Investing in infrastructure is a tried and tested way to boost economic activity, and the state and federal governments have made big investment pledges to assist with this. While it is good news for the industry, and the people it employs, it’s important that the funds are spent well to ensure proper economic benefits to the nation.
Pressure to get it right, fast
There will be pressure on the government to turn around business cases quickly to get projects off the ground, but they will need to ensure that the funding delivers long lasting economic benefits back to the nation. Choices will need to be made carefully, and proper process followed when executing, and normal operating challenges will need to be addressed.
Prior to COVID-19, the Australian construction sector was facing many challenges, including capacity constraints, a low level of digitisation and unbalanced risk allocation. We are now seeing indications that the COVID-19 pandemic is accelerating newer long-term disruptions such as digital engineering, rebalancing of supply chains towards resilience rather than efficiency, and innovation of building systems.
Faced with these challenges and disruptions, public agencies should move fast and hard on the ways they prioritise, select, develop, deliver and operate their infrastructure projects and assets (including cost reduction), while rapidly reallocating their resources against the most critical works to prepare for the future.
The main challenges facing governments at this time include:
In Australia, complex, expensive and often duplicated processes can slow down approvals. Even once a project is awarded, it can be another six to nine months of design before construction can even begin. This could mean that economic stimulus arrives too late, and not into the right hands.
Projecting future demand
To avoid building any ‘white elephants’, consideration will need to be given to which projects will have the same demand profile once we move into a post COVID-19 world. Certain industries and sectors will potentially take a lot longer for demand to come back to, such as aviation, so investment in large infrastructure projects in certain industries may warrant a second analysis of the business case to ensure the projects will contribute to a broader strategic priority.
The right economic impacts
Finding projects that enable the right economic impact, as most directly measured by employment impact and that consider post-construction employment as well. The government will be wanting this stimulus money to flow all the way through the supply chain to where it’s intended – citizen’s pockets.
Australia already has record levels of investment in infrastructure, so to expect the market to double down on that and provide even more is problematic. Finding capacity for further projects without taking it away from building the current long term strategic assets already underway could be challenging. As will finding a way to do this that avoids creating unintended demand spikes that put greater pressure on budgets, or a one-off spike that causes a boom and bust cycle.
A balanced risk allocation and managing risk
A sudden influx of projects will need to be appropriately managed for risk. The level of demand that exists for governments to fund infrastructure projects is infinite. There’s no shortage of people dreaming up projects that will warrant government investment and no shortage of rent seekers, private or local government. The challenge for governments will be to be disciplined but enabling at the same time.
Appropriate risk engineering assessment, a balanced risk allocation supported by developing and implementing a risk-based assurance program across capital portfolio of projects will ensure the right initiatives are being selected for the right investment at the right time while the residual risks are reasonably allocated to the best parties being able to manage them.
While much focus has been given to fast tracking projects, it’s important to note that even if a project has a business case, it can still take a long time to go through the procurement process and once it’s awarded, there can be another six to nine months of design before construction can actually begin. The length of this process could mean that the economic stimulus is realised too late to achieve the benefits desired. Consideration should also be given to the program of maintenance work that needs to be completed. You can read more about this here.
The next consideration should be pulling forward the projects that have already started the procurement phase. These projects will need a second analysis on the business case as the demand profile may change in a post-COVID-19 world. Performing an economic analysis to test the impact of the infrastructure project that considers employment effects, not just during the construction phase but post construction as well to ensure that we’re building something that’s going to contribute to a broader strategic priority.
Once these projects have been identified and activated, governments should consider further enabling and amplifying investment already made in the mega projects. Such projects will better enable and facilitate bigger infrastructure schemes to help crystallise future economic benefits – consider the projects that have been earmarked to be delivered over the next 10 years and bring forward elements of those.
Re-examining structural reform
Government agencies have broad powers in terms of planning approvals, and there’s an opportunity here for those powers to be utilised for relevant structural reform to get projects moving at speed. For example, we currently have a duplicated regime between the commonwealth and the states on approvals for significant infrastructure approvals, we see projects with environmental assessments have this capacity to be duplicated. These assessments can go through a state process, and then have to go through a federal process as well. For significant infrastructure projects, this becomes more expensive and more time consuming – there’s a scope for work to be done to achieve a more efficient process and find ways of streamlining red tape and green tape. This could look similar to what we’ve seen with the national cabinet that was formed to tackle the immediate health crisis of the pandemic. Our current environment creates an opportunity for commonwealth and state governments to work more cooperatively together than ever before.
The construction industry was facing capacity issues before COVID-19 hit. It’s important that we keep current capacity focused on building the long-term strategic assets, and not pivot those resources on to projects that might have a lesser long term economic benefit to the nation. It will be important for government to look for space within the economy that needs the investment. This space might be found through geography, industry or sector. If we look for parts of the market to invest in where there are underutilised resources, this can help ensure we get Australian’s working as productively as possible.
Building the right shaped pipeline will also help address capacity issues in the industry. Ensuring that this pipeline has a range of different sized jobs, that allow for different tiers of construction companies to be able to undertake the work will help protect the market from any unintended capacity spikes that can put greater pressure on budgets, and ensure the stimulus money is more widely spread. A well-thought out pipeline with a constant stream of work coming through that is creating the right mix of economic and social infrastructure for the nation.
Minimise risk in a fast-paced environment
There are specific risks that can occur in the COVID-19 environment that need to be managed, so it’s important to not only have the right projects, but to have the right process as well. The right processes at every single stage of the project lifecycle, from identification, approval, funding, and then the monitoring of how that money is actually spent will minimise the risk of wasteful investment, and even fraud.
In the current economic environment, there is potentially greater risk of organisations within the supply chain getting into financial distress which could have ripple effects that cause greater impacts not only on the project, but on other companies that operate across the whole lifecycle of the asset.
Good process is important from the very beginning which is why strong criteria is important in terms of project identification and selection. When money is being dispersed, its critical to make sure there's good control and that the money flows all the way through the supply chain and the funds aren’t just captured at one level. It's also important, post completion, to consider that if a project is set up to deliver certain benefits that it is evaluated against those benefits.
To help minimise these risks, good control and information flow from the project level back to government is critical. The government should request information on where the money has been spent, what it's been spent on, and how it has delivered the benefits that were that were ultimately intended. Commonwealth, state and local governments need to work closely together through this activity. Just because governments want to go fast, it doesn't mean that we can take shortcuts or that due process doesn't have to apply.