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.

The problem was that favourable cost/benefit results depended on using a very low discount rate to apply to future benefits from the project. Its initial cost/benefit study discounted future costs and benefits at a rate of 4 per cent a year. Using this low discount rate, the benefit-to-cost ratio was estimated to be just 1.1 to 1. That is, it was judged barely worthwhile.

Infrastructure Australia commonly requires a much higher rate for large projects seeking Commonwealth funding. According to accountancy firm KPMG"Infrastructure Australia, as well as Australia's state and territories' treasury and finance departments, advise the use of a discount rate of seven per cent for most public infrastructure projects. This rate has been in place since (at least) 1989".

The VFT also got a run during the Howard government, when Tim Fisher pushed for some of the proceeds of the sale of Sydney Airport to be devoted to fast rail. According to journalist Phillip Coorey, the newly elected Rudd government also listed a very fast train from Brisbane to Melbourne as a signature infrastructure priority. A high-speed rail advisory group was established and given $20 million to examine options. Tony Abbott won the 2013 election and abolished the group as part of his government efficiency drive. Later, the Turnbull/Morrison government devoted $20 million to exploring high-speed rail options between Melbourne and Shepparton, and between Sydney and Newcastle, and Brisbane to the Sunshine Coast. These explorations also went nowhere.

Anthony Albanese has always been a fan of the VFT, and, in the lead-up to his initial election victory in 2022, promised that, if elected, his government would start work on a route running from Brisbane to Melbourne via Sydney and Canberra. Transport and Infrastructure Minister, Catherine King, estimates that construction on the part between Gosford and Newcastle, could begin as early as 2029. The $230 million allocated for detailed planning work is supposed to be just the start.

The widespread perception is that the VFT will never be built and that the proposal merely gets revived on a regular basis when an election is becoming due. The investment returns are just not there, and private equity will never fund it. Consequently, spending another $230 million on more planning work is just a waste of public money.

On a broader note, Australia has been notorious for wasting money on dud railway projects. Two of our biggest "nation-building" rail projects have ended up being financial disasters.

One such project was the Alice Springs to Darwin Railway, opened in 2004 at a cost of $1.3 billion. The Commonwealth, SA and NT governments put up a total $560 million towards the cost with a private consortium committing $740 million. The project failed to make a profit because of insufficient demand and ended up in voluntary administration. In May 2008 it was sold off to US railroad company Genesee & Wyoming Inc, which purchased it for a mere A$334 million.

The Inland Rail project is a more recent unmitigated disaster, which went ahead despite equivocal cost-benefit assessments. The project is widely regarded as a huge pork-barrel to the National Party and as a pet project of former National, Barnaby Joyce. The cost of delivering the 1,700-kilometre project has now blown out from $16.4 bn to more than $31 bn. A reviewwarns the price tag may climb even higher because it is still unclear where the line "will start or finish". (The Queensland end of the line is still in Limbo.) If it is ever finished, large operating losses due to high capital costs and insufficient traffic are a certainty. It would have been far cheaper and more sensible to have instead fully duplicated the Newell Highway.

Melbourne's Suburban Rail Loopis another disaster in the making. The Albanese and Allan governments are facing mounting pressure to release updated costings before billions more are committed. There are warnings its true price tag may have doubled. The cost of the first stage of the project was estimated at $30bn to $34.5bn in a 2021 business case, but those figures would equate to about $42.3bn today. The returns from the project are problematic and there are doubts about the ability of the Victorian government to fund it.

Canberra's light rail is also blowing out in both price and scope, though it has a deal of public support amongst naïve taxpayers. The biggest issue is that the initial project keeps being added to, when it is questionable whether light rail can be economic in Australia's most decentralised city (by far). There are competing pro-railand opposingcommentaries on the cost efficiencies of the light rail, which contain radically different assessments. The latter suggests that "It can be shown from published sources that, to date, some $3.27bn has been committed (much of it spent) on Stage1 ($1.78bn) and on Stage 2 Planning and Build contracts ($1.496bn). One thing is certain and that is the cost is exploding because of commitments to ever-more branch lines extending the original Gungahlin to Civic line". The ACT recently experienced a net deficit just short of a billion dollarsand ACT's credit rating has been downgradedfrom AA+ to AA by S&P Global Ratings.

Apart from rail, one can point to many other white elephantine public investment projects embarked on by Australian governments (of both sides of politics). These include most of Australia's (rarely used) desalination plants, "green hydrogen" and other experimental energy systems (now mostly gone bust), the (now aborted) French diesel-electric submarine acquisition, the Murray-Darling Plan that sends valuable irrigation water to evaporate in shallow SA lakes, NSW Government purchases of productive Western pastoral lands to turn them into barely visited national parks, the M6 Motorway project now plagued by sinkholes etc etc.

This all raises the issue of how and why all this waste comes about.

A primary cause is that voters and politicians don't perceive public money and public assets in the same light as their own resources. Which politicians would be prepared to invest their own money in the VFT, Inland Rail or Snowy 2.0? None of them, though they will happily waste taxpayers' money on hare-brained projects if they think there are votes to be gained!

Another consideration is that taxpayers generally don't consider themselves as having "ownership" over public assets and collected taxes. These instead tend to be fatalistically regarded as money already gone. (48 per centof Australia's 12.2 million "income units" pay no net tax anyway so why would they care? ) Furthermore, most taxpayers often don't realise what a large amount of money, say, a billion dollars is, and frequently don't even blink at wasted billions ("not their money"). There is also a tendency for individuals to see public investments as "free" and to favour any that are of benefit to themselves, irrespective of cost to the public purse.

Do the math on the cost of the Newcastle to Sydney VFT, for example. The project will mainly benefit commuters from Newcastle and the central Coast travelling to and from Sydney. One arrives at a horrendous cost if the $93 billion outlay is compared with the mere 226,000 dwellings that exist in Newcastle and the Cenrtal Coast. The cost per household is even more frightening if you then limit the comparison to only (the far fewer) households with members likely to commute on the route.

In my view, there is no fail-proof solution to the problem of politicians wasting mega-dollars on foolish infrastructure and other public schemes, though tightening budget environments and growing debts are an increasing limitation. It would also help if Infrastructure Australia was given stronger powers to report on the viability of proposed public investments. The trouble is that it is rarely a good career move for a bureaucrat to tell politicians what they don't want to hear. This is the reason why the best Auditor-Generals are nearly always those close to retirement and therefore unconcerned with future patronage from their political masters.