Key government infrastructure investments are ending up as super-expensive white elephants

In recent weeks government infrastructure projects have returned to the news. As usual, it is more bad news. This time it again concerns the ever-troubled Snowy 2.0 Project and (yet another version of) the Very Fast Train, this time just the bit between Newcastle and Sydney.

Respected veteran finance reporter Robert Gottliebsen has reported that the cost of Snowy 2.0 project is now spiralling towards an astonishing $40bn. Around the same time, the Albanese government announced it is injecting (an initial) $230 million into detailed planning work for a very fast Newcastle to Sydney rail link. The rub is that this could eventually cost an estimated $93 billion to build (and at least ten times more if extended from Brisbane to Melbourne). All this is at a time when the Federal Treasury cupboard is bare.

According to Gottliebsen, the cost of the Snowy dams, pumps, tunnels, and generating equipment is now officially estimated at $12bn, but there are warnings of further cost blowouts, so the final cost is likely to be between $15bn and $18bn. In addition, the cost of the accompanying massive towers and high-voltage transmission cables is currently estimated at around $20bn to $25bn (after adjusting for facilities not required for Snowy power). All this adds to a $40bn project that will only store power, not produce additional power. In contrast, the cost estimate first revealed to the public in 2017 was only for $2bn.

Australia, according to Gottliebsen, is spending this $40bn in full knowledge that the power transfer over long distances will damage vast areas of highly productive agricultural land, disrupt farming lifestyles, and create environmental damage across large regions.

Snowy 2.0 will only have the capacity to operate for a maximum 175 hours, providing temporary supply from electricity stored during times of low demand. Theoretically, the $40bn for Snowy 2.0 could otherwise have been used to fund four nuclear-power plants, or about 12 large scale high efficiency low emissions coal-fired power stations (clearly much more viable propositions). The project is clearly "bonkers" and should have been canned long ago because it is so outrageously expensive.

What is wrong is that Snowy 2.0 was ill-conceived from the start. Power storage infrastructure is best located close to markets (to minimise transmission costs), but the project is being built far from Sydney and Melbourne with (surplus) solar and wind power to come from even further afield. Additionally, the project was given initial approval before preliminary engineering studies were completed, which might have identified subsequent major technical issues. Most of all, the biggest problem with Snowy 2.0 is that political considerations rather than financial analysis have dominated decision-making, and politicians have been unwilling to lose face through cutting losses.

According to Gottliebsen, the Snowy 2.0 disaster is unfairly blamed on Malcolm Turnbull, who started the project. Gottliebsen believes that blame should also be cast on Josh Frydenberg, who was energy minister in the Turnbull government, and on Angus Taylor who was energy minister in the Morrison Government. Most of all, he says it was the current Energy Minister, Chris Bowen, who gave it top priority.

Gottliebsen believes the power price consequences of Snowy 2.0 are so dire that the government may have no choice but to add the $40bn cost to the budget deficit and to our debt, rather than fund it via electricity prices. Irrespective, Australia is likely to end up with a very high cost "renewable energy" system that is not globally competitive.

Turning to the Very Fast Train (VFT), according to PM Albanese, "the time has come for high-speed rail in Australia… We're doing that by moving the Sydney to Newcastle stage into the development phase".

The problem is that this is an "old hairy" proposal, that keeps being reintroduced every ten years or so. Each time it gets examined, it is sensibly pronounced "uneconomic". Essentially, Australia does not yet have the population to support a project of this type and the distances involved are also very large. Thankfully no one has ever been prepared to fund such an expensive folly.

The proposal first came up during the term of the Hawke Government.

The original VFT proposal came out of the CSIRO about 1984. It was subsequently adopted by a private-sector joint venture in 1987, comprising Elders IXL, Kumagai Gumi, TNT and BHP. Several major studies were undertaken in the 1980s and early 1990s, which showed the proposal to be both technically and financially feasible, and would take 45 years to complete. The joint venture, however, folded in late 1991 following failure to secure a favourable taxation agreement from the Australian Government, and equivocal cost-benefit assessments.