Upgrade roads go over budget, despite additional funding last year

Upgrade roads are going over budget again. Photo / NZME

The Government's New Zealand Upgrade Programme transport projects - which had already doubled in cost - are tipped to go over budget again, although the Government is confident cost increases can be managed with funding already set aside.

The Government has triggered an "early warning" with Treasury that budgeted costs are likely to be exceeded. Officials have warned cost pressures are crating "project delivery risks".

Initially budgeted at about $6.8 billion in 2020, costs doubled in just a year, leading the Government to axe a number of projects and scaling back others to bring costs down in 2021 - it called this process "reprioritisation".

All of the projects were then given more realistic costings and budgets, the Government dropped $1.9b into the programme to manage those additional costs in the future.

Now it appears persistent inflation in the construction sector threatens to blow those new costings, but those blowouts can be contained within existing contingency funding.

Briefings to Transport Minister Michael Wood released under the Official Information Act to Simeon Brown show that even those reprioritised costings could blow out

In March 2022, Wood was warned that the last "reprioritisation of the programme was based on the latest understanding of costs at that time" but "several key assumptions and risks to the baseline estimates remained".

Those risks included "general and property escalation, Covid-19 impacts, legislative change and ground conditions".

The paper warned that the outlook for a number of costs had "changed significantly over the second half of 2021 and present ongoing cost pressures to the reprioritised programme".

The paper said that "resourcing" was "a critical risk given high demand for people, plant and materials at all stages of the infrastructure life cycle combined with a tight labour market, supply chain constraints, and Covid-19-related disruption".

A spokesman for Wood said the Government was "confident that there is currently sufficient contingency built into the budgets of the transport projects, and there is no need or intention to change these.

"Appropriate processes are built into these projects to deal with cost escalations as they arise," he said.

Brown said the Upgrade Programme was announced in 2020 as a programme to deliver roads the Labour coalition had initially axed.

"Since then, the only upgrade this programme seems to have delivered is the upgraded cost of delivering these projects due to the fact the Government has been so slow at getting them underway," Brown said.

"It is now becoming increasingly clear that despite adding billions of dollars to the programme, and some of the projects being cut, there is increasing pressure on the programmes budget contingencies," he said.

Projects that appear to be under particular pressure are Auckland's Penlink and Wellington's Otaki to North of Levin.

In the cast of Penlink Ministers hold the keys to a "tagged contingency" for the project, which can be released if it goes over budget. An "early warning" has been given to the Ministry of Transport and Treasury to "trigger an escalation threshold" and release that funding.

Waka Kotahi NZ Transport Agency warned that it had seen "higher than expected increases in property values for some regions," increasing the cost of land required to build the roads.

Officials also said that delivery agencies could give ministers "achievable options" for keeping the Upgrade Programme on budget by giving "scaling options", which could trim back on the scope of certain projects.

As many of the upgrade projects were at quite an early stage of planning when announced, scaling decisions were always going to be made as projects got nearer to completion.