Earlier this month we commissioned two international railway consultants, Phil Sayeg and Professor Phil Charles, to do a review of the Cross River Rail (CRR) project. Rumours are rife that the project will cost well-more than projected and carry far less traffic than projected, and we wanted to know the truth.
The full report can be downloaded from here.
What surprised us the most was that the project involves a private public partnership where the private part of the partnership buys the rights to the system for 24 years for $1.5 Bn, and then allows Queensland Rail to use it for a payment over the same period of $2.4 Bn, plus another $2.4 Bn for maintenance.
This sounds like a lousy deal for a government that is prepared to borrow whatever it takes, and that forswears privatisations.
The challenge for the next Queensland government is economic and financial recovery after COVID-19, and the greatest part of that challenge will be managing the capital expenditure that both sides have planned.
It is important that voters get value for money, and that projects are appropriate for the state as a whole.
CRR is the largest and most complex state government infrastructure project. It involves original expenditure of $6.26 Bn, which with known current cost over-runs could now be as high as $7.16 Bn.
The report identifies a number of planning and governance risks and failures which provide lessons for the future. These risk a cost blowout which will crowd-out other much-needed infrastructure.
The consultants call for an immediate review, which we believe should have the powers of a Commission of Inquiry.
Public Private Partnership (PPP) costs
This appears to be a form of limited privatisation. The Pulse Consortium builds the Tunnel and Stations, and in return for a $1.5 bn payment to the government gets to charge the government $2.4 bn to allow Queensland Rail to use the tunnel over the next 24 years, at which time the right will be extinguished.
Queensland Rail pays a further $2.4 bn to the consortium to maintain and operate the tunnels over that period as well.
PPPs are generally used when governments are financially constrained, and they also help to quarantine the government from construction and financial risk, as well as incentivising the private equity partner to keep costs to a minimum.
Problems with this structure in this situation are:
- It represents less than 25% of the project, so financing risk mostly remains with government
- Interest rates for the PPP component are likely to be around 3% versus 0.8% for government borrowings
- Added to interest will be fees to the packagers, and profit to the private partner
- Because of the potential cost over-runs at the Dutton Park Station as a result of variations to the contract, construction risk may have shifted back to the government.
The report identifies a governance risk. While the Cross River Rail Development Authority (CRRA) originally had an independent board, the board is currently now heads of various government departments.
Problems the report identifies with governance are:
- Implementation of the project is intricate and involves tunnels, rail lines, bridges, stations, rollingstock, and signalling systems to be delivered by a bevy of different contractors with the CRRA reporting to State Development, Transport and Main Roads, Translink and Queensland Rail;
- Lack of transparency and available information
- Potential for “optimism bias” (for example, even before COVID-19 , numbers to 2025 appear to have been over-estimated by between 40% and 56% (68,800 versus a likely range of 44,139-49,140). (p12)
Transfer to QIC
The land over the stations has been transferred to QIC. This may herald a surreptitious privatisation of more parts of the project, as occurred when Queensland Motorways was transferred to QIC from the government and then subsequently sold to the private sector.
It also puts QIC in a conflicted position as the development of the Woolloongabba station, for example, is predicated on office developments to house public servants currently in the CBD. This would have a significant impact on values in the CBD in general, where the QIC has a stake, as well as on specific buildings already owned by it.
It’s difficult to escape the conclusion that the CRR project has been shaped by political imperatives, including understating the cost, and that this has resulted in an opaque, ineffective, costly project that needs to be investigated, starting Monday November 1 with an independent review with the powers of a Commission of Inquiry.
Recommendations from the report are:
- Given the recent changes in governance with the removal of the non-government members of the CRRA, the new Minister should immediately commission an independent review of CRR, ensuring the Commissioner has the necessary investigative powers to assess the overall performance of the project.
- The investigation should also include a full technical review, identification of major risks, as well as confirmation of the total direct, indirect, and associated capital costs for the project and the whole–of life and operating costs for the project.
- The investigation should also identify and recommend ways to better integrate the planning and delivery of other associated infrastructure projects such as inland rail and inner city freight corridors, Brisbane Metro and major urban redevelopment projects such as Queens Wharf Brisbane and the proposed Eagle Street redevelopment.
- The investigation should also consider whether current governance arrangements are best suited to the evolving nature of the project as well as mechanisms to ensure ongoing reviews of the project. This includes the concept of “pop up” governance such as an ongoing, independent and appropriately-powered Inspector-General to develop and implement an ongoing assurance programme for the Minister for Transport as the Project Sponsor.
The full report can be downloaded from here.