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How to protect infrastructure spend from ‘leakage’

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Billions of dollars is being thrown at infrastructure projects in South Australia and nationally in a bid to keep the struggling economy afloat. While it is vitally important these major projects deliver significant economic bang for buck, the potential for value leakage is unprecedented, according to business advisory firm BDO.

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The COVID-19 pandemic has caused the Australian economy to significantly slow.

In response, federal and state governments are jointly investing more than $1.5 billion dollars to expedite shovel-ready projects and road safety upgrades.

Prime Minister Scott Morrison has said further investment in infrastructure will play a critical role in the Federal Government’s plan to boost the economy as it recovers from the COVID-19 pandemic.

In June, the Australian Government reconfirmed its commitment to delivering its $100 billion, 10-year infrastructure pipeline.

This long-term transport infrastructure commitment will support job retention and growth, simultaneously assisting the economy in an effort to suppress the impacts of COVID-19.

While specific projects within the program of work are still being confirmed, it is evident a sharp increase in capital project expenditure will be inevitable.

A South Australian perspective

The South Australian Government has said it is expecting up to $5.7 billion in economic benefit and almost 1300 jobs from its top 18 major infrastructure projects, worth a collective $1.68 billion.

A joint investment of $145 million between the Federal and South Australian governments aims to support construction jobs and deliver urgent road safety upgrades.

Among the projects already underway or shovel-ready and fast-tracked as part of the deal are: The Heysen Tunnel upgrade, Stuart Highway upgrade, Regional North-South Freight route and the Regional Road Network Package.

The State Government has recently announced the $135 million Oaklands Green renewal project, started construction on the $80 million new emergency services headquarters and is edging closer to completion of the North-South Corridor, with investigation works underway on the final section – Torrens to Darlington.

It has also begun projects as part of its $1.3 billion education capital works program, including construction of new schools and major upgrades to many existing sites.

SA Water has also embarked on delivering $1.6 billion worth of capital works projects over the next four years.

This is just some of the infrastructure spending taking place in SA, with Government, industry bodies and private organisations all acknowledging the essential contribution that investment in infrastructure projects will make to South Australia’s economic recovery.

Why is this significant?

Capital investment in Australia’s infrastructure is a welcomed boost for the economy, especially given the need for recovery during and post the COVID-19 crisis.

With taxpayers rightly demanding value for money, it is of utmost importance to ensure this next wave of public investment is spent wisely and delivered with a commercial mindset.

These plans are of a scale most of us will never have witnessed. As a result, the potential for value leakage in managing them is unprecedented.

Achieving success will need high levels of cross-sector collaboration, knowledge sharing and multi-faceted support from all of the professional disciplines involved. Those leading the process must also learn from previous experience.

What can be done?

When looking at the recurring themes to emerge from large Infrastructure programs, most can be addressed proactively to prevent negative impacts further down the line.

Avoiding the need to ramp up cost reduction and project recovery efforts once things have gone awry will assist with keeping public infrastructure projects out of the headlines for the wrong reasons.

Robust scope and baseline management

Detailed scoping on complex infrastructure projects is notoriously difficult to get right and change is inevitable. Clear target outcomes, an auditable budget baseline and a set of commercial principles is imperative to effectively dealing with scope adjustments and preventing runaway budgets, especially as organisations adjust to their new normal.

Clear and commercially focused contract governance: Ensuring key contracts are structured appropriately and deliver value requires an appropriate tender process and detailed understanding of commercial terms, their inherent risks and proactive risk management by all involved in their delivery. Lack of focus in this area can lead to substantial value leakage for the life of the contract.

Bolstered cost verification functions: Delivery pressures and the sheer volume of transactions on large-scale contracts mean inefficient and inaccurate charges can often slip through the net. Leading practice organisations will have a dedicated commercial and cost verification function to mitigate this risk area. These functions can pay for themselves many times over through the recovery of historical overcharging and identifying ongoing commercial efficiencies and savings.

Value-adding Management Information (MI) with trusted data: Fast paced infrastructure projects and the current hesitations felt by the Australian public address the need for accurate and up-to-date information so key stakeholders can make the best decisions. Manual reporting can be slow, subject to error and, by the time it passes through the organisation, its meaning may not be fully reflective of what is actually happening on the ground. Input data must be trustworthy and MI should focus on leading indicators to ensure decision-makers have the right information readily available to support effective project delivery.

Coordinated assurance strategy: When multiple stakeholders are at play there is a risk that assurance activity is duplicated and seen as a hindrance by those on the front line. An holistic approach to assurance mapping is important to ensure ‘assurance fatigue’ is minimised and the value these audits deliver is optimised.

Contract closeout planning: By the time contracts and projects begin to wind down, key personnel have often already moved on to the next initiative. This loss of knowledge places those left behind in a sub-optimal commercial position when it comes to contract closeout. Margins are crystallised at this point, so a full understanding of the commercial position is essential to ensure obligations are fulfilled at the right level of cost. Ensuring a full exit and transition plan is in place initially will assist in minimising these potential impacts from the beginning, with productive teams conducting detailed reviews of supplier and contract performance so negotiations may be carried out from a position of strength.

Where to from here?

While by no means an exhaustive list, these areas represent opportunities for rapid progress and significant value adding, particularly when considering the current economic climate and impacts Australia is facing through COVID-19.

There are numerous other areas, particularly with a project delivery focus, both through existing leading practice and emerging innovations, which will need to come together in a coordinated way.

The adoption of effective governance structures, internal controls and ongoing value assessment will be imperative to ensure the benefits of infrastructure spend are maximised.

Contact BDO’s Partner, Advisory, Kyffin Thompson for more information.

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