Govt launches cost review

The State Government has initiated a major review of its $4 billion capital works program to assess the impact of rapidly escalating building and construction costs.

The review provides an unexpected backdrop to next week’s State Budget, where Treasurer Eric Ripper is expected to announce a big budget surplus.

Mr Ripper told WA Business News the rise in construction costs was “a matter of concern”.

“This is an issue which is concerning the State Government,” he said. “It will inevitably put pressure on the capital works program.”

He said the review by the departments of Treasury and Finance and Housing and Works was a prudent response to the rise in costs, which had already had an impact.

Last month the State Government put aside an extra $45 million to cover cost increases on the New MetroRail project.

While this was only a 3 per cent overall increase in the cost of the rail project, the extra funding largely related to newly awarded train station contracts.

WA Business News understands these contracts have come in at least 20 per cent above earlier estimates and have been designed to accommodate the possibility of further cost spikes.

This is even higher than the 16 per cent increase in the Department of Housing and Works’ building cost index, which provides a broad measure of metropolitan construction costs.

Many private sector companies have been caught out by the rapid escalation in construction costs, including WA’s biggest company, Wesfarmers.

It recently reported a 24 per cent cost blowout on its Queensland coal mine expansion, citing the higher cost of steel and other materials.

The increased costs are the flipside of the boom WA is currently enjoying.

China’s insatiable demand for iron ore and coal is reflected in the 30-40 per cent increase in steel prices.

Similarly, the strong building industry has contributed to a sharp increase in brick prices.

And record low unemployment is mirrored in the skills shortage and escalating labour costs, especially for contractors.

With a capital works budget of about $4 billion, the State Government will feel these pressures as much as any private sector company.

In its mid-year financial projections statement, Treasury said cost increases would be mitigated to the extent some projects, such as the CBD Courts and New MetroRail, are partly or wholly based on fixed prices.

“However, the magnitude of recent building cost escalation rate increases will create a future funding pressure on major construction project budgets,” Treasury concluded.

Mr Ripper said responses to the higher costs could include “reprioritising” projects, which effectively means delaying projects.

Other options include drawing on contingency funds, although the Government has already had to top up its contingency fund for the railway project.

A third option was extra funding.

Mr Ripper said the reported budget surplus was based on the state’s “operating balance” and did not include capital works.

The latest estimate of the 2004-05 budget surplus is $498 million, nearly double the original estimate released 12 months ago.

“I want a bigger surplus,” Mr Ripper said.  “I’m hoping the Government will be able to achieve that.”

He said a large budget surplus would give the state more capacity to fund capital works as well as meet other demands on the public purse.

The increased surplus estimate reflects higher tax revenue, flowing from higher commodity prices, the buoyant housing market and a generally strong state economy.