Freight outcomes from Regional Rail Upgrades

Tabled: 18 March 2020

Audit overview

In regional Victoria, the rail freight network transports commodities to national and export markets. Expected growth in global demand for Victoria’s agricultural produce, grains and mineral commodities will increase demand on this network.

This audit examines whether regional rail upgrades are improving rural freight outcomes in a timely and cost-efficient way. We reviewed two major regional rail upgrade programs:

  • the $440 million Murray Basin Rail Project (MBRP), and the complementary $130 million Freight-Passenger Rail Separation Project (FPRSP)
  • freight-related components of three upgrade projects within the $1.75 billion Regional Rail Revival (RRR) program. These projects are along the Gippsland, Shepparton and Warrnambool rail corridors.

The Victorian Government announced the MBRP in 2014 as a once in a generation upgrade for much of the state’s regional rail freight network. It expected to complete the project by 2018.

The MBRP and the FPRSP have the potential to improve the competitiveness and reliability of rail freight for regional Victoria. Rail freight’s contestability is key because the cost of road freight and its easily available infrastructure make it increasingly attractive for freight operators. Reliability is also key for transporting bulk commodities and containerised freight over longer distances—for example, to export ports—and aligns with the rail strategies and goals in the government’s Victorian Freight Plan 2018–50 (the Freight Plan).

The direct outcomes expected from the projects are improved freight efficiency in the Murray Basin region; rail standardisation; reduced costs; easier access to export ports; and improved logistical flexibility to support more freight on rail. There are also wider social and economic benefits expected.

For our audit, we examined whether:

  • governance arrangements for the selected regional rail upgrades supported informed decision-making
  • agencies delivered selected regional rail upgrades according to approved scope, time, cost, and quality expectations
  • the selected regional rail upgrades have realised expected benefits for freight.

Conclusion

The regional rail upgrades we reviewed are not yet improving rural freight outcomes in a timely and cost-efficient way.

Governance arrangements for the MBRP have been suboptimal, with different agencies responsible for different elements of the project over time. This has led to patchy corporate memory for the planning and delivery of the project. It has also diffused senior officer accountability for project outcomes due to the many changes of key personnel since the project started.

The MBRP and FPRSP have not met scope, time, cost or quality expectations. These projects are late and will require a considerable injection of new funds if their intended outcomes are to be fully realised.

From a project and program management perspective we identified deficient project planning, cost estimation and scoping by the Department of Transport’s (DoT) predecessor agencies. V/Line Corporation’s (V/Line) inadequate contract and project management has also contributed to project delays and cost overruns for the MBRP Stage 2 works.

As a result, the MBRP and FPRSP rail upgrades have not yet realised the expected freight-focused benefits.

Findings

Project planning and delivery to date

Project status

At the time of this report, V/Line and DoT have delivered about half of the approved MBRP scope (Stages 1 to 4) using $381.5 million (86.7 per cent) of the originally approved budget up to Stage 4.

V/Line is responsible for completing any unfinished Stage 2 works, while Rail Projects Victoria (RPV) is now responsible for delivering any remaining stages of the project, working closely with DoT.

The government is reassessing delivery of the remaining stages of the MBRP. According to the original business case timelines, completion of Stage 2 is now three years late. Works within undelivered stages include the standardisation of track from Dunolly to Manangatang and Sea Lake, and dual-gauge track conversion from Gheringhap to Maryborough via Ballarat.

Achievement of the expected benefits from the MBRP will not occur without more funding to complete the expected and approved project scope. As a result, the economic analysis for the project in the original 2014 business case is no longer accurate and requires revision.

The RRR projects we reviewed have recently begun their procurement phase, so it is too early to say whether they will achieve expected outcomes. Although these projects are primarily passenger-oriented, they include some planned outcomes related to freight.

Without a more explicit alignment to Victoria’s wider rail freight policy goals, these RRR projects may not achieve wider freight outcomes.

Business case

The approved business case for the MBRP—Improving the competitiveness of the Murray Basin region (the business case)—included over-optimistic expectations about the level of demand from rail freight users, and untested assumptions about the project’s complexity and therefore the time required and likely cost.

The optimism bias in the expectations arose from:

  • incomplete engagement with key stakeholders
  • limited analysis of current and future rail freight stakeholder needs
  • DoT and V/Line’s limited understanding of the dilapidated nature of the network’s assets.

These project planning expectations adversely affected project delivery.

DoT began operations on 1 January 2019 and absorbed most of PTV’s functions on 1 July 2019. For this report, we refer to actions taken by the former Department of Economic Development, Jobs, Transport and Resources (DEDJTR), and Department of Transport, Planning and Local Infrastructure—in operation from 2015 to 2018—and PTV as taken by DoT.

DoT and V/Line’s lack of detailed knowledge about the condition of the rail freight network that the MBRP would upgrade also led to engineering and construction difficulties during the renewal works.

Procurement process for the MBRP

V/Line’s early contractor procurement process demonstrated that the market could not deliver the desired project scope within the approved time and cost allocations.

As a result of the tender outcome, V/Line sought to reallocate more funding to the early MBRP stages. The government agreed to this in June 2017.

This market response should have prompted DoT, as sponsor agency, to undertake more due diligence on the MBRP’s scope and query the assumptions and expectations in the business case.

However, this did not occur. Because of tight project time frames, reinforced by the government’s public announcements on expected time and cost, V/Line selected a contractor—with approval from Public Transport Victoria (PTV) and DoT—and signed an agreement.

A latent defect is a defect that could not have been identified through reasonable inspection.

During the contract negotiation process, V/Line undertook a general assessment of risks but did not assess many specific project risks. In particular, it did not explicitly analyse the potential cost impact of significant risks that the contractor negotiated to transfer back to V/Line such as latent defects in the network and ground conditions. V/Line advised us that cost and risk allocation at this stage was difficult given V/Line’s lack of information on ground conditions and the extent of latent defects.

Variations, disputes and delay claims

Soon after the contractor began work on the MBRP, it lodged many variations, notices of delay, and extensions of time requests. During the MBRP delivery period, V/Line assessed 81 contractor claims and variations, and accepted 32 of them. The reasons for these claims and variations included project design changes, additional works required as a result of scope changes, and delayed delivery of materials supplied by V/Line. These claims heavily impacted V/Line’s time, cost, and risk contingency baselines for the MBRP works.

V/Line did not update key project documents to reflect these contractor variations and changes to the project scope, time, and cost expectations. Further, V/Line used a single register to record both project changes and contract variations. This meant that V/Line did not have a distinct process to monitor, report, and address a project change, as opposed to a contract variation, and it could not appropriately address risks arising from these project changes.

Some of the disputes and delay claims were because V/Line did not deliver its obligations under the contract. For example, V/Line was late supplying rail and delivered track turnouts to the contractor without the information needed to assemble them.

V/Line rejected 11 of the contractor’s claims. V/Line also commissioned specialist advice to help it consider the remaining contractor claims, and used an external expert to verify the actual works performed or materials used.

The contractor lodged variation claims amounting to 24 per cent above the originally agreed contract price. Following consideration of the claims, negotiation, and verification of the value of delivered works, V/Line settled the claims with the contractor for 11.6 per cent more than the original contact price. This indicates that the contract’s original scope, cost and timing expectations were unrealistic.

Delivery performance

V/Line underperformed during the delivery of MBRP Stage 2 works. V/Line did not adequately apply contract management processes and did not effectively mitigate manageable project delivery risks that it identified early in the delivery phase of MBRP Stage 2.

V/Line intervened in the project in March 2018 after the Office of the National Rail Safety Regulator (ONRSR) identified a safety breach at one work site. This breach resulted in V/Line immediately issuing a whole-of-project cease work order to the contractor, the McConnell Dowell and Martinus Rail joint venture (MMJV). Soon after, the contractor demobilised its project workforce, leaving elements of Stage 2 works incomplete.

V/Line and the MMJV negotiated a settlement to the various claims between the parties, signed in July 2018.

The settlement resolved most commercial risks for V/Line arising from the MBRP Stage 2 works. However, it did not resolve the risk that future stages of the MBRP would remain incomplete. Both DoT and V/Line undertook project reviews to consider the delivery of future stages of the MBRP and risk to delivery of those stages.

The government allocated responsibility for delivery of future stages of the project to RPV in June 2018. Under this arrangement, RPV has the option to use V/Line resources on a fee-for-service basis. Despite this reallocation of responsibility, the government has not yet specified a revised completion date for the MBRP as part of the review of the business case.

Stakeholder engagement

Stakeholder engagement has been inconsistent throughout the life of the project. Many agencies have been involved in discussions with various parties with an interest in the success of the MBRP. Although DoT and V/Line sought stakeholder views on project-related matters, we did not see evidence of consistent analysis of stakeholders’ perspectives in project status reports or briefings to senior decision-makers.

The Australian Government is a key stakeholder in the MBRP—they made a $220 million co-contribution to the project.

During project delivery, the Australian Government made two requests for appraisal of the status of the project. However, the interactions and information flows on specific project issues from DoT to the Australian Government were not always forthright or timely.

Project scrutiny and responses

The project failures that have occurred have happened despite review processes, reflecting lack of timely and effective action to address identified issues.

HVHR and Gateway review process scrutiny

A Gateway review process is undertaken by an independent external reviewer team to examine projects and programs at six key decision points in their lifecycle:

1. Concept and feasibility

2. Business case

3. Readiness for market

4. Tender decision

5. Readiness for service

6. Benefits analysis.

The project has been subject to the Department of Treasury and Finance’s (DTF) High Value High Risk (HVHR) review mechanism, which includes the Gateway review process.

The government designated the MBRP as a HVHR project, which requires intensive scrutiny by DTF and full application of the Gateway review process at each project stage.

Although DoT and V/Line followed these DTF processes, they did not effectively mitigate problems identified at key review points.

Multiple senior responsible officers through project stages

Since inception, the project has had four senior responsible officers (SRO) in three different agencies.

The SROs and their parent agencies’ implementation of the recommendations arising from the Gateway reviews has been neither effective nor timely. New SROs joined the project, but their predecessors did not brief them on, or give them, Gateway review recommendations from previous reports.

Gateway review ratings

According to DTF’s guidance, a ‘red’ rating means the Gateway review team believe that the issues they have identified are critical and urgent, and to achieve success the project or program should take action immediately.

At each of the Gateway review points, the MBRP received an overall ‘red’ rating:

  • Gate 1/2 (combined): Strategic assessment/Business case (August 2015)
  • Gate 3: Readiness for market (October 2016)
  • ;Gate 4: Tender decision (May 2017).

Each MBRP Gateway review also identified specific ‘red’ recommendations that required an action plan to be submitted to the Treasurer, via DTF.

Oversight by senior officers

DoT and V/Line intensified senior officer scrutiny of the MBRP after the MMJV ceased project works in March 2018. However, by this point options for completing the original scope within budget had become limited.

The extra scrutiny by DoT and V/Line included:

  • engaging the Office of Projects Victoria (OPV) to carry out a comprehensive review of the project
  • weekly reporting to the Minister for Public Transport’s office on project status
  • commissioning an independent review of the project management costs
  • fortnightly meetings between RPV, V/Line and DoT to address project deficiencies in a coordinated manner
  • capability support for V/Line to deliver unfinished components of Stage 2 of the project after the contractor had ceased work.
Lessons learnt review

A PAR is a review of a project or program’s progress, objectives, governance and readiness. A team of public and private sector reviewers undertake it, usually before a key milestone or decision point. They then provide the outcome of the review to government. PARs are designed to improve delivery confidence, reduce ‘scope creep’ and allow for wider stakeholder engagement.

In May 2018, V/Line engaged a consulting firm to review the project to establish what lessons it could learn. The review made 25 recommendations, including five priority recommendations focused on project risk management along with others on clarifying project roles, responsibilities and accountabilities, and reviewing and updating project documentation.

Project assurance review

In June 2018 at the request of DoT, OPV completed a project assurance review (PAR) and gave the project an ‘amber’ delivery confidence rating. This rating meant that while the project had significant issues, they should not impact on cost, time and quality if addressed promptly.

The review gave 12 recommendations, including three ‘amber’ and nine ‘red’ recommendations. A ‘red’ recommendation is categorised as critical.

DoT has used the findings and observations from both reports to inform briefings to ministers as well as options to government on progressing future stages of the project.

Achieving expected benefits

The need for a reliable and fit-for-purpose rail freight network, as identified in the MBRP business case, still exists. However, DoT, RPV and V/Line need to resolve many issues before they can achieve the expected benefits.

Cost pressures

DoT has advised the government that the project’s original scope cannot be fully delivered with the remaining funds.

DoT advised us that a MBRP business case review is underway and will provide scope and phasing options, as well as identify the cost to complete the project, based on whichever option the government chooses. DoT advised us that it was aiming to present this revised business case to government in early 2020, but it had not been completed when we published this report.

Unresolved project challenges

TAL refers to the tonne weight bearing on the rail track. The maximum TAL is determined by factors including weight of rails, train speeds, rolling stock configuration, and strength of earthworks. Exceeding the maximum allowable TAL could damage the track or cause a derailment.

All rail track in Victoria has a designated track class rating out of 5, with 1 being the highest quality. This rating determines the maximum possible speed, and the amount of maintenance and track infrastructure components required. Rail track with a 5 rating is used on short or infrequently used lines, which require less maintenance.

A passing loop is a section on a single-lane railway that enables trains travelling in opposite directions to pass each other. It also allows trains going in the same direction to overtake.

DoT and V/Line need to address a range of technical challenges to achieve the original project’s expected benefits and outcomes:

  • Due to a pause in re-gauging the rail from Maryborough to Gheringhap (via Ballarat and the inland route to Geelong), rail freight users face a route from Mildura/Yelta to port that is now 128 kilometres longer than the original broad-gauge route.
  • The route to key export ports has a 19-tonne axle loading (TAL) restriction for most standard gauge operators using the network, even though the MBRP project business promised to increase axle loads to 21 TAL. At present, 21 TAL is only achievable in specific technical wheel size and wagon configurations due to the limitations of the Ararat to Maryborough track section.
  • The Ararat to Maryborough track section was substantially rebuilt during the MBRP Stage 2 works using mainly legacy rail. As a result, this track remains at the class 4 rating, the same as when the line last ran in the early 1990s. Under V/Line’s standards, this old rail requires lower line speeds for the section from Avoca to Ararat and low axle loads (19 TAL) for the standard gauge rolling stock used by most rail freight operators. This represents a significant missed opportunity to have improved this section of the line by including fit-for-purpose rail in the original costings and scope.
  • Remaining temporary speed restrictions (TSR), particularly on the Ararat to Maryborough section, are causing slow track speeds in some sections.
Reduced operational flexibility for freight operators

During this audit, a major rail freight operator asserted that the MBRP had reduced their operational flexibility. To support this, they provided examples of decommissioned wagon storage sidings and removal of a passing loop at Maryborough Yard which, in their view, had reduced the number of trains and wagons that can stage or pre-position through the network.

DoT advised us that the decommissioning of sidings had been consented to by key freight users and that the Maryborough passing loop was removed due to new rail engineering and safety standards.

Availability of suitable rolling stock

Broad gauge refers to railway with a track width of
1 600 millimetres. As of November 2018, Victoria has 2 309 kilometres of broad-gauge track. As most railways in Victoria are broad gauge, this causes difficulties transporting rail freight to other states that use standard gauge.

Through the MBRP, the government sought to standardise broad-gauge sections of Victoria’s regional rail track. Although interstate connections were not specifically identified as a benefit in the business case, standardising this track would enable trains in Victoria to connect with standard-gauge interstate rail, which would increase the logistical flexibility of exporting commodities from regional Victoria. The business case did acknowledge that access to standard gauge rail in a predominantly broad-gauge state is fundamental to maintaining an efficient and cost-effective supply chain.

In anticipation of this outcome, some rail freight users divested their broad gauge rolling stock. Broad-gauge rolling stock is in limited supply, and these users may now need to lease back broad-gauge wagons at a potentially higher cost.

This could increase rail haulage costs on the unfinished components of the MBRP, which is contrary to the project’s aim to reduce rail freight costs.

Risks to achieving the original project benefit-cost ratio

A BCR is used in cost benefit analyses to indicate the overall value for money of a project. It is the ratio of the benefits of a project relative to its costs. Where a project has a BCR that is higher than 1.0 (a positive BCR) this means that the benefits outweigh the costs.

Infrastructure Australia assessed the original MBRP business case as having a positive benefit-cost ratio (BCR) of 1.7.

After this assessment, the Australian Government co-funded the MBRP with an expectation that the Victorian Government would fully deliver the approved scope and proposed benefits.

At the time of this report, V/Line and DoT have delivered about half of the approved scope using 86.7 per cent of the originally approved budget up to Stage 4.

Given this, and with the MBRP main works currently paused, it is unlikely that the project will generate the economic and community benefits expected in DoT’s business case.

Impact on freight policy goals

Due to the pause on funded MBRP works and uncertainty around future strategies to improve the rail freight network, rail freight might become less attractive or less economically competitive than road.

This would undermine the government’s long-term policy goal of shifting freight from road to rail when it makes economic and environmental sense to do so.

A longer-term shift of regional freight to rail has economic benefits such as improved community amenity and road safety, as well as reduced road maintenance costs for local governments.

Rail freight also promotes integration and efficiency of national and international supply chains, particularly for bulk and containerised freight.

Reviewing the original business case

The Victorian Government’s recent desire to review the original business case and assess the state of the Murray Basin rail freight network is a pragmatic and useful way to re-baseline the time, cost and scope expectations in the MBRP approved business case.

This work should also allow V/Line and RPV to conduct appropriate due diligence on the rail freight network’s asset condition and help DoT and V/Line better understand the needs of rail freight operators and users in regional Victoria.

To help the project move forward, DoT’s Freight Victoria division, with V/Line’s support, needs to engage with industry and project stakeholders such as rural industry, packers and exporters, rail freight operators, local communities, local governments, peak bodies and the Australian Government. This engagement could include sharing and understanding lessons learnt from the MBRP delivery to date, as well as options for next steps.

A more comprehensive understanding of regional freight user needs and the network condition will help DoT and V/Line give quality and credible advice to the Victorian and Australian governments on an amended strategy to deliver the outcomes and benefits that the business case envisioned.

Recommendations

We recommend that V/Line Corporation:

1. expedites assessment of the cause of unresolved temporary speed restrictions on the re-opened standard-gauge line from Yelta to Ararat and advises the Department of Transport and relevant agencies on any required actions that are outside V/Line’s internal ability to resolve

2. expedites finalisation of all unfinished works included in the Murray Basin Rail Project Stage 2 scope and advises relevant agencies on any required actions that are outside V/Line’s internal ability to resolve

3. improves its contract management of all contracts related to major infrastructure projects by:

  • introducing measurable performance indicators to contracts and regular monitoring and reporting of contract performance to staff of sufficient seniority within V/Line’s governance structure
  • introducing processes for monitoring contractor compliance with contract obligations and identifying who is responsible for doing this
  • aligning contract requirements with key project management processes.

We recommend that the Department of Transport:

4. completes its review and refresh of the original Murray Basin Rail Project business case

5. develops and advises government on scope and cost options to progress the delivery of the outcomes originally expected from the Murray Basin Rail Project that includes and considers:

  • modelling of forecast rail freight operating trends and demand in regional areas
  • the future-proofing of a freight corridor through the Ballarat station precinct, in line with the original goals of the Freight-Passenger Rail Separation Project
  • a new benefits management framework that reflects any proposed changes to the scope and timing of the Murray Basin Rail Project because of the revised business case.

We recommend that V/Line Corporation and the Department of Transport:

6. conduct a detailed condition survey of the rail freight network’s lines and sidings subject to major upgrades to identify current asset condition versus the expected track class

7. provide joint advice to government on options to improve the track class of the rebuilt Ararat to Maryborough section of the Yelta line, with an aim to deliver higher line speeds and axle loads that better meet industry needs

8. work together, by jointly developing and co-sponsoring submissions to government, on a sustainable funding approach for regional rail freight lines that is linked to providing a fit-for-purpose track class, as well as improving broader network reliability and performance standards for rail freight operators and users

9. comprehensively re-engage with all key regional freight stakeholders, and the Australian Government where appropriate, on identifying regional rail freight needs as well as future options to progress the incomplete stages of the Murray Basin Rail Project

10. consult and coordinate with each other so that Regional Rail Revival upgrade projects respond to an integrated understanding of current and future rail freight needs, and explicitly align the freight components of Regional Rail Revival projects with broader strategic and policy goals to increase the use of rail freight in Victoria

11. ensure that, for any projects subject to Gateway review, nominated senior responsible officers are accountable for:

  • providing timely internal advice on the implications of Gateway review process findings and any urgent or critical matters that have been identified
  • informing themselves of the content and ratings of previous Gateway review process reports, any recommendations requiring action, and the status of any activities designed to resolve previous recommendations.

12. introduce and ensure that, for all major capital projects, there is compliance with project risk management processes that include:

  • regularly updating project risks, risk assessments, and risk mitigations to ensure that they remain relevant
  • a clear process to ensure project risks are escalated to appropriate levels/staff, including communication so that project staff are aware of this process
  • maintaining agency project risk registers alongside the contractor’s project risk registers and, where there are variances in a register, assessing these and identifying actions to address the differences
  • regular monitoring and reporting of project risk, and cost, time and scope tolerances. If it is apparent that these tolerances will not be met, the Department of Transport and V/Line should have a process to rectify this in a timely manner.

13. introduce and ensure that, for all major capital projects, there is compliance with project change processes that cover:

  • recording project changes and contract variations in fit-for-purpose registers to ensure any associated risk is addressed appropriately and that the impact on project scope, time, and cost is clearly identified and reported to governance committees
  • a process for updating key project documents after an agreed change to reflect any additional resourcing required and any impacts on the project’s outcomes and benefits.

Responses to recommendations

We have consulted with DoT and V/Line and we considered their views when reaching our audit conclusions. As required by the Audit Act 1994, we gave a draft copy of this report to these agencies and asked for their submissions or comments. We also provided a copy of the report to the Department of Premier and Cabinet.

The following is a summary of those responses. We include the full responses in Appendix A.

  • V/Line accepted the recommendations directed to it and has produced an action plan detailing how it will address them.
  • DoT accepted all but one recommendation, which it partially accepted. DoT has produced an action plan detailing how it will address the recommendations.

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