Victorians could be forgiven for missing the news late last week that the North East Link had blown out by $10bn.
After all, Melbourne’s West Gate Tunnel, first expected to cost $500m, then revised to $5.5bn, is now $10.2bn and counting, while the city’s Metro Tunnel has blown out by at least $1.36bn.
The total cost of the Suburban Rail Loop, meanwhile, is anyone’s guess.
But the overruns threaten to define Jacinta Allan’s premiership.
In explaining why the cost of the North East Link had grown since the project’s business case was put together in 2017, Allan blamed several “unforeseen global circumstances”, including the Covid-19 pandemic, the war in Ukraine, the soaring cost of materials and inflation.
These factors, as well as changes to the project’s design and an upgrade of its adjoining roads, will add $13.43bn to the total cost. The blow out alone is more than double what Labor suggested the entire project would cost back in 2008.
Shane Oliver, chief economist at AMP, said a “perfect storm” had contributed to the cost overrun but suggested the government was also to blame for overheating the market.
He said six years ago, when the North East Link’s business case was put together, unemployment was higher and interest rates lower, so it “made sense” for governments to borrow to build.
“Victoria did it with gusto, reflecting the sort of big government philosophy of the Andrews government,” Oliver said.
“It led to a situation where Victoria in particular – but various governments around Australia – were trying to do a whole bunch of infrastructure projects all at once, which has accentuated the cost pressures now.”
Oliver said the government was now competing in a tighter labour market for the workers and the materials it needs to complete all its big projects.
“There’s an argument that’s adding to inflation,” he said.
“Add in the higher interest rates and it’s inevitable these projects are going to blow out.”
The Grattan Institute on Thursday released modelling that warned the “big build” will affect the private sector. It said domestic builders will struggle to find the workers and materials needed to reach the government’s target of 800,000 homes in the next decade, “given the scale of the state’s infrastructure build”.
The Housing Industry Association, Infrastructure Australia, the Property Council and the Urban Development Institute agree.
The government should reconsider whether to proceed with any new infrastructure projects, the Grattan Institute’s economic policy program director Brendan Coates said.
“Projects that look really shaky, like the Suburban Rail Loop, we should cancel them,” Coates said. “We’re talking about a generation’s worth of infrastructure spending, where the benefits are really unclear. Whereas, when it comes to housing, the benefits are really clear.”
According to the modelling, if Victoria reaches the housing target, rents could be 13% lower than otherwise by the early 2030s, saving renters up to $14bn over the decade, and by almost $3bn in 2033-34 alone.
“You can’t do everything, and trying to do everything ends up being really expensive,” Coates said.
It’s something the Victorian treasurer, Tim Pallas, is keenly aware of. When he announced his mid-year budget update last week, he conceded he would like to see the government’s $21.3bn annual spend on infrastructure shrink because of “the crowding-out effect that it’s having on the private sector”.
Allan, however, denied the government was overheating the construction market.
“One of the things that has an inflationary impact on projects is having a lack of skilled workers available to come and work on those projects,” she told reporters on Monday.
“That is why having a pipeline of projects like we do here in Victoria means that we’re keeping workers engaged.”
She said workers on the Metro Tunnel and West Gate Tunnel would be able to move to the North East Link and Suburban Rail Loop projects.
In any event, the issue will follow the Allan government into the new year.
The opposition this week wrote to the Victorian Auditor General’s Office requesting an urgent review of all major transport and infrastructure projects announced or under way and will probably pursue the blowouts through parliament.
Ratings agencies are keeping an eye on the state’s finances and have warned of further downgrades if they continue to deteriorate.
With the budget tight, the government will also struggle to spend on anything else – including its promised new hospitals, women’s health hubs and schools, as well as the wages for the essential workers it employs – such as child protection workers, doctors, nurses, police and teachers.
But those within the Labor party argue all Allan has to do is “weather the storm” until some of the projects are finished.
Metro Tunnel is on track to open in late 2024, and the West Gate Tunnel in 2025 – both well before the 2026 election.
“People won’t remember the cost when their commute is halved,” one MP said.
