The response to COVID-19 has seen a significant undertaking to build major projects across Australia. It has also seen state and federal governments add significant levels of debt, writes Rob Bryant.
The question that needs to be asked is, how can project owners ensure these mega-projects be completed without compromising the objectives and benefits, and then be maintained for the long term public good?
One argument is that infrastructure builders need to take at least a 50-year view on the return on investment (ROI) of these major projects. And if any of these projects are sold off in future, then the creation of a “digital twin” of the project can allow effective operation of the project once it has been taken off government hands.
State spending equals state debt
Governments are borrowing unprecedented amounts of money to cover the response to COVID-19, and this “borrow to spend” approach has the approval of the Reserve Bank of Australia (RBA).
The fact is that government revenue streams simply can’t cover the $327 billion in state and federal COVID response and recovery spending expected by 2024. This means governments will need to borrow $1.3 trillion over the next few years to cover revenue shortfalls. While the states have varying amounts of debt, the lion’s share – $952 billion – will be owed by the Australian federal government.
By way of comparison, the states and territories will owe around $370 billion within the next three years. This means that the states’ share of all Australian government debt will be 29 per cent by 2024, which is more than double the long-term average of 13 per cent.
Taken together, every state and territory government, along with the Australian government, are now carrying debt levels that were last seen during the Second World War.
So where is all this money going? The Australian government has been spending big on COVID relief, such as JobKeeper, increases to JobSeeker, and one-off grants to pensioners and concession-card holders.
But there are also major projects that are being undertaken in both the spirit of nation-building, and also as a way to stimulate the economy. As we have noted, the RBA approves of this borrow to spend model.
In NSW, the state government is investing in major hospital and schools programs, as well as the new international airport. Other states have, or are, making investments in rail and other major infrastructure programs.
Nation building takes the fore
The major projects pipeline now sits at levels not seen since the mining boom. The potential number of projects is now worth an estimated $400 billion over the next half decade, which will act as a huge spur to the country’s economic outlook.
According to ANZ Research’s Australian Major Projects report, activity on projects worth $100 million or more will rise by an expected $21 billion year on year in 2021/22. By 2022/23, the pipeline is forecast to rise by $93 billion for the year.
The problem with these nation-building projects is that they have been subject to major cost overruns. According to the Grattan Institute, over the past two decades Australian governments spent $34 billion more on transport infrastructure than first estimates. The Institute also found that analysis of all projects valued at $20 million or more and built in the last two decades exceeded their promised costs by 21 per cent.
That’s why infrastructure projects need to take a long-term view on the return on investment. A fifty-year timeframe is a good span for the return to the community on the value of these projects.
Even more important than taking the long-term view is to use digital technology to its fullest potential. This means creating digital models (also known as digital twinning) that reflect both the project under construction, and its ongoing use by business and the community.
These digital models can predict problems with the construction process (helping to avoid cost blow-outs) and also enable project buyers to understand how the infrastructure was built and how it can be used over time. Australian Superannuation funds have increasingly invested overseas in recent years. A well delivered, robustly managed project could present attractive investment opportunities.
Whether these remain public or private assets, this once in a generation challenge caused by the pandemic means that governments have had to borrow like never before. The application of technology to ensure optimum delivery, transparency and hand over of all build information for operation.
There is an exceptional return on investment for the use of digital project controls. Infrastructure projects can be better managed, containing budgets and allowing builders, operators and investors to better understand the project, its uses and the environment within which it sits. With a clear commitment to spend big on infrastructure assets, employing the digital solutions to deliver the best outcome appears to be the easiest decision a project owner can make.
Rob Bryant is Executive Vice President, APAC, InEight
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