Grattan Institute gets it ‘wrong’ on driving value in infrastructure projects

Melbourne-based Tom Heading and Phillipa Beck, and Perth-based David Ulbrick, all of Pinsent Masons, the law firm behind Out-Law, were commenting after the publication of a controversial new report by public policy think tank the Grattan Institute, entitled ‘Megabang for megabucks: Driving a harder bargain on mega projects’.

Heading, Beck and Ulbrick said that though they endorse some recommendations contained in the report, the adversarial approach it promotes to negotiating the price of major infrastructure contracts is misguided and would only serve to increase costs to the taxpayer in the long-run.

According to the Grattan Institute’s report, the cost of about 25% of major infrastructure projects “end up costing taxpayers more than governments promised when the contract was signed”, even when construction works have started on those projects.

The report described industry claims about the difficulty of turning a profit and the long-term viability of Australian construction contractors as “overblown”, and urged federal and state governments in the country to “ensure the interests of the community prevail over the concerns of the engineering construction industry”.

It said: “Australians pay too much for major road and rail projects because governments don’t drive a hard bargain on contracts with the big construction firms”.

In response, the Australian Constructors Association (ACA) said that the report “provides some useful recommendations that unfortunately are overshadowed by poorly supported claims that further damage an already fragile construction industry”.

On the Grattan Institute’s recommendation that Australia’s federal and state “governments should only sign contracts that they are prepared to enforce”, the ACA said it agreed, but highlighted the need for those contracts “to be equitable and align the interests of all the parties”.

“For too long government delivery agencies have outsourced contract development to external legal counsel with the overriding instruction to pass as much risk to the contractor in the mistaken belief this will deliver certainty of outcome,” the ACA said. “The goal should be to achieve the best outcome for the project through procurement processes focused on delivering best value rather than lowest initial cost.”

David Ulbrick of Pinsent Masons said the central message that governments should “sign contracts that that they are prepared to enforce” sends the wrong message. He said it simply is not possible to have complete confidence in pricing risk at the outset of major projects, and that contracts need to be flexible enough and foster sufficient collaboration to address this.

This focus on enforcing contracts will only result in a hardening of the already negative risk identification and allocation behaviours that are present in infrastructure procurement sector,” Ulbrick said. “While the report cries for cheaper projects, it will undoubtedly have the effect of increasing the friction and subsequently the cost of social infrastructure.”

“The only people who will lose here are the taxpayers – increased spend on social infrastructure means less taxpayer dollars being directed towards other social needs like education and health. The impacts will be broader still because increased construction costs in the social infrastructure market will drive up capital expenditure prices in other markets as well. While it is tempting to ignore or downplay those price increases that is apt to mislead as well because increased construction costs have an impact on everyone: first, there is increased price in consumer goods as a consequence of increased capital costs associated with building infrastructure to produce and transport those goods; second, higher construction costs means lower returns to institutional investors like super funds who fund private infrastructure construction such as shopping centres and office towers,” Ulbrick said.

Tom Heading of Pinsent Masons said: “The key to delivering Australia’s infrastructure needs is not to squeeze every last dollar out of the builder’s margin. There should not be ‘win, lose’ approach to delivering these infrastructure projects. The sensible approach is to foster a sustainable construction industry where contractors want to invest in Australia’s infrastructure sector. Only good outcomes flow from that.”

Phillipa Beck of Pinsent Masons said that there is a need for more thorough project planning and risk assessment by government at the outset of major projects and then an appropriate risk allocation arising from that assessment. Beck said: "The fact that the Grattan Institute identifies that prematurely announced projects are more prone to cost overruns speaks precisely to the need for more comprehensive risk assessments at an early stage, especially on major projects.”