Large infrastructure project pre-approvals and their impact on government stimulus packages

By TBH Associate Director, Corey Farrell

For over 55 years, TBH has been involved in planning complex infrastructure projects throughout Australia as well as internationally. With constant exposure to these types of projects, TBH has built up a wealth of knowledge in terms of best practice processes which have to take place prior to construction and the resultant time and cost impacts these processes have on the physical construction works commencing.

From our experience, we have observed that immediately prior to an economic downturn, governments in developed countries tend to be proactive and develop economic stimulus packages to soften the macro effect of the downturn. These government economic stimulus packages generally contain a significant construction element due to the high level of employment the sector provides to the economy. The employment benefits apply both to those people physically on site, as well as less directly – such as in increased manufacturing jobs. The Construction industry generates over $360 billion in revenue, producing around 9% of Australia’s Gross Domestic Product with over 1 million workers.

Notwithstanding, the good intentions by the governments to support the construction sector within their economic stimulus package, it takes a long period of time before the benefits come to fruition. This can be due to items such as land acquisition, business cases, securing funds, design development, environmental studies, contract tendering and negotiation.

As a result of the above, it can take upwards of two years before the macro benefits are felt within the economy – in terms of significant additional jobs, as well as additional spending in the local economy arising from these additional jobs. Consequently, the window of opportunity to soften the effect on the economy in the event of an economic downturn can be missed and the stimulus spending is therefore less effective.

A different approach

An alternative means to fast-track the good intentions of governments can be achieved in the following ways:

  1. That large construction project can deviate from the traditional procurement process of being under one main contract. The project could be separated into smaller work packages in order to allow construction to commence sooner, instead of waiting for the above items to be finalised. For example, if a construction project consists of a combination of tunnel, viaduct and at-grade package works, under the traditional procurement method, all packages would be finalised before tendering and construction works would commence. If the packages are separated into smaller packages, it could be the case that tunnelling construction works could commence sooner due to the fact less land needs to be acquired; and
  1. In order to deviate away from the traditional procurement process, the government departments will need to have their capacity increased to ensure the faster approval of the required processes, which provides further indirect employment benefit to the local economy.

TBH notes that a number of Australia’s state and federal governments have been very active in trying to accelerate projects in the form of reduced approvals, especially for ‘shovel-ready’ projects.  Examples of the types of projects identified for acceleration include new housing estates, new industrial complexes and schools. This approach is extremely positive and will provide a much-needed employment injection into the economy. However, a number of these projects are on the smaller scale of investment and therefore many more projects would need to occur, in order to sufficiently support the economic recovery.

If more large infrastructure projects are fast tracked in this method, the employment injection would consequently surpass that of the smaller scale projects. It is recognised that applying this accelerated approach for letting contracts for large infrastructure projects may well have negative consequences. In particular, it can be more challenging for government to coordinate the various interface points between the separate contracts. These contractual coordination issues can be reduced through applying the sorts of project controls disciplines that TBH is renowned for.

However, there is still a risk that the final cost for an accelerated project may be greater than it might otherwise be under a traditional approach. Obviously, there would also be certain large infrastructure projects that would lend themselves better to this approach compared to others.

Clearly the risk of increased costs with the accelerated contracting method for large projects is a trade-off for government to consider against the economic stimulus that this approach can provide.  As noted above, the risk of such cost overruns can be greatly reduced with appropriate project control systems in place – TBH would strongly encourage the adoption of these disciplines to maintain control and visibility in these uncertain times.

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