works department is not such a bad model.

      • While I hate the Chinese buying up local property, the Chinese Government can positively contribute to Infrastructure projects here in NSW by providing engineering assistance thru their big state owned EPC companies. In the last decade the Chinese and designed and built 1000’s of km’s of high speed rail lines, hundreds of large bridges and hundreds of km’s of tunnels. Use the Chinese EPC to provide design assistance, you can still hire local Australian engineers and workers to get involved detailed design and construction. I have a collection of brochures from these Chinese state owned companies and they are very impressive demonstrating the engineering competence China has gained. When at one of Australia’s largest EPC contractors, I was contacted by China’s 2nd largest EPC at the time when one of these large rail projects was out to tender and the response I got from the Project Director was that the company policy was “no JV’s with Chinese EPCs”. I might add that same company is quite happy to sell investment property to Chinese nationals.

  2. Hang on the IMF says “Growth is expected to soften temporarily to 2.2%, where housing investment and mining exports in the first half of 2017 were undermined by bad weather,”
    The IMF has urged Australia to use low interest rates to deal with an “infrastructure deficit”, urged greater attention to upgrading surface transportation and improving technologies such as high speed rail, ports, telecommunications, broadband and green investments.
    “After three decades of almost continuous decline, public investment in infrastructure and the stock of public capital as a share of output are near historic lows ”
    WW trouble is no one can show how most future infrastructure beneifts society as a whole
    Most of the benefit goes to the construction company mates of the politicians.
    The bris-connectons court case is soon to be heard up here, billions totally down the drain

    • The big contracting companies are mostly foreign owned these days though they keep their Aussie execs who are matey with the state governments (and opposition). Both John Holland (now owned by the Chinese Central Government and controlled by the Communist Party elite), and CIMIC/Leighton/Hochtief/CPB (controlled by Spain’s ACS) have corruption and bribery scandals in their history. Yet NSW state government likes to conduct negotiations and tenders in secrecy, doesn’t release the business case for infrastructure projects no matter the cost, and doesn’t disclose extra payments made to contractors (its all “commercial in confidence”). They’ve even launched police investigations into whistleblowers who gave information to the media on the grounds of “national security”.

      More than a few NSW state government members historically have had run ins with anti-corruption authorities, which makes their moves to weaken ICAC especially disturbing.

      • correct, those guys are so inefficient they say they need the margins from the govt contracts to maintain viability.
        It is a major major rip off.
        I could build that inland rail line for less than half the advertised pricing, it if was viable,
        robo trucks is the end of that.

      • Viability is rarely a consideration in NSW as the business case is routinely ignored and hushed up. The reason for Spain’s own massive public debt and near bankruptcy was the collusion between big construction contractors and members of government to build unnecessary infrastructure at enormous cost.

    • Australia is already third world. Your son has no future except as a slave of the Chinaman.
      Unless you are very rich, it is unlikely that he will:
      * ever afford a home
      * can compete with the rest of Asia, because your economy is stuffed because of rent seekers and low productivity
      * will be well educated, with your educational standards dropping fast
      * have decent internet speeds, critical in the modern economy
      * have reliable power or keep the lights on.

      Australia is already third world, sure if you are rich you can buffer yourself from this, but you are already the “poor white trash of Asia” thanks to your corrupt political system and population who does not realize what is being done.

  3. Sydney is becoming segregated, too.

    Rich inner Eastern suburbs and Mosman where Lucy Turnbull and her friends reside have almost no planned growth, despite some having lots of open space suitable for high rises. The new urban ghettos are being built out of site of the old rich Liberal voters in the West and North West.

    • So what’s the problem?

      In all seriousness, I’d like the next NSW Labor government to put high rise public housing blocks in Bellevue Hill and Mosman. And a drug user halfway house in Point Piper. And a prison in Vaucluse.

    • Philly SlimMEMBER

      Even better. Do you realise there is an extra station on the Bondi Junction line?? Woollahra. Never built, but the platform is there and the opening etc. It is behind the house at 72A Wallaroy Road – look it up on google maps / satellite view.

      State govt could resume the whole block, build the station and about 1,000 apartments!!!

  4. $17b? Bargain! It’s only about $3,700 for every man, woman, and child living the Sydney. It’s a worthwhile sacrifice.

    Ignoring that the induced demand effect will render it redundant not long after it’s built, of course …

    • Considering that most of Sydney will never (or rarely) use it its more like $8750 for each resident of Western Sydney – or $35,000 for a family of four. But if projections that the true cost may approach $45 billion after all the road widenings, approaches and link roads are included then that becomes a staggering $100,000 for that family. They’ll have to make a lot of trips at $8.50 a pop to pay that off.

  5. Inefficient, with diminishing returns, is how I view Sydney and it’s new infrastructure plans….

    From an operational and capital expenditure efficiency point of view, it seems to make much more sense to me to look to other areas for growth – this is just low-hanging fruit stuff, and should be no-brainers for pollies with their heads on properly….

    My 2c

  6. “Basic math (and commonsense) suggests that if you double the nation’s population, you need to at least double the stock of infrastructure to ensure that living standards are not eroded (other things equal). ”

    I think this is a fairly inaccurate statement. The amount of additional infrastructure projects required to service the city really depends on location of all the additional people being added to the city, i.e. the urban sprawl. As most a being driven into high density developments that are fairly central it’s unlikely that there would be a 1:1 relationship.

    Otherwise good article.

  7. Hmmm, some would suggest that Productivity is only really important in External facing Industry. Yet here we have an example of just how mind bogglingly Inefficient Australian road construction is, we’ve gone from Toll roads costing $M/Km 20 years ago to today’s roads costing $B/Km.
    I only wish that my pay packet had inflated at the same rate.
    Not being able to afford to do what is identified as being essential for your survival is the beginning of the end for any business, I suspect the same rules apply to any society. All reminds me of the last decade of that once great company Eastman Kodak, in the final analysis they died knowing exactly what they needed to do but were incapable of the efficient and timely execution of their plans. Every decision that should of taken less than a day took a month (or longer) and every task that could be reasonably completed in a week took at least a month, this mean that the products they defined came to market so late that they were more or less worthless, their competitors started their products/projects after Kodak yet finished before them.
    In the end that was all she wrote, I wonder if Sydney will be more fortunate?